The chair of the Financial Stability Board (FSB) has warned that increasingly capable frontier AI models could heighten cyber risk across the global financial system and called on governments and financial institutions to strengthen resilience before the technology outpaces existing safeguards.

In a letter to G20 finance ministers and central bank governors ahead of their meeting in Asheville, North Carolina, Andrew Bailey said frontier AI had become one of the most significant emerging risks facing financial stability because of its potential to increase the speed, scale and sophistication of cyber attacks.

Bailey, who is also governor of the Bank of England, said the technology could undermine confidence in the financial system by exploiting vulnerabilities across common technology providers and critical financial infrastructure.

“The most immediate concern is the potential impact of frontier AI on cyber risk,” he wrote. “Frontier AI may have the ability materially to alter the speed, scale and economics of cyber risk, which could undermine market confidence system-wide, especially due to highly concentrated third-party service providers.”

He warned that financial firms and regulators should prepare for an environment where AI discovers and exploits vulnerabilities more rapidly, forcing organisations to patch systems at a much faster pace. While faster remediation could improve security, Bailey cautioned that it could also create operational risks if testing, change management, and recovery processes cannot keep up.

The letter urged jurisdictions to establish appropriate safeguards for the release and deployment of advanced AI models, arguing that many countries currently lack the protocols needed to manage increasingly powerful frontier systems safely.

Bailey also called on banks, financial market infrastructures and technology providers to strengthen vulnerability management, incident response and recovery capabilities. He highlighted the need for organisations to restore critical systems from “bare metal” following major cyber incidents and stressed the importance of resilience among critical third-party technology providers.

Alongside frontier AI, Bailey highlighted several broader threats to financial stability. He said the conflict in the Middle East had added to inflationary pressures and increased market volatility, while higher interest rates continued to push up financing costs.

He also warned that growing leverage in equity markets, particularly through leveraged exchange-traded funds, hedge funds, and momentum-driven investment strategies, could amplify any future market correction.

According to Bailey, these risks interact with elevated valuations, market concentration, and investor optimism around AI-related companies, increasing the potential for contagion across markets.

He also pointed to vulnerabilities in sovereign debt markets and private credit, warning that a large economic shock could trigger multiple weaknesses simultaneously.

“These developments are another reminder of the pace at which the financial system continues to evolve,” he added. “New technologies and changing market structures present significant opportunities, but they also require continued vigilance and international cooperation.”

---