Luke Barr
Updated ,first published
Andrew Bailey, governor of the Bank of England, has warned of a severe downturn in global stock markets if the AI bubble bursts.
In a letter to G20 finance ministers, Bailey raised concerns over the economic fallout if the debt-fuelled AI investment boom begins to unravel. He warned that the soaring levels of debt that have been used to fund AI “could amplify a future market correction”.
If the valuation of AI companies starts to plummet, investors face the prospect of losing trillions of dollars overnight. This could trigger a dangerous chain reaction if they are then forced to sell other assets.
Bailey said the risk was compounded by investors borrowing huge sums to invest in a small number of AI companies and data centre providers, pushing up their valuations to astronomical levels.
Nvidia, which is worth more than $US5.2 trillion ($7.3 trillion), recently raised $US500 billion from a consortium of US banks and investors to fund its AI investment spree. Its share price has risen by 850 per cent over the past five years.
Bailey warned that “stretched asset valuations” in AI are one factor that could trigger a sharp economic slump.
“Markets remain vulnerable to a potentially disorderly correction that could spread across borders,” he said. “The issue is not simply that investors are borrowing more but that leverage is interacting with high valuations and market concentration.”
Bailey’s warning was issued as the UK government unveiled a £100 million ($189 million) fund to back British AI start-ups. It forms part of an attempt to boost the UK’s sovereign AI capabilities, which are well behind those of the US and China.
In Bailey’s letter – sent as chairman of the Financial Stability Board, which works with central banks and governments around the world – he also warned that AI risked unleashing a wave of cyberattacks that could cripple the global economy.
He highlighted the threat posed by frontier AI, which covers the world’s most cutting-edge models, developed by tech giants such as OpenAI and Anthropic.
“The risk landscape has been further complicated by the emergence of frontier AI models, which are showing increasingly sophisticated autonomy and problem-solving abilities, as well as threat capabilities,” he said.
“For the financial system, the most immediate concern is the potential impact of frontier AI on cyber risk.
“Frontier AI may have the ability materially to alter the speed, scale and economics of cyber risk, which could undermine market confidence system-wide.”
He warned that a cyberattack at a major institution could rapidly unleash chaos across the world’s financial markets.
“The global financial system is highly interconnected and cyber disruption can spread across jurisdictions through common technology providers, shared infrastructure and cross-border financial activity,” he said.
His warning comes after a number of tech giants have reported incidents of AI agents going rogue, deceiving internal systems to launch cyberattacks elsewhere.
US tech giant Anthropic has previously said that its AI models hacked into three organisations on their own during a private experiment.
Bailey said examples such as this should serve as a wake-up call for governments around the world. The letter was sent before a meeting between G20 finance ministers and central bank governors in North Carolina.
He said: “Recent developments have also highlighted to me that many jurisdictions do not have the protocols to manage the development, release and deployment of advanced frontier AI models, heightening risks for the financial sector and beyond.”
He also noted how current economic risks are higher based on “fragilities in sovereign debt markets”. This refers to a recent rise in global borrowing costs, led by the US after its debt pile crossed $US40 trillion for the first time.
Bailey warned some hedge funds are not only exposed to AI investment but also own government debt.
“In addition, a growing footprint of leveraged entities, such as hedge funds in equity markets, which are also exposed to sovereign debt, increase the scope for contagion risk,” he said.
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