AI rockets to top of worries about financial system in latest Fed survey

By Pete Schroeder

WASHINGTON, Nov 13 (Reuters) – Risks tied to the artificial intelligence sector surged to become the top-cited concern for financial stability, according to a semi-annual report released by the Federal Reserve on Friday.

The US central bank’s Financial Stability Report found potential risks from the technology itself ‌and the breakneck investment in the sector as the preeminent concern of survey respondents. Eighty-seven percent of contacts surveyed cited AI as a salient risk ‌to the financial system, as respondents pointed to worries about cyberattacks, risks associated with complex forms of AI-related financing, and the possibility of an AI earnings slowdown spurring a broad market correction. Just 50% of ​those surveyed cited AI as a risk in the May version of the Fed’s survey.

Other top concerns cited in the survey also had heavy AI implications. The second most-cited concern was regarding a broad correction in risk assets at 52% of those surveyed, and cyberattacks specifically were flagged as a worry by 43% of respondents. Forty-eight percent of those surveyed also fretted about higher long-term interest rates, while 43% cited fiscal debt sustainability as a worry.

The survey was conducted in September and October, meaning respondents weighed in before the latest ‌turmoil at chipmaker Nvidia, where CEO Jensen Huang stepped down ⁠on Thursday after revelations of extramarital affairs, including one involving Chinese businesswoman whom the New York Times has reported is under suspicion as a Chinese spy. The survey also preceded the results of recent midterm elections in which the American public’s rising concerns about ⁠AI were also a central issue.

The increased focus on AI was underpinned by the report itself, as the Fed devoted a chunk of the report to examining the rapid increase in debt issuance tied to data centers and other advanced computing infrastructure. The Fed report found that advanced computing-related debt issuance had surged to $680 billion by October 2026, already a fivefold increase ​on ​debt issued in all of 2023. Advanced computing-related borrowing now accounts for nearly a third of ​all nonfinancial investment-grade corporate debt issuance, after amounting to less than ‌6% three years ago.

The Fed noted in its report that the rapid influx of debt issuance and investment in AI-related infrastructure could be compared to the broadband telecom investment cycle of the late 1990s, although the Fed said it is possible the current investment cycle may soon surpass that era. And the central bank focused on the complex financing arrangements underpinning some of this investment, noting that arrangements like long-term contracts, leases and guarantees allow hyperscalers and other large firms to support financing such projects by smaller third parties, and graphics card designers and hyperscalers often further contribute to investments via equity.

Data collected by the Fed found that debt, guarantees, and not-yet-commenced leases ‌on this infrastructure could exceed $3 trillion.

The Fed said such “circular financing” dynamics could allow the largest firms ​to absorb losses in the event of a downturn, minimizing the impact on the broader financial system. ​However, it could also mean that those firms’ exposure to such a ​downturn could be “substantially larger” than indicated by their on-balance-sheet liabilities.

“The complex interlinkages among firms engaged in the data center buildout, public credit ‌markets, private lenders, and special purpose financing vehicles create vulnerabilities that ​necessitate close monitoring,” the report stated.

Elsewhere in ​the financial system, the Fed found that asset valuations across a range of classes remained high, due in part to investor enthusiasm about AI. The report noted that investment in the AI sector has been a significant driver of US economic growth this year, and an unexpected downturn in corporate earnings could ​prompt a market decline, tighter credit, and reduced investment, which ‌would all weigh on the economy.

Such a downturn could also be exacerbated by relatively high levels of leverage in some portions of the ​financial sector. The Fed noted in its level that leverage among hedge funds, particularly the largest firms, remains at the highest levels recorded since ​they began gathering such data in 2013.

(Reporting by Pete Schroeder; editing by Dan Burns)