"AI and leverage pose global market correction risks" ... "concerns over a combined shock"

[Financial News] Andrew Bailey, Governor of the Bank of England, warned that the AI boom and the growing use of leverage in investments could trigger a disorderly correction in global financial markets. He said, "Markets remain vulnerable to a disorderly correction that could spread across borders."
Governor Bailey, who chairs the Financial Stability Board (FSB), said in a letter sent on the 28th (local time) to finance ministers and central bank governors of the Group of Twenty (G20) that "markets remain vulnerable to a disorderly correction that could spread across borders," the FSB said on the 31st.
Bailey pointed to vulnerabilities in the government bond market, including rising issuance, shorter maturities and greater leverage among some market participants, as well as weaknesses in private credit and stretched asset valuations, especially those tied to AI investment.
He said frontier AI has made the financial risk landscape even more complex. Because those risks can spread through shared infrastructure, technology providers and cross-border financial activity, he warned that they do not respect national boundaries.
He said the most immediate concern is cybersecurity, adding that "frontier AI could dramatically change the speed, scale and economics of cyber risk, which could undermine overall market confidence in the financial system."
Bailey urged governments to move quickly on global measures, saying that many jurisdictions still lack protocols to govern the development and deployment of advanced frontier AI models, which is increasing risks across the financial sector and beyond.
He also raised concerns about the growing use of leverage in equity markets.
He noted that this includes greater use by retail investors, leveraged exchange-traded funds (ETFs) and trend-following strategies. He added that the expanding influence of leveraged institutions, such as hedge funds with exposure to government bonds, also broadens the risk of contagion.
Bailey said that rising leverage is a hallmark of a mature financial cycle. "It can amplify a bull market," he said, "but as the past few weeks have shown, it can also deepen declines when investor sentiment turns."
Beyond the simple fact that investors are borrowing more to invest, Bailey said the problem is that this is becoming entangled with "high valuations, market concentration and rising cross-investment between AI companies and hyperscalers." He warned that this could mean "a larger shock or a combined shock could trigger multiple vulnerabilities."

[email protected] Lee Seok-woo, international affairs Reporter