Key events
Bank: corporate defaults could impact bank resilience and credit markets
The Bank of England also cites the credit markets as a potential risk to the economy.
It points to the failure this autumn of US companies First Brands and Tricolor, which have already raised concerns about weak lending standards and potential threats from the so-called shadow banking sector.
The financial stability report says:
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.
Introduction: Bank of England warns of risk of ‘sharp correction’ due to AI valuations
Good morning, and welcome to our rolling coverage of business, the financial markets and the world economy.
Risks to the financial stability of the UK have increased during 2025, the Bank of England is warning this morning, as it cites the risk of a stock market crash triggered by highly-valued AI companies.
The Bank is issuing its latest assessment of the UK financial system, and warning that the global risks threatening the country remain “elevated”, citing geopolitical tensions, fragmentation of trade and financial markets, and pressures on sovereign debt markets.
These elevated geopolitical tensions increase the likelihood of cyberattacks and other operational disruptions, the Bank points out, also citing the “material uncertainty in the global macroeconomic outlook”.
And the Bank singles out the surge in valuations of artificial intelligence companies this year, saying that this “heightens the risk of a sharp correction”.
The Bank’s Financial Policy Committee say that many risky asset valuations remain “materially stretched”, particularly for technology companies focused on AI, adding:
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.
AI companies have been driving the US stock market higher this year. Shares in chipmaker Nvidia, for example, are up 34% this year despite a 10% drop in the last month.
The FPC also sounds the alarm about the use of debt financing in the AI sector, and the web of multi-billion dollar deals between the various companies, explaining:
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.
More details to follow…
The agenda
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7am GMT: Nationwide house price index for November
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7am GMT: Bank of England publishes its latest Financial Stability Report,
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7am GMT: Bank of England publishes its latest stress test results
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10am GMT: Bank of England press conference with governor Andrew Bailey, and deputy governors Sarah Breeden and Sam Woods
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10am GMT: OECD releases its latest economic outlook
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10am GMT: Treasury Committee hearing on the budget with the OBR