Bailey Warns G20 of Growing Financial Risks Amid AI Valuations and Leverage

Andrew Bailey, Governor of the Bank of England and Chair of the Financial Stability Board (FSB), has warned G20 finance ministers about growing risks to global financial stability. In a letter to the G20, Bailey highlights three key concerns: inflated AI valuations, rising leverage, and cyber risks from frontier AI models.

According to Bailey, the financial system absorbed the shock of the Middle East conflict but remains tight. Energy prices continue to fluctuate, interest rates have increased, and risky assets are still overvalued.

Bailey singles out inflated AI valuations as a particular concern, noting that many investors are now speculating on borrowed money through leveraged ETFs and trend-following strategies. This amplifies the risk of trouble in one market spilling into others, particularly given the high valuations and market concentration.

The Governor also warns about the growing web of cross-investments between AI companies and hyperscalers, stating that a major AI company stumbling could drag down other tech giants and eventually the broader market. Bailey notes that rising leverage is a feature of a maturing financial cycle, which can intensify declines when sentiment turns.