The UK government yesterday launched a scheme which could end up insuring more than £500 billion worth of toxic assets in a bid to get lending in the recession-hit economy flowing again.

British retail banks with more than £25 billion in eligible assets will have until March 31 to join the Asset Protection Scheme which will run for a minimum of five years and cover them against huge losses from their riskiest assets.

Royal Bank of Scotland, already 70 per cent owned by the taxpayer, said yesterday it would put £325 billion of its assets into the scheme as it also announced the biggest loss in UK corporate history - £24.1 billion.

Lloyds Banking Group is expected to put in another £200 billion worth of risky assets into the scheme today.

"There are things like commercial loans or mortgages which are worth less now than perhaps they were a few months ago, which we hope will increase in value as we get through this recession," said chancellor Alistair Darling.

"The object of this is to provide that certainty and that confidence that will maintain lending and that's essential for each and every one of us."

In return for the insurance, the government will get a fee and also a commitment to increase lending as a lack of credit is squeezing both consumers and companies, plunging Britain into its first recession since the early 1990s.

RBS said it would raise its lending by an extra £25 billion over the next 12 months.

Under the scheme, banks will incur a "first loss" and then be covered for the next 90 per cent of falling value.

"Both the 'first loss' amount and the residual exposure provide an appropriate incentive for participating institutions to endeavour to keep losses to a minimum on those assets included in the scheme," the Treasury said.

The scheme will allow banks to put in corporate and leveraged loans, commercial and residential property loans, and structured credit assets including residential and commercial mortgage-backed securities.

The Treasury said it would also consider extending the scheme more widely to other UK incorporated authorised deposit-takers, including subsidiaries of foreign institutions.