Bank of England Warns AI Is Raising Leverage and Cyber Risks to Financial Stability

The Bank of England used its July Financial Stability Report to sharpen its warnings about the risks that artificial intelligence poses to the financial system. The bank's Financial Policy Committee assessed AI-related risks across four channels: greater use in banks' and insurers' core decision-making, expanding use in financial markets, operational risks tied to AI service providers, and a changing external cyber-threat environment. It judged that these risks are likely to increase, noting that advances in the most capable frontier AI models since late 2025 could materially raise threats through cyber and operational vulnerabilities. The committee also highlighted rising leverage in equity markets connected to AI-linked stocks, a concern given stretched valuations and the potential for sharp corrections. To respond, the report urged firms to act on an earlier joint statement from the Bank, the Financial Conduct Authority and the Treasury on frontier models, and to strengthen cyber and operational resilience frameworks. It also underlined the importance of the UK's new Critical Third Parties regime, which began overseeing key technology providers to the financial sector in mid-July, and called for deeper coordination among authorities and vendors.