The Bank of England has warned that risks linked to artificial intelligence and rising debt are becoming more closely connected to the wider financial system, increasing the possibility of a sharper market adjustment.
In its September Financial Policy Committee record, published Wednesday, September 30, the central bank said the likelihood of interconnected vulnerabilities crystallising had risen. It pointed to the rapid growth of AI-related debt issuance, elevated AI valuations and renewed geopolitical tensions that have pushed up energy prices and sovereign bond yields.
The Financial Policy Committee (FPC) said oil, gas and refined-product prices had risen following the renewed escalation of the conflict in the Middle East, contributing to a more prolonged negative supply shock and pushing sovereign bond yields in several advanced economies to levels not seen since 2008.
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The financial system has remained resilient so far, the committee said, but it warned that the combination of vulnerabilities leaves the market exposed to a sharper adjustment.
AI borrowing reaches $450 billion
The BoE highlighted the rapid increase in borrowing to finance AI investment. Morgan Stanley estimates cited by the central bank put global AI-related debt issuance at around $450 billion as of early September, more than double the total for all of 2025.
The increase means developments in AI are becoming relevant to a wider range of investors and funding markets. The FPC also cited estimates that around $4.1 trillion in AI-related capital expenditure could be financed through debt between 2026 and 2030.
Private credit is also expected to play a growing role in financing AI infrastructure. Morgan Stanley estimates that around $700 billion of data-center capital expenditure between 2026 and 2028 could be financed through private credit.
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The BoE said the combination of higher leverage, limited transparency and, in some cases, complex or “circular” financing arrangements could make risks harder to assess and amplify losses if expectations for AI investment fail to materialize.
The central bank also warned that a reassessment of expected productivity gains from AI could affect more than technology companies. If investors lower their expectations for AI development and adoption, the resulting adjustment could spread from AI-related assets to sovereign debt markets.
AI valuations remain a concern
AI-related and semiconductor stocks fell sharply in July, with some leveraged investors forced to unwind positions. The sell-off did not spill over into core financial markets, and the BoE said market functioning remained orderly.
However, AI valuations remain high, supported by expectations of strong future earnings. The FPC warned that a larger shock to those expectations could trigger a sharper repricing.
The committee also pointed to recent incidents involving frontier AI systems operating in testing environments. It said increasingly autonomous models had demonstrated the ability to take unexpected actions, including exploiting software vulnerabilities and accessing systems beyond their intended tasks.
The BoE said such incidents reinforced concerns over cyber and operational risks for financial institutions and called on firms to prepare for those risks.
Bank of England Governor Andrew Bailey made a similar point in an article published alongside the committee’s record. He argued that authorities should first understand, test and establish credible intervention points for frontier AI before relying on a formal regulatory framework.
“Understanding, testing and establishing credible points of intervention must come first,” Bailey wrote.
Energy prices add pressure
AI risks are emerging alongside renewed pressure on global financial markets from higher energy prices.
The FPC said the escalation of the Middle East conflict had increased uncertainty over economic growth and interest rates while higher oil, gas and refined-product prices were contributing to a prolonged supply shock.
Higher sovereign bond yields have tightened financial conditions, although the BoE said UK households and companies remain resilient and the country’s banking system is appropriately capitalized and highly liquid.
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The committee kept the UK’s countercyclical capital buffer at 2%, its neutral setting. The buffer is designed to give banks additional capital that can absorb losses when financial risks increase.
BoE prepares further market reforms
The central bank also set out a timetable for changes to bank leverage rules and the UK gilt repo market.
The BoE expects to consult on proposed leverage-ratio reforms in early 2027. It also plans further measures to strengthen the resilience of the gilt repo market, where institutions use government bonds in short-term financing transactions.
The FPC said hedge-fund leverage in the gilt market remains elevated but stable. It has previously identified concentrated leveraged positions as a potential source of vulnerability during periods of market stress.
