The Bank of England's Financial Policy Committee (FPC) said the likelihood that interconnected vulnerabilities in the financial system crystallise at the same time has risen since its previous assessment, in the record of its 25 September meeting published on 30 September. The committee, chaired by Governor Andrew Bailey, pointed to the re-escalation of the conflict in the Middle East and to the rapid increase in artificial-intelligence-related debt issuance, which it said had broadened the exposure of capital markets to developments in AI.
The FPC tied the reassessment to energy prices. It said oil, gas and refined product prices had risen significantly, with Brent crude above 100 dollars a barrel and UK gas prices above 175 pence per therm, producing what it called "a more protracted negative supply shock to the global economy". Sovereign bond yields across a number of advanced economies had risen to levels not seen since 2008, the record says, with gilt yields and US Treasury yields at those levels and Japanese government bond yields near three-decade highs. The committee attributed the move to both higher interest rate expectations and an increase in term premia, the additional compensation investors demand for holding longer-dated debt. It said persistently higher sovereign yields could tighten financing conditions for households and businesses, raise market volatility and constrain advanced economies' capacity to respond to future shocks.
On AI, the FPC set out the numbers behind its concern. As of early September, Morgan Stanley estimated that global AI-related debt issuance totalled around 450 billion dollars, more than double the total for all of 2025. JP Morgan analysts estimated that AI-related capital expenditure financed through debt issuance would total around 4.1 trillion dollars between 2026 and 2030, while Morgan Stanley estimated that 700 billion dollars of data-centre capital expenditure between 2026 and 2028 would be financed by private credit. Issuance by AI hyperscalers in sterling credit markets accounted for 47 percent of GBP corporate bond issuance so far this year, even though it remains much smaller than in the United States and the euro area. Global AI-related issuance in 2026 is expected to exceed that of countries such as the UK, the record says. The FPC warned that rising indebtedness, combined with opacity and at times "circular arrangements", complicates the assessment of risks and could amplify losses if expectations disappoint.
Market leverage is the second channel the committee flagged. It reported that gilt repo dealer net cash lending to key non-bank financial institution sectors had increased from around 100 billion pounds to around 200 billion pounds since 2023, based on Sterling Money Market Daily data, while global prime brokerage notional had doubled. Hedge fund leverage in the gilt market was described as stable but still elevated. The FPC agreed to proceed with the leverage ratio reforms it outlined in July, which the Bank of England expects to consult on in early 2027, and estimated that the package could increase leverage capacity at UK banks with significant market activity by around 5 percent. It said it would consider raising the general leverage ratio buffer above 25 basis points if it judged risks to be heightened and additional resilience warranted. A comprehensive update on work to improve gilt repo market resilience, including potential policy proposals, is due in early 2027. The countercyclical capital buffer was left at 2 percent.
The record is a risk assessment, not a forecast, and the FPC was explicit that the system has absorbed the move in yields so far. Market adjustments had been "mostly gradual". AI-related and semiconductor stocks fell sharply in July, and the sell-off forced some leveraged investors with concentrated positions to unwind, but market functioning remained orderly with no spillovers to core markets. Domestically, the committee judged UK households and corporates resilient and the banking system appropriately capitalised, with household and corporate debt around 70 percent and 50 percent of GDP respectively, and past stress tests showing banks could absorb a severe energy price shock. Among the vulnerabilities it did flag, the share of mortgage lending at high loan-to-income ratios rose to 14.1 percent in the current quarter, against a four-quarter rolling average of 12.0 percent, while official insolvencies were around 7 percent higher in July than the previous month but 5 percent lower than in July 2025.
Reuters reported that Bailey, in an article on AI risks published alongside the record, argued that "rigorous model testing, conducted both before and after deployment" should come before tighter regulation, adding that regulation was not, in his view, the right place to start.
Sources
- Bank of England, Financial Policy Committee Record, September 2026 (published 30 September 2026): bankofengland.co.uk
- Reuters via Global Banking and Finance Review, Bank of England sees growing risk that dangers from AI and debt will materialise (30 September 2026): globalbankingandfinance.com
