Global finance watchdog chief warns of potential AI bubble

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BRUSSELS —Global finance could find itself in a bubble of artificial intelligence overvaluation akin to the dotcom boom and the 2008 financial crisis, a top official from global risk body the Financial Stability Board told POLITICO in an interview.

John Schindler, secretary-general of the FSB, is the latest top official to add his voice to concerns over a possible AI bubble, amid feverish investment in and record-high valuations for tech-related companies.

“One of the things that the financial system always faces is asset valuations and are they appropriate?” Schindler said, speaking from his office in Basel.

“We know at the dotcom period that those asset valuations — very eager to catch the latest technology, the latest darling of the markets — led to some exuberance. We saw this in the housing price bubble before the great financial crisis. We might be seeing that now.”

AI-related companies have gained approximately $27 trillion in market value since November 2022, according to research by Goldman Sachs. Chipmaker Nvidia became the world’s first $ 5 trillion company last year.

The FSB worries that financial bets are concentrated in a few massive companies, and that a price correction in those companies could create a wider financial shock due to hedge fund leverage and banks’ exposures.

In both the EU and U.K., policymakers are pushing citizens to invest in equity markets in a bid to grow the economy and get a better return for savers than cash holdings. But with little understanding of stocks and shares, individuals could take risky decisions and end up with losses.

SpaceX, the rocket maker and AI company founded by Elon Musk, set records for its June IPO before tumbling in price .

There are wider signs that enthusiasm around AI investments could be slowing, as questions grow over the profitability and productivity growth the technology can bring. Stocks in chip companies have seen sharp losses and a selloff in recent weeks.

“It does look like some of the valuations … are quite up for the markets overall and for some of these companies. But I’m not a stock market prognosticator. I can’t tell you how much further they’ll go, whether they’re justified or not. But it is something we monitor and discuss and work on trying to make sure that things don’t go badly,” Schindler said.

The “central bank for central banks,” the Bank for International Settlements, warned that disappointing returns for the AI hyperscalers could result in a “protracted investment bust” which could trigger a “sudden pullback in financing.” The International Monetary Fund also warned that markets could contract if AI doesn’t match expectations around its profitability and the productivity gains it can deliver.

The chair of the FSB, Schindler’s colleague Andrew Bailey, who is also the Bank of England governor, has cautioned on several occasions of a potential price correction in AI stocks.

But Schindler played down the wider risks, saying: “Our job is to think about all the things that can go wrong and think about ways to make those better. So this is just one of the things.”

Asked whether the finance industry has enough safeguards in place to remain stable if an AI bubble unravels, Schindler said: “I do hope so.”

Banks have “largely proven pretty resilient to shocks” since the 2008 crisis, but the financial system is “always evolving,” he said. Schindler also pointed to the nonbank sector, which is far bigger than it was in 2008 and less regulated than the banking industry.

“There could be build-ups of risk in parts of that sector that it’s harder for us to assess. So, I can’t say it will all be fine,” he added.

The FSB is also scrutinizing the amount of leverage firms are using to acquire AI assets, Schindler said, referring to the practice of taking on debt to increase investment returns.

“If it’s just mom and pop putting $100 in the stock market, that’s one thing. If it is mom and pop leveraging that ten times over, that’s something else, because the repercussions when something causes it to unwind are much more significant.”