THE rescue of Bear Stearns has been greeted in some quarters as the salvation of the financial markets. The Federal Reserve's commitment to lend money to investment banks has revived sentiment towards them; American financial stocks rose by 11% in the week ending March 21st, according to Dresdner Kleinwort. There has been a strong rally in investment-grade bonds. Volatility has fallen in both share and currency markets.

But the rebound still looks vulnerable. First, there is the continued logjam in the money markets, where banks are still struggling to find funding. Three-month rates for euro-zone interbank loans hit 4.7% on March 25th, their highest level this year. In Britain bank borrowing costs touched 6%, three-quarters of a point above official rates. Banks may be desperate to hold on to their own money, lest they suffer the same fate as Bear Stearns, and investors may be suspicious about the financial health of the industry.

Second, there are signs of stress in emerging markets. Iceland has long been a favoured destination for the “carry trade”, whereby investors borrow in lower-yielding currencies to invest in higher-yielding ones. But the country's central bank this week raised interest rates to 15% and injected liquidity into the banking system, after Icelandic banks faced difficulty getting foreign financing following a 22% drop in the krona against the euro this year. Other carry-trade beneficiaries, such as Turkey, have also seen their currencies weaken and their financing costs rise. Joining the trend, Romania raised rates on March 26th to support its currency. These moves suggest investors are becoming more risk averse, not less.

Third, there is the evidence that investors are choosing to “deleverage”—or reduce their market positions in order to repay their debts. Deleveraging by hedge funds was blamed for the sharp fall in commodity prices that followed news of the Fed's latest interest rate cut. It may be that hedge funds decided to reduce their riskiest positions after the central bank indicated that it was still worried about inflation; a belief that the Fed was “asleep at the wheel” had previously been pushing raw materials prices up and the dollar down.

More humble investors than hedge funds are also having their access to credit restricted. IG Index, a British spread-betting firm, says it has increased the margin requirements for ordinary punters wanting to gamble on bank stocks, from 5% to 10%, and to as much as 20% for four more volatile stocks (Alliance & Leicester, Anglo Irish, Bradford & Bingley and Lehman Brothers). And Gavekal, an economic consultancy, says that American farmers are having problems hedging against changes in the wheat price, because of the cost of meeting margin requirements.

The problem with deleveraging is that it can create a self-perpetuating cycle. Tighter credit standards lead investors to sell assets, forcing down prices and making other lenders nervous about the creditworthiness of their borrowers. It can also cause some panicky price movements, as sellers, fearing further losses, unload their assets at almost any price.

As banks tighten credit, businesses and consumers will face pressure to cut spending (witness the latest fall in American durable-goods orders). The economic effects of that restraint will then feed back to the markets. “The Fed may have underwritten the solvency of the banks but the economic problems haven't gone away,” says Peter Oppenheimer, a strategist at Goldman Sachs.

What the world's monetary authorities have yet to show is that they can influence the banks' willingness to lend, as well as the rate at which they do business. Until they do, financial markets will continue to be vulnerable.