System-wide exploratory scenarios - SWES for short - are the BOE's way to gauge how the entire UK financial system would hold up under imagined shocks. The first round now underway zeroes in on private markets, which have grown markedly since the financial crisis, and is nearing completion.
This round asks what happens to the flow of credit if a severe global slump hammers private markets, with knock-on effects for asset managers, investors and banks. It is due to conclude next year, and marks only the second use in the UK of a system-wide approach rather than firm-by-firm stress tests.
AI-driven disruption is on the shortlist for the next SWES, according to one person with knowledge of the talks. Another said no decision has been made, and a third noted there are options beyond an AI scenario.
Even the current exercise bakes in AI. The hypothetical setup rests on a "severe but plausible" global supply and geopolitical shock that triggers a deep recession. In that world, AI stock valuations take a hit and development slows. Since this work began, officials' worries about how AI intersects with finance have broadened.
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Regulators are increasingly focused on three fronts: a potential AI-fueled valuation bubble, new cyber vulnerabilities exposed by the latest models, and autonomous AI agents that could intensify market stress by pushing traders into the same moves at the same time.
Officials are alert to the risk that trading models behave similarly under pressure, amplifying swings. They are also watching whether advances in AI expose weakness in companies' cyber defenses, and whether an AI stock bubble could burst with wider economic fallout.
Governor Andrew Bailey has called AI a potential game changer for the UK's sluggish growth, but he has also flagged risks. "Everybody's priced to be a winner," he said recently.
The bottom line: a future SWES centered on AI would probe how shocks could pass through the system and affect the supply of credit, with spillovers to asset managers, investors and banks. If your portfolio leans into AI or relies on credit-sensitive assets, these are the pipes regulators are pressure testing.
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