Washington has been trying to bolster the financial system for the last five years so it can deal with mayhem in the markets. The turmoil this week will test those rebuilding efforts.
Investors, after months of piling into risky markets in search of returns, are now stampeding out.
In recent weeks, they have dumped junk bonds issued by American companies, particularly energy companies that have borrowed heavily to exploit the shale oil boom. A steep slide in the price of oil could now cause some of the companies to default, analysts say.
The most dangerous pain, however, is occurring abroad. Russia has a full-blown currency crisis, caused partly by the oil price decline. And oil’s move has fed fears about other countries. Turkey’s currency reached a record low on Tuesday, and Brazil’s currency has weakened sharply in recent days. Venezuela’s government bonds have plunged to levels that indicate that investors think a default is probable.
Such difficulties echo the crisis that buffeted markets in the developing world in 1998, when Russia actually defaulted on debt denominated in rubles. And the global convulsions of that year infiltrated the financial system of the United States, even though the country’s economy was performing well, as it is now.
Back then, contagion made its way onto Wall Street through an enormous hedge fund called Long-Term Capital Management that nearly collapsed after making bets way beyond its means.
The parallels with 1998 have led investors and regulators to ask if any similarly dangerous weak points exist today. And if they do, the question is whether the big banks are sturdy enough to bear the shocks. For the moment, many specialists say the system is sufficiently girded.
“This doesn’t threaten the banks and other financial institutions because they are considerably stronger than they were a few years ago,” said Donald Kohn, a senior fellow at the Brookings Institutionand a governor of the Federal Reserve during the 2008 financial crisis.
The banks are stronger today because they rely less on borrowed money to finance their trading and lending. And the Wall Street banks are not lending as much money to hedge funds and other investors to make highly speculative bets that could be vulnerable right now.
Also, the current problems overseas are largely in countries where American banks have limited activities. This puts global banks in a significantly better position than in 2011 and 2012, when the existence of the euro was threatened and investors were fleeing from Europe’s banks.
“The number of connections between the U.S. and European financial sectors are certainly much deeper than the connections between the U.S. and Russian financial sectors,” said Timothy A. Duy, a professor of economics at the University of Oregon. He cautions, however, that some European banks are more exposed to Russia.
Still, the big banks continue to rely on billions of dollars in short-term loans that could dry up in a panic, causing the financial system to freeze up. And even if that type of financing holds up, banks and hedge funds can be caught out when markets move in wild and unexpected ways. For instance, Jefferies, the New York investment bank, on Tuesday reported a 73 percent decline in fourth-quarter revenue in its unit that trades bonds. Some of that decline came from marking down securities that it holds.
The markets are also tripping big investors. Saba Capital, the hedge fund of Boaz Weinstein, has performed poorly this year.
Officials of the Federal Reserve met on Tuesday and will continue to meet on Wednesday to discuss monetary policy. They will most likely debate whether the upsets in the markets will harm the economy. The tumble in junk bonds, for instance, could close a way some companies finance their operations, which could lead them to cut production and employment. That threat hangs heavily over the energy company borrowers, which have contributed significantly to recent job growth.
But Mr. Kohn said he did not think the market conditions were bad enough to persuade the Fed to deviate from its path of slowly tightening monetary policy.
“My expectation is that they would see this as a downside risk, but not necessarily as a central tendency that would push off tightening,” he said.
Some investors are more concerned about geopolitical risks undermining economic confidence. The plunging oil price, for instance, could create even harder economic times for countries like Russia and Iran. A political eruption in a large oil-producing country could act as a heavy drag elsewhere. Geopolitical instability could undermine the efforts of Europe and Japan to get out of the doldrums.
But low oil prices might also constrain governments that have stoked instability.
The latest instability may have other positive effects. It may turn out to be a mini-1998 that expunges some of the froth from markets that, until recently, seemed to defy gravity.
“Investors should react to markets that are riskier than they anticipated,” Mr. Kohn said. “Some adjustment is justified.”
A version of this article appears in print on 12/17/2014, on page B1 of the NewYork edition with the headline: Test for Post-Crisis Financial System.