Fed Puts Near-$1 Trillion Bank Exposure on Record
The Federal Reserve disclosed in its November Financial Stability Report that the largest US bank holding companies carry close to $1 trillion in exposure to firms behind the AI buildout. The figure appeared in the Fed’s November report, and the central bank still describes the banking system as sound, with high capital ratios.
Yet the same report shows the mood among market participants has shifted sharply. 87% of market contacts surveyed by the New York Fed named AI as a risk, up from 50% in spring.
Advanced Computing Borrowing Reached $680 Billion by October
The exposure sits on top of a borrowing surge. This year’s borrowing for advanced computing infrastructure passed $680 billion by October, the Fed’s report showed, roughly five times the $130 billion raised in all of 2023.
The debt is only part of the funding chain. Big tech firms also back smaller, riskier developers through leases and guarantees, and neither hits the giants’ balance sheets right away. Developers use leases from cloud giants to secure construction financing, while chipmakers guarantee resale values on graphics processing units 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.
Where Banks Stand Inside the Circular Financing Web
The Fed pointed to a trade-off in these ties. In the report, it noted that via these connections, the largest technology firms may absorb losses in 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 largest US banks sit inside the same web. Their exposure covers tech giants, data center developers, and utilities, and also includes private credit vehicles and computing-related special purpose entities.
High-Yield Funds and Private Debt Hold the Riskiest Slices
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. 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. Investors got a taste of the stakes earlier in November, when US stocks shed $2 trillion in an hour, according to the report’s account.
Fed survey respondents warned that stretched valuations and debt-heavy funding could amplify losses in a sharper correction.
Not Every Voice Sees a Big Tech Debt Threat
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.
In the Fed’s outline, the chain starts with an unexpected drop in corporate earnings. That makes tech earnings the next test for banks.
Tech Earnings and the Stress Test Set the Next Marker
What would confirm the Fed’s concern is a visible deterioration in tech earnings that feeds through to asset prices and credit conditions. What would break the thesis is another quarter of strong bank profits and clean stress-test results despite the $1 trillion exposure.
The numbers to watch are the near-$1 trillion bank exposure figure, the $680 billion in advanced computing borrowing through October, and the 87% of New York Fed survey contacts flagging AI as a risk.
Sources: beincrypto.com