The Bank of England has warned that the rapid rise in artificial intelligence-focused company valuations could face a sharp market correction, as it described stock prices in both the UK and US as showing signs of extreme stretch comparable to past financial crises.
Valuation pressures in AI and equity markets
In its Financial Stability Report, the central bank said UK share prices are near their most stretched levels since the 2008 global financial crisis. It added that equity valuations in the United States resemble conditions seen before the dotcom bubble burst. The Bank said valuations are “particularly stretched” among companies focused on artificial intelligence.
The central bank said the next five years of growth in the AI sector are expected to be driven by trillions of dollars in investment, much of it funded through debt. It cited industry estimates that spending on AI infrastructure could exceed $5tn (£3.8tn). While a portion of this is expected to be funded by AI firms themselves, the Bank said around half of the funding would come from external sources, mainly through borrowing.
“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 report said.
Warnings from global financial institutions
The Bank of England is the latest authority to raise concerns about a potential correction in AI-related share prices. Jamie Dimon, chief executive of JP Morgan, told the BBC in October that he was “far more worried than others” about the risk of a serious market correction in the coming years.
The International Monetary Fund and the Organization for Economic Co-operation and Development have also issued warnings about the risk of price corrections.
The dotcom boom refers to the late 1990s period when early internet company valuations surged before collapsing in early 2000. The crash led to widespread company failures and job losses, while falling share prices reduced the value of savings, including pension funds.
Government policy and market concentration
Concerns over a possible AI-related market correction come as Chancellor Rachel Reeves used her Budget to encourage more investment into stocks and shares by reducing the amount that can be saved in cash Individual Savings Accounts.
Bank of England Governor Andrew Bailey said earlier this year that the US AI sector is “very concentrated” and accounts for a large share of the total value of the US stock market. He said AI companies differ from dotcom-era firms in that they generate positive cash flows, but added that competition within the sector remains uneven.
“There is a difference to the dotcom situation in that these companies have got positive cash flows, they are not created on hope,” he said. “But it doesn’t mean to say everybody is going to win equally.”
Capital requirement changes for UK banks
Alongside its market warnings, the Bank announced plans to lower the amount of capital UK High Street banks must hold. It proposed reducing the benchmark Tier 1 capital requirement to 13% from the 14% level in place since 2015.
The decision follows stress tests that showed major banks could withstand a severe downturn in which unemployment doubles, house prices fall sharply, and the economy contracts by 5%. The Bank said lenders would still retain a £60bn buffer above minimum requirements after the change.
The Financial Policy Committee said lowering the threshold would make it easier for banks to provide loans to households and businesses. The new requirement is scheduled to take effect in 2027.
Mortgage pressures and household impact
Elsewhere in the report, the Bank said homeowners coming off fixed-rate mortgages over the next two years face an average £64 rise in monthly repayments. The typical owner-occupier refinancing is expected to see an 8% increase in monthly costs.
The Bank said 3.9 million people, representing 43% of mortgage holders, are expected to refinance at higher rates by 2028. It added that about one-third will see their payments fall during the same period as interest rates decline from their 2022 peak.
The Bank of England base rate has fallen from 5.25% in 2024 to its current level of 4%.
Broader financial stability risks
The central bank said risks to financial stability increased during 2025 due to geopolitical tensions, global trade disputes, and rising government borrowing costs. It added that intensifying international tensions have raised the risk of cyber-attacks and other forms of economic disruption.
Featured image credits: George Rex via Wikimedia Commons
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