Federal banking regulators on Wednesday unveiled a much smaller version of its original plan to kick start the market for banks' bad loans.

The Public-Private Investment Program, or PPIP, is now offering up to $30 billion in leverage to facilitate private-sector purchases of banks' legacy loan securities, just 3% of the original scope. In announcing the revised program, a trifecta of key banking regulators said the program was downsized because of improvements in the financial markets, but that it could be "quickly expanded" if necessary.

"While the programs will initially be modest in size, we are prepared to expand the amount of resources committed to these programs," the Treasury Department, Federal Reserve and Federal Deposit Insurance Corp. said in a statement.

The move was widely expected , as were some of the nine firms named as approved fund managers: AllianceBernstein, BlackRock ( BLK), Invesco, Marathon Asset Management, Oaktree Capital Management, RLJ Western Asset Management, The TCW Group, Wellington Management and a partnership between Angelo, Gordon & Co., and General Electric's ( GE) GE Capital Real Estate arm.

In apparent response to criticism that only large, high-profile firms would be able to participate, regulators also said the nine fund managers would be collaborating with 10 smaller companies with established reputations. Those include Advent Capital Management, Altura Capital Group, Arctic Slope Regional Corporation, Atlanta Life Financial Group, Blaylock Robert Van, CastleOak Securities, Muriel Siebert & Co., Park Madison, The Williams Capital Group and Utendahl Capital Management.

In practice, investors will have three months to raise at least $500 million to be matched by the Treasury for use in an individual "Public-Private Investment Fund," or PPIF. The funds can be used to buy commercial mortgage-backed securities and residential mortgage-backed securities that are not guaranteed by Fannie Mae ( FNM), Freddie Mac ( FRE) or another agency. The securities need to have been issued before 2009 and initially given the equivalent of a triple-A rating by at least two ratings firms.

Investors will also be eligible to use leverage from the federal Term Asset-Backed Securities Loan Facility, or TALF, with certain limitations.

In addition to PPIF, regulators said they would be testing out another part of the PPIP: The Legacy Loan Program, which deals with whole loans rather than securities owned by banks. That portion was put on hold in late-March, but will be tested through the sale of a receivership this summer in a similar design to the Resolution Trust Corp. used by the federal government during the Savings & Loan crisis in the 1990s.

The government hopes to help cleanse the balance sheets of banks whose operations were hobbled when the credit markets froze up last fall. Though some parts of the market have stabilized and improved, there are still big gaps between the prices banks are willing to accept and the bids private investors are making on their assets. If successful, the program could help major firms like Bank of America ( BAC), JPMorgan Chase ( JPM), Wells Fargo ( WFC), Citigroup ( C), Goldman Sachs ( GS) and Morgan Stanley ( MS), as well as mid-size and regional competitors like KeyCorp ( KEY), Capital One ( COF), US Bancorp ( USB) and Regions Financial ( RF).

In a statement, Tim Ryan, president and CEO of the financial services group Securities Industry and Financial Markets Association, or SIFMA, issued support for the plan.

"Clearing troubled legacy assets off of banks' balance sheets is a positive step forward in our economic recovery," he said.