The UK's financial system is bracing for heightened instability, with the Bank of England's Financial Policy Committee (FPC) sounding a warning bell over leverage in equity markets and the unprecedented growth of Artificial Intelligence (AI) financing. According to the Committee's July 2026 record, vulnerabilities previously identified have intensified, particularly a substantial increase in the use of leverage in equity markets, which has reached £250 billion – a rise of 25% since December 2025.
The ongoing geopolitical tensions in the Middle East continue to cast a long shadow over global economic confidence. The recent signing of a Memorandum of Understanding between the US and Iran has led to a reduction in near-term energy price risks, with Brent crude prices stabilising at around $72 per barrel. However, significant uncertainty and volatility persist in both energy and interest rate markets, with UK sovereign bond yields averaging 2.5% since the start of July.
A key concern for the FPC is the rapid ascent of equity prices, driven by a narrow set of AI-related companies, which have seen their valuations surge to £150 billion – a 30% increase in just six months. This growth has been fuelled by positive earnings news and retail inflows through exchange-traded funds (ETFs) and levered ETFs, with hedge fund leverage also increasing significantly.
The financing needs of AI-related companies are expanding at an unprecedented pace, with public and private credit markets providing £100 billion in new debt last quarter alone. While there is currently little evidence that AI activity is crowding out other businesses or governments from accessing funding, the FPC acknowledges the potential for AI to boost productivity and long-term economic growth by as much as 2.5% annually. However, considerable uncertainty remains regarding the scale and timing of future productivity gains and the ability of companies to monetise these advancements.
The FPC also highlighted that rapid advances in 'frontier AI' capabilities are introducing new financial stability risks, specifically related to cyber and operational resilience. The potential for these vulnerabilities to crystallise simultaneously with other macroeconomic shocks has increased since the December 2025 Financial Stability Report, potentially amplifying their combined impact on financial stability.
The Committee continues to monitor these evolving risks closely, acknowledging that while the UK's financial system has demonstrated resilience throughout this period, persistent uncertainty and volatility in energy and interest rate markets persist. The FPC will provide further guidance on managing these risks as more information becomes available.