Bank of England to Stress Test AI Valuation Risks in Private Equity and Credit Markets

The Bank of England (BoE) has raised concerns over inflated valuations in the artificial intelligence (AI) sector and announced a comprehensive stress test targeting the global private equity and private credit markets to assess their resilience to potential financial shocks.

In its December 2025 Financial Stability Report, the BoE highlighted that investor enthusiasm has driven AI company valuations to unsustainable levels in both the US and UK. This trend raises concerns about potential market corrections that could expose deeper financial vulnerabilities. The report also noted that growing ties between AI firms and credit markets could amplify losses during a downturn. Additionally, hedge funds have amassed approximately £100 billion in leveraged gilt positions, exposing markets to potential instability from unexpected shocks.

To address these risks, the BoE is launching a stress test focusing on the $16 trillion global private equity and private credit sectors. This initiative aims to understand systemic risks and their potential impact on the broader UK economy. Key players in the private finance industry, such as Apollo, Bain Capital, Blackstone, and Goldman Sachs Asset Management, are participating in this voluntary exercise. The test will be conducted in two stages, with a final report expected by early 2027.

Sarah Breeden, Deputy Governor for Financial Stability, emphasized the importance of this exercise, stating, "Private equity and private credit play an increasingly valuable role in helping UK companies to innovate, invest and grow. To keep delivering those benefits, we need a robust understanding of how risks might flow through the financial system in a stress."

The BoE's proactive measures underscore the importance of vigilance in rapidly evolving sectors like AI and private credit. By identifying and mitigating emerging risks, the BoE aims to prevent potential financial crises that could have widespread societal impacts, including job losses, reduced investment, and economic downturns.

This is not the first time the BoE has conducted stress tests to assess the resilience of financial institutions. However, the current focus on private equity and private credit sectors is notable, reflecting their increased prominence and potential systemic importance. The inclusion of major global players in the exercise highlights the interconnectedness of the UK financial system with global markets.

The Bank of England's recent actions underscore its dedication to safeguarding the UK's financial system amid evolving risks. By addressing concerns in the AI sector, corporate lending, and gilt repo markets, and by initiating a comprehensive stress test of private markets, the BoE aims to enhance the resilience of the financial system and protect the broader economy.