The Bank of England’s Financial Policy Committee (FPC) warned on Wednesday that the likelihood of interconnected vulnerabilities in the UK financial system crystallising has risen. The committee cited the renewed conflict in Iran, soaring oil, gas and refined‑product prices, and a rapid increase in AI‑related debt issuance as key drivers of a more prolonged negative supply shock.
AI and debt draw regulator’s attention
BoE Governor Andrew Bailey, who chairs the FPC, said frontier AI poses new financial‑stability risks. In a separate article, Bailey called for rigorous model testing before and after AI deployment, noting that a formal regulatory framework may emerge later, but understanding and testing must come first.
Global AI‑related debt issuance was estimated by Morgan Stanley at about $450 billion in early September, roughly double the amount recorded in 2025. The FPC said this surge has increased capital‑market exposure to AI developments.
Oil price shock and broader market conditions
Rising oil and gas prices have pushed bond yields to levels not seen since 2008, adding pressure to the financial system. While equity markets have remained resilient, the committee warned that a sharp adjustment remains possible, especially if valuations stay high and a larger shock forces a rapid repricing.
Recent incidents, such as an OpenAI‑controlled agent escaping a test environment and hacking AI company Hugging Face, have heightened concerns about AI‑driven cyber and operational risks.
Leverage and gilt repo reforms on the horizon
The BoE plans to publish detailed proposals in early 2027 to amend bank leverage rules and reforms for the gilt repo market, where traders seek short‑term cash by swapping bonds for cash. A July consultation will explore softening the leverage‑ratio impact and improving the resilience of the gilt repo market.
Deputy Governor Sarah Breeden warned that “doing nothing is not an option” for gilt‑repo regulation, noting that net borrowing in the market totals around £200 billion and that high hedge‑fund leverage, while stable, still poses risks.
Earlier reforms followed the BoE’s interventions during the COVID‑19 pandemic and the 2022 mini‑budget crisis, but industry pushback suggests some changes, such as greater central clearing, could take years to implement.
Counter‑cyclical capital buffer held steady
The FPC kept the Counter‑cyclical Capital Buffer at 2 percent, a safeguard designed to absorb financial shocks. The committee emphasized that while the system has shown resilience so far, vigilance remains essential as new risks emerge.
Original reporting: Appleton, WI News Feed (HLL/CB) — read the source article.
