Rapid AI advances increasing financial stability risks, Bank of England warns
The Bank of England has warned that rapid advances in artificial intelligence are leading to increased risks to financial stability due to concerns about cyber attacks and “more strained” share valuations in the sector.
The central bank also warned that it has seen “more pronounced” vulnerabilities linked to risky assets and private loans so far this year as conflict in the Middle East increases uncertainty in the global economy.
Economists at the bank have warned that there is an increasing likelihood that multiple issues will become clear at once.
The bank’s latest Financial Stability Report (FSR) revealed increased risks to stability in 2026 but stressed that UK lenders and consumers remain “resilient”.
He highlighted that artificial intelligence is a particular area where risk has increased since its previous meeting, amid a period of rapid technological development where investors are pumping more cash into the sector.
The bank said progress in artificial intelligence technology has shown “a significant increase in risks to financial stability arising from cyber and operational vulnerabilities.”
Frontier AI models can increasingly exploit vulnerabilities in software and therefore increase “the sophistication and impact of cyberattacks on firms,” including banks and market infrastructure.
During the same period, share prices of artificial intelligence companies increased due to increased investment demand in the sector and positive earnings news.
The Financial Policy Committee (FPC) said valuations have become “further stretched” due to concerns about a potential AI bubble.
The report highlighted that a hypothetical drop in the value of AI stocks could lead to a “drastic” correction in equity markets, especially in the US.
He said this possible sharp correction could spread to the UK and affect UK GDP by up to 2.2 per cent.
It was also noted that “unprecedented” investments have been made in the sector in an environment where artificial intelligence companies using credit markets are rapidly increasing.
The Bank on Tuesday proposed relaxing some of its regulations on lenders’ capital, which were put in place in the wake of the 2007 financial crisis.
A new capital buffer framework would reduce the leverage requirements of large locally focused UK banks by around 20 basis points (0.2 percentage points), but this would vary by bank, he said.
Leverage restrictions were introduced in the wake of the financial crisis, but the FPC launched a review of the rules last year amid industry concerns that the restrictions were too stringent.
A consultation will be held, expected to conclude next year.
