Rapid advances in AI 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 has warned.
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 (FSR) 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 (FPC) 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 GDP 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.
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