The boom in AI-related investment is driving economic growth, but the sector’s growing reliance on private credit, and the uncertainty of returns on these investments, poses a rising risk to the global financial system, according to a paper from the Bank for International Settlements (BIS).
In a staff bulletin issued Wednesday, economists at the BIS note that the rapidly rising need for investment in the AI sector has pushed firms to increase their reliance on debt financing, particularly private credit, “a shift that is not only reshaping corporate balance sheets but also raises important questions about credit standards and financial stability.”
Spending on chips, hardware, software and data centre construction to facilitate AI usage has become an important driver of GDP growth, the report said, and these spending needs are only growing.
“Analyst forecasts indicate that annual spending on data centres alone could increase by between US$100 billion and US$225 billion in the next five years,” it said.
This growing need for investment has pushed the AI industry to seek external financing, such as corporate bonds, but private credit has emerged as a “particularly fast-growing source” of funding for the industry too, it noted.
“The share of private credit loans to AI-related companies has increased from less than 1% of total outstanding loan volumes to almost 8%,” the paper said — and, it estimated that outstanding private credit to AI firms could reach US$300 billion–US$600 billion by 2030.
“The increasing reliance on debt introduces vulnerabilities to the broader financial system,” it noted.
AI firms that carry greater leverage could “amplify shocks and affect the health of financial intermediaries if expected returns on AI investments fail to materialize,” the paper said.
“This raises concerns about the potential for systemic spillovers, not least given the rapid growth of less transparent private credit markets and the circular financing within the AI ecosystem,” it warned.
As it stands, private credit spreads suggest that AI loans are being judged to be as risky as other corporate loans, the paper noted.
“This stands in stark contrast to the high equity valuations of AI companies, which imply outsized future returns,” it said. “This schism suggests that either lenders may be underestimating the risks of AI investments (just as their exposures are growing significantly) or equity markets may be overestimating the future cash flows AI could generate.”
Ultimately, the paper said the long-term future of the AI boom will depend on whether these investments pay off as hoped.
“Failure to meet expectations could result in sharp corrections in both equity and debt markets,” it said.
Also, the collapse of AI investment could weigh on GDP growth, it noted — as typically happens when investment bubbles come to an end.
“If a decline in AI investment were to come with a significant stock market correction, negative spillovers could be larger than previous booms suggest,” the paper said, adding, “while AI may deliver a sustained boost to economic growth, it remains to be seen whether this potential will be realized.”