The governor of the Bank of England, Andrew Bailey, has warned that an AI bubble global downturn is a real possibility if overstretched markets in artificial intelligence (AI) suffer a sharp correction. Bailey made the warning in a letter to G20 finance ministers, who are currently meeting in North Carolina, USA.
AI refers to computer systems that can perform tasks which would normally require human intelligence, such as recognising patterns or generating text. The concern here is not about the technology itself, but about how heavily investors have bet on it and what might happen if confidence collapses.
Why Bailey is worried about an AI bubble global downturn
Writing in his capacity as chairman of the Financial Stability Board (FSB), an international watchdog that monitors the global financial system, Bailey said that ‘markets remain vulnerable to a potentially disorderly correction that could spread across borders, particularly given fragilities in sovereign debt markets’. Sovereign debt refers to money that governments have borrowed, and fragility there means a shock in one place can quickly ripple elsewhere.
Bailey pointed to a specific structural problem. ‘The issue is not simply that investors are borrowing more,’ he wrote, ‘but that leverage is interacting with high valuations and market concentration, in particular the increasing cross-investment between artificial intelligence (AI) companies and hyper scalers, in a way that could amplify a future market correction.’ Hyper scalers are the very large technology companies that provide cloud computing and data infrastructure to AI firms.
In plain terms: a web of shared investors and shared infrastructure ties AI companies together so tightly that a fall in one part of the market could drag others down with it. Bailey added: ‘I remain concerned therefore that a large shock or combination of shocks could concurrently trigger multiple vulnerabilities.’
He also pointed to ‘volatility’ caused by the impact of energy shocks from the US-Iran war as a further pressure on already strained markets.
Shared infrastructure raises the stakes further
The interconnection Bailey describes extends beyond investment portfolios. The Financial Stability Board has found that cyber disruption can spread across jurisdictions through common technology providers, shared infrastructure, and cross-border financial activity. That finding adds another layer to Bailey’s concern: it is not only capital flows that link these markets together, but the physical and digital plumbing that AI companies and financial institutions share. A disruption that begins in one country’s technology systems can propagate rapidly because so many institutions rely on the same underlying services.
The FSB’s role is precisely to identify these kinds of systemic risks before they become crises, which gives Bailey’s letter added weight. He is not speaking as a domestic central banker alone, but as the chair of a body whose job is to think about the global financial system as a whole.
The UK government’s response: a £100 million AI fund
Bailey’s warning arrived on the same day that Chancellor John Healey announced a £100 million fund aimed at backing British AI start-ups. The fund is part of the UK Government‘s efforts to grow what it calls ‘Sovereign AI’ capacity, meaning homegrown AI technology designed to ensure the UK is not dependent on services and infrastructure developed abroad.
Ministers want companies to compete for the funding to help tackle challenges including cutting waiting lists in the NHS, improving patient care, bolstering cybersecurity, and supporting defence.
Healey said: ‘Britain is home to some of the most innovative AI companies in the world, and this Government is backing them to start, scale and succeed here in the UK. This first-of-its-kind competition will help make sure more of the benefits of AI are felt in every UK postcode.’
He added: ‘As G20 countries seek to make the most of AI opportunities, I’m determined Britain has a lead role in harnessing this technology to drive more jobs, better public services, and growth that’s UK-wide.’
The juxtaposition is a useful one. Bailey’s letter cautions that the global AI investment boom carries real systemic risk, while Healey’s fund reflects a government intent on making sure the UK captures economic gains from the technology regardless. The FSB is expected to continue monitoring AI-related financial exposures as part of its ongoing global stability work.
