Bank of England issues July stability report on leverage and cyber risks

The Bank of England’s Financial Policy Committee stated on 7 July 2026 that the UK financial system has stayed resilient while facing increased risks from equity-market leverage, AI-related valuations, and the Middle East conflict. The report noted that equity prices, especially for AI-linked stocks, have risen and valuations have become more stretched on some metrics.

Hedge-fund leverage in equity markets has increased substantially, and retail inflows through exchange-traded funds have added momentum.

The conflict that began in late February closed the Strait of Hormuz and damaged energy infrastructure, pushing Brent crude above $100 per barrel for several months. After the United States and Iran signed a Memorandum of Understanding in June, prices fell back to just above pre-conflict levels.

Sovereign bond yields rose sharply then declined, while global issuance of shorter-maturity sovereign debt reached historically high levels. During the period of highest volatility, gilt-yield moves were amplified by hedge-fund deleveraging.

Rapid advances in frontier AI models have raised the scale and speed at which software vulnerabilities can be identified and exploited, the report said. The FPC warned that these developments increase cyber-attack sophistication and the frequency of required patches, heightening operational disruption risks for financial firms.

The Committee urged firms to act on the May 2026 joint statement from the Bank, Financial Conduct Authority and HM Treasury on frontier models and to strengthen existing cyber and operational resilience frameworks.

Investor sentiment in private and riskier credit markets had already weakened before the conflict, with elevated redemption requests in some retail funds. Higher interest rates and lower growth could increase debt-servicing pressures for leveraged borrowers.