The Bank of England has warned that risks to the UK financial system are increasing as the renewed conflict in Iran pushes up oil and gas prices and growing debt linked to artificial intelligence exposes markets to potential shocks.
The Bank’s Financial Policy Committee said interconnected weaknesses across the financial system were becoming more likely to crystallise, even though financial markets and the wider system had remained relatively resilient so far.
According to the committee, rising oil and gas prices have pushed bond yields to levels not seen since 2008, increasing concerns about the potential for a sharp adjustment across financial markets. The Financial Policy Committee has maintained its Countercyclical Capital Buffer at 2%, a measure designed to strengthen banks against emerging financial risks.
“The likelihood that interconnected vulnerabilities in the financial system crystallise has risen,” the committee said in its latest quarterly meeting record.
It said the renewed escalation of the conflict in Iran and the resulting increases in oil, gas and refined product prices were creating a more prolonged negative supply shock, which could put additional pressure on inflation, borrowing costs and household finances.
Bank of England governor raises concerns over AI risks
Bank of England Governor Andrew Bailey has also highlighted growing financial and operational risks linked to artificial intelligence, particularly as increasingly advanced AI systems become more widely used across the economy.
In an article published alongside the Financial Policy Committee’s latest assessment, Bailey called for rigorous testing of advanced AI models both before and after they are deployed. He argued that policymakers should first focus on understanding the risks and establishing effective intervention points before introducing more formal regulation.
Bailey said regulation could eventually become necessary, but stressed that understanding, testing and identifying credible ways to intervene should come first.
The Bank also warned that the rapid increase in AI-related debt issuance has increased the exposure of global capital markets to developments in the technology sector.
Morgan Stanley estimated in early September that global AI-related debt issuance had reached around $450 billion, roughly twice the level recorded in 2025.
The Bank said AI-related and semiconductor stocks had experienced sharp falls in July, although market conditions remained orderly. However, it warned that high valuations mean a more significant shock could lead to a much sharper repricing of assets.
The growing use of advanced AI systems has also raised concerns about cyber and operational risks. The Bank pointed to a number of incidents that have increased policymakers’ concerns about whether increasingly capable AI systems could circumvent existing safeguards.
The Financial Policy Committee said these developments reinforced its assessment that advances in AI could increase cyber and operational risks across the financial system.
Bank of England prepares reforms to leverage and gilt markets
The Bank of England also confirmed that it will publish more detailed proposals in early 2027 covering potential changes to bank leverage requirements and rules governing the gilt repo market.
The gilt repo market plays an important role in the financial system, allowing market participants to raise short-term cash against government bonds.
The Bank said a consultation on changes to leverage rules will begin early next year. It also stressed the importance of continuing work to strengthen the resilience of the gilt repo market.
The issue has become a growing concern for policymakers because disruption in the market could make it harder for investors to trade government bonds during periods of financial stress.
Deputy Governor Sarah Breeden previously warned that “doing nothing” was not an option because of the continued risk that problems in the gilt repo market could cause bond trading to dry up during a financial crisis.
According to Bank of England data, net borrowing in the gilt repo market stands at around £200 billion, while hedge fund leverage has remained high but relatively stable in recent months.
The Bank began developing proposals for tighter rules following interventions during periods of market disruption in 2020 and 2022, including during the COVID-19 pandemic and following the UK government’s 2022 mini-budget.
However, the proposed reforms have faced resistance from parts of the financial industry. Breeden has indicated that some changes, including greater use of central clearing, could take years rather than months to implement.
What the Bank of England warning could mean for households
The latest warning comes at a time when UK households are already facing pressure from higher living costs and borrowing costs. Higher energy prices can feed into household bills and business costs, while increases in bond yields can affect borrowing conditions across the wider economy.
For Nigerians and other African communities living in the UK, developments in interest rates, energy prices and the wider economy can have a direct impact on household budgets. Higher borrowing costs can affect mortgages and other forms of credit, while increased energy and transport costs can put further pressure on families managing day-to-day expenses.
The Bank of England’s warning does not mean that a financial crisis is imminent. Instead, the Financial Policy Committee is highlighting vulnerabilities that could become more serious if several economic and market pressures intensify at the same time.
The central bank’s focus on AI also reflects the growing importance of the technology sector to the global economy. As investment in artificial intelligence expands, policymakers are increasingly examining whether rapid growth in AI-related borrowing and asset valuations could create new risks for financial markets.
For UK households, businesses and investors, the message from the Bank of England is that financial markets remain resilient, but the combination of geopolitical tensions, higher energy prices, elevated borrowing and rapidly growing AI investment requires close monitoring.
For Nigerians living in the UK, changes in the country’s financial and economic outlook can have practical consequences for household finances, particularly for families managing mortgages, rent, energy bills, transport costs and other everyday expenses. Many members of the Nigerian diaspora are also connected financially to family and businesses in Nigeria, meaning changes in the UK economy can influence how much households are able to save, invest or send home.
Chijos News will continue to follow major UK economic and financial developments and explain what they could mean for Nigerians and the wider African diaspora living in Britain.