Andrew Bailey warns G20 finance ministers that high AI valuations and borrowing could spark the next financial crash
Andrew Bailey, governor of the Bank of England and chair of the Financial Stability Board, has written to G20 finance ministers to highlight risks to the global financial system. His letter focuses on inflated valuations in artificial intelligence, growing market leverage, and cyber threats from advanced AI models. Many nations currently lack rules for these technologies.
The financial system has absorbed the shock from the conflict in the Middle East, Bailey notes, but conditions remain tight. Energy prices continue to swing, interest rates have climbed, and risky assets still carry high valuations.
AI investments and leverage could amplify the next shock
Beyond fragile government bond markets and opaque private credit, Bailey singles out inflated AI valuations. What worries him most is how many investors are now speculating on borrowed money.
He points to leveraged ETFs and trend-following strategies pulling in more retail investors, plus hedge funds holding positions in both equities and government bonds. That mix makes it easier for trouble in one market to spill into others.
The core issue is that all this leverage lands on top of high valuations and heavy market concentration. Bailey flags the growing web of cross-investments between AI companies and hyperscalers and warns that one major AI company stumbling could drag down other tech giants and eventually the broader market.
“As we have seen multiple times in the past, rising leverage is a feature of a maturing financial cycle. While it can reinforce rising markets, it can also intensify declines when sentiment turns, as recent weeks have demonstrated,” Bailey writes.
Frontier AI could reshape how cyberattacks hit banks
Bailey’s second concern is frontier AI. These models are gaining autonomous capabilities, but they’re also becoming more dangerous. Frontier AI could “materially alter the speed, scale and economics of cyber risk,” he writes. Attacks would get cheaper, faster, and more frequent, potentially shaking trust in the financial system.
That risk compounds because banks worldwide depend on a handful of large tech providers. A successful attack on just one could hit institutions across multiple countries at once, and Bailey warns that uneven cyber defenses between nations could become a vulnerability in their own right.
Frontier AI can also help defend against cyberattacks, but Bailey argues that tech advances need to be matched by preparation. Many countries have no rules for developing, releasing, or deploying advanced AI models, which creates risks well beyond finance. Global steps toward safe AI model releases “should be a priority,” Bailey writes. The FSB is currently studying how financial firms can safely use frontier models for cyber defense.
Bailey’s letter lands in the middle of a broader debate about AI investment stability. NYU finance professor Aswath Damodaran recently warned that an AI crash could hurt more than the dot-com bust. Unlike that era, the AI industry demands massive spending on physical infrastructure, much of it debt-financed. If a correction hits, the fallout won’t stop at shareholders but could ripple across the entire economy.
What it means
For the people making things, this means the tools they rely on are now part of a fragile financial web. If a major AI provider fails or is targeted by an attack, the cost could spread quickly through the markets that fund development. Builders and artists should expect that the stability of their technology stack depends on global financial health, not just technical performance.
