Big Banks Have Nearly $1 Trillion Tied To Ai. What If The Boom Cracks?

What Happened

Investors got a taste of the stakes earlier in November, when US stocks shed $2 trillion in an hour.

Not everyone shares that worry. Macro investor Raoul Pal has called Big Tech debt fears overblown. Banks also report strong profits, the Fed noted, and their AI-linked exposures face the annual supervisory stress test.

Market Context

The Fed still describes the banking system as sound, with high capital ratios.

Yet 87% of market contacts surveyed by the New York Fed named AI as a risk, up from 50% in spring. So can banks absorb a hit if the boom cools?

Those links matter most if AI spending stops paying off. Weaker-than-expected earnings could drag down asset prices, tighten credit and prompt a pullback in capital spending, the Fed said.

Why It Matters

Big tech firms also back smaller, riskier developers through leases and guarantees. Neither hits the giants’ balance sheets right away.

“Via these connections, the largest technology firms may absorb losses in the event of a future downturn, mitigating their effects on the rest of the financial system. However, it also suggests that these firms’ economic exposure to such a downturn may be substantially larger than suggested by their on-balance-sheet liabilities,” the Fed noted.

A slower economy could then stress leveraged firms and raise loan losses at banks.

The riskiest slices of these deals sit with high-yield funds, life insurers and private debt vehicles.

Fed survey respondents warned that stretched valuations and debt-heavy funding could amplify losses in a sharper correction.

In the Fed’s outline, the chain starts with an unexpected drop in corporate earnings. That makes tech earnings the next test for banks.

Details

The largest US bank holding companies have close to $1 trillion in exposure to firms behind the AI buildout. The Federal Reserve (Fed) disclosed the figure in its November Financial Stability Report.

How Banks Got Pulled Into the Data Center Race

The answer starts with how the buildout is being paid for. This year’s borrowing for advanced computing infrastructure passed $680 billion by October, the Fed’s report showed. That is about 5 times the $130 billion raised in all of 2023.

Developers use leases from cloud giants to secure construction financing. Chipmakers guarantee resale values on graphics processing units (GPUs) to support purchases of their chips.

When the giants also take equity stakes, the Fed says it creates a “circular financing” dynamic.

These commitments have grown even faster than the giants’ debt. Leases yet to start exceed $1 trillion, while guarantees and contract commitments top $2 trillion.

The Fed pointed to a trade-off in these ties.

The largest US banks sit inside the same web. Their exposure covers tech giants, data center developers, and utilities.

It also includes private credit vehicles and computing-related special purpose entities (SPEs).

What an AI Slowdown Would Mean for Lenders

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