AI valuation inflation and leverage could trigger next financial crisis, Bank of England chief warns

The letter from Andrew Bailey arrives amid a broader debate about the stability of AI investments. The concern is not just about high valuations themselves, but about the leverage built on top of them, which can amplify downturns. Bailey's warning about the interconnectedness of AI companies and hyperscalers suggests that a problem in one major player could have cascading effects on the broader market.

Bailey's second major concern, the cyber risk from frontier AI, adds another layer of systemic vulnerability. The financial system's dependence on a small number of large tech providers means a single successful attack could have cross-border repercussions. The lack of rules for advanced AI models in many countries is highlighted as a risk that extends beyond finance, with Bailey calling for global steps toward safe AI model releases.

The broader context includes a warning from NYU finance professor Aswath Damodaran that an AI crash could hurt more than the dot-com bust, due to the massive, often debt-financed spending on physical infrastructure. This suggests the fallout from a correction could ripple across the entire economy, not just affect shareholders.