Artificial intelligence is set to boost economic productivity, but at the same time it may become a source of new threats to financial stability. This is the conclusion reached by the Bank of England in its latest Financial Stability Report, in which it has, for the first time, so explicitly linked the development of AI to market risk, debt and cybersecurity.
The Bank of England points out that investor enthusiasm for AI companies has led to an increase in the use of financial leverage. Investment funds are increasingly borrowing to buy shares in AI-related companies, whilst firms in this sector are themselves financing infrastructure expansion through debt at an ever-increasing rate. According to the Bank of England, the current scale of investment is unprecedented.
However, the Bank emphasises that current valuations are based on several ambitious conditions being met. This will require the widespread and cost-effective deployment of AI, the development of appropriate infrastructure, and continued access to finance. If any of these elements fails, investors may sharply revise their expectations.
“A reassessment of these prospects could trigger a fall in share prices, which could be exacerbated by high concentration, correlated momentum-driven positions that may amplify volatility as markets fall, and increased leverage” – warns the Bank of England.
At the same time, the regulator points to growing operational risks. Increasingly sophisticated AI models are able to detect software vulnerabilities more quickly, which could make cyberattacks on banks and financial institutions more effective. On the other hand, the same technology can help defend against such attacks. The Bank acknowledges that, at this stage, it is difficult to assess definitively which side will gain the upper hand.
In practice, however, this means that systems will need to be updated more frequently, which in itself increases the risk of operational disruptions.
At the end of June, Sarah Breeden, Deputy Governor of the Bank of England, also suggested the need to develop new regulations for autonomous AI systems. “Our framework was not designed to accommodate autonomous agents, and relying on human intervention in a feedback loop for all of an agent’s actions is unlikely to be realistic,” she said.
Despite the growing risks, the Bank of England assesses that the UK banking sector remains resilient. At the same time, the report highlights a shift in the regulators’ approach. AI is no longer viewed solely as a technology that boosts productivity, but also as a factor that could affect the stability of the entire financial system.
