The Bank of England Sounds the "Bubble Alarm" Again: AI Valuations May Experience "More Dramatic Corrections"

According to Zhitong Finance APP, the Bank of England warned on Wednesday that valuations in the field of artificial intelligence still face "more severe adjustments" than in July, noting that such corrections could have broad impacts on global economic growth and sovereign bond yields.

In its Quarterly Financial Stability Report, Bank of England policymakers stated that interconnected vulnerabilities within the financial system are rising, and the likelihood of multiple risks erupting simultaneously is increasing. The trillion-dollar artificial intelligence market is one of the key sources of risk; in addition, the "renewed escalation" of the Middle East conflict is also a contributing risk factor.

The Financial Policy Committee (FPC) wrote in the minutes of its quarterly meeting: "The likelihood of interconnected vulnerabilities in the financial system materializing has risen." The report added: "Specifically, a renewed escalation of the conflict, along with associated increases in oil, natural gas, and refined oil product prices, is leading to a more prolonged negative supply shock."

The committee pointed out that the rise in oil and gas prices has pushed bond yields to levels not seen since 2008. Although the financial system and equity markets have so far demonstrated resilience, the FPC warned that the risk of sharp corrections remains. The committee will maintain the Countercyclical Capital Buffer (CCyB) at an unchanged level of 2%.

Surge in AI-related Debt Issuance

The FPC stated that the "rapid increase" in AI-related debt issuance has also increased capital markets' exposure to AI trends. Morgan Stanley estimated in early September that the total amount of global AI-related debt issuance was about $450 billion, twice the amount for 2025.

The committee noted that AI and semiconductor stocks experienced a sharp drop in July, but market operations remained orderly. Valuations remain elevated, and the onset of a more significant shock could trigger even more severe repricing.

Governor Bailey Focuses on Frontier AI Risks

The FPC is chaired by Bank of England Governor Andrew Bailey, with responsibilities focused on financial stability risks. In an article on AI risks released concurrently with the FPC minutes, Bailey further elaborated on his concerns about frontier AI risks and emphasized the need to "conduct rigorous model testing both before and after deployment" before stricter regulation is implemented.

He wrote: "Over time, a more formal regulatory framework is likely to emerge. But in my view, regulation is not the appropriate starting point. Understanding, testing, and establishing credible intervention points must come first."

Cyber and Operational Risks

A series of events has heightened policymakers' concerns that AI systems may bypass safety measures. In one July incident, an OpenAI agent escaped a controlled testing environment and infiltrated the AI company Hugging Face.

The Bank of England stated: "These developments reinforce the committee's judgment... that advances in AI may increase cyber and operational risks."

Domestic Judgments and Next Steps

Domestically, the committee judges that UK households and businesses remain resilient, and the UK banking system is well-capitalized and highly liquid.

The Bank of England said it will propose more detailed plans for adjustments to bank leverage rules and UK government bond repo market regulations at the beginning of 2027. In July, the committee had indicated it would moderate the impact of leverage requirements (which mandate banks to hold a minimum proportion of capital relative to total assets). Public consultation on these adjustments will begin early next year—the Bank noted that this "increases the importance of continuing to formulate and implement measures to enhance the resilience of the UK government bond repo market."

According to Bank of England data, the net borrowing size of the UK government bond repo market is about £200 billion ($270 billion); the Bank said hedge fund leverage has remained at relatively high but stable levels in recent months.

The Bank has previously issued multiple warnings that asset bubbles may be forming in several areas—including AI-related stocks, credit markets, and sovereign debt. In the previous Financial Stability Report in July, the FPC estimated that if there were a sharp correction in the AI sector's stock market, UK GDP could be dragged down by up to 2.2 percentage points.