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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 cited higher sovereign yields, Middle East conflict, expanding AI-related debt and cyber risks, while saying the UK banking system and households remained resilient.
The Bank of England’s Financial Policy Committee (FPC) said the risk of financial vulnerabilities occurring together had increased since July, citing the renewed Middle East conflict, rising sovereign bond yields and growing exposure to artificial intelligence financing. In its record of a 25 September 2026 meeting, the committee said the financial system had so far remained resilient, while warning that interconnected risks could still trigger a sharp adjustment.
The FPC linked the deterioration in its risk outlook to renewed uncertainty over global growth and interest rates after the conflict in the Middle East escalated again. Higher oil, gas and refined product prices, it said, were contributing to a more prolonged negative supply shock. Sovereign bond yields across several advanced economies had risen to levels not seen since 2008, tightening financial conditions.
Market moves had mostly been gradual, and the committee said the financial system had so far proved resilient. Hedge fund leverage in the gilt market remained stable but elevated, leaving the possibility of a sharp adjustment. The FPC pointed to the Bank’s work on gilt repo market resilience as relevant to that vulnerability.
The record also describes expanding AI-related risks in financial markets and firms’ operations. AI company equity valuations fell sharply in July, with the adjustment amplified by the unwinding of stretched positions and investor deleveraging. The FPC said some leveraged investors with concentrated positions suffered significant losses, but there was no spillover to core markets. Meanwhile, AI-related debt issuance was growing rapidly, making a wider range of investors and funding markets more exposed to developments in the sector.
How AI and Yields Intersect
The committee’s concern is that risks may reinforce one another. Higher borrowing costs can put pressure on sovereign debt, risky assets and credit markets at the same time that AI financing is expanding. If expectations for AI earnings, investment or productivity gains were reassessed, the effects could reach beyond technology company valuations: the FPC said that expectations of AI-driven productivity also form part of growth prospects and fiscal outlooks.
AI risks also extend beyond investment losses. The committee said recent incidents in frontier AI test environments, where autonomous models took unexpected actions, sharpened concerns about cybersecurity and operational resilience. It urged firms to prepare for those risks and engage with guidance from regulators, the National Cyber Security Centre and sector groups.
For UK households and businesses, the record offers a qualified assessment. The FPC judged them resilient and said banks were appropriately capitalised and held high levels of liquidity. That resilience matters because banks need to be able to keep supporting households and companies if financial conditions worsen. The warning is that current resilience does not remove the risk of a more abrupt market correction.
Risks Since the July Meeting
The September record follows the FPC’s previous meeting in July. Since then, the committee said, the re-escalation of conflict in the Middle East had renewed uncertainty about economic growth and interest rates in advanced economies. Rising energy prices contributed to the supply shock and higher sovereign yields described in the record.
Alongside those developments, financing for AI investment continued to grow, including through debt issuance. The FPC said global AI-related issuance in 2026 was expected to exceed the issuance of countries such as the UK. It also flagged opacity and, at times, “circular arrangements” in this financing, which can make exposures harder to assess and could amplify losses if expectations disappoint.
The committee also highlighted vulnerabilities in risky credit markets, including parts of private credit, if financing conditions tighten. It cited the ongoing Private Markets System-Wide Exploratory Scenario exercise as a way to address data gaps and improve understanding of how private markets that finance the real economy might respond to stress.
How Exposures Could Unfold
The record does not say that the vulnerabilities have crystallised or predict when they might. It describes a higher likelihood of risks occurring together, while noting that markets have mostly adjusted gradually and that there has been no spillover from the July AI equity sell-off into core markets.
The eventual effects of rising yields, AI-related borrowing and any reassessment of AI earnings or productivity expectations remain uncertain. The committee also identifies opacity and circular financing arrangements as obstacles to assessing exposures. Its record does not quantify potential losses from these channels or set out a single stress outcome.
Monitoring Markets and Firm Readiness
The Bank’s work on gilt repo market resilience and the ongoing private markets exploratory scenario are among the efforts identified in the record to improve understanding of vulnerabilities. The committee also called on firms to engage with relevant regulatory guidance, National Cyber Security Centre analysis and sector information-sharing groups as they prepare for AI-related cyber and operational risks.
The record does not specify a date for a further policy action on these risks. The FPC’s next assessment will depend on how financial conditions, market exposures and firms’ resilience develop; the September record says the committee considers these risks in order to safeguard the resilience of the UK financial system.
Key Questions
What did the FPC say had changed since July?
The committee said the risk of interconnected financial vulnerabilities crystallising had increased, amid renewed Middle East conflict, higher sovereign yields and growing AI-related exposures.
Did the committee say the UK financial system was already in crisis?
No. The FPC said the financial system had so far been resilient to higher sovereign yields and that market adjustments had mostly been gradual. It warned that a sharp adjustment remained a risk.
What AI-related risks did the record identify?
The record identified rapid growth in AI-related debt issuance, opaque or circular financing arrangements, and potential losses if expectations disappoint. It also highlighted cyber and operational risks associated with rapid frontier AI development.
What did the FPC say about UK households and banks?
The committee judged UK households and businesses to be resilient. It said the banking system was appropriately capitalised, had high levels of liquidity and remained able to support them in a stress.
Source: primary
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