BANK OF ENGLAND WARNS OF AI RISKS TO FINANCIAL STABILITY

The Bank of England has warned that rapid advances in artificial intelligence pose heightened risks to financial stability, according to its latest Financial Stability Report. The central bank cautioned that frontier AI models are increasingly capable of exploiting software vulnerabilities, which could increase the sophistication and impact of cyber attacks on firms including banks and market infrastructure. The Bank also noted that share prices of AI companies have risen sharply amid increased investment in the sector, with valuations becoming "more stretched" according to the Financial Policy Committee. Economists at the Bank warned of an increased likelihood that multiple financial issues will materialise simultaneously.

The report identified broader economic pressures beyond AI-related concerns. The central bank highlighted "more pronounced" vulnerabilities linked to risky assets and private credit so far this year, with the conflict in the Middle East increasing uncertainty in the global economy. The Bank stressed that UK lenders and consumers remain "resilient" despite these identified risks. The report modelled that a hypothetical sharp correction in AI stock valuations could reduce UK GDP by as much as 2.2 percentage points, with particular exposure in the United States equity markets potentially spilling into the UK.

On Tuesday, the Bank proposed loosening regulations on lenders' capital introduced following the 2007 financial crisis. The new capital buffer framework would reduce leverage requirements on large domestic-focused UK banks by approximately 20 basis points, though this reduction would vary by individual bank. The Bank's Financial Policy Committee indicated that risks to stability have increased in 2026 overall.