As the global financial system struggles to keep pace with the artificial intelligence investment boom and capital flows surge through loosely regulated, non-bank channels, a key international organisation has warned that an AI downturn could develop into a sharper, faster crash than a traditional banking crisis.
In its annual economic report released on Sunday, the Bank for International Settlements (BIS) said funding for AI was increasingly channelled through hedge funds, private credit vehicles and other non-bank intermediaries.
These firms commonly operated with less oversight than conventional lenders, which could create blind spots, according to Zhang Tao, BIS chief representative for Asia and Pacific regions.
BIS, a Switzerland-based institution that is often dubbed the “bank of central banks”, said in its report that the system could unwind far more rapidly in a downturn.
“If the market has any sort of correction, the interconnectedness of the financial system and interplay of vulnerabilities could mean the speed of a correction could be much faster than previous banking crisis episodes,” Zhang said in an interview with the South China Morning Post in Hong Kong.
Such a rapid unwind, he warned, would ripple through financial markets and raise broader stability concerns.