• Andrew Bailey warns soaring AI valuations could eventually face an asset price correction
• The Bank of England is preparing for potential AI-related shocks to financial markets
• Bailey says markets currently appear to price AI companies as winners
• Cyberattacks and deepfakes present additional risks as AI capabilities expand
• AI could also strengthen economic growth and accelerate analysis supporting monetary policy decisions 

Bank of England Governor Andrew Bailey has warned that the extraordinary sums flowing into artificial intelligence could expose financial markets to significant shocks if investors' expectations are not met.

The rapid expansion of AI has driven valuations of leading technology businesses sharply higher, while companies are committing hundreds of billions of dollars to developing the technology, software and supporting infrastructure.

Bailey said the Bank is monitoring the investment surge "very carefully" and acknowledged that a correction in valuations is possible.

"You could see some correction of asset prices at some point," he said.

AI chipmaker Nvidia is currently valued at $5.5 trillion, making it the world's most valuable listed company, while Alphabet, Meta, Microsoft and Amazon are investing hundreds of billions of dollars in AI.

Anthropic and OpenAI are also preparing potential US stock market listings that could attract further investment into the sector.

Bailey said substantial investment was understandable given expectations that AI could become an important source of economic growth. However, current valuations also assume significant commercial success.

"Everybody is currently priced to be a winner," Bailey said, before cautioning that history suggests those expectations will not be fulfilled across the industry.

He pointed to the early development of internet search as an example of how market leadership can change as technologies mature.

"Google was not the first market leader in internet search. It was Netscape. Nobody can remember Netscape today. It doesn't exist. So not everybody always wins."

For financial authorities, the challenge is ensuring that the financial system can withstand potential market disruption if enthusiasm surrounding AI cools or individual companies fail to deliver anticipated returns.

"We are prepared for the fact that there will be, I think, some shocks come along to markets and we have to deal with that," Bailey said. "We have to make sure the system is resilient."

However, financial market valuations are only one part of the emerging AI risk landscape. Bailey also highlighted cybersecurity, warning that AI provides a significantly more powerful means of discovering vulnerabilities in software.

"In the wrong hands... it's a very powerful, potentially very powerful, weapon," he said.

Deepfakes represent another concern. Bailey himself has been depicted in fabricated images circulated online and said identifying the origin of such material can be difficult.

He called for greater assistance from technology companies to improve traceability.

Despite the risks, Bailey emphasized AI's potential economic benefits, including the possibility of strengthening UK growth.

The Bank is also using the technology to support the work behind monetary policy decisions. Bailey said AI could accelerate analysis supporting the Monetary Policy Committee while leaving responsibility for decisions with policymakers.

"It's not taking a decision, but it's a tool in the hands of the policy maker and that's good," he said.

His comments come against a backdrop of pressure in global bond markets, with long-term government borrowing costs rising in the UK, US and other major economies.

The combination of elevated asset valuations and substantial capital moving toward AI therefore adds another potential source of volatility for financial authorities to monitor.