Artificial intelligence now leads the risks that respondents to the Federal Reserve's financial stability survey see for the financial system. The Fed's report also examined the rapid rise in AI-related corporate debt issuance and found the system otherwise fairly stable.
The Federal Reserve's latest survey of financial stability risks put artificial intelligence at the top of the list. 87% of respondents cited AI as a salient risk, up from 50% in the spring survey. The central bank released the semi-annual report on Friday.
Respondents point to valuations, cyber threats and financing
Respondents named three areas of concern: elevated equity valuations, cybersecurity risk, and risks tied to complex forms of AI-related financing. On valuations, lower-than-expected earnings could trigger lower valuations and a market correction.
The next most-cited danger, a risk asset correction, drew 52% of those surveyed. Higher long-term rates came in at 48%, while cyberattacks and fiscal debt sustainability each drew 43%.
However, the survey ran in September and October, so respondents weighed in before the turmoil at Nvidia, where CEO Jensen Huang stepped down on Thursday, according to Reuters.
AI-linked debt climbs to $680 billion
The Fed devoted part of the report to debt tied to data centers and other advanced computing infrastructure. Advanced computing-related debt issuance reached $680 billion by October 2026, a fivefold increase on all of 2023.
Such borrowing now makes up nearly a third of nonfinancial investment-grade corporate debt issuance, compared with less than 6% three years ago. Debt, guarantees and not-yet-commenced leases on this infrastructure could exceed $3 trillion, the Fed's data showed.
The Fed said such circular financing dynamics could let the largest firms absorb losses in a downturn. Those firms' exposure could also be substantially larger than their on-balance-sheet liabilities show, the report said.
Hedge fund leverage at highest level since 2013
Otherwise the report found the system fairly stable. Even so, hedge fund leverage is at its highest since 2013 and concentrated on a relatively small group, according to CNBC.
Sources: CNBC, Reuters via Investing.com
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