Bank of America (BoA) will receive $20bn in fresh capital from the US government and a guarantee on a further $118bn of potential losses on troubled assets.

The emergency bail-out comes amid a deteriorating balance sheet at Merrill Lynch, the brokerage BoA acquired earlier this month.

Details of the BoA rescue package were released in Washington DC in the early hours of Friday morning US time, in a joint statement from the US Treasury, the Federal Reserve and the Federal Deposit Insurance Corporation.

US lawmakers yesterday voted to release a second tranche of funding under the $700bn Troubled Asset Relief Program (TARP). BoA is scheduled to report its fourth quarter earnings today.

The package is on top of the $25bn BoA received from TARP funds last October. Under the terms of the deal BoA will receive $20bn in exchange for preferred stock.

BoA will absorb the first $10bn loss on a pool of $118bn of troubled assets and the Treasury and FDIC the next $10bn. Ninety per cent of losses beyond that will be absorbed through a loan from the Federal Reserve. The assets are largely mortgage-related securities inherited from Merrill Lynch.

In return for the financial assistance, BoA has agreed to cut its dividend to one cent per share from 32 cents and cap executive pay.