Bank of England Warns AI, Debt Risks Threaten Financial Stability

LONDON — The Bank of England's Financial Policy Committee warned Wednesday that the likelihood of interconnected financial system vulnerabilities crystallizing has risen, citing the re-escalation of conflict in Iran, higher AI-related debt issuance and elevated oil and gas prices that have pushed bond yields to levels unseen since 2008. The FPC kept its Countercyclical Capital Buffer at 2%, saying markets have proven resilient but a sharp adjustment remains possible. Governor Andrew Bailey, who chairs the committee, said in a separate article that frontier AI demands "rigorous model testing" before tighter regulation, adding that understanding and credible intervention points must come first. The FPC flagged a "rapid increase" in AI-related debt issuance, which Morgan Stanley estimated in early September at around $450 billion globally, double 2025's level, raising capital markets' exposure to AI developments. The BoE will publish detailed proposals in early 2027 on bank leverage rules and the gilt repo market, with consultation starting early next year. Net gilt repo borrowing totals about £200 billion ($270 billion).