BoE sounds alarm on soaring AI data center loans

The Bank of England (BoE) is probing the increase in lenders’ funding for data centers. The bank has been weighing the potential fallout from AI firms falling short of their lofty valuations. It cautioned that inflated prices throughout the sector might eventually become a source of market instability if investor sentiment were to change.

Bank lending at the moment is relatively modest for early projects, a fair amount of which are financed by equity. But all that is expected to change, with McKinsey & Co. estimating that worldwide investors will need about $5.2 trillion by 2030 to meet the demand for AI.

The BoE warns that banks are at risk from direct loans made to AI companies 

The BoE is now examining the growing connections between AI companies and the financial industry, according to people briefed on the discussions. They observed that the central bank opened its review when it began to sense that the industry’s spending had shifted away from hiring and toward expensive data center construction.

In a blog post, the BoE pointed out its concerns: “If the projected scale of debt-financed AI and associated energy infrastructure investment materializes over this decade, financial stability risks are likely to grow.”

It added that financial institutions could be at risk from both loans made directly to AI companies and credit extended to funds or institutions connected to the sector. According to another person familiar with the matter, data center–related securitized loans represent one form of indirect exposure. Bank of America put the total value of such securities at about $49 billion as of August.

Large tech companies are increasingly turning to borrowing to sustain their massive expenditures. Meta secured approximately $30 billion in loans to develop a sprawling data center site in Louisiana, which is expected to reach Manhattan-like proportions. This agreement will be the most significant private capital agreement ever recorded in history.

Within the deal, Meta and Blue Owl Capital Inc. will share ownership of the tech company’s Hyperion data center based in Richland Parish, Louisiana. According to individuals knowledgeable about the situation, the tech giant will retain only 20% of the shares for Meta.

JPMorgan and Mitsubishi UFJ are spearheading a lending deal worth more than $22 billion to support Vantage Data Centers’ ambitious campus expansion.

The BoE wants to understand the interconnections between AI players

Since the early days of the AI rally, many have warned that the hype could tumble, similar to the dot-com boom that imploded at the turn of the millennium. The world’s largest tech firms are still investing billions in next-generation chips and data centers, betting on a future where machines and chatbots perform an increasingly growing share of economic tasks.

Still, no technology in history has attracted as much investment as quickly, especially since it has yet to prove its profitability. Industry leaders who are wary of AI’s profitability potential nevertheless continue pouring in money, fearing that hesitation could see them overtaken by competitors.

The BoE has also been trying to understand how closely linked the key players driving the AI boom are. For starters, Nvidia has committed up to $100 billion to support OpenAI’s data center expansion.

OpenAI, for its part, pledged to populate the new facilities with millions of Nvidia chips. However, their deal quickly drew criticism for being “circular” in nature. The ChatGPT creator also announced a partnership with Nvidia’s main rival, Advanced Micro Devices Inc., to roll out tens of billions of dollars’ worth of AMD chips. 

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