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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 renewed Middle East conflict, higher sovereign bond yields, growing AI-related borrowing and cyber risks, while judging UK households, businesses and banks resilient so far.
The Bank of England’s Financial Policy Committee (FPC) said the risk of multiple financial vulnerabilities crystallising at the same time had risen since July, citing renewed Middle East conflict, higher sovereign bond yields and growing exposure to artificial intelligence financing. In its 25 September 2026 meeting record, the committee said the financial system had so far remained resilient, while warning that interconnected risks could amplify a future shock.
The committee linked the worsening outlook to the re-escalation of conflict in the Middle East and rises in oil, gas and refined product prices. It said these developments were contributing to a more prolonged negative supply shock and renewed uncertainty about economic growth and interest rates. Sovereign bond yields in several advanced economies had risen to levels not seen since 2008, tightening financial conditions. Market adjustments had been mostly gradual, and the financial system had so far withstood the changes.
The FPC said AI-related investment and borrowing were growing rapidly, widening the range of investors and funding markets exposed to the sector. Global AI-related debt issuance in 2026 was expected to exceed that of countries such as the UK, according to the record. The committee warned that rising indebtedness, limited transparency and some circular financing arrangements could make risks harder to assess and increase losses if expectations disappoint.
The record also flagged cyber and operational risks after incidents in frontier AI test environments in which autonomous models took unexpected actions. The FPC urged firms to prepare and engage with relevant regulator guidance, National Cyber Security Centre analysis and sector groups. Domestically, it judged households and businesses resilient, and said UK banks remained appropriately capitalised and highly liquid.
How Risks Could Reinforce Each Other
The FPC’s concern is that pressures in separate markets could coincide. Higher yields can tighten financing conditions; that could weigh on risky credit and asset valuations just as conflict-driven energy costs affect growth. The committee said a reassessment of expected AI productivity gains could hit AI company valuations and, because growth and fiscal outlooks partly depend on those gains, potentially affect sovereign debt markets too.
The warning matters to households and businesses because the banking system is a key source of credit during economic stress. The FPC’s current assessment is that UK banks have the capital and liquidity to support them in a stress scenario. Its record nevertheless highlights vulnerabilities in markets and financing structures that could transmit shocks beyond the firms or investors directly involved.
From July’s Outlook to September’s Record
The FPC meets to identify threats to UK financial stability and agree actions intended to safeguard the financial system’s resilience. Its September record compares the outlook with its previous meeting in July and describes a rise in the likelihood that vulnerabilities may crystallise together. The committee’s assessment is a risk judgement, not a statement that a crisis has occurred.
The record points to several areas under scrutiny: sovereign debt markets, risky asset valuations, risky credit markets and the financing of AI investment. It said hedge fund leverage in the gilt market remained elevated, although stable, and that a sharp adjustment remained possible. The Bank’s work on resilience in the gilt repo market is one response to that concern. Separately, a private markets System-Wide Exploratory Scenario exercise is underway to address data gaps and examine how private credit could be affected by stress.
The Scale of Possible Market Spillovers
The record does not quantify the likelihood or potential scale of a combined market shock. It says hedge fund leverage in gilts remains elevated but stable, and that a sharp adjustment remains a risk; the conditions that might trigger one are not specified in the supplied material. The timing and extent of any repricing of AI-related assets, debt or expected productivity gains are also uncertain.
It is not yet clear how frontier AI incidents might translate into operational disruption at financial firms, or how broadly AI-related financing structures expose investors. The FPC also points to data gaps in private markets, which the exploratory scenario is intended to help address. Its judgement that UK households, businesses and banks are resilient does not establish how every institution or borrower would fare under a specific future shock.
Monitoring Markets and Testing Resilience
The FPC said firms should prepare for AI-related cyber and operational risks and engage with guidance and analysis from regulators, the National Cyber Security Centre and relevant sector groups. The committee’s record also underscores the Bank’s ongoing work to improve resilience in the gilt repo market.
The private markets System-Wide Exploratory Scenario exercise is underway, with the aim of filling data gaps and improving understanding of how private credit could respond to stress. The supplied record does not set out a date for its results or announce a new policy action. The committee’s next assessments will show whether the risks it identified have changed and whether further action is needed.
Key Questions
What did the Financial Policy Committee warn about?
It said the likelihood of interconnected financial vulnerabilities crystallising together had risen since July, citing conflict-related economic uncertainty, higher sovereign yields, risky credit and growing AI-related exposures.
Did the committee say the UK financial system was in crisis?
No. The record says the financial system had so far been resilient and that UK banks remained appropriately capitalised and highly liquid. It warns of risks that could intensify, rather than reporting that a crisis has occurred.
Why is the FPC concerned about AI financing?
AI investment and debt issuance are growing rapidly, increasing the number of investors and markets exposed to the sector. The committee said indebtedness, opacity and circular financing arrangements could complicate risk assessment and amplify losses if expectations disappoint.
What happens next?
Firms are being urged to prepare for AI-related cyber and operational risks. The Bank’s gilt repo resilience work and an exploratory exercise on private markets are also underway; the record gives no results date for the exercise.
Source: primary
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