Bank of England weighs AI risk in next financial sector stress test

The Bank of England is discussing whether to include artificial intelligence as a central risk in its next system-wide exploratory scenario, according to sources familiar with the matter. The current exercise focuses on private markets and is set to conclude next year, but AI is rising on the regulatory agenda amid concerns over valuation bubbles, cyber risks, and the potential for AI-driven trading models to amplify market shocks.

Officials are concerned that AI agents used in trading could prompt herding behaviour, increasing volatility if models respond similarly to market events. There is also regulatory attention on the risk of AI exposing weaknesses in cyber defences and the possibility of an AI stock valuation bubble bursting with wider economic effects. The Bank's current scenario already includes some AI disruption, but officials say the scope of concern has widened since the exercise began.

Governor Andrew Bailey has said AI could boost growth but has also warned of its risks, particularly in cyber security. The Bank is still considering its options for the next stress test, with no final decision yet on whether AI will be the main focus.

Senior executives in banking and insurance should prepare for more scrutiny of AI risk management as regulators assess how technology could affect financial stability.