London, December 02, 2025
The Bank of England has issued a warning about a potential AI asset bubble that threatens the UK’s financial stability, citing stretched valuations in artificial intelligence-related technology sectors and increased risks linked to debt-financed investments, as outlined in its 2025 financial stability report.
Elevated AI Equity Valuations and Debt Risks
The Bank highlighted that equity valuations for AI-exposed companies in the US have reached levels similar to those seen during the dot-com bubble, while UK technology sector valuations are at their highest since the 2008 global financial crisis. The report emphasized that such inflated valuations significantly increase the risk of a sharp market correction. Moreover, the growing practice of funding AI and related infrastructure investments through debt is a key concern. If the projected scale of debt-financed AI investments materializes over the next decade, it could amplify financial stability risks considerably. Banks are exposed both directly, through lending to AI companies, and indirectly, via loans to private credit funds and other financial entities holding AI-related assets.
Broader Financial Stability Pressures
The Bank’s report also underscored several interconnected factors creating additional risk for the UK’s financial system. Geopolitical tensions are intensifying the likelihood of cyberattacks and operational disruptions. Trade and financial market fragmentation are adding layers of global macroeconomic uncertainty. Pressures in sovereign debt markets are driving government borrowing costs higher, which in turn is expected to increase mortgage costs for UK homeowners. The Bank forecasts a £64 (8%) rise in typical owner-occupier mortgage costs as existing fixed-rate deals expire over the next two years. There is also concern about increased foreign hedge fund purchases of UK debt, which could trigger financial instability under certain scenarios.
Banking Sector Resilience Amidst Risks
Despite these challenges, the Bank of England’s 2025 Capital Stress Test confirmed that UK banks maintain sufficient capital buffers to support economic growth even if financial market conditions deteriorate. This resilience, however, does not negate the underlying risks from stretched AI asset valuations and debt exposures highlighted in the report. The Bank continues to emphasize vigilance given the fast-evolving nature of AI investments and associated financial market dynamics.
Implications for Policymakers and Business Leaders
The warning sends a clear signal to policymakers, regulators, and market participants about the urgent need to monitor AI-related financial risks closely. Inflationary pressures in AI asset valuations combined with substantial debt financing increase the possibility of a disruptive correction that could strain the broader financial system. Continued assessment, regulatory oversight, and strategic risk management will be essential to contain vulnerabilities and maintain financial stability. The Bank of England, consistent with prior alerts issued alongside the International Monetary Fund, remains closely engaged in tracking these emerging risks in 2025 and beyond.