The BIS cautions that a collapse in AI could impact credit markets as severely as the financial crisis of 2008.

      The Bank for International Settlements (BIS) cautioned that a downturn in AI investments could disrupt credit markets similarly to the 2008 financial crisis, highlighting issues such as circular financing and insufficiently disclosed risks in its annual report. The Basel-based institution identified the dangers associated with AI alongside inflation and fiscal stress as key areas requiring attention.

      The BIS stated, “Disappointment in returns could lead to a sudden reduction in financing, transforming the capital expenditures boom into a prolonged investment downturn, potentially affecting financial conditions.” It also noted that “a significant correction in the equity market could have greater macroeconomic implications today than in previous times.”

      The report pointed out “circular financing” as a particular weakness, where chip manufacturers and large tech firms invest in AI labs or neocloud service providers, who then commit to large-scale, multi-year chip purchases from those investors. Additionally, data center construction is increasingly being outsourced to external companies, which lease back the facilities through long-term contracts that include exit clauses. “The terms of such agreements are often inadequately disclosed, leading to risks of the same asset being pledged multiple times,” according to the BIS. The financial intricacies of the AI sector have been rising, marked by record bond issuances, adjusted pricing strategies, and June’s export controls.

      The BIS warned that the re-evaluation of risk, whether instigated by rising interest rates or an AI downturn, could severely impact credit markets much like the 2008 global financial crisis. This comparison is noteworthy, especially from an institution that acts as a central bank for central banks.

      BIS chief Pablo Hernandez de Cos emphasized inflation as an additional risk factor, referencing that the cost-of-living shock of 2022 “remains fresh in the minds of economic agents,” which heightens the chances of second-round effects following the ongoing energy disruptions in the Middle East. The report also highlighted vulnerabilities in sovereign debt, pointing out that hedge funds employing “highly leveraged strategies reliant on short-term financing” have assumed a more prominent role as government bond buyers, leading to “risks of fire sales and de-leveraging feedback loops.”

      This annual report was released just before the European Central Bank’s three-day symposium in Sintra, where global policymakers will examine similar stability risks. The concentration of AI stocks now surpasses levels seen during the dot-com era, with the ten largest S&P 500 companies accounting for 36% to 40% of the index. The BIS warns that the financial framework underpinning the AI boom, beyond just equity valuations, presents systemic risks that regulators have not yet fully assessed.