Taiwan central bank warns of AI bubble risk as 3 peers flag danger

Three central banks have publicly warned that the AI investment boom risks creating a financial stability event.

Taiwan's central bank governor warned Thursday that the AI boom carries real bubble risks, joining the Bank of England and European Central Bank in flagging how leveraged financing and concentrated equity bets could destabilize markets.

"We do have concerns about the possibility of an AI bubble," Yang Chin-long, governor of Taiwan's central bank, told lawmakers at a parliamentary hearing. "AI is driven by real growth potential, but it's the possibility of over-expansion via over-leveraging that concerns us."

The Bank of England's Financial Policy Committee separately warned that AI-related shares have pushed global equity markets higher on gains driven by a narrow group of companies, flagging rising index concentration, heavier hedge fund leverage and rapid growth in leveraged ETFs. If earnings expectations crack, the BoE said, those same forces could turn a short-term tech selloff into a much bigger and longer-lasting market event.

The warnings mark a shift: AI is becoming a financial stability subject before it has finished becoming a profit story. The BoE said AI companies' use of debt and credit markets has accelerated with greater use of public debt, private credit, leveraged finance and structured finance, calling the pace of investment "unprecedented historically."

The European Central Bank went further, telling significant euro area banks in a July 7 letter that emerging AI models can identify vulnerabilities and generate working exploits at "unprecedented speed." It ordered lenders to submit action plans by Oct. 31, 2026, covering faster patching, better monitoring, AI-enabled defensive tools and third-party risk checks.

The European Systemic Risk Board warned on July 7 that frontier AI models could raise the speed, scale and sophistication of cyber attacks in the short to medium term, while also flagging that concentration of leading AI providers outside the European Union creates strategic dependency and geopolitical risk.

Leveraged Bets Amplify the Danger

Sarah Breeden, deputy governor for financial stability at the BoE, said hedge funds active in AI equity markets are also borrowing against gilts and other government debt, creating spillover risk. "There is, of course, the risk of a spillover, either from one international bond market to another, or from the equity markets and AI firms to UK government bond markets," she said.

The BoE noted that hedge funds offloading debts pushed up gilt yields during the Middle East crisis. AI stocks are now increasingly concentrated in specific regions, making up more than half of market capitalization in the United States, South Korea and Taiwan, the central bank found.

Regulators Build the Rulebook in Public

The Financial Stability Board in June proposed 12 sound practices for financial institutions adopting AI, aimed at firm-wide governance, senior management oversight, risk controls and model life cycle checks. The IMF said in May that extreme cyber losses could trigger funding stress, solvency concerns and wider market disruption.

For Taiwan, the stakes are particularly high. The island plays a crucial role in the global AI supply chain for tech giants including Nvidia and Apple, anchored by chipmaker Taiwan Semiconductor Manufacturing Co., which has been leading Taiwanese stocks to record highs this year. Yang said the central bank's June decision to hold rates steady was appropriate given the underperformance of traditional industries relative to the booming tech sector.

None of this kills the AI investment case. AI may still cut costs, improve drug discovery and lift productivity. But as the BoE's FPC noted, many companies still have to prove that customers will pay enough for AI services to justify the huge buildout behind them — and many lenders still have to prove they understand the collateral.

This article is for informational purposes only and does not constitute investment advice.