The Bank of England warned strongly that behind the worldwide artificial intelligence (AI) boom lurks the risk of a financial system collapse.
It analyzed that the share prices of AI-related technology corporations have soared to levels just before the early-2000s "dot-com bubble" burst, and that if this bubble pops, a sharp correction in global financial markets could shake the broader economy.
On the 2nd (local time), according to Reuters, the BBC, and other major overseas outlets, the Bank of England's Financial Policy Committee (FPC) released its semiannual Financial Stability Report and delivered this assessment. The report pointed out that valuations of U.S. tech stocks are so high that they are comparable to the dot-com bubble era. It also said U.K. share prices are experiencing the highest level of froth since the 2008 global financial crisis. This means U.S. and U.K. markets have become extremely vulnerable to external shocks, beyond a simple rise in stock prices.
At a news conference that day, Bank of England Governor Andrew Bailey said, "Looking at current market conditions, there are similarities to the early 2000s dot-com bubble," adding, "Unlike then, today's technology corporations are generating actual cash flow and revenue, but we must remember that not every corporation can be a winner." Experts interpreted Bailey's remarks as acknowledging the potential of AI technology while suggesting that the current market overheating cannot be justified.
In the report, the Bank of England stressed that the AI industry has grown on the back of massive liability. The Bank of England estimated that more than $5 trillion (about 7,350 trillion won) will be invested in AI infrastructure over the next five years.
This astronomical funding is largely raised through corporations' debt. The report analyzed, "AI giants are borrowing vast sums to spend on the race for large-scale data centers and chips," adding, "About half of the total investment will be financed externally, primarily through liability (debt)." If the AI bubble deflates, the shock could spread beyond the stock market to the bond market and the banking system.
If AI corporations cannot repay what they borrowed, the banks and private equity and private credit markets that funded them could collapse in a chain reaction. The report warned, "The links between AI corporations and the credit market are deepening, and interconnections among corporations are increasing," adding, "If asset price adjustments occur, loan losses could seriously threaten financial stability."
The International Monetary Fund (IMF) and the Organization for Economic Cooperation and Development (OECD) have also recently voiced concerns in succession about the potential for asset price corrections among tech stocks. In Oct., Jamie Dimon, known as the "Wall Street king," the chair of JPMorgan Chase, likewise said in a BBC interview that he is "far more worried than others about the possibility of a serious market correction in the future," as leading investment experts have long stressed the need for global coordination.
The Bank of England also said that as geopolitical tensions rise worldwide, including the war in Ukraine, cyberattacks such as hacking have become a "constant" threat to the financial system. In a system risk survey conducted by the Central Bank, 86% of respondent corporations cited cyberattacks as the greatest risk factor. This is a record high.
Earlier this year in the U.K., Jaguar Land Rover (JLR), a well-known automaker, suffered a severe cyberattack that disrupted parts supply for more than a month and halted production. Retailer Marks & Spencer (M&S) was also targeted by a cyberattack.
In an interview with the Independent, Governor Bailey said, "If you ask what risk has risen most sharply since the financial crisis, cyber risk would undoubtedly be at the top," adding, "As defensive technologies advance, attackers' technologies advance simultaneously, so the threat never disappears." He added, "The financial sector must cooperate to build defensive systems, and this is not optional but essential."
The Bank of England also unveiled plans to ease capital regulations that banks must meet to revive a sluggish economy. It decided to lower the benchmark Tier 1 capital ratio, which had been maintained at 14% since 2015, by 1 percentage point to 13%. It is the first capital regulation easing in 17 years since the 2008 global financial crisis.
Lowering capital ratios by 1 percentage point allows banks to secure that much more lending capacity. The measure is intended to encourage banks to release money held in their coffers and extend more loans to households and corporations. Governor Bailey explained, "We judge that the banking system's capital soundness has been sufficiently secured," adding, "In the latest stress test, even under a worst-case scenario with unemployment surging to 8.5% and house prices plunging 30%, U.K. banks were shown to have the capacity to continue lending."
However, some argued that in a situation where potential risk factors such as an AI bubble burst, private equity distress, and geopolitical risks are widespread, easing capital regulations could inadvertently weaken the financial system's defenses. In response, the Central Bank drew a line, saying, "Even if regulations are eased, banks are still assessed to be holding about 60 billion pounds (about 115 trillion won) more capital than the minimum requirement as a buffer," adding, "It is sufficient to absorb unexpected shocks."