Bank of England warns G20 that inflated AI valuations risk a financial crisis
Andrew Bailey, governor of the Bank of England and chair of the Financial Stability Board (FSB), sent a letter to G20 finance ministers flagging AI as a central risk to the global financial system. The FSB coordinates financial regulation across G20 nations. Bailey writes that the system absorbed the shock of the Middle East conflict, but conditions remain tight: energy prices keep swinging, interest rates have climbed, and risky assets still carry high valuations.
His first concern is leverage building on top of those high valuations. He points to leveraged ETFs and trend-following strategies pulling in more retail investors, plus hedge funds holding positions in both equities and government bonds, a mix that makes it easier for trouble in one market to spill into others. He also flags a growing web of cross-investments between AI companies and hyperscalers, warning that one major AI company stumbling could drag down other tech giants and eventually the broader market. "As we have seen multiple times in the past, rising leverage is a feature of a maturing financial cycle. While it can reinforce rising markets, it can also intensify declines when sentiment turns, as recent weeks have demonstrated," Bailey writes.
His second concern is frontier AI itself. These models are gaining autonomous capabilities while becoming more dangerous, and Bailey warns they could "materially alter the speed, scale and economics of cyber risk," making attacks cheaper, faster and more frequent in ways that could shake trust in the financial system. That risk compounds because banks worldwide depend on a handful of large tech providers, so a successful attack on just one could hit institutions across multiple countries at once; Bailey adds that uneven cyber defenses between nations could become a vulnerability of their own. Frontier AI can also help defend against cyberattacks, but he argues preparation needs to keep pace with the technology. Many countries currently have no rules for developing, releasing or deploying advanced AI models, which he says creates risks well beyond finance, and he calls global steps toward safe AI model releases a priority. The FSB is now studying how financial firms can safely use frontier models for cyber defense.
The letter lands amid a broader debate about AI investment stability. NYU finance professor Aswath Damodaran has separately warned that an AI crash could hurt more than the dot-com bust, since the AI industry demands massive, heavily debt-financed spending on physical infrastructure; if a correction hits, he argues the fallout would not stop at shareholders but could ripple across the entire economy.
Key facts
- Andrew Bailey, Bank of England governor and FSB chair, warned G20 finance ministers that inflated AI valuations and rising leverage threaten global financial stability.
- He flagged leveraged ETFs, trend-following strategies and hedge funds holding both equities and bonds as channels that let trouble in one market spread to others.
- Bailey warned that cross-investments between AI companies and hyperscalers mean one major AI company stumbling could drag down other tech giants and the broader market.
- He said frontier AI could 'materially alter the speed, scale and economics of cyber risk,' and that many countries still have no rules for developing or deploying advanced AI models.
- NYU professor Aswath Damodaran separately warned an AI crash could hurt more than the dot-com bust because so much AI infrastructure spending is debt-financed.
Why it matters
This is a formal warning from the head of a G20-wide financial stability coordinator, not a market commentator, that AI valuations and leverage have become a systemic risk rather than a company-level one. Bailey ties AI directly to the mechanics of the next possible financial crisis: leverage compounding on high valuations, and cross-investments between AI firms and hyperscalers that could transmit a single company's trouble across the wider tech sector and markets generally.
Who it affects
The letter is addressed to G20 finance ministers and central bank governors, but its warnings reach further: banks exposed to concentrated tech-provider dependence, retail investors in leveraged ETFs and trend-following funds, hedge funds holding combined equity and bond positions, and AI companies and hyperscalers whose cross-investments Bailey singles out. Governments that currently have no rules for advanced AI models are also implicated, since Bailey says that regulatory gap creates risk beyond finance.
How to use it
There is no product, price or license here; the letter is a policy signal. Financial institutions and regulators can read it as an early marker that the FSB is treating AI-linked leverage and frontier-AI cyber risk as agenda items, with the FSB already studying how financial firms can safely use frontier models for cyber defense.
How solid is it
The claims come directly from Bailey's letter to G20 finance ministers, delivered in his capacity as Bank of England governor and FSB chair, giving it institutional weight. The source does not give the letter's exact date, specific figures for how inflated valuations or leverage have become, or name the AI companies and hyperscalers involved in the cross-investments Bailey describes, so the warning is stated at a general level rather than with quantified evidence.
Risks and caveats
Bailey's own language is conditional: leverage 'can' reinforce or intensify market moves, and a stumble 'could' drag down other firms, not that it will. No timescale for a possible correction or crisis is given. Damodaran's dot-com comparison is reported as a separate, prior warning, and the source does not state whether he made it in direct connection with Bailey's letter or independently.
“As we have seen multiple times in the past, rising leverage is a feature of a maturing financial cycle. While it can reinforce rising markets, it can also intensify declines when sentiment turns, as recent weeks have demonstrated.”
— Andrew Bailey, governor of the Bank of England and chair of the Financial Stability Board