TL;DR
The BIS warned that an AI investment bust could be as disruptive to credit as 2008, flagging circular financing and poorly disclosed risk in its annual report.
The central banks' central bank said chipmakers taking stakes in AI labs who then buy their chips back creates risks of "the same asset being pledged multiple times."
The BIS warned that an AI investment bust could be as disruptive to credit as 2008, flagging circular financing and poorly disclosed risk in its annual report.
The Bank for International Settlements warned on Sunday that an AI investment bust could hit credit markets with disruption comparable to the 2008 financial crisis. In its annual report, the Basel-based institution listed AI-led risks alongside inflation and fiscal stress as “pressure points” that “demand attention.”
“Disappointment in returns could trigger a sudden pullback in financing and turn the capex boom into a protracted investment bust, with potential knock-on effects on financial conditions,” the BIS said. It added that “a major equity-market correction could have larger macroeconomic consequences today than in the past.”
The report singled out what it called “circular financing” as a specific vulnerability. Chipmakers and hyperscalers take equity stakes in AI labs or neocloud providers, who in turn commit to multi-year purchases of chips or computing power from those same investors. Data centre construction is increasingly outsourced to third parties that lease facilities back on long-term contracts with embedded exit clauses. “The terms of such deals are typically poorly disclosed, with risks of the same asset being pledged multiple times,” the BIS wrote. The AI boom’s financial complexity has been escalating through record bond issuance, metered pricing shifts, and export controls that converged in June.
The BIS warned that repricing of risk, “whether triggered by higher interest rates or an AI bust, has the potential to be similarly disruptive” to credit markets as the 2008 global financial crisis. The comparison is significant coming from the institution that serves as the central bank for central banks.
BIS chief Pablo Hernandez de Cos highlighted inflation as a compounding risk, noting that the 2022 cost-of-living shock “is still in the memory of economic agents,” which raises the probability of second-round effects from the current Middle East energy disruption. The report also flagged sovereign debt vulnerabilities, warning that hedge funds using “highly leveraged strategies that rely on short-term financing” now play a much larger role as buyers of government bonds, creating “risks of fire sales and de-leveraging feedback loops.”
The annual report landed on the eve of the European Central Bank’s three-day symposium in Sintra, where global policymakers will scrutinise many of the same stability risks. AI stock concentration already exceeds dot-com-era levels, with the ten largest S&P 500 companies accounting for 36% to 40% of the index. The BIS’s message is that the financial architecture supporting the AI boom, not just the equity valuations, carries systemic risk that regulators have not yet fully mapped.
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