July – Q2 2026 Digital Asset Review

On 9 July 2026, the Bank of England published the record of its Financial Policy Committee meeting held on 26 June 2026, warning that vulnerabilities in risky asset valuations, sovereign debt markets and private credit remain and some have become more pronounced since the December 2025 Financial Stability Report. The FPC highlighted a substantial increase in equity-market leverage, material risk from Middle East developments, and new financial-stability risks from rapid advances in frontier AI. Separately, the ECB released its September 2026 SESFOD survey on 7 October 2026, showing credit terms eased slightly for a fourth consecutive quarter, while the Federal Reserve published minutes of its September 15-16, 2026 FOMC meeting and the EBA issued a brief mission statement on 2 October 2026.

Background

The Bank of England's Financial Policy Committee record describes a global risk environment shaped by the conflict in the Middle East, which it says resulted in a substantial negative supply shock to the global economy and triggered significant market reactions. Energy and some other commodity prices, as well as sovereign bond yields, were volatile and initially rose sharply above pre-conflict levels. Market interest rates globally, including in the UK, rose, tightening financial conditions, while risky asset prices reached high levels. The signing of a Memorandum of Understanding between the US and Iran led energy prices to fall back to just above pre-conflict levels and sovereign bond yields declined, but the FPC says substantial uncertainty remains and energy prices and interest rate markets have remained volatile. Against this backdrop, the FPC notes persistent vulnerabilities previously identified, including in private credit, and says leverage has increased in equity markets. The ECB's SESFOD survey covered a period of uncertainty linked to the Middle East conflict and volatile energy prices, and notes the ECB raised key interest rates by 25 basis points in June and held them unchanged in July. The Federal Reserve's minutes cover its September 15-16, 2026 meeting, and the EBA page describes its mission to contribute to the stability and effectiveness of the EU financial system.

What happened

The Bank of England's Financial Policy Committee record, published on 9 July 2026, states that vulnerabilities in risky asset valuations, sovereign debt markets and risky credit markets, including private credit, remain and some have become more pronounced since the December 2025 Financial Stability Report. It notes a substantial increase in the use of leverage in equity markets and says developments in the Middle East have affected the global risk environment materially. The FPC says recent rapid advances in frontier AI capabilities have increased financial stability risks related to cyber and operational resilience. It describes equity prices increasing especially for AI-related stocks, driven in part by a narrow set of AI-related companies, increasing market concentration in some global indices, and a significant rise in hedge fund leverage in equity markets. It also notes rapid growth in assets under management of levered ETFs and accelerated use of credit markets by AI-related companies. The ECB's September 2026 SESFOD survey, released 7 October 2026, reports that credit terms and conditions eased slightly for all counterparty types for a fourth consecutive quarter, mainly through price terms, and that demand for securities financing rose for equities and most other collateral types. The Federal Reserve released minutes of its September 15-16, 2026 FOMC meeting on 7 October 2026, and the EBA published a mission statement on 2 October 2026.

Market impact

The Bank of England record says energy and some other commodity prices, as well as sovereign bond yields, were volatile and initially rose sharply above pre-conflict levels, and that market interest rates globally, including in the UK, have risen, tightening financial conditions. It says risky asset prices have reached high levels and equity prices have increased especially for AI-related stocks. The signing of the US-Iran Memorandum of Understanding led energy prices to fall back to just above pre-conflict levels and sovereign bond yields declined, but the FPC says substantial uncertainty remains and energy prices and interest rate markets have remained volatile. The ECB's SESFOD survey reports that demand for funding secured against most collateral types increased, led by equities at a net 27% of respondents. Financing rates and spreads increased for most-favoured clients across all collateral types, while haircuts decreased for most bond collateral types and asset-backed securities. Initial margin requirements decreased slightly for foreign exchange, interest rate, equity and several credit derivative types. Hedge funds' use of leverage increased slightly, and liquidity and market functioning deteriorated slightly for equities and several corporate bond types. The ECB raised key interest rates by 25 basis points in June and held them unchanged in July.

Why it matters

The Bank of England's FPC says persistent vulnerabilities previously identified could interact with further developments in the Middle East, and that the likelihood of these vulnerabilities crystallising at the same time has increased since the December Financial Stability Report, potentially amplifying their combined impacts on financial stability. It warns that rising equity prices driven by a narrow set of AI-related companies increase market concentration, and that hedge fund leverage creates risks via prime brokers and through interconnected markets such as sovereign debt. It also says AI-related companies' use of credit markets has accelerated rapidly, including in public markets, private credit, leveraged and structured finance, and is set to increase further, a pace of investment it calls unprecedented historically. The ECB's survey suggests credit terms eased for a fourth consecutive quarter, which the ECB links to competition and counterparty financial strength among other reasons, while hedge fund leverage rose slightly. The Federal Reserve minutes and EBA statement provide context on monetary policy and EU banking supervision respectively, though the sources provide limited detail on their content.