Pablo Hernandez de Cos, general manager, the Bank for International Settlements
The dynamics of the current situation pose particular risks, he added, noting that AI investment is concentrating among only a few players, and capital spending outpaces cashflow at such companies, prompting them to rely on debt and private credit.
Moreover, a lot of that activity is “opaque and interconnected.”
The artificial intelligence boom remains a global financial stability danger that risks more damage than past crashes, the Bank for International Settlements chief said.
Pablo Hernandez de Cos reiterated a warning delivered by his institution in June, observing that investors’ hopes pinned to the technology have driven “elevated” stock valuations based on “ambitious expectations.”
“Should the returns to AI disappoint, a pullback in investment could turn today’s capital expenditure boom into a bust,” he told an event in Mumbai on Thursday. “The consequences of such a correction could be larger than in the past.”
Several global policymakers have rung alarm bells on the matter this year. Among the most recent was Financial Stability Board Chair Andrew Bailey, who cited the danger of a “disorderly correction that could spread across borders.”
“A key feature of the AI market that raises the risk of such a bust is the investment arms race between AI firms,” de Cos said. “Driven by intense competition, these firms risk over-investing resources.”
He listed the 1830s canal mania, Britain’s 1840s railway mania, the electrification boom of the 1920s and the dotcom bubble of the 1990s as relevant past examples.
“In each of these cases, the eventual correction that followed had economy-wide implications,” he said.
On the eve of his speech, Fitch Ratings published one possible such scenario, featuring a 35% drop in US stocks over a period of half a year.
That would result in an American recession and “a very sharp slowdown” in global growth, economists Alex Muscatelli, Brian Coulton and Zazral Purewsuren wrote in a report.
De Cos reckons this time could be different from prior crashes because of greater consumer investments in stocks that could then hurt spending, more of a global focus on US equities, and the possibility of domestic asset bubbles caused by local AI-related export booms.
The dynamics of the current situation pose particular risks, he added, noting that AI investment is concentrating among only a few players, and capital spending outpaces cashflow at such companies, prompting them to rely on debt and private credit.
Moreover, a lot of that activity is “opaque and interconnected.”
“Under so-called circular financing, chip manufacturers and hyperscalers take equity stakes in AI firms, which in turn commit to purchasing their chips and compute, linking these players in ways that are difficult to observe and, at times, difficult to value,” de Cos observed.
A crash isn’t inevitable, he added.
“I do not say that this is where the AI boom must lead,” he said. “But the scale and speed of the current investment boom, and the weight of expected commercial returns, do warrant some caution.”
De Cos also cited the separate stability risk to cyber security, noting prior research that suggests AI could “tilt the balance in favor of attackers.”
A former Bank of Spain governor, de Cos is a possible successor to European Central Bank President Christine Lagarde. At a time of mounting speculation that she will resign from that job early, a publisher this month revealed her plans to publish memoirs in late January.
Bloomberg