We have previously written about the possible economic and litigation implications of mushrooming corporate debt. Now, the Federal Reserve has flagged some of those same concerns.

In its semi-annual monetary policy report to Congress last Friday, the Fed expressed anxiety regarding the amount of debt taken on by American companies. Even “before the outbreak of the pandemic,” business debt was “already elevated.” Now, amidst the pandemic, “business leverage now stands near historical highs.”

The Fed took a sanguine view of “near-term risks,” stating that low interest rates and other factors provide cause for optimism in the short term. But the Fed appears more worried about longer-term risks, citing “considerable” insolvency concerns at small, medium, and even some large firms. If bankruptcies do result, then the economic pain can be expected to spread to securitized corporate debt—also known as collateralized loan obligations, or CLOs—and trigger litigation over the quality of the underlying bonds.