The Bank of England and HM Treasury have launched their £8bn 'Funding for Lending' scheme, designed to boost lending to the economy.
Banks and building societies will be able to borrow more from the Bank of England at a lower cost if they increase lending to UK households.
The plan was originally set out in the Mansion House speeches given by Mervyn King and Chancellor George Osborne in June.
Participating banks will qualify to borrow up to five per cent of their stock of existing lending, equivalent to £80bn across all potential banks and building societies.
Mervyn King, governor of the Bank of England, said: "This joint action by the Bank and the Treasury creates strong incentives for banks to expand their lending to the real economy.

"The more banks expand lending, the more they can use the Scheme. That will encourage banks to make loans to families and businesses both cheaper and more easily available."
Mr Osborne said: "The Treasury and the Bank of England are taking co-ordinated action to inject new confidence into our financial system and support the flow of credit to where it is needed in the real economy- showing we are not powerless to act in the face of the eurozone debt storm."
The scheme will begin on 1 August and be open for 18 months.
John Cridland, director-general of the Confederation of British Industry, said: "Smaller businesses I talk to are concerned with cost of borrowing as well as with its availability. Funding for Lending will help transition to a 'new normal' where structural changes in banking, driven by capital and liquidity reforms, are impacting on business finance."