The Bank of England has connected abstract market risks to the potential for real-world pain, warning that a bursting AI bubble could lead to “finance drying up for households and businesses.” The Financial Policy Committee (FPC) stated that the risk of a “sharp market correction” is no longer a distant threat.
The abstract risk is found in the “stretched” valuations of AI companies. Figures like OpenAI’s $500 billion market worth seem disconnected from the real economy, but the FPC warns that their collapse would have tangible consequences.
The link is confidence and credit. A market crash would shatter investor confidence and cause banks to tighten lending standards, making it harder for individuals to get mortgages and for companies to secure loans for expansion and payroll. This is the real-world impact the Bank fears.
The potential for such a crash is growing, especially with research from MIT showing 95% of firms are not yet profiting from AI. This reality check could pop the bubble. This is compounded by political risks, with the FPC flagging Donald Trump’s attacks on the US Federal Reserve as another major threat.
A loss of faith in the Fed could trigger a “sharp repricing of US dollar assets,” creating a separate but equally damaging shockwave. For the UK, the FPC concluded that these global problems would translate into local pain, as “material spillovers” disrupt the domestic credit supply.