Bank of England warns AI hype could trigger global market crash

The Bank of England warned on Wednesday that global financial markets could face a “sharp correction” if investor sentiment turns negative on artificial intelligence or the U.S. Federal Reserve’s independence. The central bank’s Financial Policy Committee issued its strongest warning to date about AI-triggered market risks, noting that U.S. stock valuations have reached levels similar to the dotcom bubble peak and expressing concern about potential spillovers to Britain’s financial system.

The big picture: Market concentration and AI-driven valuations have created unprecedented vulnerability in global financial markets.

• The five largest companies now represent 30% of the S&P 500’s total valuation, marking the greatest concentration in 50 years.
• Share valuations based on past earnings are the most stretched since the dotcom bubble 25 years ago.
• This concentration leaves markets “particularly exposed should expectations around the impact of AI become less optimistic,” the BoE said.

Fed independence concerns: Political pressure on the Federal Reserve could trigger widespread market volatility with global consequences.

• President Donald Trump has repeatedly urged the U.S. central bank to slash interest rates and has sought to remove one of its policymakers.
• “A sudden or significant change in perceptions of Federal Reserve credibility could result in a sharp repricing of U.S. dollar assets, including in U.S. sovereign debt markets, with the potential for increased volatility, risk premia and global spillovers,” the BoE warned.

UK exposure risks: British financial markets remain closely tied to U.S. market movements, amplifying potential contagion effects.

• British government borrowing costs are closely correlated with U.S. Treasury yields.
• A fall in U.S. bond prices would likely push up the cost of servicing new British public debt.
• Thirty-year gilt yields hit their highest since 1998 last month, with shorter-maturity yields also rising.

Domestic stability assessment: The BoE found little change in domestic financial stability risks despite ongoing economic pressures.

• Households and businesses continue to cope with rising inflation, forecast to have hit 4% in September.
• Risk managers surveyed by the BoE expressed more confidence in British financial system stability than six months ago.
• Main domestic dangers are viewed as coming from cyberattacks and geopolitical factors.

Regulatory stance: The central bank maintained its current regulatory framework for banks.

• The countercyclical capital buffer (CCyB) remains steady at 2%.
• The minimum leverage ratio stays at 3.25% after annual review.
• No changes were made to main tools for regulating banks.