UK banks can handle financial unrest amid AI fears: BoE

LONDON: The Bank of England on Tuesday said Britain’s banks are sufficiently strong to weather renewed financial unrest amid fears of a market bubble caused by an overvalued AI sector.

“The UK banking system is well capitalised, maintains robust liquidity and funding positions, and asset quality remains strong,” the BoE said after its latest stress tests on lenders including HSBC, Barclays and Santander.

“The results of the 2025 Bank Capital Stress Test demonstrate that the UK banking system is able to continue to support growth even if economic and financial conditions turned out to be materially worse than expected.”

The BoE added in its latest Financial Policy Committee report that “many risky asset valuations remain materially stretched, particularly for technology companies focused on artificial intelligence.

“The role of debt financing in this sector is increasing quickly as AI-focused firms seek large scale infrastructure investment.”

The BoE appeared to step up on its warning in October that technology firms focused on artificial intelligence could be overvalued, posing a risk to financial stability.

The central bank on Tuesday added that “deeper links between AI firms and credit markets, and increasing interconnections between those firms, mean that, should an asset price correction occur, losses on lending could increase financial stability risks”.

The AI sector has seen valuations balloon this year, with Nvidia becoming the first $5-trillion company, before the chip giant’s valuation and that of tech rivals recently suffered heavy losses on fears of a bubble, similar to that experienced prior to the dotcom industry crashing in 2000.

The BoE is not alone among major central banks to warn over AI.

The European Central Bank last week noted that heightened market exuberance around artificial intelligence and eye-popping levels of government debt could pose risks to eurozone financial stability.

The BoE also warned over large state debt on Tuesday.

“Global risks remain elevated and material uncertainty in the global macroeconomic outlook persists,” it said. “Key sources of risk include geopolitical tensions, fragmentation of trade and financial markets, and pressures on sovereign debt markets.”

However in a sign of confidence for UK banks, the BoE cut its estimate for the level of capital reserves that lenders must hold to protect against potential collapse.