The Treasury is expected to announce an insurance scheme for banks in order to boost lending in the economy, according to reports.

Under the proposed scheme, banks would purchase insurance from the Treasury which will then guarantee to cover banks’ losses up to a certain point in the case of defaults.

The BBC reports that the insurance plan would reduce the amount of money being kept by banks to cover bad debts and could free up funds to be lent on to companies.

Commenting on the reports, Liberal Democrats treasury spokesman Vince Cable said such steps may be necessary but asked what the previous funds allocated to help the banking system had been used for.

He said: “We do need to establish first of all what happened to the £37 billion worth of taxpayers’ money that’s already gone into the banking system.

“Where did it go? Why isn’t it coming out in the form of new lending? There is a real crisis at the moment that very large numbers of very good British companies, completely solvent companies, cannot raise credit from the bank.

“They cannot be allowed to go down in large numbers taking large numbers of jobs with them, simply because the banks aren’t functioning properly,” he added.

Reports about the insurance scheme come amidst speculation that the government hopes to set up a bad bank in which it seeks to place all toxic assets in order to help banks repair their balance sheets.

Last week, the government announced £20 billion in guarantees to loans given to small and medium enterprises in order to prevent companies from going into administration due to a lack of finance.