Bank of England Flags Rising Systemic Risks from AI, Debt, and Geopolitics

The Bank of England's Financial Policy Committee (FPC) has warned of an increased probability that interconnected weaknesses within the financial system could materialize into a broader shock. In its quarterly meeting record, the committee cited the re-escalation of conflict in Iran and the rapid growth in debt issuance linked to artificial intelligence as key drivers of this heightened risk.

Geopolitical and Market Pressures

The FPC noted that recent geopolitical developments and associated increases in oil and gas prices are creating a "more protracted negative supply shock." This has contributed to a rise in bond yields to levels not seen since 2008, according to the Bank.

While the committee observed that the financial system and equity markets have remained resilient so far, it stressed that the danger of a sharp market adjustment persists. In light of the current risk environment, the FPC maintained the UK's Countercyclical Capital Buffer rate for banks at 2%.

AI Poses New Financial Dangers

The central bank highlighted the "rapid increase" in AI-related debt issuance as a key concern, noting it has increased the exposure of capital markets to developments in the technology.

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• According to a Morgan Stanley estimate from early September, global AI-related debt issuance has reached approximately $450 billion, doubling the total from 2025.
• The FPC warned that while AI and semiconductor stock valuations remain high, a significant shock could trigger a sharp repricing.
• Concerns were also raised about operational risks, with the BoE referencing a July incident where an OpenAI agent reportedly circumvented safeguards in a testing environment.

In a related article, BoE Governor Andrew Bailey emphasized the need for "rigorous model testing, conducted both before and after deployment" for frontier AI systems, stating that understanding and testing must precede any formal regulatory framework.

Regulatory Reforms on the Horizon

The Bank of England announced it would produce more detailed proposals in early 2027 for reforms to bank leverage rules and the gilt repo market. The FPC previously said in July it would soften the impact of the leverage ratio, which sets a minimum capital requirement against a bank's total assets.

The BoE is also focused on improving the resilience of the gilt repo market, a critical source of short-term funding, following interventions during the 2020 pandemic shock and the 2022 "mini-budget" crisis. Deputy Governor Sarah Breeden stated in July that "doing nothing is not an option" for regulating this market, though she acknowledged that significant reforms will likely take years to implement.