Bank of England chief sounds alarm over AI borrowing binge that could trigger market crash

The Bank of England Governor has sounded the alarm over sky-high levels of borrowing in the artificial intelligence (AI) sector, which could pose a risk to financial stability.  

Andrew Bailey said 'none of us know' whether there is a 'bubble' in the AI sector, adding that high leverage increased the risks. 

Investors are growing jittery over the amount of debt being used to fund investment in AI infrastructure. US bank Morgan Stanley expects AI-linked companies will borrow around £373billion this year to invest in data centres and other global projects. 

Speaking at an event hosted by the Official Monetary and Financial Institutions Forum, he said: 'If we lose public trust, or don’t establish public trust, then that is going to make the financial position look more precarious.'

Bailey added: 'We have to watch this very carefully, because we could see a correction.' 

The Bank of England Governor said a wider fall in the AI market could spread through the financial system and into the wider economy.

He said 'everybody is priced to be a winner.' He added: 'Remember Netscape? It was one of the original winners in the internet, ICT (information and communications technology) period. It doesn’t exist anymore.'

On AI, Bailey said: 'There is very big borrowing going on to support this innovation, to support this investment. I think on the AI front, the big issue now is what I call public trust.'

Businesses like Amazon, Apple, Google and Microsoft have gone on a borrowing binge to help pay for spending on data centres and other AI infrastructure. 

Beyond concerns about huge debts, calls are also mounting for tighter regulation of the technology and moratoriums on data centre development, both of which could slow down AI. 

Earlier this month, Bailey said AI could trigger financial market shocks, adding that the UK needed to be prepared for them.

He said the central bank is watching the huge amounts of money being invested in AI 'very carefully' and cautioned that 'not everybody always wins'.

The money that has been spent on and loaned to AI firms over the last few years in the hope of large returns is causing markets to value some of them as multi-trillion-dollar businesses.

Asked by the BBC this month if he believed an AI bubble could burst, Bailey said: 'You could see some correction of asset prices at some point.'

This week, the International Monetary Fund (IMF) said there was 'growing evidence' that AI capabilities might not require as much investment, or the potential economic gains may not be as large as expected.

Athanasios Vamvakidis, deputy director of the IMF's monetary and capital markets department, said: 'An AI market correction will affect the real economy.'

He said while global risk sentiment was strong, underpinned by solid earnings and optimism about ⁠AI, such 'resilience is not necessarily safety'. 

An AI correction would have an impact on wealth and investment that could spill into broader markets, Vamvakidis added.

The risk of such a selloff, as well as a spike in sovereign bond yields or a major cyber-attack, was among 'plausible near-term catalysts' that policymakers should monitor, the IMF said. 

Should the momentum in AI investment slow, the IMF noted growing leverage in the sector could exacerbate any shock by triggering forced selling and higher volatility. 

The current quarterly earnings season in the US will deliver the latest verdict on whether the AI businesses are worth their high valuations.