Repeated supply shocks threaten financial stability, Bailey warns
Bank of England Governor Andrew Bailey warned that repeated supply shocks, leveraged bond market participants and artificial intelligence financing threaten systemic resilience. Speaking at the Istanbul Economic Forum, Bailey rejected unconditional rate guidance while defending post-crisis bank regulations.
The leveraged debt shift
Bailey identified structural vulnerabilities across government bond markets, where leveraged investors have replaced traditional long-term pension funds.
While this shift increased debt absorption capacity, Bailey warned it created fragility through margin calls and stop-outs that can spark cross-border deleveraging.
He highlighted risks from artificial intelligence financing, noting that sharp downward revisions to AI earnings expectations could spill across equity, credit and sovereign markets.
Despite these emerging pressure points, Bailey stated that banking systems remain well-capitalised and without funding stress, crediting post-2008 regulatory reforms for preventing acute liquidity crises during recent geopolitical shocks.
Looking through the shocks
Facing successive disruptions from Covid, the Ukraine war and the Middle East, monetary policy faces supply shocks that depress output while driving inflation higher.
“I remain sceptical of unconditional promises about future interest rates,” Bailey said, noting that central banks can look through temporary price increases only when inflation expectations remain firmly anchored.
He also warned that persistent shocks and slowing potential growth erode fiscal space, limiting governments' ability to deploy countercyclical cushions.
Diagnosed, but unshielded
Bailey provides an incisive diagnosis of structural vulnerabilities in bond markets and AI financing.
Yet his proposed remedies remain strikingly cautious, relying on familiar tools instead of bold structural reforms.
Without stricter limits on leveraged funds, authorities remain exposed to recurring liquidity runs.