The Bank for International Settlements (BIS) has flagged financial vulnerabilities associated with AI-related financing, warning that the race to capture market share may have led to overinvestment, sowing the seeds of a sector-wide bust if returns disappoint.

“This is one of the pressure points we see facing the global economy,” Tao Zhang, chief representative of BIS for Asia and the Pacific, said, adding that there are financial vulnerabilities associated with AI-related financing. “Risk premia are compressed, asset valuations are stretched, and the financing of AI is increasingly leveraged and features complex interactions within the AI supply chain, ” he said. The BIS has therefore highlighted the need for macroprudential policies to lean against persistently strong risk appetite and stressed the importance of greater transparency in private credit markets, particularly in sectors such as AI, Zhang said.

Impact of frontier AI models

According to Zhang, frontier AI models can increase the speed, scale and complexity of cyber-attacks. Given the financial system’s role as critical infrastructure, regular cooperation is essential. He said the same tools could strengthen cyber defences by helping detect and fix vulnerabilities. The net impact on systemic cyber risk depends on several factors, not least the computing power available to attackers and defenders.

“Both domestic and international coordination on cybersecurity are critical. That was the case before frontier models came onto the scene, and it remains so now. At the domestic level, the financial industry, central banks and financial supervisors should collaborate with national security agencies and other stakeholders to accelerate vulnerability remediation and strengthen core cyber hygiene practices,” Zhang said.

West Asia and supply chains

Zhang said the West Asia conflict has exposed the risks of relying on a handful of critical trade routes and warned that the inflationary impact of such shocks could outlast the initial disruption. Despite signs of easing geopolitical tensions and a sharp fall in oil prices, the effects of the disruption may have further to run, he said.

“Inflation has risen. This increase could become persistent if businesses pass on higher input costs. This could sustain inflation pressures well after energy flows and oil prices normalise,” Zhang cautioned.

On the policy front, he said central banks must prioritise medium-term price stability to anchor inflation expectations. “Monetary policy must be complemented by sound fiscal and macroprudential policies to lay the foundations for sound and sustainable growth,” he said.

The conflict in the Middle East and disruptions associated with the closure of the Strait of Hormuz show how dependence on a small number of critical transit routes can create risks extending beyond oil and gas markets, Zhang said. “Disruptions to critical inputs can create chokepoints that affect broader production networks, regardless of the economic value of the individual component involved. Asian economies are particularly exposed to such disruptions,” he said.

Stronger supply chains would help economies such as India weather supply-side disruptions, while such shocks may become more frequent in the years ahead, Zhang said. “More robust global production networks would help economies, including India, weather supply-side disruptions that may become more frequent in the years ahead.”

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