Bank of England Warns Rapid AI Advances Are Raising Financial Stability Risks

The Bank of England has warned that rapid advances in artificial intelligence are increasing risks to financial stability, in its Financial Stability Report published on 7 July. The Financial Policy Committee said vulnerabilities have become more pronounced in 2026 across risky assets, sovereign debt and credit markets, including private credit, with the conflict in the Middle East adding to global uncertainty. AI featured prominently. The committee said equity valuations, particularly for AI-related companies, have become more stretched, market concentration has increased and hedge fund leverage has risen significantly, all of which could amplify a shock. It cautioned that a hypothetical fall in AI stock values could produce a sharp correction in equity markets, especially in the US, which could spill into the UK and reduce GDP by as much as 2.2 percentage points. The report also flagged unprecedented AI investment driving heavy demand for debt financing while uncertainty persists over future profits and productivity gains, and highlighted heightened cyber security and operational resilience risks from frontier models. Despite this, the committee concluded that UK households, businesses and banks remain broadly resilient. Separately, the Bank has proposed a new capital buffer framework that would reduce leverage requirements on large domestic-focused UK banks.