BIS warns $1T AI spending could trigger bust

The Bank for International Settlements says the $1 trillion AI investment boom—already outpacing major hyperscalers’ earnings—resembles past speculative surges that ended in abrupt pullbacks and economy-wide recessions. The BIS warns the risk is amplified by c

When the Bank for International Settlements put pen to paper for its Annual Economic Report 2026, it did something that doesn’t come naturally to central bankers: it drew a line straight through history.

The BIS. the Basel-based institution that coordinates the world’s central banks and acts as a watchdog for the global financial system. framed the current moment as more than a technology story. It compared the AI investment boom to the canal mania of the 1830s. the British railway bubble of the 1840s. and the dot-com crash of 2000—each sparked by genuine breakthroughs. each ultimately unraveling into recession.

In language meant to sting. the BIS wrote that “The scale and pace of the current AI investment boom. accompanied by expectations of large productivity payoffs. bear resemblance to these precedents.” It added that those episodes ended with “an eventual reversal in investment. inducing economy-wide recessions.”.

The report was released Sunday, and it leaves little room for readers to treat the risk as theoretical.

The fear isn’t that AI doesn’t work—it’s that everyone is betting the same way at once

The BIS acknowledges the technology itself is real. Task-level studies, it says, consistently show productivity gains of 20% to 50% in time savings.

But in its account, the fragility comes from the investment stampede. The five largest hyperscalers are on pace to spend more than $1 trillion on AI-related capital expenditure across 2025 and 2026 combined. The BIS says that sum is already outpacing earnings and free cash flow for those companies. leaving some to issue debt to cover the gap.

The BIS’s concern isn’t individual companies making expensive bets. It’s that they’re making them together, driven by the belief that only a handful of firms will ultimately dominate the market.

“The intense competition raises the risk of firms over-committing resources to investment projects with still uncertain returns,” the report states, “leaving all firms vulnerable to disappointments in AI payoffs.”

Using contest-theory modeling. BIS economists argue that as competitive pressure lifts capex higher. the sector’s net economic surplus—total payoffs minus investment costs—falls and could turn negative in adverse scenarios. They warn that a disappointment in returns could trigger “a sudden pullback in financing and turn the capex boom into a protracted investment bust.”.

The wiring underneath makes a normal slowdown harder to contain

The BIS also points to how the AI spending is financed, describing what it calls “a complex web of private arrangements.” One of the most visible forms is circular financing.

Under the structure the report describes, hyperscalers take equity stakes in AI labs. Those labs then commit to multi-year purchases of chips or computing power from the same hyperscalers. Data centers are outsourced to third-party contractors, then leased back under long-dated contracts that include embedded exit clauses.

The BIS warns that “The terms of such deals are typically poorly disclosed,” and says there are risks of the same asset being pledged multiple times.

In a scenario where hyperscalers slow or halt aggressive capex deployment, the report says the shock wouldn’t stay neatly inside one balance sheet. Infrastructure contractors, chipmakers, AI labs, and the private credit lenders behind them would face simultaneous revenue shortfalls.

Engineering and construction firms at the end of that chain are singled out as especially vulnerable, carrying “comparatively weak” balance sheets with little cushion against a sudden reversal.

Zhang Tao. the BIS’s Asia-Pacific representative. told the South China Morning Post that a correction could unwind “much faster than previous banking crisis episodes.” His point was that much of the financing flows through hedge funds and private credit vehicles that carry less regulatory oversight than traditional banks.

What the report is describing is a system that can move quickly when confidence breaks—because the money and obligations are tangled.

Even a financial hiccup could hit household spending

The BIS’s warning doesn’t stop at corporate investors. It argues that the consequences could spread through the broader economy.

U.S. stocks account for roughly 64% of the MSCI Global index. and household equity exposure has more than doubled relative to income since 2010. In that setting. the BIS says “A major repricing of AI-related stocks” could bring “more pronounced wealth effects and sharper consumption pullback than in the past.” Because the U.S. market is so globally connected, wealth destruction could propagate internationally.

The report also points to direct lending funds, describing an ecosystem that it says has grown to $1 trillion-plus. Over the past five years, it says direct lending funds have quadrupled lending to the AI and IT sectors, and now represent about 15% of their portfolios.

Signs of stress are already visible. The BIS notes that some retail-facing direct lending funds have faced mounting redemption requests, forcing asset liquidations.

“A larger shock,” it adds—whether from a renewed inflation surge or a sharp AI-led repricing—could trigger a more widespread credit crunch.

Then there’s the second shock, arriving in early 2026 and tightening the noose

The BIS doesn’t treat AI risk as a standalone problem. In its opening chapter, it documents another shock that arrived in early 2026: the closure of the Strait of Hormuz following the start of the Iran conflict in late February.

The closure cut more than 10 million barrels of crude oil per day from global supply, the report says, calling it a larger disruption than either the 1973 oil embargo or the 1979 Iranian revolution.

The effect was immediate in markets. Oil prices surged 67% to an intraday peak of $120 a barrel within two weeks. Fertilizer and plastics prices both rose 50%. Since the conflict began, global headline inflation has jumped by half a percentage point.

Markets, the BIS says, have remained buoyant—equity valuations rich and credit spreads compressed—on assumptions that the Hormuz disruption is temporary and that the AI boom will continue.

But the report sets up an uncomfortable interaction: if inflation proves stickier than expected, central banks may need to raise rates. The BIS warns that the tightening required to contain energy-driven inflation could be what pops the AI-financed debt bubble.

“The current tension between exuberant risk appetite and elevated macroeconomic risks,” the BIS wrote, “could unwind abruptly.”

What the BIS is asking for, and what it isn’t calling

The report stops short of declaring the AI boom a bubble outright. It does something more careful—and arguably more consequential. Its prescription is for “robustness. ” a word it uses carefully and repeatedly to describe what policymakers should build beyond the fragile “resilience” the global economy has demonstrated so far.

That means staying vigilant on inflation even when it becomes politically uncomfortable, restoring fiscal space rather than relying on stimulus, and extending prudential standards to the non-bank financial institutions now central to AI financing.

In the BIS’s telling, the danger isn’t just that AI spending is large. It’s that the timing, the financing structure, and the macro shocks pulling at risk appetites could combine into an abrupt reversal—one that history suggests is never as smooth as the boom.

Bank for International Settlements BIS AI investment hyperscalers capex private credit circular financing Strait of Hormuz oil prices inflation wealth effects direct lending funds