Bank of England warns AI could amplify market and cyber risks

The Bank of England has warned that artificial intelligence is emerging as a growing threat to financial stability, citing heightened market expectations, rising leverage and increasing cyber risks linked to the technology.

In its half-yearly assessment of risks to Britain's financial system, released on Tuesday, the central bank said earlier concerns over elevated share price valuations, high public debt, and risky private credit lending to businesses remained in place.

However, it also identified new risks that have become more pronounced since its previous report.

The BoE said these include increased borrowing by investors, including hedge funds, to purchase shares, significant debt taken on by AI-related companies to finance investments, and the rapid expansion of AI's potential to cause harm.

Despite highlighting these risks, the central bank said Britain's banking system remains resilient.

It also outlined proposals aimed at making it easier for banks to reduce the amount of capital they hold after a crisis, allowing them to continue supporting lending across the economy.

AI expectations could amplify market volatility

The Bank of England said current market optimism surrounding AI assumes the technology will achieve widespread profitable adoption, supported by successful infrastructure development and continued access to financing.

According to the central bank, any deterioration in these expectations could trigger broader market instability.

"A reassessment of these prospects could trigger a fall in equity prices that might be amplified by high concentration, correlated momentum-driven positions that can exacerbate volatility as markets fall, and increased leverage," the BoE said.

The report added that the long-term financial sustainability of AI-related companies will depend on their future earnings potential.

"Considerations around the future earnings potential for AI-related companies will also be relevant to the sustainability of these companies' debt," the BoE said.

The central bank also noted that limited transparency around how AI-related companies finance themselves could worsen financial stress during periods of market disruption.

Regulators increasingly focused on AI risks

The BoE said regulators around the world have stepped up their focus on the risks associated with artificial intelligence.

These include cyber and operational risks linked to frontier AI models, as well as challenges created by increasingly capable agentic AI systems that can operate with limited human intervention.

The report follows comments made by BoE Deputy Governor Sarah Breeden at the end of June, when she signalled for the first time that bespoke regulation for artificial intelligence may be required to address emerging risks posed by advanced autonomous systems.

Cyber and operational risks remain uncertain

In its latest assessment, the Bank of England said it remains unclear whether advances in AI will ultimately provide a greater advantage to cyber attackers or strengthen the capabilities of those defending financial systems.

However, the central bank said the growing use of AI is likely to require financial firms to update their software more frequently. While such updates may improve security and functionality, they could also increase the risk of operational disruption.

Overall, the BoE said that although the UK's banking sector remains resilient, the combination of elevated market expectations for AI, growing leverage, cyber threats and operational challenges warrants close monitoring as artificial intelligence becomes increasingly integrated into the financial system.