The biggest financial risks to the UK right now: Bank of England
The Bank of England’s Financial Policy Committee (FPC) has identified AI, geopolitical tensions, and fragmented trade as some of the biggest risks to the UK’s financial stability right now.
The FPC’s role within the bank is to identify and monitor risks to financial stability. Twice a year, it publishes a Financial Stability Report, which sets out its view on these risks and what it is doing to remove or reduce them.
The report notes that risks to financial stability have increased during 2025. Global risks remain elevated and material uncertainty in the global macroeconomic outlook persists.
Key sources of risk include geopolitical tensions, fragmentation of trade and financial markets, and pressures on sovereign debt markets. Elevated geopolitical tensions increase the likelihood of cyberattacks and other operational disruptions.
AI and asset valuations
In the FPC’s judgement, many risky asset valuations remain materially stretched, particularly for technology companies focused on Artificial Intelligence (AI). Equity valuations in the US are close to the most stretched they have been since the dot-com bubble, and in the UK since the global financial crisis (GFC). This heightens the risk of a sharp correction.
The role of debt financing in the AI sector is increasing quickly as AI-focused firms seek large-scale infrastructure investment. By some industry estimates, AI infrastructure spending over the next five years could exceed five trillion US dollars.
“While AI hyperscalers will continue to fund much of this from their operating cash flows, approximately half is expected to be financed externally, mostly through debt. Deeper links between AI firms and credit markets, and increasing interconnections between those firms, mean that, should an asset price correction occur, losses on lending could increase financial stability risks,” the group said.
Credit and defaults
The report also notes that credit spreads remain compressed by historical standards. Two recent high-profile corporate defaults in the US have intensified focus on potential weaknesses in risky credit markets previously flagged by the FPC.
These include high leverage, weak underwriting standards, opacity, complex structures, and the degree of reliance on credit rating agencies, and illustrate how corporate defaults could impact bank resilience and credit markets simultaneously.
“While the impact of these specific defaults has been limited, a diverse range of financial market participants were exposed. Such diversity can help absorb risks, but opacity around the extent of exposures, and their possible interconnections, can also create uncertainty about how widely shocks in credit markets can propagate,” the group said.
“It is important that market participants have a clear understanding of their exposures, including in stress scenarios where correlations and losses can shift outside historical norms. Market participants should also ensure that underwriting standards are robust and that they do not over-rely on credit ratings as a substitute to carrying out appropriate due diligence.”
Private markets
The group has also noted that private markets have grown significantly in the UK over the past two decades and are an important source of funding for corporates.
“While resilient to date, the private markets ecosystem has not been tested through a broad-based macroeconomic stress at its current size. In order to enhance understanding of the broader risks and dynamics of private markets, the FPC supports the next system-wide exploratory scenario (SWES), focused on the resilience of the private markets ecosystem,” it said.
Debt
Public debt-to-GDP ratios in many advanced economies have continued to rise this year. Governments globally face spending pressures, given the context of changing demographics and geopolitical risk, potentially constraining their capacity to respond to future shocks.
“Significant shocks to the global economic or fiscal outlook, should they materialise, could be amplified by vulnerabilities in market-based finance (MBF), such as leveraged positions in sovereign debt markets,” the FPC said.
“As an open economy with a large financial centre, the UK is exposed to global shocks, which could transmit through multiple, interconnected channels.”
It added that stress in one market, such as a sharp asset price correction or correlation shift, could spillover into other markets. Simultaneous de-risking by banks and non-banks can lead to fire sales, widening spreads, and tightening financing conditions for UK households and corporates.
“Market participants should ensure their risk management incorporates such scenarios,” it said.
