Bank watchdog boss says ‘plenty to worry about’ including AI bubble risk

The head of the UK’s banking watchdog has warned that the finance sector has “plenty to worry about” including the risk of an “AI bubble” and concerns over the US credit markets.

Sam Woods also told City bosses and top bankers that potential reforms related to government bonds from the US secretary to the Treasury would be “highly risky”.

He gave a speech to City figures at the annual Mansion House dinner on Wednesday evening.

The chief executive officer of the Prudential Regulation Authority (PRA) and Bank of England deputy governor said the UK banking system has successfully weathered “severe blizzards and gales” in recent years.

However, he said a raft of significant risks mean that the world continues to be a “dangerous place”.

Mr Woods said: “The geopolitical landscape is bleak. Cyber attacks are relentless.

“New technologies, if not well governed and controlled, have the potential to cause significant disruptions.

“And within the financial services sector, there is plenty to worry about – including opaque and complex private lending by non-banks, recent cracks emerging in US credit, the risk of an AI bubble, and overly concentrated life reinsurance structures.”

In his speech, Mr Woods also cautioned over recent suggestions in the US that higher-rated government bonds could be removed from leverage ratio calculations.

Scott Bessent, the US secretary to the Treasury, argued earlier this year that this could be used to reduce Treasury yields and improve market resilience.

However, the PRA boss said he believes the idea “carries real risk” for the financial system.

Mr Woods added: “My view is that this would be a profound – and highly risky – change.

“In my view such a change would be equivalent to ripping off our jacket, warm hat and gloves and throwing them all over the nearest cliff.”