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The Editors

This Is a Test of the Shadow Banking System

Turmoil in debt markets offers insight into what's good -- and what's not.
Banks and shadows.

Banks and shadows.

Photographer: Andrew Harrer/Bloomberg

It's hard to know how bad the latest turmoil in the market for risky corporate debt will become. Already, though, it offers some insight into what's good -- and what could be better -- about the so-called shadow banking system.

Over several years following the 2008 recession, in an effort to reap better returns amid extremely low interest rates, investors piled into higher-yielding debt issued by companies with relatively shaky finances. This is a classic example of shadow banking: People put their savings into various types of funds, which in turn provided hundreds of billions of dollars in financing to companies, largely bypassing traditional banks.