Bank of England warns AI infrastructure debt could trigger market drop

In short: The Bank of England says a surge in borrowing to fund AI infrastructure is increasing the risk of a sharp fall in financial markets.

What's going on

The Bank of England said the financial system could face a “sharper correction” than the one seen over the summer, as more money is being borrowed to build and run AI infrastructure. AI infrastructure includes expensive things like data centres (warehouses full of computers), chips, and networking equipment.

In the year to September, AI related debt issuance reached about $450bn, according to the Bank of England, citing estimates by Morgan Stanley. That is more than double last year’s level. The Bank also said AI related bond sales could exceed the amount of bonds sold by the UK government this year.

The Bank’s Financial Policy Committee said this fast growth means more of the financial markets are now tied to how well AI companies perform. It pointed to a recent example when shares in AI linked companies and some chipmakers fell in July and then recovered. It said the risk of another drop remains, especially if expectations about profits fall because AI adoption is slower than investors hope.

Governor Andrew Bailey also said regulators cannot simply assume the AI industry will handle these risks on its own. He warned about broader concerns too, including advanced AI systems being misused for cyber attacks.

What to watch

Watch for signs that AI companies are not meeting revenue expectations, or that investors are pulling back from funding new AI projects. The Bank said the system has held up so far, but it also noted other pressures like higher energy prices, inflation, and high government debt levels, which can make markets more fragile.

Source: Financial Times