Bank for International Settlements warns AI boom may spark global financial instability

The Bank for International Settlements (BIS) issued its Annual Economic Report warning that a rapid surge in artificial‑intelligence investment, combined with record‑high public debt, rising inflation and broader financial fragilities, creates significant systemic risk for the global economy. BIS General Manager Pablo Hernández de Cos said the AI boom is increasingly reliant on debt and complex financing structures, heightening the vulnerability of corporate bond markets and sovereign debt, and that a sudden loss of confidence could trigger sharp drops in bond values and tighter financial conditions. The report highlighted four pressure points: renewed inflation, uncertainty over the sustainability of AI‑driven capital spending, heightened asset‑price valuations, and the new fiscal‑financial stability nexus formed by leveraged hedge‑fund activity in sovereign markets. BIS also flagged the possibility that AI‑enabled cyber threats could further destabilise financial systems and warned that excessive optimism about AI’s productivity gains may be short‑lived. It urged policymakers to act decisively, prioritising price stability, fiscal sustainability, coordinated oversight beyond banks and structural reforms to mitigate these emerging risks.