Bank of England FPC Warns AI and Middle East Conflict Threaten UK Financial Stability

The Bank of England's Financial Policy Committee (FPC) met on 26 June 2026 and published its record on 2 July 2026, highlighting heightened risks from frontier AI, the Middle East conflict, and leveraged equity markets. The FPC noted that rapid advances in AI have increased cyber and operational risks, with AI models now capable of exploiting software vulnerabilities at scale. Leverage in equity markets has risen substantially, particularly in AI-related stocks, increasing market concentration. The Middle East conflict triggered volatility in energy prices and bond yields, though a US-Iran memorandum of understanding has eased near-term pressures. The FPC maintained the UK countercyclical capital buffer (CCyB) at 2%. It also proposed reforms to the leverage ratio framework, including removing the countercyclical leverage buffer and adjusting systemic buffers to align with international standards. The FPC welcomed the Bank's policy statement on systemic sterling-denominated stablecoins and supported reforms to money market funds. The committee emphasized the need for firms to strengthen risk management and for international coordination on AI cyber risks. The FPC also reaffirmed its benchmark for system-wide Tier 1 capital requirements at around 13% of risk-weighted assets.