The Bank of England has warned that financial risks in the United Kingdom have risen this year, due to heavy investment in artificial intelligence, risky lending, and leveraged positions in government bond markets. This was highlighted in the BoE’s semi-annual Financial Stability Report released on Tuesday.
The report notes that the UK banking sector remains well capitalised and that domestic corporate and household debt levels are low. Nevertheless, overseas exposures and certain corners of the financial markets are exerting pressure.
Governor Andrew Bailey stated, “Overall risks to financial stability have increased this year. The main sources include geopolitical tensions, fragmentation of trade and financial markets, and pressures on sovereign debt markets.”
He added, “Governments around the world face rising expenditure pressures, which may limit their ability to respond to future shocks.”
Investor enthusiasm for AI has pushed stock valuations in the United States to levels last seen during the dotcom bubble and to their highest levels in the UK since the 2008 financial crisis. Increased connections between AI firms and credit markets mean that any asset price correction could amplify lending losses and financial stability risks. Bailey said, “Even if AI succeeds, there is no guarantee that all currently high-value firms will remain winners.”
The report cited the collapse of US firms First Brands and Tricolor as early warnings of potential broader issues. Leveraged activity by hedge funds in the gilt repo market has reached record highs. Should financing dry up suddenly, these funds may be forced into fire sales of government bonds.
Deputy Governor Sarah Breeden commented, “The resilience of the gilt repo market underpins the sovereign bond market, forming the foundation of all UK financial market activity. It is therefore a primary area of focus.” The BoE plans to conduct stress tests on private market resilience.
Key UK Financial Risk Indicators
| Topic | Details |
|---|---|
| Risk Sources | AI investments, risky lending, leveraged positions in government bonds |
| Domestic Banking | Well capitalised |
| Overseas Risk | High; pressure in other financial markets |
| Hedge Fund Activity | Record leveraged positions in gilt repo market |
| Market Impact | Lending losses in case of asset price corrections |
| Measures | Stress tests; BoE monitoring |
AJ
Source- InsuranceJournal