The Bank of England has issued a stark warning regarding the global surge in artificial intelligence spending, highlighting concerns that the multi-trillion-dollar investment in AI infrastructure is becoming dangerously reliant on debt. The central bank noted that stock prices associated with the AI sector have reached levels it deems "materially stretched."
The core risk identified is that if AI stocks experience a significant downturn, the repercussions will not be confined to the technology sector but will rapidly spread to the wider debt market.
According to the UK central bank, an estimated $5 trillion in total AI spending is projected over the next five years. Currently, a substantial portion of this investment is being funded by the cash reserves of major technology companies, often referred to as hyperscalers.
However, the bank anticipates that approximately half of the future spending will be financed through external sources, primarily through borrowing. It has also observed early signs of stress in credit default swaps linked to companies that are heavily leveraging debt to build AI systems.
Stock Drops Could Impact Wealth and Corporate Borrowing
In its bi-annual Financial Stability Report, the Bank of England indicated that a sharp decline in technology shares connected to AI would diminish UK household wealth, consequently reducing consumer spending. The same scenario would also negatively affect lenders exposed to companies involved in building AI infrastructure.
The bank stated that losses on these loans would lead to increased borrowing costs for companies across the broader market.
This warning amplifies ongoing discussions about a potential AI bubble, with some analysts drawing parallels to the dot-com boom that burst in the early 2000s. As prices escalate, companies are accelerating their spending on AI hardware, particularly on new data centers essential for powering advanced AI models.
Despite these potential risks, Andrew Bailey, the Governor of the Bank of England, acknowledged that AI firms are demonstrating actual revenue generation, a contrast to many early internet startups. Speaking at a press conference in London, he commented, "They are not created on hope but as we see and we were seeing it last week, I think in the debate is Google moving onto Nvidia’s patch, it doesn’t mean to say everybody’s going to win. It doesn’t mean to say everybody’s going to win equally."
The central bank also estimated that AI has been responsible for two-thirds of the gains in the S&P 500 this year. It further noted that spending related to the technology contributed to half of the US economic growth in the first half of 2025. The report added, "The financing of AI development is reaching an inflection point. If material credit losses on AI lending were to occur, directly or indirectly, this could have spillovers to broader credit conditions, including in the UK."
AI Financing Shows Red Flags in Debt Markets
The central bank reported an increase in corporate debt issuance by AI companies in recent months. It pointed to early warning signals within the derivatives market, citing Oracle Corp., a major database and cloud firm closely associated with Nvidia, as a key example.
The bank elaborated, "The five-year credit default swap spreads of Oracle, an AI company which has lower free cash flow margins than some other larger hyperscalers and has issued a large amount of debt this year to finance AI infrastructure spending, have widened from less than 40 basis points to around 120 basis points since end-July."
This movement is distinct from the broader US market, where spreads on investment-grade US corporate debt remained largely stable during the same period. Credit default swaps function as insurance against a company's inability to repay its debt; a rise in their prices indicates an increased perceived risk of default.
Oracle has emerged as a significant indicator for AI sector risk. Traders who are betting against the sector have increasingly utilized its credit default swaps as a hedge against a potential sharp sell-off. These trades yield profits if AI market sentiment deteriorates and fears of default intensify.
At the epicenter of the current AI investment boom is Nvidia, the chip manufacturer that has become the world's most valuable company, with a market capitalization of $4.37 trillion. The stock price of NVDA directly reflects the demand for the high-performance processors required to run the most sophisticated AI models.
Over the past year, Nvidia has secured billions of dollars in deals with customers and partners. It has also established partnerships with competitors, including Intel Corp. These agreements have intertwined the financial standing of several major industry players. The Bank of England expressed concerns that these connections now raise the possibility of a systemic AI bubble, where a single failure could rapidly propagate across stock, credit, and funding markets.