AI investment boom may fuel financial risks: BIS
“This is one of the pressure points we see the global economy facing,” said Tao Zhang, BIS chief representative for Asia and the Pacific, adding that there are financial weaknesses related to AI-related financing. “Risk premia are being compressed, asset valuations are being stretched, and AI financing is increasingly being leveraged, and AI involves complex interactions within the supply chain,” he said. The BIS therefore underscores the need for macroprudential policies to withstand persistently strong risk appetite and underscores the importance of greater transparency in private credit markets, especially in sectors such as artificial intelligence, Zhang said.
The impact of frontier AI models
According to Zhang, edge AI models can increase the speed, scale and complexity of cyber attacks. Given the critical infrastructure role of the financial system, regular collaboration is essential. The same tools can strengthen cyber defenses by helping detect and remediate vulnerabilities, he said. The net impact on systemic cyber risk depends on several factors, primarily the computing power available to attackers and defenders. “Both domestic and international coordination on cybersecurity is critical. This was the case before the advent of border models, and it remains the case now. At the domestic level, the financial industry, central banks, and financial supervisors should collaborate with national security agencies and other stakeholders to accelerate vulnerability remediation and strengthen basic cyber hygiene practices,” Zhang said. he said.
West Asia and supply chains
Zhang said the conflict in West Asia had highlighted the risks of relying on a handful of critical trade routes and warned that the inflationary impact of such shocks could last longer than the initial disruption. Despite signs of easing geopolitical tensions and a sharp decline in oil prices, the effects of the disruption could linger further, he said.
“Inflation has risen. This increase could become permanent if businesses absorb higher input costs. This could sustain inflationary pressures after energy flows and oil prices normalize,” Zhang warned. On the policy front, he said central banks should prioritize medium-term price stability to stabilize inflation expectations. “To lay the foundations for solid and sustainable growth, monetary policy needs to be complemented by sound fiscal and macroprudential policies,” he said.
Disruptions associated with conflict in the Middle East and the closure of the Strait of Hormuz show that dependence on a small number of critical transit routes can create risks that extend beyond oil and gas markets, Zhang said. “Disruptions in critical inputs can create bottlenecks that affect wider production networks, regardless of the economic value of the component involved. Asian economies are particularly exposed to such disruptions,” he said.
Stronger supply chains will help economies like India weather supply-side disruptions, but such shocks could become more frequent in the coming years, Zhang said. “More robust global production networks will help economies, including India, address supply-side disruptions that may become more frequent in the coming years.”
