The Bank of England's Financial Policy Committee (FPC) has reported a heightened risk of interconnected vulnerabilities within the financial system becoming critical. This assessment, made at its September 2026 meeting, points to the re-escalation of the conflict in the Middle East and the rapid increase in artificial intelligence (AI)-related debt issuance as key factors.
The renewed conflict has intensified uncertainty regarding economic growth and interest rate trajectories in several advanced economies. This has re-energised the risk that vulnerabilities in sovereign debt markets, risky asset valuations, and risky credit markets could materialise simultaneously. The FPC noted that the conflict's re-escalation and subsequent rises in oil, gas, and refined product prices are causing a more prolonged negative supply shock to the global economy, contributing to sovereign bond yields reaching levels not seen since 2008.
While the financial system has shown resilience to these bond yield increases, the FPC highlighted that hedge fund leverage in the gilt market remains elevated. Concerns also persist regarding the sustainability of AI-related earnings and capital expenditure growth, with equity valuations for AI companies having fallen sharply in July. The FPC also underscored the importance of firms preparing for AI-related cyber and operational risks, following recent incidents in frontier AI test environments.
Domestically, the Committee judges that UK households and corporates remain resilient, and the UK banking system is appropriately capitalised with high liquidity. The FPC has maintained the UK countercyclical capital buffer (CCyB) rate at its neutral setting of 2%.