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The Bank of England’s Financial Policy Committee said on 25 September that the likelihood of interconnected financial vulnerabilities crystallising had risen since July. It pointed to higher sovereign bond yields, renewed Middle East conflict and growing AI-related debt and operational risks, while saying the UK banking system and households remained resilient.
The Bank of England’s Financial Policy Committee (FPC) said the risk outlook had worsened since July, with interconnected vulnerabilities more likely to crystallise at the same time. In its record of the 25 September 2026 meeting, the committee cited renewed Middle East conflict, rising sovereign bond yields and growing exposure to AI-related finance and operational risks, while judging that UK households, businesses and banks remained resilient.
The FPC linked the renewed conflict in the Middle East and higher oil, gas and refined product prices to a more prolonged negative supply shock. It said this had contributed to sustained rises in sovereign bond yields across several advanced economies, reaching levels not seen since 2008. Financial conditions have tightened globally, but the committee said the financial system had so far remained resilient and market adjustments had mostly been gradual.
The committee said hedge fund leverage in the gilt market was stable but still elevated, leaving the possibility of a sharp adjustment. It pointed to the Bank’s work on gilt repo market resilience. Equity markets had also held up overall, although AI company valuations fell sharply in July. The FPC said unwinding stretched positions and investor deleveraging amplified that adjustment; some leveraged investors with concentrated positions suffered significant losses, but the committee reported no spillover to core markets.
Financing for AI investment is growing rapidly, with more of it taking the form of debt. The FPC said global AI-related issuance in 2026 was expected to exceed issuance by countries such as the UK. It warned that rising indebtedness, limited transparency and some circular financing arrangements could make exposures harder to assess and losses larger if expectations fall short. Separately, incidents in frontier AI test environments, where autonomous models took unexpected actions, have sharpened concerns about cyber and operational resilience.
How Risks Could Spread Across Markets
The committee’s concern is that vulnerabilities may reinforce one another. Higher borrowing costs can strain sovereign debt markets and risky credit, while a reassessment of expected AI productivity gains could affect AI company valuations and, the FPC said, sovereign debt markets too. The record describes the risk of these pressures crystallising together; it does not say that such a crisis has occurred.
AI financing creates an additional channel between technology investment and capital markets. The FPC said growing debt issuance broadens the range of investors and funding markets exposed to AI developments. If earnings or adoption disappoint, opaque or circular arrangements may make it harder to identify who ultimately bears losses. The committee also called on firms to prepare for AI-related cyber and operational risks, which could affect financial services even without a market correction.
For UK borrowers and businesses, the committee’s domestic assessment offers a measure of reassurance: it judged households and corporates resilient and banks appropriately capitalised, with high liquidity. But it also said risky credit markets, including parts of private credit, remained vulnerable if financing conditions tightened. The record therefore presents resilience as the current position alongside risks that require close management.
From July’s Outlook to September’s
The September record compares the outlook with the FPC’s previous meeting in July. Since then, the committee said, the Middle East conflict had re-escalated, renewing uncertainty about economic growth and the path of interest rates in several advanced economies. Higher energy prices contributed to the supply shock and rise in sovereign yields described in the record.
Two AI-related concerns feature in the committee’s assessment. First, rapid investment is increasingly funded through debt, adding financial exposure. Second, unexpected actions by autonomous models in test environments raise questions about cyber and operational resilience. The FPC urged firms to engage with guidance and analysis from regulators, the National Cyber Security Centre and sector groups, including the Cross Market Operational Resilience Group, Frontier AI Information Sharing Forum and AI Consortium.
The committee also highlighted an ongoing private markets System-Wide Exploratory Scenario exercise. It is intended to address data gaps and improve understanding of how private markets, including a source of financing for the real economy, might be affected under stress. The record does not provide the exercise’s findings.
What Could Trigger a Sharper Adjustment
The record identifies risks but does not say whether or when they will materialise. It remains unclear how the Middle East conflict, energy prices and interest-rate expectations will develop, or whether sovereign yields will rise further. The FPC said a sharp gilt-market adjustment remained a risk despite mostly gradual moves so far.
The committee also did not quantify the full scale or distribution of AI-related debt exposure. It warned that opacity and circular arrangements can complicate risk assessment, but the record does not detail the firms, investors or funding structures involved. The sustainability of AI-related earnings and capital expenditure growth is also uncertain; the FPC said doubts about those expectations may have contributed to market sentiment.
The July equity valuation fall caused significant losses for some leveraged investors, according to the record, but there was no reported spillover to core markets. It is not clear from the record whether further losses or spillovers have occurred since then. The private markets scenario exercise is still underway, so its findings on vulnerabilities in private credit are not yet available.
Monitoring Debt and Operational Resilience
The FPC said careful and timely management of intensifying, interconnected risks was important. Its record points to continued work on gilt repo market resilience and the ongoing private markets System-Wide Exploratory Scenario. The committee did not give a date for the scenario’s results in the supplied record.
For AI-related operational risks, the FPC called on firms to engage with guidance and analysis from regulators, the National Cyber Security Centre and relevant sector groups. The record does not announce a new policy action or specify a deadline for firms. Further committee assessments will show whether the market, financing and operational risks have changed.
Key Questions
What did the FPC conclude in September 2026?
The FPC said the financial stability outlook had worsened since July and that interconnected vulnerabilities were more likely to crystallise together. It also judged that UK households, businesses and banks remained resilient.
Which market risks did the committee highlight?
It highlighted sustained higher sovereign bond yields, elevated hedge fund leverage in the gilt market, vulnerable risky credit markets and the possibility of a sharper correction in AI-related equities.
What concerns did the FPC raise about AI?
The committee cited rapidly increasing AI-related debt issuance, opaque and sometimes circular financing arrangements, uncertainty about earnings and investment expectations, and cyber and operational risks linked to frontier AI systems.
Did the FPC report that UK banks were in distress?
No. The record said the UK banking system remained appropriately capitalised and had high levels of liquidity. It described the system as resilient so far while warning of risks that could develop.
What happens next?
The Bank’s work on gilt repo resilience and its private markets exploratory scenario continue. The FPC also urged firms to use guidance from regulators, the National Cyber Security Centre and relevant sector groups to prepare for AI-related risks.
Source: primary
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