Bank of England Governor Andrew Bailey has warned that a sharp correction in artificial intelligence valuations could spread across borders and cause wider financial instability.
Bailey, who chairs the Financial Stability Board, issued the warning in a letter to G20 finance ministers meeting in North Carolina, United States.
He said markets remained vulnerable to a potentially disorderly correction, particularly because of weaknesses in sovereign debt markets and the growing use of borrowed money by investors.
Bailey also raised concerns about the combination of high valuations, market concentration and increasing financial links between AI companies and major technology firms.
“The issue is not simply that investors are borrowing more,” Bailey said, warning that leverage combined with high valuations and market concentration could amplify the effects of a future market correction.
He said a major shock, or several shocks occurring at the same time, could expose multiple weaknesses in the global financial system.
Bailey also highlighted volatility linked to energy shocks from the US-Iran war, saying such pressures could add to existing risks in financial markets.
His warning comes as investment in artificial intelligence continues to grow rapidly, with technology companies attracting large amounts of capital as businesses and governments seek to expand their use of AI.
At the same time, Britain is seeking to strengthen its domestic AI industry. The government has announced a £100 million fund to support British AI start-ups as part of efforts to develop homegrown technology and reduce reliance on AI services and infrastructure developed abroad.
The funding will support companies working on applications including reducing waiting lists in the National Health Service, improving patient care, cybersecurity and defence.
Chancellor John Healey said Britain had some of the world’s most innovative AI companies and wanted to help them grow and create jobs while improving public services.
The contrasting developments highlight the challenge facing governments as they seek to benefit from rapid advances in AI while managing the financial risks that could emerge if investor confidence and valuations fall sharply.
