Bank of England warns of AI bubble risk

The Bank of England has warned of a “sharp correction” in the value of big tech companies amid growing concerns about an artificial intelligence (AI) bubble.

It said UK share prices are close to the “most stressed” levels since the 2008 global financial crisis, while US share valuations resemble prices before the dotcom bubble burst.

The central bank's financial stability report said valuations were “particularly stretched” for companies specializing in artificial intelligence.

In its report, the Bank also announced plans to reduce the amount of capital High Street banks must hold to boost lending and economic growth.

It marks the first cut in the amount lenders must hold since the 2008 financial crisis and follows stress tests showing they could withstand a crisis scenario with unemployment doubling, house prices plummeting and the economy shrinking by 5%.

The bank said growth in the artificial intelligence sector over the next five years will be fueled by trillions of dollars of debt, raising risks to financial stability if company values ​​fall.

He cited industry data that spending on artificial intelligence infrastructure could exceed $5 trillion (£3.8 trillion) and said most of this spending would be financed by the artificial intelligence firms themselves, but about half would come from external sources, mostly through debt.

“Deeper connections between artificial intelligence firms and credit markets, and the growing interconnections between these firms, mean that if asset prices adjust, credit losses could increase risks to financial stability,” it said.

The Bank of England has become the latest institution to sound the alarm about a potential collapse value of artificial intelligence companies reminiscent of previous incidents such as the dot-com bubble.

Jamie Dimon, executive director of the American bank JP Morgan, told the BBC in October he was “much more concerned” than anyone else about the risk of a major market correction in the coming years.

The International Monetary Fund and the Organization for Economic Co-operation and Development also warned of price adjustments.

The dot-com boom refers to a period in the late 1990s when the value of early Internet companies rose on a wave of optimism about what was then new technology, before the bubble burst in early 2000 and many stock prices collapsed.

This led to some companies going bankrupt, resulting in job losses.

Falling stock prices could also affect the value of people's savings, including their pension funds.

Concerns about AI-related stock market correction reach Chancellor Rachel Reeves used her budget to encourage savers to put cash into stocks and shares, reducing the amount that can be saved in cash.

This was stated by the head of the Bank of England, Andrew Bailey. previously raised concerns about potential financial collapsewarning after the collapse of two US companies that “alarm bells” were ringing.

On Tuesday, he said the artificial intelligence sector in the US is “very concentrated” and accounts for the majority of the country's stock market value.

But he added: “The difference from the dot-com situation is that these companies have positive cash flows, they are not created on hope.

“But as we see, and we saw last week in the debate about whether Google is moving to the Nvidia patch, that doesn't mean everyone wins, it doesn't mean everyone benefits equally.

“It is important to be clear that it is not inconsistent, but rather consistent, that AI is becoming the next general purpose technology in terms of driving productivity growth across all economies. I hope that's the case, but we'll see.”

The central bank also said risks to financial stability have increased in 2025, citing geopolitical tensions, global trade wars and rising borrowing costs for governments.

It said growing tensions between countries have specifically increased the likelihood of cyber attacks and other disruptions.

Having assessed the ability of High Street lenders to cope with the crisis, the Bank proposed lowering the Tier 1 capital requirement benchmark for firms to 13% from the 14% level it had been at since 2015. The requirement refers to the buffer reserve that banks must hold in case of any losses from risky lending.

The central bank said it would still provide firms with a £60 billion buffer against their minimum requirements so they can continue lending to households and companies.

The Bank's Financial Policy Committee said lowering the threshold would make it easier for lenders to provide loans to households and businesses. The changes are due to take effect in 2027.

Elsewhere in its financial stability report, the Bank warned that homeowners moving away from fixed-rate mortgages would face a £64 increase in monthly payments over the next two years.

The central bank said the typical owner-occupier moving away from fixed rates will see their bills rise by 8% as the impact of higher interest rates continues to be felt.

In total, 3.9 million people, or 43% of mortgage holders, are expected to refinance at higher rates by 2028, the bank said.

But a third of them will see their monthly payments fall during this period, he added, as interest rates have fallen significantly after jumping sharply in 2022.

The Bank of England's base rate, which affects the cost of personal loans including mortgages, fell from 5.25% in 2024 to the current 4%.