Speaking last night at the Mansion House Osborne told the audience about government plans for a Bank of England “funding for lending” scheme designed to cut bank funding costs in exchange for promising to lend.
The Treasury said the plans, backed by a government indemnity, could boost mortgage lending by £80bn by combating the rising cost of loans.
The move comes as fears over the future of the eurozone worsen ahead of Greek elections.
The Bank of England also announced plans for an emergency scheme offering lenders six month liquidity in tranches of no less than £5bn a month.
Osborne said: “The government – with the help of the Bank of England – will not stand on the sidelines and do nothing as the storm gathers.
“We are rolling up our sleeves and doing everything possible to protect British families and firms.”
Bank of England governor Mervyn King said: “The Bank would lend, as in its existing facilities, against a much greater value of collateral comprising loans to the real economy to protect taxpayers.
“But the long term nature of the lending and its pricing mean that the Bank could conduct such an operation only with the approval of the Government, as offered by the Chancellor earlier. So such a scheme would be a joint effort between Bank and Treasury.”
Nigel Stockton, financial services director at Countrywide, said: "It is always useful to learn that such a large headline sum of money - £80bn - appears to have been made available - and let me emphasise that this is very welcome if it goes to the areas that need it most and which will have the most impact.
“I will only start putting the bunting back out when I have seen how this is to be deployed. We have been on record for some time now calling for the introduction of mortgage lending targets which would benefit both the housing market and the UK economy.
“The market needs specific mortgage lending targets and increased gross lending targets. Without these targets, there is a real danger that this money will again be used by the banks for balance sheet management and not to increase mortgage lending."
And Which? executive director Richard Lloyd added: "While we cautiously welcome the Chancellor's new "funding for lending" scheme, we want to see clear safeguards in place to ensure that banks pass this cheap credit on through loans to small businesses and to consumers through lower interest rates on their mortgages.”
Terry McCutcheon, CEO of Finance Planning Group, was also wary about whether all of the new funding will make its way through to businesses and families.
He said: "There's a lot of pressure for banks to hold onto capital - both regulatory pressure and risk aversion emanating from the situation in Europe. So who's to say that every pound borrowed will find its way out to the public and how will the Bank of England monitor and deal with this?
"The other issue is that there is a risk that some people are not in a position to pay this money back, so it doesn't matter what funds are available if people aren't meeting strict affordability criteria."
Meanwhile Stephen Johnson, managing director of commercial lending at Shawbrook Bank, said if the scheme achieved its aim of getting more cash to small firms and families it could "only be a good thing".
But he also warned that demand for loans was a critical factor.
He said: “It does remain to be seen whether the scheme will encourage more lending to SMEs by the banks, or whether claims that SMEs have no demand for credit in the current economic climate will continue.
“For us, there is no question that the demand exists. We talk to strong and stable small businesses who are looking for funding every day. In fact since we launched in October last year, as a bank that only lends to SMEs and individuals, we have been inundated with applications from credit-worthy SMEs."
Johnson added that just providing more capital to small businesses is not enough.
"Our conversations with SMEs show there’s a big job to be done in increasing confidence and showing that banks are willing to lend," he said.
