Bank of England governor Andrew Bailey has warned of a severe downturn in global stock markets if the AI bubble bursts.
Mr Bailey sent a two-page letter to G20 finance ministers and central bank governors as part of his role as chair of the International Financial Stability Board (FSB), raising concerns over the economic collapse if the debt-fuelled AI investment boom unravels.
He warned that the soaring levels of debt used to fund AI could “amplify a future market correction”, explaining that if the valuation of these companies collapsed, then investors faced the prospects of losing trillions of dollars overnight, triggering a chain reaction in the market if they are then forced to sell other assets.
The governor said investors borrowing huge sums to invest in a small number of AI companies and data centre providers had pushed up valuations to unsustainable levels, compounding the risks. Mr Bailey warned that the “stretched asset valuations” in AI could trigger a sharp economic slump.
“Markets remain vulnerable to a potentially disorderly correction that could spread across borders,” he warned. “The issue is not simply that investors are borrowing more but that leverage is interacting with high valuations and market concentration.
“The risk landscape has been further complicated by the emergence of frontier AI models, which are showing increasingly sophisticated autonomy and problem-solving abilities, as well as threat capabilities. For the financial system, the most immediate concern is the potential impact of frontier AI on cyber risk.
“Frontier AI may have the ability materially to alter the speed, scale and economics of cyber risk, which could undermine market confidence system-wide.
“The global financial system is highly interconnected and cyber disruption can spread across jurisdictions through common technology providers, shared infrastructure and cross-border financial activity.”
Mr Bailey’s warning comes after a number of companies reported incidents of AI agents going rogue and tricking internal systems to launch cyber attacks elsewhere. Anthropic revealed that its AI models hacked into three organisations during an experiment.
He said: “Recent developments have also highlighted to me that many jurisdictions do not have the protocols to manage the development, release and deployment of advanced frontier AI models, heightening risks for the financial sector and beyond.”
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