The Bank of England has warned that the global race to build artificial intelligence infrastructure is increasingly being fuelled by debt, creating a growing risk to financial stability if the current AI boom turns into a market correction.
Governor Andrew Bailey said valuations of AI-driven technology companies were now approaching levels last seen during the dotcom bubble in the US, and levels not seen since the financial crisis in the UK and EU. The Bank’s latest Financial Stability Report goes further, highlighting a new risk: the deepening reliance on credit markets to finance an estimated $5 trillion of AI infrastructure over the next five years.
While the tech giants dominating the sector, the so-called “hyperscalers”, will fund part of this investment through their own cash flow, the Bank estimates around half will be financed through external borrowing, much of it debt. That, it warns, is a vulnerability hiding in plain sight.
“The AI sector is a particular hotspot,” Bailey said. “The role of debt financing is increasing quickly as firms seek large-scale infrastructure investment.”
If sentiment towards AI shifts and valuations fall sharply, the Bank cautions that the sector’s growing ties with the credit markets could amplify losses and trigger wider instability. A sell-off in America’s AI-heavy stock market, where AI companies now account for 44% of the S&P 500’s market value and have driven 67% of its gains this year, would inevitably spill over into the UK despite the FTSE 100’s relatively limited exposure.
Nvidia, the chipmaker at the centre of the AI boom, recently became the first company to hit a $5 trillion valuation, though its shares have since slipped back.
Even so, Bailey insisted the Bank’s planned loosening of capital rules for UK lenders remains the right step, citing strong results from its latest stress tests and the increased resilience of the banking sector since 2008.
But the message for business leaders and investors is clear: the AI gold rush is increasingly being underwritten by borrowed money. If high-growth earnings forecasts do not materialise, the correction could be sharp — and this time, the shockwaves could travel through the credit markets as well as the stock exchanges.
