The rise of AI, stablecoins and private markets: how stable is the financial system?

The EU and the United States reached a trade agreement, and the economic impact of trade uncertainty has been milder than expected. But the full effects of the policy changes are yet to be seen. So, what does this mean for financial stability?

The term “AI bubble” is on everyone’s lips right now. But bubbles are hard to identify and even harder to differentiate from legitimate growth. So, are valuations stretched? What about market concentration and circular funding in the AI industry? And how exactly are companies funding investment in AI?

There is significant leverage behind AI investments. Returns will largely depend on how widely AI is adopted. Could AI become a general-purpose technology, like the railways did?

How do private credit markets differ from equity financing? Why are risks to euro area financial stability increasing as private markets expand? And how does all this relate to systemic risk in the banking sector and the build-up of AI infrastructure?

Despite what the name suggests, stablecoins carry liquidity run risks that could affect financial stability. With rapid growth and increasing links to traditional finance, what risks does this innovation create?

Governments have made progress in reducing debt levels since the pandemic. But in some euro area countries, debt remains too high and pressures to increase spending – for instance on defence – are rising. While this poses one of the biggest risks to financial stability, it could also be an opportunity for long-term growth if properly managed.

Given the potential AI bubble, questions around the sustainability of government budgets and the rise in stablecoins, where does this leave euro area banks? Profitability is strong and non-performing loan ratios are historically low. So, how is the banking sector doing overall?

John Fell shares his hot tip with listeners.