WASHINGTON -- Banks squeezed by a global credit crisis have a new way to get their hands on cash so they can keep making loans to individuals and businesses. The Federal Reserve, under pressure to take more aggressive action, unveiled a plan Wednesday designed to bring banks and their borrowers relief.

Some questions and answers about what the Fed is doing:

Q: Why is the Fed taking this action?

A: The credit crisis has unhinged Wall Street and threatens to hurt the U.S. economy, which is fighting to avoid a recession.

Q: Why are banks having problems?

A: A meltdown in the housing and credit markets has made banks and other financial institutions reluctant to lend to each other, causing a cash crunch. Banks have to maintain a certain level of cash reserves, which changes every day. During normal times -- when credit is smoothly flowing -- a bank, on some days, may be short on its reserves and would need to borrow from another bank to make up the difference. Or a bank may have excess reserves that it is willing to lend to another bank. Now, however, during the credit crunch, many banks have been hoarding cash -- not wanting to lend or borrow from others banks. That makes it harder and more expensive for individuals and businesses to obtain credit from banks to finance all sorts of things, such as homes, cars, school and small-business ventures.

Q: Why are banks reluctant to lend to each other?

A: The collapse in the subprime market -- home loans made to people with tarnished credit or low incomes -- triggered the credit crisis. Banks, financial companies and other investors who made subprime loans or put money into securities backed by those subprime mortgages have lost billions of dollars. Investors in the U.S. and abroad have grown more wary of buying new debt, thereby aggravating the credit crunch. Because subprime loans were sliced up and repackaged into an array of complex instruments sold to investors around the globe, there's great uncertainty about where those bad subprime loans pieces will surface and the size of additional losses from those bad investments. Credit problems have spread to other areas.

Q: How does the Fed's plan help?

A: At the heart of the Fed's plan is the creation of a new temporary facility to provide banks with at least $40 billion in emergency loans. The Fed is trying to shore up the finances of the banking system.

Q: And how will that help individuals and businesses?

A: If banks have adequate cash on hand, they may be more likely to make loans to people and businesses that need them. The free flow of credit is the economy's lifeblood. It allows people to make big ticket purchases and businesses to build and expand. The plan won't have an immediate impact on the availability and cost of credit to individuals, but it should help over the course of the coming weeks, analysts said.

Q: How does the core of the plan work?

A: The Fed's facility will lend $40 billion in emergency funds to banks through two auctions next week -- Monday and Thursday. Banks needing cash and that are judged to be in "generally sound financial condition" by their local Federal Reserve bank can participate in the auction. Banks place bids to get a slice of the money.

The loans are expected to be at rates lower than the 4.75 percent the Fed currently charges banks for direct loans through its discount window. To secure the short-term, 28-day loans, banks can pledge a broad variety of collateral. It is the same type of collateral -- such as corporate bonds, real-estate loans, agricultural loans and collateralized mortgage obligations -- allowed if the bank borrowed through the discount window.

Two more auctions are scheduled for Jan. 14 and Jan. 28; the Fed has not yet determined how much money in loans would be available through those auctions. If the new facility proves popular, the Fed may consider whether it should become a permanent tool in the Fed's arsenal.

Q: Why set up this new, temporary facility if cash-strapped banks already have the option of going to the Fed's discount window for an emergency loan?

A: Tapping the Fed's discount window can put a stigma on a bank if word gets out. Analysts say it is akin to getting branded with a financial scarlet letter. Ever since the credit crisis intensified in August, the Fed has been working hard to remove that blot. But banks remain fearful that market watchers will find out if they got a loan through the window, which could undermine customers' confidence in the institution's soundness. (The Fed does not reveal the identity of banks using the discount window and said it won't reveal which banks tap the new auction facility for loans.)

Banks using the discount window also pay a higher, penalty rate -- currently 4.75 percent -- on those loans. That compares with the 4.25 percent federal funds rate that banks now charge each other on overnight loans. The Fed sliced both rates Tuesday by a moderate one-quarter percentage point. It marked the third cut this year in the federal funds rate and the fourth reduction to the discount rate since the middle of August.

Wall Street took a nosedive, disappointed that the rate cuts weren't deeper.

Fed officials insist the discount window is still relevant and don't believe there will be a stigma attached to banks using their new loan facility.

Q: What else is in the Fed plan?

A: The Fed also set up lines of credit with the European Central Bank and the Swiss National Bank that could be used for additional resources. It said that this temporary arrangement would supply up to $20 billion in reserves to the Europeans' central bank and up to $4 billion to the Swiss central bank.

Q: How long was the plan in the works?

A: The Fed has been negotiating with other central banks since August, when the credit crisis worsened. When the situation took yet another bad turn over the last couple of weeks, the negotiations intensified. It had become clear that interbank lending markets had deteriorated. One of the problems that has plagued the global financial system since the summer has been a high London Interbank Offered Rate, known as the LIBOR, which reflected banks' unwillingness to lend to each other. The rate also is popular for making adjustments to adjustable-rate mortgages.

The Fed's announcement Wednesday was part of a globally coordinated response involving the Bank of Canada, the Bank of England, the European Central Bank and the Swiss National Bank.

Q: Why didn't the Fed announce this on Tuesday, when it sliced the federal funds rate and the discount rate? Was Wall Street's big tumble after the Fed decision on Tuesday a factor in the timing of Wednesday's announcement?

A: A senior Fed official said the market plunge on Tuesday "had nothing to do with today's announcement" and that it was "in the works for a while." The official, who briefed reporters on condition of anonymity because of the sensitive nature of the actions, said the Fed waited until Wednesday so that the announcement could be jointly made with the other central banks.