The central bank of central banks just released its flagship annual report — and it sees a $1 trillion AI investment boom headed for a reckoning

The Bank for International Settlements draws an explicit parallel to the dotcom crash and railway mania, but the stakes are bigger now.

The canal mania of the 1830s. The British railway bubble of the 1840s. The dot-com crash of 2000. Each began with a genuine technological breakthrough that attracted more capital than commercial returns could ultimately justify. Each ended in a recession.

The Bank for International Settlements — the Basel-based institution that coordinates the world’s central banks and serves as the global financial system’s most authoritative watchdog — sees the $1 trillion AI investment boom in the same lineage. And it’s not subtle about the comparison.

“The scale and pace of the current AI investment boom, accompanied by expectations of large productivity payoffs, bear resemblance to these precedents,” the BIS writes in its Annual Economic Report 2026, released Sunday. “These episodes ended with an eventual reversal in investment, inducing economy-wide recessions.”

A bet that’s already outrunning the balance sheet

The five largest hyperscalers are on pace to spend more than $1 trillion on AI-related capital expenditure across 2025 and 2026 combined — a sum the BIS says is already outpacing their earnings and free cash flow, forcing some to issue debt to cover the gap.

The BIS’s concern isn’t that AI is a fraud. The technology is real, and the report acknowledges that task-level studies consistently show productivity gains of 20% to 50% in time savings. But the concern is that every major hyperscaler is making the same massive bet simultaneously, driven by the perception that only a handful of players will ultimately dominate the market. That logic, the BIS warns, is a recipe for collective overcommitment.

“The intense competition raises the risk of firms over-committing resources to investment projects with still uncertain returns,” the report states, “leaving all firms vulnerable to disappointments in AI payoffs.”

Using contest-theory modeling, BIS economists find that as competitive pressure drives capital expenditure higher, the net economic surplus for the sector as a whole — total payoffs minus investment costs — declines and could turn negative in adverse scenarios. A disappointment in returns, the report warns, “could trigger a sudden pullback in financing and turn the capex boom into a protracted investment bust.”

The hidden wiring underneath

What makes an AI bust particularly dangerous, the BIS argues, isn’t just the scale of the spending — it’s how it’s financed.

Hyperscalers, chipmakers, and AI labs are linked through what the report calls “a complex web of private arrangements.” The most prominent is circular financing: hyperscalers take equity stakes in AI labs, which in turn commit to multi-year purchases of chips or computing power from those same hyperscalers. Data centers are outsourced to third-party contractors that lease the facilities back under long-dated contracts with embedded exit clauses.

“The terms of such deals are typically poorly disclosed,” the BIS writes, “with risks of the same asset being pledged multiple times.”

If the hyperscalers slow or halt their aggressive capex deployment, the entire supply chain — infrastructure contractors, chipmakers, AI labs, and the private credit lenders behind them — would face simultaneous revenue shortfalls. The engineering and construction firms at the end of that chain are particularly vulnerable, carrying “comparatively weak” balance sheets with little cushion against a sudden reversal.

BIS Asia-Pacific representative Zhang Tao told the South China Morning Post that a correction could unwind “much faster than previous banking crisis episodes” — precisely because so much of the financing flows through hedge funds and private credit vehicles that carry less regulatory oversight than traditional banks.

Such warnings are commonplace across Wall Street. Apollo Global Management Chief Economist Torsten Slok, for example, argued in mid-May that AI was “penetrating every corner of financial markets,” with an equity market phenomenon mutating into a capital markets-wide transformation. Meanwhile, AI accounts for nearly half of all investment-grade bond issuance, 87% of venture capital funding, and a growing share of high-yield debt.

The wealth effect problem

The financial fallout wouldn’t stay contained in Silicon Valley or on hyperscaler balance sheets. U.S. stocks now account for roughly 64% of the MSCI Global index, and household equity exposure has more than doubled relative to income since 2010.

A major repricing of AI-related stocks, the BIS warns, “could have more pronounced wealth effects and sharper consumption pullback than in the past.” And given the U.S. market’s global footprint, the wealth destruction would propagate internationally.

Direct lending funds — already a $1 trillion-plus ecosystem — have quadrupled their lending to the AI and IT sectors over the past five years, now representing about 15% of their portfolios. Signs of stress are already visible: some retail-facing direct lending funds have faced mounting redemption requests, forcing asset liquidations.

“A larger shock,” the BIS writes, “whether from a renewed inflation surge or a sharp AI-led repricing, could trigger a more widespread credit crunch.”

The Hormuz complication

The AI risk doesn’t exist in a vacuum. The report’s opening chapter documents a second major shock that arrived in early 2026: the closure of the Strait of Hormuz following the start of the Iran conflict in late February, which cut more than 10 million barrels of crude oil per day from global supply — a larger disruption than either the 1973 oil embargo or the 1979 Iranian revolution.

Oil prices surged 67% to an intraday peak of $120 a barrel within two weeks. Fertilizer and plastics prices both soared 50%. Global headline inflation has jumped by half a percentage point since the conflict began.

The energy shock and the AI risk interact in an uncomfortable way. Financial markets have remained buoyant — equity valuations rich, credit spreads compressed — on the assumption that the Hormuz disruption is temporary and that the AI boom will continue. But if inflation proves stickier than expected and central banks are forced to raise rates, the same tightening that’s needed to contain energy-driven inflation could be what pops the AI-financed debt bubble.

“The current tension between exuberant risk appetite and elevated macroeconomic risks,” the BIS writes, “could unwind abruptly.”

The BIS stops short of calling the AI boom a bubble outright. Its prescription is for “robustness” — a word it uses carefully and repeatedly to describe what it wants policymakers to build beyond the fragile “resilience” the global economy has demonstrated so far.

That means central banks staying vigilant on inflation even when it’s politically uncomfortable, governments restoring fiscal space rather than deploying stimulus, and regulators extending prudential standards to the non-bank financial institutions now sitting at the center of AI financing.

This story was originally featured on Fortune.com