(By Mayur Pahilajani - iStockAnalyst Writer)

Washington, D.C. - The United States government will invest $250 billion in nation's banking system on Tuesday in order to curb the the slumping economic growth. It is considered as one of the boldest interventions by the authorities since the Great Depression.

"The actions today are aimed at restoring confidence in our institutions and markets and repairing their capacity to meet the credit needs of American households and businesses," Federal Reserve Chairman Ben Bernanke said in a statement on Tuesday, ahead of the announcement by the officials.

The government is also expected to announce its plans to temporarily guarantee new debt provided by banks for three years. In addition, the Federal Deposit Insurance Corporation will provide an unlimited guarantee on bank deposits in non-interest bearing deposit transaction accounts.

Regulators are expected to implement an enhanced supervisory framework to assure appropriate use of this new guarantee.

"The voluntary equity purchase program will strengthen financial institutions' capacity and willingness to lend," Bernanke said in the statement.

"The guarantee of the senior debt of all FDIC-insured depository institutions and their holding companies will restore the confidence of these institutions' creditors and reinvigorate the crucial inter-bank lending markets."
 
These steps are similar to the decision taken by the authorities in France, Germany, Spain, the Netherlands and Austria as they committed $1.8 trillion to insure bank loans and purchase stakes in lending institutions. The news pushed up the stocks across the globe as investors gained confidence.

Reports have suggested that as a part of $250 billion rescue package, the U.S. government is expected to purchase preferred shares of around $125 billion in the country's nine largest financial services firms to improve their lending capacities. 

In a joint statement on Tuesday by U.S. Treasury Secretary Henry M. Paulson, Jr, FDIC Chairman Sheila C. Bair and Bernanke confirmed that nine major financial institutions have agreed to participate in both the capital purchase program and the FDIC guarantee program. However, the no details on the distribution of funds was mentioned.

While, the reports suggest the firms include Citigroup Inc. (NYSE:C), Goldman Sachs Group Inc. (NYSE: GS), Wells Fargo & Co. (NYSE: WFC), JPMorgan Chase & Co. (NYSE: JPM), Bank of America Corp. (NYSE: BAC), Merrill Lynch & Co Inc. (NYSE: MER), Morgan Stanley (NYSE: MS), State Street Corporation (NYSE: STT) and Bank of New York Mellon Corporation (NYSE: BK).

Another step taken by the U.S. Federal Reserve is to increase access to funding for businesses in all sectors in the economy through its Commercial Paper Funding Facility (CPFF) program. The program provides "a broad backstop" for the commercial paper market, according to the statement.

The CPFF will provide funds for purchases of commercial paper of 3 month maturity from high-quality issuers from October 27.

Sources: http://www.federalreserve.gov/newsevents/press/monetary/20081014a.htm
               http://www.federalreserve.gov/newsevents/speech/bernanke20081014a.htm