Bank of England warns AI crash could push UK into recession – POLITICO

But Bailey ruled out any new regulations or policies to mitigate the financial stability risks posed by the sector’s high valuations, arguing instead that a greater understanding of banks’ impact on financial stability was needed.

Hedge funds have poured into semiconductors and other AI-related stocks in recent months, and AI companies now account for half of the U.S. S&P 500, up from a quarter in 2022, along with rapid growth in Taiwan and South Korea’s stock markets.

The bank also said retail investors increasingly putting cash into the stock market “may have added momentum to the rise in stock prices,” and Bailey added that it was particularly concerned about the rapid rise in popularity of leveraged exchange-traded funds (ETFs) among depositors.

“Although the direct exposure to AI companies in UK stock indices is quite low, adjustments in the valuations of these companies could nevertheless have a significant impact on global equity markets more generally,” the Financial Stability Report said. “This will have a knock-on effect on the UK macroeconomy and financial system.”

The bank’s modeling shows that stock market impacts would account for about 36% of the impact on the economy, while bond market turmoil would account for about half.

Meanwhile, the report warns that the “self-reinforcing capital loop” in which technology companies invest in AI companies that spend money on products from the same technology companies “raises the likelihood that negative shocks will result in large-scale, correlated negative earnings revaluations across a wide range of AI-related businesses.”

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