Morgan StanleyMS
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Financials
Morgan StanleyBank of England Warns of Emerging Financial Risks Amid Iran Conflict and Rising AI Debt
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The Bank of England warned on the 30th that renewed escalation of the Iran conflict and a surge in artificial intelligence-related bond issuance are raising the risk that interconnected vulnerabilities within the financial system will materialize. The Financial Policy Committee noted that bond yields have risen to levels not seen since 2008 amid higher crude oil and natural gas prices, and warned that while the financial system and stock markets have so far shown resilience, the danger of a sharp correction is smoldering. It kept the countercyclical capital buffer, which adjusts levels according to financial risk, unchanged at 2%. Governor Bailey, who chairs the committee, said in a contribution on AI risk that rigorous model validation before and after deployment is needed before regulation is tightened. The committee noted that the surge in AI-related bond issuance has also increased the degree to which capital markets are swayed by AI developments, and according to an estimate presented by Morgan Stanley in early September, global AI-related bond issuance reached about 450 billion dollars, double the level of 2025. The Bank of England also said it will present more detailed proposals in early 2027 on changes to banks' leverage rules and rules for the UK government bond repo market, with a public consultation on the proposed changes to begin in early 2027. According to Bank of England data, net borrowing in the UK government bond repo market totals about 200 billion pounds, or 270 billion dollars.
Morgan Stanley