Bank of England Governor Andrew Bailey has warned G20 policymakers that risks tied to artificial intelligence could intensify a future market correction and expose the global financial system to faster, more disruptive cyberattacks.
Bailey delivered the warning in an official letter to G20 finance ministers and central bank governors in his capacity as chair of the Financial Stability Board, the international body that monitors vulnerabilities in the global financial system. The letter was sent ahead of a meeting of finance officials in Asheville, North Carolina.
His assessment did not predict that AI would inevitably cause a recession. Instead, Bailey outlined how elevated AI-related valuations, growing leverage, concentrated markets and emerging cyber capabilities could interact with existing financial weaknesses. A sufficiently large shock, or several shocks arriving together, could trigger pressure across markets and national borders, he said.
AI Boom Adds to Market Vulnerabilities
Investor enthusiasm surrounding AI has helped push valuations higher across parts of the technology sector. Bailey said the concern extends beyond the price of individual companies because leverage, market concentration and cross-investment among AI developers and large cloud-computing companies could magnify losses if sentiment changes.
Borrowing has also become more visible in equity markets, including through leveraged exchange-traded funds, momentum-based strategies and hedge fund activity. Such positions may reinforce gains while markets are rising but can accelerate declines when investors retreat or are forced to sell assets.
“The issue is not simply that investors are borrowing more,” Bailey wrote. He argued that leverage is interacting with high valuations and concentrated exposure in ways that could amplify a correction. The FSB’s accompanying press release similarly identified increased leverage in bond and equity markets as a source of concern.
Recent analysis from the Bank of England points in the same direction. Its July 2026 Financial Stability Report said forecasts supporting AI-related equity valuations remain highly uncertain and depend partly on companies successfully building infrastructure, developing viable products and translating heavy investment into earnings.
Market risk is only one part of the broader picture. Bailey also cited fragile sovereign debt markets and vulnerabilities in private credit.
Frontier AI Raises Cybersecurity Concerns
Bailey described cyber risk as the most immediate financial stability concern associated with frontier AI. These advanced models are displaying increasingly sophisticated autonomy, problem-solving ability and threat capabilities, creating the potential for cyberattacks to become cheaper, faster and easier to conduct at scale.
Financial networks are particularly exposed because banks, payment systems and other market participants often depend on common technology providers and shared infrastructure. An incident that begins at one institution or in one country may therefore disrupt services elsewhere through cross-border transactions and interconnected systems.
Uneven preparedness could make the damage harder to contain. Countries differ in their legal frameworks, cybersecurity capabilities and ability to restore critical services. Bailey warned that weaknesses in one jurisdiction could consequently affect institutions and markets far beyond the location where an attack begins.
The Bank of England’s Financial Policy Committee reached a similar conclusion in July. It said rapid progress in frontier AI had significantly increased financial stability risks arising from cyber and operational vulnerabilities, including the ability of advanced models to identify and exploit software weaknesses across multiple stages of an attack.
AI may also strengthen defensive capabilities by helping organizations detect vulnerabilities and respond to threats. Bailey nevertheless said those advances must be matched by preparedness, testing and recovery systems capable of handling more severe incidents, including simultaneous disruptions involving several firms or a shared technology provider.
Regulators Seek a Coordinated Response
Authorities should give priority to safe and responsible model release and deployment worldwide, Bailey said. The cross-border nature of financial networks means national measures alone may be insufficient when a cyber incident can travel through technology providers, market infrastructure and international financial activity.
Financial institutions and their suppliers were urged to strengthen vulnerability management, incident response and recovery arrangements. The letter specifically raised the need to restore critical systems and data from basic infrastructure after a major attack, rather than assuming that standard backups or ordinary continuity plans will always remain available.
The FSB has already begun developing guidance for financial institutions. Its June 2026 consultation on responsible AI adoption proposed 12 practices covering organization-wide governance, management of AI throughout its lifecycle, cybersecurity, information technology and third-party risks.
