AI tops the Fed's list of financial-system worries

The Federal Reserve's twice-yearly health check of the financial system has put AI at the top of the risks its contacts worry about, named by 87% of survey respondents 2

. That lands with force because, per the report, AI investment has been a major driver of US growth this year: the growth engine and the most-cited risk are the same sector 1

Source: ET

The 87% is not the Fed's own judgment. It is the share of the market participants, economists, analysts and institutional contacts the central bank surveys who called AI a salient risk 2

. The survey runs twice a year, and the previous edition, published in May, put AI at 50%, so concern roughly doubled in six months 6

. AI led the next concern, a broad sell-off in risk assets at 52%, by 35 percentage points 4

Source: ET

What the worry actually is

Respondents flagged three distinct areas of AI concern, as the report summarizes them 2

. The first is equity valuations that could fall if earnings disappoint. The second is cybersecurity, whether from state-backed attackers or from damage caused by frontier AI models themselves. The third is complex AI-related financing 2

. Some respondents said stretched valuations, circular financing and heavy reliance on debt could amplify losses, spilling over into business investment and household spending 3

. Some also noted AI advances are lowering the barrier to sophisticated cyberattacks 3

Source: Reuters

The debt behind it

The Fed's own data underpins the concern. Debt tied to advanced computing reached $680 billion by October, five times the total issued in all of 2023 1

. Debt, guarantees and leases not yet begun on AI infrastructure could exceed $3 trillion, the Fed's own upper estimate 6

. The report also flagged circular financing, in which long-term contracts, leases, guarantees and equity stakes can let hyperscalers support smaller firms' borrowing. It presented both directions: large firms could absorb losses and shield the wider system, and their true exposure could be substantially larger than balance sheets show 1

. The Fed compared the buildout to the late-1990s broadband telecom boom, while saying the current cycle may soon surpass that one 4

Stable, with sharp edges

The Fed judged the system otherwise fairly stable. One pocket it called out: hedge fund leverage sits at its highest since the Fed began tracking it in 2013, concentrated among a small group of firms 2

. On the AI interlinkages, the report's own words were that they "create vulnerabilities that necessitate close monitoring" 6

. No new rules were proposed; the stated response is monitoring.

Fieldwork ran in September and October, before Nvidia's chief executive stepped down and before the midterm elections, so neither event is in these numbers 1

. In exit polling, 56% of voters in this month's midterms said data centers were a crucial or major factor in their vote 2

AI tops the Fed's list of financial-system worries, and the worry has a number behind it

What the worry actually is

The debt behind it

Stable, with sharp edges

References

AI rockets to top of worries about financial system in latest Fed survey

AI risks are the biggest threat to the financial system, Fed survey finds

AI is now Wall Street's biggest nightmare: 87% of experts warn of risks to financial system, Fed survey finds

AI rockets to top of worries about financial system in latest Fed survey

AI risks top financial stability concerns, Fed reports By Investing.com

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