The Bank of England announ­­ced an overhaul of its money market rules on Thursday, to make them more effective in a future financial crisis.

The aim of the rules is to keep overnight market interest rates at the Bank's recommended official level - currently 4.5 per cent. The changes will provide a more effective range of options to cope with periods of stress.

Coming closely behind the government's bank recapitalisation plan, which has raised the international reputation of Gordon Brown, the prime minister, the move represents an attempt by the Bank to take the initiative ahead of other countries.

Mervyn King, the Bank gov­ernor, hopes the framework will offer a "systematic way to help banks plan access to central bank liq­uidity and so add certainty".

Over the past year leading central banks have had to modify their operations to lend money to the banking system for short periods. The Bank of England has repeatedly had to offer liquidity in ways its published rulebook said were outlawed.

It has lengthened the terms of its lending, reduced the penalties for emergency lending, accepted broader collateral in return for cash, and devised a scheme that offers liquid asset swaps for up to three years.

Mr King insists that central banks can offer only short-term relief - not funding - for banks in need of cash. He wants them to believe that the new rules will be permanent and not need modifying if the crisis deepens. The changes involve three elements.

First, from Monday, the Bank will establish an "operational standing facility", which will allow banks to borrow in exchange for top-quality collateral or lend to the central bank overnight if technical problems or late payments leave a bank temporarily short of cash or awash with it. To avoid the stigma associated with such borrowing, use of the new facility will not be published for up to a month and interest rate penalties will be a quarter the size of the current facility.

Second, also from Monday, it will set up a "discount window facility" for banks to swap their assets for government bills for a period of a month. Such borrowing will remain confidential for at least three months.

The fee structure is designed to allow banks to manage their risks in the sure knowledge of what the central bank will do in stressed times. The fees will rise the more a bank borrows and the riskier the collateral it offers to the central bank.

Third, the Bank is accepting wider collateral in its regular longer-term monthly auctions of cash. It will consult on an auction design that will allocate cash between different forms of assets.

In a move that goes further than auctions for wider collateral from the Federal Reserve or European Central Bank, the Bank will insist commercial banks bid for funds based on both rock-solid collateral and more risky assets. With two bids from auction participants, the Bank thinks it will gain an early warning of stresses in the banking system.

The Bank was confident on Thursday that its new framework would operate successfully in normal and stressed times. Officials expressed the same confidence about the old framework a year ago.