The Zhitong Finance App learned that the Bank of England warned on Wednesday that valuations in the artificial intelligence sector are still facing “more drastic adjustments” than in July, and pointed out that such pullbacks may have a broad impact on global economic growth and sovereign bond yields.
Bank of England policymakers said in the quarterly financial stability report that interrelated vulnerabilities in the financial system are rising, and the possibility that multiple risks will erupt at the same time is increasing. The multi-trillion dollar artificial intelligence market is an important source of risk; in addition, the “further escalation” of the Middle East conflict is also a risk factor.
The Financial Policy Committee (FPC) wrote in the minutes of its quarterly meeting: “The possibility that interconnected vulnerabilities in the financial system will become a reality has increased.” The report added: “Specifically, the renewed escalation of the conflict and the associated rise in oil, gas and refined oil prices are leading to a negative supply shock that lasts longer.”
The committee notes that rising oil and gas prices have pushed bond yields to levels not seen since 2008. Despite the resilience of the financial system and stock markets so far, the FPC warns that the risk of drastic adjustments remains. The Commission kept the countercyclical capital buffer (CCyB) unchanged at 2%.
AI-related debt issuance surges
According to FPC, the “rapid increase” in AI-related debt issuance has also increased capital market exposure to AI trends. In early September, Morgan Stanley estimated that the total amount of AI-related debt issued globally was about $450 billion, double that of 2025.
The committee mentioned that AI and semiconductor stocks fell sharply in July, but the market is still operating in an orderly manner. Valuations are still high, and if there is a more significant impact, it may trigger more drastic repricing.
President Bailey is concerned about cutting-edge AI risks
The FPC is chaired by Bank of England Governor Andrew Bailey and is responsible for focusing on financial stability risks. In an article on AI risks published at the same time as FPC records, Bailey further elaborated on his concerns about cutting-edge AI risks and emphasized the need for “strict model testing before and after deployment” before more stringent regulations are implemented.
He wrote, “Over time, a more formal regulatory framework is likely to take shape. But in my opinion, regulation is not the right place to start. Understanding, testing, and establishing credible intervention points must come first.”
Network and operational risk
A series of events have heightened policymakers' concerns that AI systems might bypass protective measures, including an incident in July where an OpenAI agent left a controlled testing environment and hacked AI company Hugging Face.
The Bank of England said: “These developments reinforce the Commission's judgment... that advances in AI may increase network and operational risks.”
Domestic judgments and follow-up arrangements
At the domestic level, the Commission judged that British households and businesses are still resilient, and that the UK banking system has sufficient capital and abundant liquidity.
The Bank of England said it will propose a more detailed plan on bank leverage rules and adjustments to the rules relating to the UK treasury bond repurchase market in early 2027. The Commission said in July that it would mitigate the impact of the leverage requirement (which requires banks to hold a minimum percentage of capital in terms of total assets), and public consultation on the relevant adjustments will begin early next year — the central bank said it “increases the importance of continuing to develop and implement measures to enhance the resilience of the British Treasury bond repurchase market.”
According to Bank of England data, net borrowing in the UK treasury bond repurchase market is around £200 billion (US$270 billion); the central bank said hedge fund leverage has remained high but stable in recent months.
The central bank has warned many times before that asset bubbles may be forming in various fields, including AI-related stocks, credit markets, and sovereign debt; in the previous financial stability report in July, the FPC estimated that if there is a sharp correction in the AI sector stock market, it could drag down the UK's GDP by up to 2.2 percentage points.