It noted that the share of investment-grade bonds rated at the lowest level has reached near-record highs, making up about 35 percent of corporate bonds outstanding, amounting to roughly $2.25 trillion in debt. The Fed said that, in an economic downturn, widespread downgrades of these bonds might spark a rapid sell-off, which could increase liquidity and price pressures in the corporate bond market. 

Another concern is who is doing the borrowing. The report noted that, in previous years, primarily high-earning firms with relatively low leverage were taking on the most additional debt. Over the past year, however, that spot goes to firms with high leverage, high interest expense ratios and low earnings and cash holdings. However, at the same time, the Fed noted that with interest rates low by historical standards, debt service is a lot cheaper, particularly for risky firms. Overall corporate credit performance has remained generally favorable. 

The report also pointed to areas where the financial sector is strong. In particular, it said that the nation’s largest banks are strongly capitalized, and leverage of broker-dealers is substantially below pre-crisis levels. Insurance companies, also, have also strengthened their financial position since the crisis. The report also said that funding risks in the financial system are low relative to the period leading up to the crisis, as banks hold more liquid assets, and money market mutual funds are less vulnerable to destabilizing runs by investors.