Bank of England warns of rising financial risks from Iran conflict and AI debt

London, United Kingdom. The Bank of England has warned that renewed conflict in Iran and increased AI-related debt issuance have raised the risk of interconnected weaknesses in the financial system materialising. Its Financial Policy Committee said the financial system and equity markets had remained resilient, but the danger of a sharp adjustment persisted.

Energy prices and financial stability

Rising oil and gas prices had pushed bond yields to levels not seen since 2008, the Financial Policy Committee said in the record of its quarterly meeting.

“The likelihood that interconnected vulnerabilities in the financial system crystallise has risen,” the committee said.

“Specifically, the re-escalation of the conflict and the associated rises in oil, gas and refined product prices are leading to a more protracted negative supply shock,” it added.

The committee maintained its Countercyclical Capital Buffer, a variable buffer against financial risks, at 2 per cent.

Chaired by Bank of England Governor Andrew Bailey, the committee focuses on financial stability risks.

Growing exposure to AI-related debt

The committee said the “rapid increase” in AI-related debt issuance had increased capital markets’ exposure to developments in AI.

In early September, Morgan Stanley estimated that global AI-related debt issuance totalled around $450 billion, double the level in 2025.

Bailey calls for rigorous AI testing

In an article on AI risks released alongside the committee’s meeting record, Bailey expanded on his concerns about frontier AI and stressed the need for “rigorous model testing, conducted both before and after deployment” before tighter regulation.

“Over time, a more formal regulatory framework may well emerge. But regulation is not, in my view, the right place to start. Understanding, testing and establishing credible points of intervention must come first,” he wrote.