The Bank of England has warned that the risk of several financial-system vulnerabilities crystallising simultaneously has increased as higher energy prices, stretched asset valuations, leveraged markets and rapid growth in artificial intelligence-related borrowing become more closely connected.
The Financial Policy Committee said renewed conflict in the Middle East had increased uncertainty around growth and interest rates in advanced economies. Higher oil and gas prices have pushed bond yields upwards, adding to pressure already evident in sovereign debt, risky credit and highly valued equity markets.
The committee kept the UK countercyclical capital buffer at 2%, indicating that it continues to regard the banking system as capable of absorbing stress while monitoring vulnerabilities elsewhere in the financial system.
Artificial intelligence has become a more prominent part of that assessment. Rapid growth in AI-related debt issuance has increased capital-market exposure to the sector as companies finance data centres, semiconductor capacity, energy infrastructure and other computing assets.
The issue extends beyond the amount of capital being committed. AI infrastructure is increasingly financed through public debt markets, private credit, leveraged finance and structured products, creating additional channels through which a reassessment of expected demand could affect lenders and investors.
The Bank had already highlighted those links earlier in the year. Assumptions around future computing demand, electricity availability and the depreciation of data-centre assets and advanced chips will influence whether large infrastructure investments ultimately generate expected returns.
Recent volatility in semiconductor and AI-related equities provided an early test. Markets remained orderly through that repricing, but elevated valuations leave the sector susceptible to larger adjustments if earnings, demand or financing expectations weaken materially.
Artificial intelligence is also entering the Bank’s assessment of operational resilience. Faster development of frontier systems has increased scrutiny of cyber security, automated decision-making and the possibility that advanced systems could circumvent safeguards protecting critical financial infrastructure.
The Bank’s immediate approach emphasises testing and understanding those systems rather than imposing a fixed regulatory framework before their capabilities and risks are sufficiently understood.
Separate reforms are being developed around leverage and the gilt repo market. The Bank expects to publish more detailed proposals in early 2027 covering bank leverage rules and measures intended to improve the resilience of gilt repurchase markets.
Net borrowing in the gilt repo market stands at about £200bn. Hedge-fund leverage has remained high but broadly stable, leaving policymakers focused on how an interconnected market would respond during another period of sharp repricing or declining liquidity.
The gilt market has already demonstrated how quickly liquidity can deteriorate. The Bank intervened during the initial pandemic shock in 2020 and again during the liability-driven investment crisis of 2022. Both episodes increased scrutiny of leverage and short-term financing in markets usually regarded as highly liquid.
The September assessment connects risks that previously might have been considered separately. Energy shocks can alter inflation and interest-rate expectations, rising yields can pressure sovereign and corporate debt, leveraged investors can amplify price movements, and growing AI financing can concentrate additional exposure in a fast-expanding asset class.
UK banks remain resilient enough for the FPC to leave the countercyclical buffer unchanged. The committee’s latest record nevertheless shows financial stability being considered increasingly through the connections between markets, borrowers and technologies rather than through isolated pockets of risk.
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