According to a report from Zhitong Finance APP, the Bank of England warned on Wednesday that valuations in the artificial intelligence sector still face the risk of a "more violent adjustment" than in July, and noted that such a pullback could have broad implications for global economic growth and sovereign bond yields.

In its quarterly financial stability report, Bank of England policymakers said that interconnected vulnerabilities within the financial system are on the rise, increasing the likelihood that multiple risks will erupt simultaneously. The multi-trillion-dollar artificial intelligence market is one of the major sources of risk; in addition, the "renewed escalation" of conflict in the Middle East is also a risk factor.

The Financial Policy Committee (FPC) wrote in its quarterly meeting minutes: "The probability that interconnected vulnerabilities in the financial system will materialize has increased." The report added: "Specifically, the renewed escalation of conflict and the associated rise in oil, natural gas, and refined product prices are giving rise to a longer-lasting negative supply shock."

The committee pointed out that rising oil and gas prices have pushed bond yields to levels not seen since 2008. Although the financial system and stock markets have so far shown resilience, the FPC warned that the risk of a sharp correction remains. The committee kept the countercyclical capital buffer (CCyB) unchanged at 2%.

Surge in AI-related debt issuance

The FPC said the "rapid increase" in AI-related debt issuance has also raised capital markets' exposure to developments in AI. Morgan Stanley estimated in early September that total global AI-related debt issuance was about $450 billion, double the level of 2025. The committee noted that AI and semiconductor stocks fell sharply in July, but market functioning remained orderly. Valuations remain elevated, and a more significant shock could trigger a more violent repricing.

Governor Bailey focuses on frontier AI risks

The FPC is chaired by Bank of England Governor Andrew Bailey, and its mandate focuses on financial stability risks. In an article on AI risks published alongside the FPC minutes, Bailey further elaborated on his concerns about frontier AI risks and stressed the need for "rigorous model testing both before and after deployment" before stricter regulation can be put in place. He wrote: "Over time, a more formal regulatory framework is likely to emerge. But in my view, regulation is not the right starting point. Understanding, testing, and establishing credible intervention points must come first."

Cyber and operational risks

A series of incidents has heightened policymakers' concerns that AI systems could bypass safeguards, including an incident in July in which an OpenAI agent escaped a controlled testing environment and breached the AI company Hugging Face. The Bank of England said: "These developments reinforce the committee's judgment... that advances in AI may increase cyber and operational risks."

Domestic assessment and next steps

On the domestic front, the committee judged that UK households and businesses remain resilient, and that the UK banking system is adequately capitalized and liquid. The Bank of England said it will set out more detailed proposals in early 2027 on adjustments to bank leverage rules and rules related to the UK government bond repo market. The committee said in July that it would soften the impact of the leverage ratio requirement (which requires banks to hold a minimum proportion of capital against total assets), and public consultation on the relevant adjustments will begin early next year — the central bank said this "increases the importance of continuing to develop and implement measures to enhance the resilience of the UK government bond repo market."

Bank of England data show that net borrowing in the UK government bond repo market is about 200 billion pounds ($270 billion); the central bank said hedge fund leverage has remained at a high but stable level in recent months. The central bank has previously warned repeatedly that asset bubbles may be forming in multiple areas, including AI-related stocks, credit markets, and sovereign debt; in its previous financial stability report in July, the FPC estimated that a sharp correction in AI-sector stock markets could drag down UK GDP by as much as 2.2 percentage points.