BIS warns AI bust could match 2008 crisis impact on credit

The Bank for International Settlements issued a stark warning on Sunday, stating that a collapse in AI investment could unleash disruption on global credit markets comparable to the 2008 financial crisis. In its latest annual report, the Basel-based institution, often described as the central bank for central banks, classified AI-related dangers alongside inflation and fiscal stress as critical pressure points that regulators cannot afford to ignore.

“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 cautioned. It further noted that “a major equity-market correction could have larger macroeconomic consequences today than in the past,” underscoring the heightened sensitivity of the current financial system.

The report specifically flagged circular financing as a hidden vulnerability. In this arrangement, chipmakers and hyperscalers take equity stakes in AI labs or neocloud providers, which then commit to multi-year purchases of chips or computing power from those same investors. Meanwhile, data centre construction is increasingly outsourced to third parties who lease the facilities back under 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. This financial complexity has intensified through record bond issuance, shifting metered pricing models, and converging export controls, all of which peaked in June.

The BIS warned that a 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. This comparison carries significant weight given the institution’s role as a global financial watchdog.

BIS chief Pablo Hernandez de Cos highlighted inflation as a compounding factor, noting that the 2022 cost-of-living shock “is still in the memory of economic agents.” This memory, he argued, raises the likelihood of second-round effects from the current energy disruptions in the Middle East. The report also pointed to sovereign debt vulnerabilities, warning that hedge funds employing “highly leveraged strategies that rely on short-term financing” now play a much larger role as buyers of government bonds. This creates “risks of fire sales and de-leveraging feedback loops,” the BIS added.

The annual report was released just ahead of the European Central Bank’s three-day symposium in Sintra, where global policymakers are expected to grapple with many of the same stability risks. AI stock concentration already exceeds levels seen during the dot-com era, with the ten largest S&P 500 companies now accounting for 36% to 40% of the index. The BIS’s core message is clear: the financial architecture underpinning the AI boom, not just the equity valuations themselves, carries systemic risks that regulators have yet to fully understand or map.