Readers may have noted the appearance of our Crunch-o-meter in recent days. This is our attempt to reflect, day by day, whether the credit crunch is getting better or worse. No single measure can do this fully, of course, and there has already been some pointy-headed sniffing about our methodology. But it does, we hope, give a flavour of banks' willingness to lend to one another and, therefore, the likely price and availability of credit to everyone else, whether personal or corporate, in future.

On most days recently, the Crunch-o-meter has pointed to “Better”. Conditions do seem to be getting a tiny bit easier, though there is still serious stress in the system.

That chimes with the Bank of England's own assessment. In its Financial Stability Report, out today, the Bank reckons that the most likely outcome in the next few months is a gradual improvement in conditions as investors realise that the prices of debt securities have overshot on the way down, having previously overshot on the way up.

Soon, the theory goes, bottom-fishing investors will come into the market, pushing up the price of existing debt, restoring confidence and balance-sheet strength to the banks and encouraging them to ease the terms and increase the supply of future lending.

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Certainly, that may already be happening in the paralysed market for loans to finance leveraged buyouts. Senior debt that was trading at around 80p in the pound a fortnight ago is changing hands for 90p now. Any improvement in the larger problem area of American sub-prime is likely to be patchy and slow at best, until house prices in the United States bottom out.

The Bank argues that the market is valuing mortgage-backed securities wrongly. Present prices, the Bank says, imply that three-quarters of all American sub-prime borrowers will default and that banks then will recover only half the value of their outstanding loans. That would constitute welching on an unprecedented scale. Perhaps the Bank is right. Debt investors will soon come out of their funk. In two or three years' time, we may well be saying that this was a fantastic time to Hoover up lashings of sub-prime debt at bargain prices. But, as Keynes remarked, markets can stay irrational longer than investors can stay solvent. There are still significant risks.

The danger most worrying Threadneedle Street is that banks remain too averse to risk and, therefore, continue to price new loans too highly or refuse to lend at all. That is why it has applauded Royal Bank of Scotland and HBOS, which have announced capital raisings, and is frowning at banks that have not. John Varley, Barclays's chief executive, who for now at least has turned his face against a share issue, should not count on a warm welcome next time he pops in for a fireside chat with Mervyn King.

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