While the Bank of England is busy stress testing the UK’s private markets, another threat is looming in the minds of regulators.
Turmoil caused by artificial intelligence is among the options being discussed for the BOE’s next system-wide exploratory scenario, according to a person familiar with the matter. The SWES, as a test is known, measures the resilience of the UK’s financial sector against hypothetical danger.
The BOE is currently in the final stages of the first round of its SWES examining risks specifically in private markets, which have surged in size since the financial crisis. It is testing how the flow of credit to the economy would be impacted by a severe global downturn sending shocks through private markets, with ripples to asset managers, investors and banks.
It’s due to conclude next year and is only the second time the UK has used a system wide approach to assess risks, rather than stress testing institutions like banks and insurers individually.
A second person familiar with the matter said no decisions have been made yet about the next SWES, while a third said there are potential options other than AI.
Still, AI is rising up the agenda for regulators as concerns mount over a valuations bubble, cyber vulnerabilities and autonomous AI agents causing a market meltdown.
Officials are worried that AI agents used in financial trading could amplify market stresses if it causes herding behavior as models respond to the episode in a similar way. They are also on alert for the newest AI models exposing fragility in companies’ cyber defenses, while regulators have long been watching for any signs of an AI stock valuation bubble that bursts and causes economic fallout.
The current private markets exercise includes some AI disruption as part of the hypothetical scenario that is underpinned by a “severe but plausible” global supply and geopolitical shock which causes a deep recession. That modeled a scenario where AI valuations are hit and its development is held back. However, concerns over AI and the financial sector have widened since the BOE first started the exercise.
While BOE Governor Andrew Bailey believes AI could be a game changer that boosts Britain’s pedestrian growth rates, he has also warned of the risks.
“Everybody’s priced to be a winner,” he said recently. “The market’s job is to estimate the future stream of returns. Future stream of returns could be positive but the market could overestimate them.”
Bailey added that, since the spring, AI has been “a very big issue for us in terms of cyber.”
Photograph: Skyscrapers beyond the Bank of England in the City of London financial district; photo credit: Chris Ratcliffe/Bloomberg
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