The Bank of England has warned that the global race to build artificial intelligence infrastructure is increasingly being fueled by debt, posing a growing risk to financial stability if the current AI boom leads to a market correction.
Governor Andrew Bailey said valuations of AI-driven tech companies are now approaching levels last seen during the dot-com 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 a step further, highlighting a new risk: increasing reliance on credit markets to finance an estimated $5 trillion worth of AI infrastructure over the next five years.
While the tech giants that dominate the sector, the so-called “hyperscalers,” will fund some of these investments with their own cash flow, the bank estimates that about half will be financed through external borrowing, much of it through debt. It warns that this is a vulnerability that obviously remains hidden.
“The AI sector is a particular hotspot,” Bailey said. “The role of debt financing is rapidly increasing as companies seek large infrastructure investments.”
If sentiment towards AI changes and valuations fall sharply, the bank warns that the sector’s increasing ties to credit markets could compound losses and trigger greater instability. A sell-off in the US AI-heavy stock market, where AI companies now account for 44% of the S&P 500’s market value and have accounted for 67% of its profits this year, would inevitably spill over into the UK, despite the FTSE 100’s relatively limited presence.
Nvidia, the chipmaker at the center of the AI boom, recently became the first company to reach a $5 trillion valuation, although its shares have since declined.
Still, Bailey insisted the bank’s planned easing of capital rules for UK lenders remains the right move, citing the positive results of its recent stress tests and the banking sector’s increased resilience since 2008.
But the message to business leaders and investors is clear: the AI gold rush is increasingly being backed by borrowed money. If high-growth earnings forecasts fail to materialize, the correction could be sharp – and this time the shockwaves could spread across both credit markets and stock markets.
