Central bank warns of risks from 'stretched' valuations of AI-focused tech companies in US, UK, increased reliance on debt
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The Bank of England has warned that risks in the UK's financial system have increased this year, in part due to stretched valuations of companies focused on artificial intelligence, which could lead to a "sharp correction".
Investor enthusiasm around AI has pushed share prices in the UK to their "most stretched" since the 2008 financial crisis, while in the US market valuations recall those during the dot-com bubble, the central bank said.
Valuations are "particularly stretched" for companies focusing on AI, it said.
'Stretched' valuations
Tech companies are increasingly turning to debt markets to fuel AI growth, raising financial stability risks if the share value of the companies falls.
The bank cited industry figures forecasting more than $5 trillion (£3.8tn) of spending on AI infrastructure, about half of which AI firms would bring in from outside sources, mainly through debt.
"Deeper links between AI firms and credit markets, and increasing interconnections between those firms, mean that, should an asset price correction occur, losses on lending could increase financial stability risks," the bank said.
Even if AI proves successful, there is no guarantee that all the companies that are highly valued today will turn out to be winners, according to the bank.
It noted that the collapse of US car parts maker First Brands and auto dealership and lender Tricolor could be a warning of bigger problems to come, building on remarks by BoE governor Andrew Bailey in October.
Government constraints
Other sources of risks to financial stability include geopolitical tensions, fragmentation of trade and financial markets and pressure on sovereign debt markets, Bailey told a press conference.
"As governments around the world face increasing spending pressures, their capacity to respond to shocks in the future may be more constrained than we've seen in the past," he said.