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The Bank of England’s Financial Policy Committee said interconnected risks to financial stability had increased at its 25 September meeting. It highlighted higher sovereign yields, growing AI-related borrowing and AI-linked cyber and operational risks, while judging UK households, businesses and banks resilient.
The Bank of England’s Financial Policy Committee (FPC) said the likelihood of interconnected vulnerabilities hitting the financial system at the same time had risen since July. In its record of a 25 September 2026 meeting, the committee pointed to renewed Middle East conflict, higher sovereign bond yields, risky market valuations and growing artificial intelligence (AI) financing as sources of concern, while saying the UK banking system remained strong enough to support households and businesses in a stress.
The FPC said the conflict’s re-escalation and increases in oil, gas and refined product prices were contributing to a more prolonged negative supply shock. Sovereign yields had risen across several advanced economies to levels not seen since 2008, tightening global financial conditions. The committee said financial markets had so far been resilient and adjustments had mostly been gradual, but warned that elevated hedge fund leverage in the gilt market left a risk of a sharper move. It pointed to the Bank’s work on gilt repo market resilience.
Equity markets had also broadly withstood higher yields, although valuations for AI companies fell sharply in July. The FPC said the drop was amplified by the unwinding of stretched positions and deleveraging. Some leveraged investors with concentrated positions recorded significant losses, but the committee reported no spillover to core markets. It said a more substantial shock to expectations for AI earnings or adoption could still prompt a sharper correction.
The record also highlighted the rapid growth of debt financing for AI investment. Global issuance in 2026 was expected to exceed that of countries such as the UK, the FPC said. It warned that rising company indebtedness, limited transparency and, at times, “circular arrangements” could make risk harder to assess and increase losses if expectations fell short. Separately, recent incidents in frontier AI test environments, in which autonomous models took unexpected actions, have heightened concerns about cyber and operational resilience.
Risks Could Reinforce Each Other
The committee’s central concern is that pressures in one market could compound vulnerabilities elsewhere. If expectations for AI growth were reassessed, the consequences could extend beyond technology company valuations: the FPC said growth and fiscal outlooks also partly depend on anticipated productivity gains from AI. That could connect a market correction to sovereign debt markets at a time when yields are already elevated.
For households and businesses, the record offers a mixed assessment. The FPC judged them resilient and said the UK banking system was appropriately capitalised and held high levels of liquidity. That assessment matters because banks’ capacity to keep lending can help limit the effects of financial stress on the wider economy. It is not a guarantee against future shocks: the committee stressed that interconnected risks remain capable of crystallising together.
From July’s Outlook to September
The September record updates the FPC’s assessment from its previous meeting in July. Since then, the committee said, renewed conflict in the Middle East had added uncertainty about economic growth and interest-rate paths in several advanced economies. Higher energy prices contributed to the supply shock and sustained increases in sovereign yields.
The committee also linked two developments in AI: more financing flowing into AI investment, including through debt, and concerns about the resilience of systems using advanced models. It urged firms to engage with guidance and analysis from regulators, the National Cyber Security Centre and sector groups, including the Cross Market Operational Resilience Group, Frontier AI Information Sharing Forum and AI Consortium. The record said the private markets System-Wide Exploratory Scenario exercise was underway to address data gaps and improve understanding of how private credit could be affected by stress.
How Risks May Unfold
The record does not specify whether or when the identified vulnerabilities will crystallise, or quantify the potential losses from a simultaneous market shock. It also does not provide a precise forecast for the scale of AI-related debt issuance; it says global issuance in 2026 is expected to exceed that of countries such as the UK, without giving a figure in the material available here.
The extent to which AI earnings and productivity expectations will hold, and whether recent market losses could spread beyond affected leveraged investors, remain uncertain. The committee said risky credit markets, including parts of private credit, remained vulnerable to tighter financing conditions. Further data and analysis from the ongoing exploratory exercise are expected to improve understanding, but the record does not set out its findings.
Resilience Work Continues
The Bank’s work on resilience in the gilt repo market and the private markets System-Wide Exploratory Scenario exercise will continue. The latter is intended to fill data gaps and assess how private-market finance could fare under stress. The FPC also called on firms to prepare for AI-related cyber and operational risks by engaging with guidance from regulators, the National Cyber Security Centre and sector groups.
The record does not announce a new policy action or give a date for the next milestone in these exercises. The committee’s assessment may develop as market conditions change and more information becomes available on AI financing, private credit and firms’ operational preparedness.
Key Questions
What did the FPC conclude in September 2026?
It said interconnected financial vulnerabilities were more likely to crystallise together than at its previous meeting in July, while judging UK households, businesses and banks resilient.
Which financial risks did the committee highlight?
The record pointed to higher sovereign yields, risky asset valuations, vulnerable credit markets and growing AI-related debt financing. It also highlighted AI-linked cyber and operational risks.
Did the committee report that the UK banking system was in immediate trouble?
No. The FPC said the UK banking system remained appropriately capitalised, with high levels of liquidity, and strong enough to support households and businesses in a stress.
Why is AI financing a financial stability concern?
The committee said rapidly growing debt issuance, company indebtedness and opaque or circular financing arrangements could make risks harder to assess and amplify losses if expectations disappoint.
What happens next?
The Bank’s gilt repo resilience work and an exploratory exercise on private markets are ongoing. The FPC also called on firms to use guidance from authorities and sector groups to prepare for AI-related operational and cyber risks.
Source: primary
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