Bank of England Warns of Stretched Markets, AI Financing and Private-Credit Risks in Its Financial Stability Report
The Bank of England warned that high equity-market valuations, a rapid build-up of leverage and fast-growing financing tied to artificial intelligence pose risks to financial stability, in its July Financial Stability Report. The central bank’s Financial Policy Committee said the vulnerabilities it had flagged previously persist and have in some ways become more pronounced.
The committee’s first concern was valuations and leverage. It said equity valuations remain stretched, particularly in the United States and in AI-linked names, with a widely watched valuation measure for US equities as elevated as at any point since the dot-com era, while a substantial rise in the use of leverage in equity markets has left prices more vulnerable to a sharp correction if sentiment turns.
Artificial-intelligence financing was a prominent new theme. The report said AI firms’ use of credit markets has accelerated rapidly across public markets, private credit and leveraged and structured finance, and observed that bond issuance by large AI infrastructure companies in the first half of 2026 had already exceeded their issuance for the whole of 2025. With free cash flows declining, the committee warned that these firms are becoming more dependent on refinancing, a vulnerability if credit conditions tighten. It also flagged private and risky credit markets, where structural weaknesses of leverage, complexity and opacity persist.
On the policy settings, the committee kept the UK countercyclical capital buffer at 2 percent, its neutral level, and signalled changes to the leverage regime that would modestly lower large-bank leverage requirements. The Governor, Andrew Bailey, summed up the message by saying the previously highlighted vulnerabilities persist and have in some ways become more pronounced, driven by increased leverage, particularly in equity markets, and he noted that conflict in the Middle East had delivered a negative supply shock to the global economy.
Why it matters: The Bank of England is one of the most influential financial-stability watchdogs, and its warnings on stretched valuations, leverage and AI-related credit speak to risks in global markets that reach well beyond the UK. For MENA investors, sovereign funds and banks with international exposure, the message is that the assets driving global returns, particularly technology and AI, are increasingly financed by leverage and credit that could unwind sharply, a risk worth weighing as regional institutions deploy capital into global markets and into AI themselves.
Outlook: The markers to watch are whether equity valuations and leverage build further, how AI-linked borrowing evolves as those companies’ cash flows come under pressure, and any signs of stress in private credit. The committee’s next assessment and any move on capital buffers will show how its concern is evolving.
Sources: Bank of England.
