TL;DR
Get smart everyday buys delivered free — and shop member deals
- Fast, free delivery on millions of items
- Access to Prime Big Deal Days deals on October 6–7
- Prime Video, Amazon Music and more included
The Bank of England’s Financial Policy Committee said on 25 September that the likelihood of several financial vulnerabilities crystallising together had risen since its July meeting. It cited higher sovereign bond yields, Middle East conflict, AI-related market exposure and risks in credit markets, while saying the UK banking system and households remained resilient.
The Bank of England’s Financial Policy Committee (FPC) said the risk of interconnected vulnerabilities crystallising together had increased since July, citing higher sovereign bond yields, renewed conflict in the Middle East and growing exposure to artificial intelligence financing. In its record of a 25 September 2026 meeting, the committee said the financial system had so far proved resilient, while warning that a sharper market adjustment remained possible.
The FPC linked the worsening outlook to a renewed escalation of conflict in the Middle East, which it said had raised uncertainty about economic growth and interest rates in advanced economies. Higher prices for oil, gas and refined products were contributing to a more prolonged negative supply shock. Sovereign bond yields in several advanced economies had risen to levels not seen since 2008, tightening global financial conditions.
Market adjustments had been mostly gradual, and the committee said the financial system had been resilient so far. Hedge fund leverage in the gilt market was stable but remained elevated. UK equity markets had also withstood higher yields, although AI company valuations fell sharply in July as stretched positions unwound and some investors deleveraged. The FPC said some leveraged investors had incurred significant losses, with no spillover to core markets.
The committee also pointed to rapid growth in financing for AI investment, including debt issuance. It said greater indebtedness, opaque financing and arrangements described as “circular” could make risks harder to assess and amplify losses if expectations disappoint. Separately, it said risky credit markets, including parts of private credit, remained vulnerable to tighter financing conditions.
Several Risks Could Converge
The concern in the record is that vulnerabilities may reinforce one another. Higher energy prices can weigh on growth and affect interest-rate expectations, while rising sovereign yields tighten financing conditions. If expectations for AI-related earnings or productivity gains were reassessed, the FPC said the effects could reach beyond AI company valuations to sovereign debt markets.
The committee’s assessment matters to households and businesses because the availability and cost of credit depend partly on financial system resilience. It said UK households and corporates remained resilient and that banks were appropriately capitalised and held high levels of liquidity. Those judgements describe conditions at the time of the meeting; they do not remove the risks the committee identified.
For markets, the record highlights that resilience to date does not rule out a sharper adjustment. The FPC said elevated gilt-market leverage and deeper connections between vulnerabilities leave the possibility of a sudden move in place. It emphasised the Bank’s work on gilt repo market resilience as part of managing that exposure.
From July’s Outlook to September
The FPC meets to identify risks to UK financial stability and agree policy actions intended to safeguard the financial system’s resilience. Its September record compares the outlook with the committee’s previous meeting in July and says the likelihood of vulnerabilities occurring together has risen.
The committee’s concerns span sovereign debt, risky asset valuations and risky credit markets. The September record adds growing AI financing exposure and recent incidents in frontier AI test environments, where autonomous models took unexpected actions. The FPC said these incidents reinforced calls for firms to prepare for AI-related cyber and operational risks.
The Bank is also conducting a private markets System-Wide Exploratory Scenario exercise. According to the record, the exercise is intended to fill data gaps and improve understanding of how private markets, an important source of financing for the real economy, might be affected in a stress scenario.
How Risks May Develop
The record does not predict whether or when the risks will crystallise. It says a sharper correction could follow a more significant shock to expectations for AI company earnings, or concerns about the pace of AI development or adoption. The scale and timing of any such adjustment remain uncertain.
The FPC also identifies limits to assessing AI financing risks: indebtedness is increasing, some arrangements are opaque, and the record does not quantify the possible losses. It does not provide a specific estimate for how higher energy prices or yields may affect growth, borrowers or markets.
Although the committee says the banking system is resilient, the record’s assessment concerns the conditions and stress analysis discussed at the meeting. The supplied account does not detail the full scenario results or quantify the effects of a future shock. It also leaves open how private credit and other private markets would respond under stress.
Monitoring Markets and Resilience
The Bank’s work on gilt repo market resilience remains relevant as elevated leverage and higher yields keep the potential for a sharp adjustment in view. The private markets System-Wide Exploratory Scenario exercise is underway to improve the committee’s understanding of possible stress transmission and address data gaps.
The FPC urged firms to engage with guidance and analysis from regulators, other relevant authorities and the National Cyber Security Centre. It also pointed to sector groups, including the Cross Market Operational Resilience Group, Frontier AI Information Sharing Forum and AI Consortium, as sources of work on operational and cyber resilience. The September record does not set out a date for a further policy decision; the risks will be revisited as conditions and evidence develop.
Key Questions
What did the FPC report in September 2026?
It said the likelihood of interconnected financial vulnerabilities crystallising together had increased since July, citing higher sovereign yields, Middle East conflict, AI financing and risky credit markets.
Did the committee say the UK financial system was already in crisis?
No. The FPC said the financial system had been resilient so far and described UK households and businesses as resilient. It also said the banking system remained appropriately capitalised, with high liquidity.
What AI-related risks did the FPC identify?
The committee cited rising debt issuance for AI investment, opacity and some circular financing arrangements, and cyber and operational risks highlighted by incidents in frontier AI test environments.
Why are higher sovereign bond yields a concern?
The FPC said rising yields had tightened global financial conditions. It also said elevated hedge fund leverage in the gilt market and connections between vulnerabilities meant the risk of a sharp adjustment persisted.
What happens next?
The Bank’s gilt repo resilience work and private markets System-Wide Exploratory Scenario exercise are underway. The committee also called on firms to engage with relevant regulatory and cyber resilience guidance.
Source: primary
Fall Picks
fall essentials
As an affiliate, we earn on qualifying purchases.
