The Bank of England warned on Tuesday that rising borrowing by equity investors has raised the risk of a sharp market fall that could threaten the financial system. Its Financial Policy Committee flagged a significant rise in hedge fund leverage tied to stakes in AI-related companies.
Rising borrowing among equity investors has raised the risk of a sharp price fall that could threaten the stability of the financial system, the Bank of England warned Tuesday. In its twice-yearly report, the BOE's Financial Policy Committee said many of the threats it had previously flagged have intensified.
Hedge fund borrowing draws the warning
The committee singled out the growing use of leverage by investors building stakes in AI-related companies. According to the BOE, there has been a significant rise in hedge fund leverage in equity markets: "There has been a significant rise in hedge fund leverage in equity markets, creating risks, including via the prime brokers that facilitate this activity."
That borrowing could accelerate declines in equity prices if investors hit a setback, such as disappointing revenues for providers of AI-generated services, the central bank said. Hedge funds that also hold government bonds could then face pressure to sell those assets, broadening the impact of any shock.
AI investment and the U.S.-Iran conflict
The BOE pointed to the risks of meeting the historically unprecedented levels of investment needed to develop AI, alongside high uncertainty about future revenues. A reassessment of those prospects, it said, could trigger a fall in equity prices that might be amplified by high concentration, correlated momentum-driven positions that can exacerbate volatility as markets fall, and increased leverage.
The committee also noted that steps toward a lasting resolution to the U.S.-Iran conflict had helped reduce, but not eliminate, some threats to stability. The signing of a Memorandum of Understanding had pushed energy prices back to just above pre-conflict levels, though the BOE cautioned that substantial uncertainty remains and that a fresh intensification of the conflict is among the possible setbacks.
Source: MarketScreener
Trading involves risk.
Risk Disclaimer
