“A tightening of supply could also affect relatively more resilient borrowers reliant on private-market finance, including UK corporates, especially as UK private markets are heavily dependent on overseas investors,” it said. Market participants should, it added, have a “clear understanding of their direct and indirect exposures to risky credit markets.”
At the same time, fears that the record-high prices of AI-focused stocks could collapse and send ripples through the financial system have persisted, with the FPC highlighting that valuations for U.S. tech firms focused on AI remain “particularly stretched.”
“Despite the volatility that the conflict has generated, risk premia in global equity and debt markets remain compressed by historical standards, heightening the risk of a sharp correction if macroeconomic conditions worsen,” said the committee. “AI-related repricing could transmit widely throughout the financial system and impact the real economy.”
Finally, the FPC warned that existing sovereign debt vulnerabilities could be worsened by the conflict, as “a relatively high use of leverage by a small number of hedge funds pursuing similar strategies” risked causing stress on the gilt market.
Despite the concerns, the committee found that the U.K. banking system remains “appropriately capitalised,” and had maintained its high levels of liquidity. U.K. bank share prices declined over recent weeks but are still significantly higher than a year ago.
The Bank noted that while household and corporate finances looked resilient, 1.3 million people will see an increase in mortgage payments by the end of 2028 as a result of the war. “The economic outlook had deteriorated following the negative supply shock, increasing pressure on UK households and corporates,” said the committee.