The Bank of England's Financial Policy Committee warned that interconnected vulnerabilities across the financial system had become more likely to crystallise. It kept the UK countercyclical capital buffer at its neutral setting of 2%, saying banks remained appropriately capitalised and liquid. The record of its 25 September meeting was published on 30 September.
The committee linked the deterioration in its risk assessment to renewed Middle East conflict, higher energy prices and sovereign bond yields at levels not seen since 2008 in several advanced economies. It said the financial system had so far remained resilient and market adjustments had mostly been gradual. However, elevated hedge-fund leverage and tighter connections between risks left the possibility of a sharp adjustment.
AI FINANCING BROADENS MARKET EXPOSURE
The FPC said rapid growth in debt-financed artificial-intelligence investment had broadened capital-market exposure to the sector. It cited a Morgan Stanley estimate that global AI-related debt issuance had reached about $450 billion by early September, more than double the total for 2025. The committee said increasing leverage, opaque structures and some circular financing arrangements could amplify losses if expectations disappointed.
The record also highlighted cyber and operational risks from increasingly capable AI systems. It urged financial firms to prepare for AI-related cyber and operational risks and to engage with regulators, the National Cyber Security Centre and industry resilience groups. The committee said recent test-environment incidents showed that weakened safeguards could allow models to take unexpected actions.
CAPITAL AND GILT REFORMS MOVE FORWARD
The FPC agreed to proceed with previously proposed leverage-ratio reforms and said the Bank expected to consult in early 2027. It estimated the changes could increase leverage capacity at UK banks with significant market activity by about 5% from current levels. The committee said this increased the importance of measures to improve the resilience of the gilt repo market.
The Bank plans a comprehensive early-2027 update on potential gilt-repo proposals, including market-based measures such as greater central clearing or minimum haircuts. The FPC will also monitor market leverage and could consider raising the general leverage-ratio buffer above 25 basis points if risks increase.