The rapid growth of artificial intelligence investments could lead to a significant global economic downturn if the market experiences a sharp correction, according to Bank of England Governor Andrew Bailey.
In a letter addressed to finance ministers attending a G20 meeting in North Carolina, Bailey warned that the interconnectedness of the global financial system makes it vulnerable to a disorderly correction. He noted that companies are borrowing heavily to invest in AI, amplifying potential shocks. "The issue is not simply that investors are borrowing more, but that leverage is interacting with high valuations and market concentration, in particular the increasing cross-investment between artificial intelligence (AI) companies and hyper scalers, in a way that could amplify a future market correction," Bailey wrote.
He expressed concern that a substantial shock or a combination of events could simultaneously trigger multiple vulnerabilities within the financial system. The volatility experienced in markets following the Iran war fallout was cited as an example of how shocks can spread across borders. Bailey, writing in his capacity as chairman of the Financial Stability Board, highlighted fragilities in sovereign debt markets as a contributing factor.
The rise of "frontier AI" also presents cybersecurity risks that could transcend national borders, he cautioned. Disruption could spread through common technology providers and shared financial infrastructure, with differing legal and cybersecurity capabilities across jurisdictions potentially exacerbating the impact of any incident.
Bailey's warning comes as the UK government announced a £100 million fund to support British AI startups. Chancellor John Healey stated the fund is part of an effort to develop "Sovereign AI" capacity and ensure the UK benefits from the technology. Ministers aim to direct funding towards challenges such as improving NHS patient care, enhancing cybersecurity, and bolstering defense capabilities. Healey emphasized the government's commitment to fostering AI innovation within the UK to drive job creation and economic growth.