The Bank of England has warned that financial risks in the United Kingdom have increased this year, driven by high valuations of companies investing in artificial intelligence, risky lending, and leveraged positions in government bond markets. This assessment was published in the Bank’s semi-annual Financial Stability Report on Tuesday.
The report notes that the UK banking sector remains well capitalised, and domestic corporate and household debt levels are low. However, overseas exposures and certain segments of the financial system are exerting pressure on market stability.
Governor Andrew Bailey stated, “Financial stability risks have increased this year. Key sources include geopolitical tensions, fragmentation in trade and financial markets, and pressures in sovereign debt markets.”
He added, “With governments facing rising expenditure pressures globally, their ability to respond to future shocks may be more constrained than in the past.”
Investor enthusiasm for AI has pushed US stock valuations to levels last seen during the dotcom bubble and UK valuations to their highest since the 2008 global financial crisis. Increased links between AI firms and credit markets mean that any asset price correction could amplify lending losses and threaten financial stability.
The report cites the collapse of US companies First Brands and Tricolor as early warning signs of potential broader problems. Hedge funds’ leveraged activity in the gilt repo market reached record levels, raising concerns that any sudden funding shortage could force large sales of government bonds.
Deputy Governor Sarah Breeden noted, “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 critical focus area.”
Key UK Financial Risk Indicators
| Topic | Details |
|---|---|
| Risk Sources | AI investments, risky lending, leveraged government bond positions |
| Domestic Banking | Well capitalised |
| Overseas Risk | High; pressure in other financial markets |
| Hedge Fund Activity | Record leveraged positions in gilt repo market |
| Market Impact | Potential lending losses from asset corrections |
| Measures | Private market stress testing; central bank monitoring |
AJ
Source- InsuranceJournal