The Bank of England is undertaking a review of investment banks in London amid concerns over their expanding exposure to Asian equities closely linked to the artificial intelligence (AI) sector. Officials are monitoring the rapid growth in client holdings and borrowing related to a concentrated group of AI-focused companies, seeking to mitigate risks from potentially volatile market positions.

Several prominent investment banks operating in the UK serve as prime brokers, facilitating hedge funds and other institutional investors in financing their Asian investments. Traditionally a niche activity, this segment has experienced significant expansion driven by soaring valuations of firms connected to AI semiconductor infrastructure. Companies such as South Korea’s SK Hynix, Taiwan’s TSMC, and China’s Cambricon Technologies are among those attracting large inflows of capital.

A recent initial public offering exemplifies the surge in investor appetite. CXMT, a Chinese memory chip manufacturer, saw its shares rise 466% upon debut on the Shanghai Stock Exchange, briefly surpassing Hong Kong-listed Tencent in market value. Despite these gains, the sector’s stocks remain highly volatile. For example, SK Hynix’s share price fell nearly 23% over two sessions recently, erasing more than $250 billion from its market capitalization. Such rapid declines raise concerns that leveraged positions backed by prime brokers could incur substantial losses, increasing the risk of client defaults.

Insiders familiar with the situation indicate that the Bank of England’s Prudential Regulation Authority has initiated a review of prime brokerage operations to evaluate whether banks are accumulating overly concentrated exposures in Asian equities. The regulator is also wary that some clients may be employing options strategies to amplify their leveraged bets and potentially sourcing capital from Asian retail investors, who may respond swiftly to market turbulence by liquidating holdings.

This growing volume of Asia-related business is generating considerable revenues for major investment banks such as Goldman Sachs, JPMorgan Chase, and Morgan Stanley. Industry observers note that, driven by these developments, Asia could surpass Europe as the leading region for certain banks’ income streams this year.

The Bank of England’s supervisory arm has the authority to demand higher liquidity buffers from prime brokers if it determines that the institutions are assuming excessive risks. The current review reflects heightened caution amid rapid market developments and stresses in AI-linked stock valuations. Officials aim to ensure that the expanding exposure does not create vulnerabilities that could have broader financial stability implications.