Bank of England flags AI risks as threat to financial stability amid investor speculation

Bank of England sees growing risks to financial stability from AI

By David Milliken and Phoebe Seers LONDON, July 7 (Reuters) - The Bank of England said on Tuesday that artificial intelligence poses a growing threat to financial stability, as investors bet heavily it will prove a success while the technology increases banks' vulnerability to cyberattacks. In a half-yearly assessment of risks to Britain's financial system, the central bank said previous risks it had identified from stretched share price valuations, high public debt and risky private credit lending to businesses had not gone away. But since its last report, it highlighted additional dangers from investors - including hedge funds - borrowing to buy shares, AI-related companies borrowing heavily to fund investments and rapid growth in AI's capacity for harm. Despite this, ⁠it judged that Britain's banking system remained resilient and set out proposals to make it easier for banks to run down the amount of capital they hold after a crisis in order to sustain lending to the economy. For investors' bets on AI to pay off, the BoE said there would need to be widespread profitable adoption of the technology, effective build-out of new infrastructure and easy access to finance for the sector. "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. "Considerations around the ⁠future earnings potential for AI-related companies will also be relevant to the sustainability of these companies debt," it added, noting that a lack of transparency about how they borrowed could worsen a crisis. Regulators globally have begun to focus more keenly on the impact of AI, from cyber and operational risks associated with frontier AI models such as Anthropic's Mythos ⁠to the challenges posed by agentic systems capable of acting with limited human intervention. At the end of June, BoE Deputy Governor Sarah Breeden signalled for the first time the need for bespoke AI regulation to contain risks posed by ⁠increasingly capable agentic systems. "Our frameworks were not built to contemplate autonomous agents, and relying on a human in the loop for all agent actions is unlikely to be realistic," Breeden said. In Tuesday's report, the BoE ⁠said it was unclear if better AI strengthened the hand of attackers or those seeking to defend financial systems. But it was likely to require more frequent software updates by financial firms, which themselves carry a risk of operational disruption. (Reporting by David Milliken and Phoebe Seers) (([email protected], opens new tab; +44 20 7513 4034)) Keywords: BRITAIN BOE/ Our Standards: The Thomson Reuters Trust Principles., opens new tab

Bank of England sees growing risks to financial stability from AI

The Bank of England identifies artificial intelligence as a growing threat to financial stability. Investors are heavily betting on AI's success, increasing banks' cyberattack vulnerability. Previous risks like high debt and credit lending persist alongside new AI dangers. The central bank proposes measures to ease capital requirements for banks after a crisis. Britain's banking system remains resilient, but AI's future impact requires careful monitoring. The Bank of England said on Tuesday that artificial intelligence poses a growing threat to financial stability, as investors bet heavily it will prove a success while the technology increases banks' vulnerability to cyberattacks. In a half-yearly assessment of risks to Britain's financial system, the central bank said previous risks it had identified from stretched share price valuations, high public debt and risky private credit lending ⁠to businesses ⁠had not gone away. But since its last report, it highlighted additional dangers from investors, including hedge funds borrowing to buy shares, AI-related companies borrowing heavily to fund investments and rapid growth in AI's capacity for harm. Despite this, it judged that Britain's banking system remained resilient and set out proposals to make it easier for banks to run down the amount of capital they hold after a crisis in order to sustain lending to the economy. For investors' bets on ⁠AI to pay off, the BoE said there would need to be widespread profitable adoption of the technology, effective build-out of new infrastructure and easy access to finance for ⁠the sector. "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. "Considerations around the future earnings potential for AI-related companies will also be relevant to the sustainability of these companies debt," it added, noting that a lack of transparency about how they borrowed could worsen a crisis. Regulators globally have begun to focus more keenly on the impact of AI, from cyber and operational risks associated with frontier AI models such as Anthropic's Mythos to the challenges posed by agentic systems capable of acting with limited human intervention. At the end of June, BoE Deputy ⁠Governor Sarah Breeden signalled for the first time the need for bespoke AI regulation to contain risks posed by increasingly capable agentic systems. "Our frameworks were not built to contemplate autonomous agents, and relying on a human in the loop for all agent actions is unlikely to be realistic," Breeden said. In Tuesday's report, the BoE said it was unclear if better AI strengthened the hand of attackers or those seeking to defend financial systems. But it was likely to require more frequent software updates by financial firms, which themselves carry a risk of operational disruption.

Rapid AI advances raising financial stability risks - Bank of England

(Alliance News) - Rapid advances in artificial intelligence have led to heightened risks over financial stability amid concerns about cyber attacks and "more stretched" stock valuations in the sector, the Bank of England warned Tuesday. The central bank also cautioned that it has seen "more pronounced" vulnerabilities linked to risky assets and private credit so far this year, as the conflict in the Middle East has increased uncertainty in the global economy. Economists at the bank warned there is an increased likelihood that numerous issues will crystalise at the same time. The bank's latest financial stability report found that risks to stability have increased in 2026 but stressed that UK lenders and consumers are still "resilient". It highlighted that AI has been a particular area where risk has grown since its previous meeting, amid a period of rapid technological development as investors pump more cash into the industry. The bank said progress in AI technology presents "a significant increase in the risks to financial stability from cyber and operational vulnerabilities". Frontier AI models are increasingly capable of exploiting software vulnerabilities and could therefore increase the "sophistication and impact of cyber attacks on firms", including banks and market infrastructure. Over the same period, the share price of AI firms has shot higher amid increased demand to invest in the sector and positive earnings news. The Financial Policy Committee said that valuations "have also become more stretched" amid concerns of a potential AI bubble. The report highlighted that a hypothetical fall in the value of AI stocks could result in a "sharp" correction in the equity markets, particularly in the US. It said this possible sharp correction could spill into the UK and hit UK gross domestic product by as much as 2.2 percentage points. It also highlighted "unprecedented" investment in the sector amid a rapid increase in AI firms using credit markets. On Tuesday, the bank proposed to loosen part of its regulations of lenders' capital, which were introduced following the 2007 financial crisis. It has indicated that a new capital buffer framework would reduce the leverage requirements on large domestic-focused UK banks by around 20 basis points [0.2 percentage points], but that this will vary by bank. The leverage restrictions were launched following the financial crisis but the FPC launched a review into the rules last year amid industry concerns that the restrictions were too tight. A consultation will take place, which is expected to conclude next year. By Henry Saker-Clark, Press Association Deputy Business Editor