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The Bank of England’s Financial Policy Committee said on 25 September that the likelihood of several financial vulnerabilities crystallising together has increased since its July meeting. It pointed to higher sovereign yields, Middle East conflict, expanding AI-related debt and cyber and operational risks, while saying UK households, businesses and banks remain resilient.
The Bank of England’s Financial Policy Committee (FPC) said its assessment of financial stability risks had worsened since July, with vulnerabilities in sovereign debt, risky assets and credit more likely to crystallise at the same time. In the record of its 25 September 2026 meeting, the committee also highlighted growing AI-related borrowing and cyber and operational risks, while judging that UK households, businesses and banks remain resilient.
The FPC linked renewed uncertainty about economic growth and interest rates to the re-escalation of conflict in the Middle East and increases in oil, gas and refined-product prices. It said these developments were contributing to a more prolonged negative supply shock and sustained rises in government bond yields across several advanced economies. Yields had reached levels not seen since 2008, according to the record.
The committee said financial markets had so far absorbed the rise in yields, with adjustments mostly gradual. Hedge-fund leverage in the UK gilt market was stable but remained elevated, leaving the possibility of a sharp adjustment in place. The FPC pointed to the Bank’s work on gilt repo market resilience as relevant to this exposure.
The record also described rapid growth in financing for AI investment, with an increasing share funded through debt. Global AI-related issuance in 2026 was expected to exceed that of countries such as the UK, the committee said. It warned that rising indebtedness, limited transparency and sometimes circular financing arrangements could make exposures harder to assess and amplify losses if expectations fall short. Separately, recent incidents in frontier AI test environments, in which autonomous models took unexpected actions, reinforced concerns about cyber and operational resilience.
How Risks Could Reinforce Each Other
The committee’s central concern is that multiple vulnerabilities may interact. A reassessment of AI companies’ earnings or investment prospects could weigh on equity valuations and credit, while the same expectations of future AI productivity gains also feed into some growth and fiscal outlooks. The FPC said a reassessment could consequently affect sovereign debt markets as well as AI-related assets.
Higher borrowing costs can also expose weaknesses in leveraged positions and risky credit markets, including parts of private credit. The FPC said those markets remain vulnerable if financing conditions tighten. For readers, the concern is not that a crisis has already occurred: the committee reported resilience so far. It is that simultaneous shocks could transmit losses more widely than separate market movements would.
The record has a UK focus because the FPC is responsible for identifying threats to the country’s financial stability. Its assessment also matters to firms and investors whose funding, operations or portfolios are exposed to global bond markets, private credit or AI-related investment.
Developments Since the July Meeting
The FPC meets to identify risks to financial stability and agree policy actions intended to safeguard the resilience of the UK financial system. Its September record compares the latest outlook with the committee’s previous meeting in July and says the likelihood of interconnected vulnerabilities crystallising has increased.
The record describes different developments behind that change. Sovereign yields rose as energy costs and uncertainty increased. AI company equity valuations fell sharply in July, with the adjustment amplified by stretched positions unwinding and leveraged investors reducing exposure. The committee said some leveraged investors incurred significant losses, but it reported no spillover to core markets from that episode.
Alongside market risks, the FPC cited faster advances in frontier AI and unexpected model actions in test environments. It urged firms to engage with guidance from regulators, the National Cyber Security Centre and relevant sector groups. The record also noted the ongoing Private Markets System-Wide Exploratory Scenario, intended to address data gaps and improve understanding of how private markets could respond to stress.
Where Market Exposures Remain Unclear
The record identifies risks but does not establish that a sharp market adjustment or wider financial stress will occur. It is unclear how AI earnings and adoption expectations will develop, how much losses could spread if those expectations are revised, or how opaque and circular financing arrangements are distributed across investors and markets.
The FPC also says data gaps limit understanding of private-market exposures under stress; the exploratory scenario is underway to improve that picture. While gilt-market hedge-fund leverage was stable, it remained elevated, and the record does not quantify the potential scale of losses from a sudden adjustment. The committee reported no spillover to core markets from July’s AI equity repricing, but said the risk of a sharper correction persists.
Monitoring Markets and AI Resilience
The FPC said timely and careful management of the intensifying, interconnected risks is important. Its record points to continued work on gilt repo market resilience and to the ongoing private-markets exploratory scenario, which is intended to improve data and understanding of stress transmission.
It also called on firms to prepare for AI-related cyber and operational risks by engaging with material from regulators, the National Cyber Security Centre and sector groups. The record does not give a date for a further policy decision on these issues. The committee’s next assessment will depend on how bond yields, energy prices, risky credit and AI financing develop.
Key Questions
What did the FPC conclude in September 2026?
The committee said the financial stability outlook had worsened since July and that interconnected vulnerabilities were more likely to crystallise together. It also judged UK households, businesses and banks to be resilient.
Which risks did the committee highlight?
It cited higher sovereign bond yields, uncertainty linked to renewed Middle East conflict, vulnerabilities in risky credit and asset valuations, rising AI-related debt, and cyber and operational risks from rapid AI development.
Did the FPC report a financial crisis or market spillover?
No. The record says financial markets had so far been resilient to higher sovereign yields and that July’s fall in AI equity valuations did not spill over to core markets. It nevertheless said the risk of a sharper correction persists.
What does the record say about UK banks?
The FPC said the banking system remained appropriately capitalised and had high levels of liquidity. It judged banks strong enough to support households and businesses in a stress.
What is expected to happen next?
The Bank’s work on gilt repo resilience and the private-markets exploratory scenario is continuing. The committee also urged firms to use relevant guidance and prepare for AI-related cyber and operational risks; the record specifies no date for a new policy decision.
Source: primary
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