Bailey: Financial Resilience Cannot Be Taken for Granted
Andrew Bailey says the financial system has weathered repeated shocks, but weaker growth, supply disruptions, rising debt and AI exposures create risks that require credible policy.
What you need to know
Bank of England Governor Andrew Bailey said the financial system has remained resilient through repeated geopolitical and economic shocks, but warned that lower growth, persistent supply disruptions, rising sovereign debt, leveraged markets and expanding AI-related exposures mean resilience cannot be taken for granted. He called for sustainable growth, credible monetary and fiscal frameworks, and stronger core financial markets.
- Bailey said banking systems remain well capitalised and markets have functioned without major liquidity breakdowns.
- He warned that sovereign debt, credit and asset valuation vulnerabilities could crystallise together.
- He linked AI financing exposures to operational, cyber and financial stability risks.
Resilience so far, risks ahead
Bailey said the financial system has weathered the latest period of uncertainty, with banking systems generally well capitalised and no funding stress observed. Most markets have continued to function without a major breakdown in liquidity or trading conditions, and markets have withstood significant increases in sovereign bond yields, he said.
He attributed much of that resilience to post-global financial crisis reforms, whose value he said is clear today. But he cautioned that specific problems can emerge even when the wider system appears stable, and that lower growth, repeated supply shocks and changing market structures mean resilience cannot be taken for granted.
Supply shocks and policy tensions
Bailey said weaker potential growth and more frequent large negative supply shocks create a particular difficulty for monetary policy: such shocks push inflation and output in opposite directions. The textbook response is to look through a one-off price-level increase, but that is possible only if inflation expectations remain well anchored, he said.
He added that supply shocks can create tension between monetary and financial stability, as higher rates raise debt-servicing costs while incomes and earnings come under pressure. He said resilience before a shock is important so policymakers can respond without turning an economic adjustment into a financial crisis.
Market structure and policy priorities
Bailey said global government bond markets have changed profoundly, with leveraged investors playing a much larger role while traditional demand for long-duration debt has declined. This has increased markets' capacity to absorb additional government debt but brought greater fragility, as leveraged positions can unwind rapidly and force selling across markets, he said.
He outlined three priorities: pursue sustainable growth, keep monetary and fiscal frameworks credible, and strengthen the resilience of core markets through greater central clearing, appropriate minimum haircuts and stronger risk management.
What risks did Bailey identify for financial stability?
Bailey cited weaker growth, repeated supply shocks, vulnerable sovereign debt and credit markets, elevated asset valuations, leveraged positions in bond markets and expanding AI-related financial exposures as risks to a system that has so far remained resilient.
Sources & context
- Financial resilience in an age of repeated shocks - speech by Andrew Bailey - Published on 08 October 2026 ↗bankofengland.co.uk
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