It may be hard to believe in the face of gyrating currency markets, collapsing share prices and the howls of struggling business leaders, but the early signs are that the flurry of measures two weeks ago to stabilise the banks are starting to work.

We are not out of the woods by any stretch but the Bank of England in its latest Financial Stability Review is at least able to report positive initial results. Alas, the Bank was similarly confident in its last report six months ago. The most likely path ahead, it said in May, was that confidence and risk appetite would gradually improve and that the worst was over. That proved much too sanguine.

Since then, Lehman has gone bust, Freddy Mac, Fannie Mae and Bradford & Bingley have been nationalised and vast chunks of the world's banking system are only still operating because of the life support systems provided by governments - supplying gargantuan doses of liquidity and the promise of vast injections of capital.

At the last count, £5 trillion (or £750 for every human on the planet) has been proffered to the banks by governments desperate to avoid financial anarchy.

Of course, almost by definition, the Bank has to be positive and calming. One of its two main functions is the preservation of financial stability. In these extraordinarily dicey conditions, any opinion other than cautious confidence would be an open invitation for Hollywood-style levels of panic, complete with hysterical crowds rampaging down Threadneedle Street.

There are two promising indicators. The cost of insuring bondhonders of banks against default has fallen sharply in the past fortnight. And the interest rates the banks charge one another has eased in some cases.

However, some fresh worries have emerged in the past few weeks. Hedge funds are being forced into fire sales to meet margin calls and to repay a growing army of customers wanting their money back. Insurance companies, which are seeing their asset values shredded, could be vulnerable to ratings agency downgrades that could pitch them into a downward spiral. Emerging market economies are getting deeper into trouble, as the lengthening queue of mendicants outside the IMF attests.

Much will depend on the extent to which the banks can be persuaded to lend over the next two to three years. Too sharp a contraction of credit would topple more into bankruptcy. The banks need to pull back lending but only very gently and gradually or they will be caught in a vicious negative feedback loop, pushing more people into difficulty and so turning more loans sour.

They have only enough capital to withstand a recession of early 1990s severity. Anything worse and taxpayers will probably have to be tapped a second time.

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