The Basel, Switzerland-based institution said AI was the single biggest force supporting global growth over the past year, even as tariffs and a blockade of the Strait of Hormuz threatened to tip the world economy into stagflation. However, it warned that over a trillion dollar buildout of AI infrastructure globally could itself become the trigger for the next financial crisis. It described AI sector financing as opaque, warned of a possible AI bust, and drew direct comparisons with the dotcom crash.
This is not a distant Wall Street problem. India has placed some of the world’s largest bets on the AI buildout, which means the same risks the BIS is flagging globally could also emerge closer to home.
How did AI become the growth engine that masked other economic risks?
According to the BIS report, growth held up far better than expected in 2025 despite significant headwinds from higher tariffs and geopolitical uncertainty. It attributes this to three factors:
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Tariff effects turned out weaker than feared. -
AI optimism triggered a surge in capital expenditure on data centres, semiconductors and power infrastructure. -
Rising stock valuations driven by AI enthusiasm kept financial conditions loose.
The report notes that capital expenditure on semiconductor purchases, data centre construction and power infrastructure expanded sharply in the US, driven by hyperscalers — the handful of technology giants building most of the world’s AI infrastructure. This spending rippled through global supply chains, particularly in Asia, by boosting demand for semiconductors and data-storage hardware.
Rising equity valuations, whose ratio to household income has more than doubled since 2010, supported consumption through wealth effects, while corporate credit spreads narrowed amid record bond issuance by AI-related firms. The BIS calls this pattern “AI exuberance” and argues that it has now become a vulnerability rather than a strength.
Why is the BIS worried about AI spending?
The scale of the buildout is what concerns the BIS most.
The report says the five largest hyperscalers are set to spend more than $1 trillion on AI-related capital expenditure between 2025 and 2026 alone. These commitments now exceed both earnings and free cash flow, pushing some firms to issue debt to continue funding the buildout.
India is not a bystander to this buildout. Reliance Industries Chairman Mukesh Ambani committed $110 billion to AI infrastructure over seven years at the India AI Impact Summit in February, as part of a coordinated push under which Indian companies and the government are collectively targeting more than $200 billion in AI infrastructure investment.
Avendus Capital projects the sector could attract $23 billion in fresh investment over the next five years as GPU deployment scales nationally, Outlook Business reported in May.
Why is opaque AI financing a concern?
What elevates this into a financial stability concern, in the BIS’s view, is how AI spending is financed and how intertwined that financing has become.
The report describes a complex web of private arrangements linking hyperscalers, chipmakers and AI labs. One example is circular financing, in which chipmakers and hyperscalers take equity stakes in AI labs or neocloud providers that, in turn, commit to multi-year purchases of chips or computing power from those same investors.
Data centre construction is increasingly being outsourced to third parties that lease facilities back to hyperscalers under long-dated contracts containing embedded exit clauses. The BIS says the terms of these arrangements are often poorly disclosed, creating the risk of the same underlying asset being pledged multiple times.
Why is private credit another AI-related financial risk?
The BIS also identifies a separate vulnerability outside the traditional banking system.
It centres on private credit, a rapidly growing source of financing in which investment funds lend directly to companies instead of banks.
According to the report, private credit funds have quadrupled their lending to AI and IT companies over the past five years. AI now accounts for around 15 per cent of their loan books, even though lending standards have not tightened significantly to reflect the additional risk.
The complication is that banks themselves are becoming increasingly exposed to these private credit funds by lending to them or holding stakes in them, often without full visibility into the underlying assets.
If an AI slowdown were to trigger losses in private credit, the impact would not remain confined to that market. It could spread to the banking system and affect mid-sized companies that depend on this form of financing and collectively employ a large share of the workforce.
How is the RBI responding to similar risks?
While the BIS report focuses on global risks, the Reserve Bank of India (RBI) has been monitoring similar vulnerabilities from a domestic perspective.
Its December 2025 Financial Stability Report noted that the global economy remained resilient because of strong AI-related investment, but warned that this resilience rested on growing vulnerabilities, including the expanding role of non-bank financial intermediaries and their increasing interconnectedness with banks — the same structural concern highlighted by the BIS in relation to private credit and AI financing.
The RBI has also addressed the operational risks associated with AI. It directed banks and other regulated entities to complete board-approved gap assessments on AI-related cybersecurity threats and submit time-bound action plans by the end of June, as Business Standard reported earlier.
What is BIS
The Bank for International Settlements, founded in 1930 and headquartered in Basel, Switzerland, is often called the central bank for central banks. It does not deal with individuals or companies, instead serving as a forum where the world’s central banks coordinate policy, share research and set global banking standards, including the Basel capital and liquidity norms that shape bank regulation in several countries.
Currently, it has 63 member (central banks) representing roughly 95 per cent of global GDP. The Reserve Bank of India has been a full member since 2013, with the RBI governor taking part in the BIS Board of Governors meetings alongside counterparts from the US Federal Reserve, the European Central Bank, and other major monetary authorities.
