Advanced AI could materially change the speed, scale and economics of cyber risk, potentially undermining confidence across financial markets, particularly because of the concentration of critical third-party service providers, Bailey wrote.
Many jurisdictions also lack protocols for managing the development, release and deployment of advanced frontier AI models, he added. That could increase risks not only for financial markets but for the broader economy.
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Cybersecurity Is The First Fault Line
The warning comes amid growing concern about the security implications of advanced AI. Recent testing incidents involving models from Anthropic and OpenAI have highlighted how safeguards can be breached, raising concerns that increasingly capable systems could outpace existing controls.
For banks, asset managers and critical technology providers, the risks include vulnerabilities in shared infrastructure and technology dependencies. Bailey said firms will need stronger vulnerability management, faster incident response and more resilient recovery capabilities, while preparing for severe scenarios involving simultaneous disruptions across multiple institutions.
Broader Market Fragilities Are Building
AI is not the only concern raised in Bailey’s letter. He also flagged vulnerabilities in sovereign debt markets, increasing leverage among equity investors and stretched asset valuations, particularly in AI-related investments.
Those risks could reinforce one another if a market already priced at elevated levels were hit by an unexpected shock. Rapidly evolving technology and limited governance could add another layer of uncertainty to an already interconnected financial system.
Policy Challenge Extends Beyond Innovation
The debate is increasingly shifting from encouraging AI innovation to ensuring that financial institutions can absorb the operational, cybersecurity and market risks associated with frontier models.
That issue will be discussed as the U.S. hosts the G20 summit in North Carolina this week, bringing together finance ministers, central bankers and other senior officials to address the global economic outlook and emerging risks to financial stability.
For policymakers and financial institutions, Bailey’s warning points to a potential source of systemic risk beyond traditional credit and interest-rate shocks: the interaction between advanced AI, cyber threats and highly interconnected financial infrastructure.
