BoE warns of greater risk to financial stability with AI leverage

The BoE (Bank of England, in English) warned that the risks to global financial stability have increased since December, reflecting the greater leverage in stock markets, especially in companies linked to AI (artificial intelligence), in addition to the still high uncertainties about the Middle East and the future returns on investments in the sector.

In its Financial Stability Report, released this Tuesday (7), the institution stated that "the probability of these vulnerabilities materializing at the same time has increased" since the previous edition.

According to the FPC (Financial Policy Committee, in English), the signing of the memorandum of understanding between the United States and Iran caused energy prices to fall to levels close to those before the conflict, reducing short-term risks.

Still, the BoE stressed that "substantial uncertainty remains" and that "energy prices and interest markets remained volatile."

The report also highlights that "there has been a significant increase in the leverage of hedge funds in equity markets", creating risks for the financial system.

For the monetary authority, the strong appreciation of AI-related stocks has increased the concentration of the main global indices, while more concentrated and leveraged positions increase the potential for sudden movements.

In the BoE's assessment, although AI has the potential to boost productivity and economic growth in the long term, the profit projections that underpin current valuations of companies in the sector "are highly uncertain" and depend on the successful expansion of infrastructure, continued access to financing and the pace of technology adoption.

Thus, "a reassessment of these perspectives could trigger a fall in share prices", a movement that would be amplified by high market concentration, correlated positions and increased leverage.

The bank adds that, in this scenario, hedge funds could be forced to sell assets, including sovereign bonds, magnifying the effects on other financial markets.

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Source: CNN