Bank of England Warns AI-Driven Leverage Raises Financial Stability Risks

The Bank of England published its July 2026 Financial Stability Report, warning that vulnerabilities in risky asset valuations, sovereign debt and private credit markets persist and have in some cases intensified since its December assessment. The Financial Policy Committee highlighted a substantial increase in the use of leverage in equity markets, particularly around a narrow set of artificial-intelligence-related stocks whose valuations have become stretched, leaving global indices more concentrated and exposed to a sharp correction if investor expectations about AI earnings shift. The report also noted that the scale of debt financing supporting AI infrastructure is growing rapidly, meaning an adverse shock to AI companies could more materially affect global financing conditions in future. Separately, the committee said rapid progress in frontier AI models is increasing financial stability risks, especially around cyber security and operational resilience, underscoring the need for firms to manage these risks carefully. Despite these concerns, the FPC judged that the UK financial system has remained resilient and continued to support the real economy, and it announced changes to the bank capital framework intended to make the regime more proportionate.