The banks will have to pay for the insurance, but the government says it does not expect to be paid in shares.
While criticising the banking sector for some irresponsible lending in the past, Mr Brown said the new scheme was vital to help restore normal lending levels.
"Good businesses must have access to credit, jobs should not be lost needlessly," he said.
"It is because of this that we are taking the action to expand lending."
The government hopes that by insuring banks against additional losses, it will encourage them to resume normal lending to businesses and individuals.
Chancellor Alistair Darling told the BBC that banks taking out the insurance would have to make "very specific legally binding agreements to lend more money".
Despite the scope of the government's latest announcement, it has done little to lift investor sentiment in the banking sector, at least initially.
Bank's new role
Vince Cable believes the government is not addressing the situation correctly.
Under the Bank of England's new role, it will be able to buy up to £50bn of high quality assets directly from companies.
In the past, it has only bought such assets from banks or financial institutions.
A new subsidiary company will be set up to buy the assets, but the Bank's executive will decide what sort of assets it will buy and from which companies.
But the list of assets includes corporate bonds, so some companies will now be able to borrow money directly from the Bank of England.
Liberal Democrat treasury spokesman Vince Cable said the government's latest plans did not go far enough, and that instead, it should now nationalise the whole banking sector.
"The government must bite the bullet on the public ownership and control of the banks to ensure that lending is maintained to sound companies who can keep the economy ticking over in these turbulent times," he said.
Northern Rock extension
There have also been changes to the terms of previous bank rescues.
Northern Rock has said that it is to be given longer to repay its loans from the government.
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