AI boom poses new financial stability risks, BIS head says

LONDON, Sept 10 (Reuters) - AI's rapid rise is creating new financial stability risks, Bank for International Settlements head Pablo Hernandez de Cos said, with spending on related infrastructure already at a scale significant enough to influence global economic conditions.

For central banks, AI does not change monetary policy mandates but makes economies harder to interpret by affecting demand, supply and financial markets simultaneously. 

The BIS estimates the world's five largest technology firms will invest more than $1 trillion in AI between 2025 and 2026, while industry forecasts suggest global AI investment could grow from about $500 billion now to as much as $4 trillion by 2030.

"The promise of AI is real," Hernandez de Cos told a conference hosted by India's central bank, while cautioning that its long-term impact would depend on policy choices, investment in skills and infrastructure and how widely benefits are shared.

Hernandez de Cos said the AI boom was increasingly being financed through debt and private credit rather than corporate earnings, which merited close scrutiny because much of the funding remained "opaque and interconnected".

AI is also changing global trade flows. Economies closely tied to the technology supply chain, including South Korea, Singapore, Malaysia and Taiwan, have benefited from stronger export prices for AI chips and equipment.

Hernandez de Cos pointed to evidence that generative AI can significantly boost productivity. Studies have found gains of between 10% and 65% in specific tasks, particularly in coding, consulting and professional writing.

The broader question is how much of those improvements translate into economy-wide productivity growth. 

Current estimates suggest AI could raise total factor productivity growth by about half a percentage point a year, depending on the pace of adoption and how effectively labour and capital are reallocated.

Advanced economies are expected to benefit first because of their larger service sectors and greater readiness to deploy AI. Emerging economies face more varied prospects, although Hernandez de Cos said India had a "genuine opportunity" to narrow the gap, helped by its digital public infrastructure.

JOB LOSSES AND OPAQUE FINANCING

While AI can enhance workers' productivity, it can also replace routine cognitive tasks, Hernandez de Cos said.

Job losses are so far limited, but signs are emerging in customer service, programming and administrative roles, making retraining and reskilling increasingly important.

Hernandez de Cos also said lofty valuations, market concentration and opaque financing structures could create vulnerabilities if corporate profits fall short of expectations.

"I do not say that this is where the AI boom must lead," he said. "But the scale and speed of the current investment boom, and the weight of expected commercial returns, do warrant some caution," he said, drawing parallels with past booms such as the railway expansion era and the dotcom surge.

(Reporting by Marc Jones; Editing by Alexander Smith)