The Bank of England has warned the financial system is at risk of a “sharper correction” than happened over the summer because of the growing reliance on debt to fund the boom in AI infrastructure. AI-related debt issuance totalled $450bn in the year to September, more than double all of last year, the BoE said in its quarterly update on financial stability, citing estimates by Morgan Stanley. Global AI-related debt sales are expected to exceed the amount of bonds sold by the UK government this year.

Shares in AI-linked companies and semiconductor makers slumped in July before recovering as investors responded to concerns over earnings potential. The BoE said the “risk of a sharper correction persists”, notably if there is a shock to earnings expectations reflecting concerns around AI development or adoption. The FPC said if AI-driven productivity gains fail to boost growth, it would affect AI asset valuations and sovereign debt markets.

Andrew Bailey, BoE governor, said regulators “cannot stand aside” and assume the AI industry will resolve risks, including models going rogue or being used for cyber attacks. However, he said “understanding, testing and establishing credible points of intervention must come first”.

Overall vulnerabilities have increased, the central bank said, blaming the war in Iran, energy prices, inflation, high government debt and rising interest rates. It also warned that high leverage at hedge funds betting on UK government bond markets was intensifying risks. The BoE said it would examine market-based measures for gilt repo markets and publish proposals early next year.