The Bank of England building in London, Britain, December 1, 2025. REUTERS/Maja Smiejkowska

By David Milliken

LONDON, Dec 2 (Reuters) - The Bank of England said risks to Britain's financial system had risen this year due to stretched valuations of companies investing in artificial intelligence, risky lending to big companies and some trading in government bonds.

"Risks to financial stability have increased during 2025," the BoE said in its half-yearly Financial Stability Report.

"Global risks remain elevated and material uncertainty in the global macroeconomic outlook persists. Key sources of risk include geopolitical tensions, fragmentation of trade and financial markets, and pressures on sovereign debt markets," it added.

However, the BoE lowered capital requirements for major banks operating in Britain and judged that the British banking sector was well capitalised and said aggregate indebtedness in the domestic corporate and household sector remained low.

Many of the risks identified by the BoE in the report had been highlighted by members of the central bank's Financial Policy Committee in previous months.

Investor enthusiasm for artificial intelligence had pushed share valuations in the United States to their most stretched since the dotcom bubble, and in Britain to their highest since the global financial crisis.

"Deeper links between AI firms and credit markets, and increasing interconnections between those firms, mean that, should an asset price correction occur, losses on lending could increase financial stability risks," the BoE said.

The central bank also noted the collapse of U.S. car parts maker First Brands and auto dealership and lender Tricolor which Governor Andrew Bailey said in October might be a warning of bigger problems to come.

The BoE intends to conduct a stress test focused on the resilience of the private market ecosystem.

The central bank also highlighted that leveraged borrowing by hedge funds in the gilt repo market had reached close to 100 billion pounds ($132 billion) last month, dominated by a small number of hedge funds.

"This reinforces the need for market participants to ensure the risk management of their positions takes account of potential shocks, including correlation shifts outside historical norms," the BoE said.

($1 = 0.7568 pounds)

(Reporting by David Milliken; Editing by Kate Holton)