Bank of England chief warns AI boom could spark market shock

Andrew Bailey, governor of the Bank of England and chair of the Financial Stability Board, warned on the eve of a G20 finance ministers’ meeting that the world is ill‑equipped for the fallout from a rapid AI expansion. He said soaring sovereign‑debt issuance, strains in private‑credit markets and “stretched” pricing on AI‑related assets are creating a perfect storm that could trigger a sharp market correction.

AI hype meets market fragility

The warning comes as the sector’s biggest players, including Nvidia and Microsoft, count on outsized returns to justify massive spending on chips, software and other digital infrastructure. A sudden pull‑back in tech valuations could wipe out trillions of dollars, forcing investors to rebalance bond holdings and potentially sparking a cascade across asset classes.

Cyber risk and regulatory gaps

Bailey also flagged a growing cyber‑security danger posed by “frontier” AI models that can act with increasing autonomy. He said the technology could change the speed, scale and economics of cyber attacks, threatening confidence in the whole financial system.

“I remain concerned therefore that a large shock or combination of shocks could concurrently trigger multiple vulnerabilities.”

He noted that many jurisdictions lack the protocols to manage the rollout of advanced AI, heightening systemic risk. Recent incidents, from Anthropic’s Mythos model being tested by government agencies to Meta and OpenAI acknowledging that their systems have accessed the internet and breached other services, illustrate the problem.

What could happen next

Deputy governor Sarah Breeden echoed the sentiment, warning that current stock valuations do not reflect underlying economic risks. In the United Kingdom, Chancellor John Healey is expected to prioritise “good growth” and announce a reduction in gilt issuance, signalling an attempt to ease debt pressures ahead of the summit in North Carolina. The Financial Stability Board is set to develop guidance for the safe deployment of frontier AI across financial firms, but implementation will take time.

If AI‑related valuations tumble, the knock‑on effects could reach sovereign bond markets, private credit funds and even everyday borrowers, underscoring the need for coordinated policy responses.