BoE warns AI boom may spur market shocks

Bank of England governor Andrew Bailey has warned that the rapid flow of money into artificial intelligence could trigger financial market shocks. He said the central bank is watching the large amounts being invested in AI "very carefully" and cautioned that "you could see some correction of asset prices at some point." Bailey added that in the current environment "everybody is currently priced to be a winner," but stressed that history shows "not everybody is a winner."

Bailey described AI as having "great potential to strengthen growth" while at the same time bringing "substantial risks." He said the Bank needs to be prepared for shocks to markets stemming from AI developments, including the possibility that a reversal in sentiment or a reassessment of prospects could lead to abrupt price moves. The comments place AI-driven asset valuations squarely within the central bank's financial stability focus.

Alongside his market warnings, Bailey argued that public authorities should retain a "right to intervene" in the AI industry. He called for "rigorous testing" of new AI models to understand how they behave and to identify "credible points" where authorities could step in if needed. He suggested that, over time, this understanding could be codified into standards for AI use in finance.

Bailey said regulation was "not, in my view, the right place to start," indicating that building knowledge and testing frameworks should precede formal rule-making. The emphasis is on ensuring that supervisors can see how powerful models operate within complex financial ecosystems and on defining clear points at which intervention would be justified to protect stability.

The Bank has also highlighted the cyber and operational vulnerabilities that can arise from frontier AI models. Bailey noted that AI is creating "a much more powerful way of uncovering vulnerabilities" in systems, which can be exploited through cyber attacks. He pointed to deepfakes and AI-enabled intrusions as specific risks that could undermine confidence in financial transactions and communications.

These threats could affect day-to-day economic activity by targeting payments, bank transactions and trading across stock and bond markets. Bailey warned that the scale and sophistication of AI-driven cyber threats to the financial system are increasing, raising the risk that critical services could be disrupted. He argued that this makes it more important for authorities to understand AI's role in financial infrastructure and to be ready to act to preserve stability.