Federal Reserve Chairman Ben Bernanke announced the actions in a statement, saying they were being taken after a weekend of discussions with officials from the Treasury Department and the Securities and Exchange Commission and top executives of financial firms.
Those talks were aimed at seeing whether another financial institution would be willing to take over venerable investment bank Lehman Brothers and failing that, how other institutions could pool resources to protect the global financial system.
Bernanke said the discussions had been aimed at identifying "potential market vulnerabilities in the wake of an unwinding of a major financial institution and to consider appropriate official sector and private sector responses."
"The steps we are announcing today, along with significant commitments from the private sector, are intended to mitigate the potential risks and disruptions to markets," Bernanke said.
Besides expanding the types of collateral that can be used, Bernanke said the Fed would also increase the frequency of some of the auctions being used to get loans to banks from every other week to a weekly basis.
In a separate statement Treasury Secretary Henry Paulson said he supported the Fed's moves and said the actions taken should "strengthen and enhance our financial markets. These initiatives will be critical to facilitating liquid, smooth functioning markets and addressing potential concerns in the credit markets."
Paulson, who was involved in three days of talks at the New York Federal Reserve Bank, said he appreciated the efforts by other financial firms involved in the discussions to promote "orderliness and stability in our financial markets as we work through this extraordinary environment."
The Fed's steps represented the latest in a series of actions the central bank has taken over the past year to try to protect the U.S. financial system from a credit crisis that erupted as a result of rising loses in subprime mortgage lending.
The central bank in August 2007 invited commercial banks to make use of its emergency loan program if they found themselves short of cash. Then last December, it expanded the program to auction off loans to cash-strapped banks, seeking to overcome a perceived stigma from banks getting direct assistance from the Fed.
Last March, it implemented the biggest expansion in the emergency loan program since the Great Depression by announcing that investment banks could obtain money from the Fed. That action came after the near-collapse of investment bank Bear Stearns, which was taken over with the help from a $29 billion Fed loan by JP Morgan Chase and Co.
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