Bailey joins IMF in warning of AI financing risks

The International Monetary Fund says three risks are building under markets that have so far held up well: a correction driven by artificial intelligence, a sharper rise in government bond yields, and cyberattacks. All three, it warns, could be made worse by high leverage and thin liquidity. The warning comes from the Fund's October Global Financial Stability Report, released on October 13 at the IMF-World Bank Annual Meetings in Bangkok. "Resilience is not safety," IMF official Athanasios Vamvakidis said at the launch.3news.com+1

The message has drawn new attention this week. A speech by Bank of England Governor Andrew Bailey, posted by the Bank for International Settlements on Monday, also flags exposures tied to AI financing. On the same day, the IMF's daily markets monitor noted a sharp selloff in chipmakers last week amid concerns about how AI investment is being funded.imf.org+1

Circular AI deals

The Fund says faltering AI investment or profits could trigger a correction that sets off broad deleveraging across asset classes. Hyperscalers, the largest data center operators, are borrowing more, while investors are using leverage to buy AI stocks, the IMF wrote in a blog post. It looked at 14 circular financing deals among AI firms since 2023. Together they involved about $300 billion in equity and $650 billion in debt, in exchange for $1.4 trillion in future revenue commitments, according to the briefing transcript. Officials called this a possible "triple whammy": falling equity values, debt that is harder to service, and revenue that never arrives.imf.org+1

Bonds, cyber and weak banks

Sovereign yields have climbed on energy-driven inflation and fiscal worries. Higher yields could push down valuations, including for AI-linked assets, and reduce the value of bonds used as collateral, the IMF said. On cyber threats, the Fund found that in more than 70 percent of reported cases this year, software providers had almost no time to patch flaws before attackers exploited them.3news.com

Under the IMF's adverse stress scenario, banks holding 22 percent of global banking assets would end up with capital ratios below regulatory limits. That is up from 18 percent a year ago, the Fund said. The IMF urged limits on leverage and liquidity mismatches in AI, private credit and other nonbank sectors, including sectoral capital and concentration requirements on banks' exposures. It also called for sustainable public debt and stronger cyber defenses, according to the blog.imf.org+1

Bailey echoes concerns

In remarks delivered in Istanbul on October 8, Bailey said the rapid growth of AI-related financing "has created new exposures." He warned that if earnings expectations or confidence in AI adoption were sharply revised, "the consequences could spread through equity, credit and sovereign markets," according to the BIS text. He also noted that leveraged investors now play a larger role in government bond markets, and that this greater capacity to absorb debt "has come with greater fragility."bis.org

"AI safety and financial stability are therefore becoming increasingly connected," Bailey said.