Global economic growth is slowing and the US is moving into recession. Large indebted industries such as telecommunications and airlines are in deep trouble. Consumer spending has provided the main grounds for business optimism, but it is largely funded by borrowing.

It is hardly surprising, therefore, that credit spreads have widened, reflecting market fears that the quality of loans is deteriorating. Non-performing loans have been increasing in the US and bad debt provisions are up sharply. In Europe, the downward trend in bad debts has bottomed out and provisions are also rising.

Yet there are few signs yet of the sort of banking crises that afflicted several leading industrial countries in the late 1980s and early 1990s. Provisions in both the US and Europe are well below levels a decade ago - and in Europe remain below the five-year average.

"Every time something happens, such as the Asian turmoil in 1997 or the more recent problems of the telecom industry, people think there will be a banking crisis," says Sam Theodore, managing director of financial institutions at Moody's, the credit ratings agency. "Individual banks may suffer but the market is repeatedly surprised to find nothing more serious happens."

Banks are less susceptible to such events because they have become much stronger over the last decade. One reason is they are better capitalised, a consequence of the 1988 Basle Accord that set international standards for the amount of capital banks should hold. Banks have increased their capital by more than 50 per cent since 1988, helping them ride out the storms of the 1990s.

At the same time, the world's leading banks have become more diversified through mergers and acquisitions, relying less on profits made from lending to companies and individuals. Over the past 10 years, most large banks have targeted fee-earning businesses such as private banking, wealth management for the mass affluent, custody services for institutional investors and bancassurance - selling insurance to their customers. Loan exposures to industries such as telecoms or airlines are large in absolute terms, but have become smaller as a proportion of banks' balance sheets than in the 1980s.

Most of the world's largest lenders now routinely publish their exposure to individual industries, which rarely exceed 4 per cent of their portfolios and are usually much less. Some regulators are concerned that these figures underestimate the impact of sectoral crises - a meltdown in telecoms, for example, would hit the industries that manufacture equipment, as well as the operators. But most analysts believe the pain in telecoms is more likely to be felt by the shareholders than by the lenders, since the operators remain in businesses that create sufficient income to service loans.

One other consequence of the greater diversity of bank income is it has helped boost profitability, especially among European banks that have made efforts to raise meagre returns on capital. The diversified activities often yield higher returns than lending to consumers and businesses in overcrowded banking markets. When bad debt provisions have to be made, banks have a greater profit cushion before they are thrown into losses.

Even when credit problems arise, however, most lenders are better equipped to deal with them, having invested in systems for evaluating the riskiness of loans and monitoring them when times change. From simple credit scoring for individual consumers through to sophisticated risk assessment for the largest borrowers, banks can now much more accurately vet loans, fix a realistic interest rate margin and set aside appropriate capital on their balance sheets.

Andrew Stott of Oliver Wyman, an international financial services strategy consultancy, says the result is that banks are better able to manage credit risks. "Risks can't be eliminated, but banks with more advanced risk management tools can identify credit deterioration at an earlier stage," he says. "They can help borrowers restructure their loans or take more security to reduce the chances of default. They can also change their pricing for new business to reflect the changed risk environment."

Planned revisions to the Basle Accord will allow banks to use such systems in evaluating the amount of capital they need to hold rather than crude yardsticks set by regulators. The revised accord is expected to encourage wider adoption of such systems, since using internal risk ratings could allow banks to reduce their regulatory capital.

Finally, banks are now passing on much of the risk inherent in lending to other financial institutions, using credit derivatives as well as more traditional methods such as syndication of loans among groups of lenders. While some banks, for example, were in the vanguard of lending to the telecoms industry, they were quick to disperse the risk through the financial system, typically retaining only small amounts of such debt on their own balance sheets.

"Risk is better spread around the markets than it used to be," says Diane Glossman, banking analyst at UBS Warburg in New York. "The risk still exists and somebody holds it - but the banks hold less."

The credit derivatives market has grown rapidly in recent years, and is now estimated to cover more than $1,000bn of loans globally. This has been welcomed by regulators both for diversifying risk and contributing to more accurate pricing of loans, though this has been coupled with warnings about over-reliance on a market that has yet to be tested during an economic slowdown.

The scale of credit derivatives remains small in relation to the overall lending market but banking crises can be sparked by single defaults. And nothing can protect banks if there is a more generalised economic crisis with widespread defaults by borrowers large and small and difficulties afflicting several important industrial sectors at once.

For now, however, the view of most analysts is that the global banking system is ready to deal with the expected level of turbulence. "In relation to last time, banks are much better prepared - more capital, more reserves, better risk assumptions," says Warburg's Ms Glossman. "They are better equipped to deal with whatever comes down the pike."