The Bank of England has warned that the rapid expansion of artificial intelligence is creating new risks for financial stability, highlighting elevated market expectations, growing leverage and increasing cyber threats linked to the technology, according to a report by Bloomberg.
In its latest Financial Stability Report, the central bank said optimism surrounding AI has become an important source of market risk, particularly if expectations for widespread commercial adoption fail to materialise. It cautioned that a sharp reassessment of AI-related valuations could trigger broader market volatility, especially given concentrated investor positioning and the use of leverage by some market participants, including hedge funds.
The Bank said successful AI investment depends on several factors, including profitable deployment of the technology, continued development of supporting infrastructure and sustained access to financing. Should confidence in those assumptions weaken, equity markets could face a significant correction, amplified by crowded momentum trades and leveraged positions.
The report also highlighted rising debt levels among AI-focused companies, noting that borrowing used to finance investment in the sector could become a source of stress if expected earnings fail to emerge. Limited transparency around some financing arrangements could further complicate any market disruption.
Alongside market risks, the Bank identified AI as an increasingly significant operational and cybersecurity challenge for financial institutions. While advances in artificial intelligence may strengthen defensive capabilities, they could also enhance the sophistication of cyberattacks, leaving the overall balance of risks uncertain.
The central bank said the widespread adoption of AI is also likely to require more frequent software upgrades across the financial sector, increasing the potential for operational disruption during system updates.
The latest assessment builds on recent comments from Bank of England Deputy Governor Sarah Breeden, who has suggested existing regulatory frameworks may not be sufficient to address increasingly autonomous AI systems. Speaking last month, Breeden said the emergence of agentic AI could require dedicated regulation, arguing that supervisory models based on continuous human oversight may become increasingly difficult to maintain.
Despite identifying new AI-related vulnerabilities, the Bank concluded that the UK banking sector remains resilient overall. It also outlined proposals designed to give banks greater flexibility to draw down capital buffers following periods of stress in order to support lending to the real economy.
The report noted that previously identified vulnerabilities—including elevated asset valuations, high levels of public debt and risks associated with private credit markets—continue to warrant close monitoring alongside the emerging challenges posed by artificial intelligence.
