Bank of England Governor Andrew Bailey said on Tuesday that the danger of a sharp correction in equities remains high, noting that elevated valuations appear to reach further than just optimism linked to artificial intelligence.
Speaking to the Financial Policy Committee, Bailey said the breadth of stretched equity valuations seems to exceed what can be explained by AI-related enthusiasm alone. The committee voiced particular concern that the various risks to financial stability could crystallize simultaneously.
Bailey identified risks stemming from frontier AI as the largest change in the risk picture since December. He urged firms to implement official UK guidance designed to strengthen cyber resilience in response to the threats posed by AI developments.
On regulatory matters for banks, Bailey said the FPC conducted a detailed discussion on leverage reform, calling the subject complex. He said some cleanup work is necessary for leverage rules that affect the major UK domestic banks.
The governor stated that exempting government bonds from leverage calculations would be inconsistent with Basel agreements. He added that he does not anticipate the Bank of England imposing caps on banks' returns to shareholders as part of any leverage adjustments.
Bailey said he does not see a case for higher capital requirements in the UK banking system. He also welcomed the resumption of access to Mythos and said he would like to engage with Anthropic to understand how that access functions for UK banks.
Describing the Bank of England's stance on AI and cyber risks, Bailey said it differs from the European Central Bank by choosing to work collaboratively with banks rather than issuing prescriptive directives. He also raised the question of whether market-based leverage issues should be resolved through banks.
Context and implications
The remarks underline the FPC's focus on market valuations, operational resilience in the face of emerging AI threats, and technical adjustments to leverage rules affecting major domestic lenders. While Bailey did not call for more capital in the banking system, the committee's discussions on leverage mechanics and the treatment of government bonds signal regulatory attention on balance-sheet metrics.
Bailey's call for firms to follow official cyber resilience guidance reflects concern that frontier AI developments have altered the operational risk landscape, prompting a proactive stance by UK authorities toward bank preparedness.