Bank of England Warns AI-Linked Debt and Market Leverage Raise Stability Risks

The Bank of England's Financial Policy Committee has warned that vulnerabilities in risky asset valuations, sovereign debt and credit markets, including private credit, persist and in some cases have intensified since its December assessment, according to its July Financial Stability Report. The committee highlighted a significant increase in the use of leverage in equity markets and cautioned that a sharp correction could have outsized consequences. A central theme was the rapid rise of debt financing tied to artificial-intelligence infrastructure: the pace of AI investment is described as unprecedented, and companies are increasingly turning to the financial system, particularly debt markets, to fund it. While the risks have so far been contained by relatively modest outstanding debt, the committee warned that an adverse shock to AI firms that hurt their ability to service borrowing could materially tighten global financing conditions as that debt grows. The report also flagged that rapid advances in frontier AI are raising financial-stability risks around cyber security and operational resilience. Despite geopolitical developments weighing on the global risk environment, the committee judged that the UK financial system had remained resilient and continued to support the real economy.