Bank for International Settlements warns of potential macroeconomic risks stemming from circular relationships among AI companies

The intertwined and capital-intensive nature of circular artificial intelligence (AI) investment relationships, involving some of the world's biggest companies, could morph into macroeconomic risks, the Bank for International Settlements (BIS) says.

This, BIS says, comes alongside over-investment and debt funding risks in the ongoing AI boom. 

The comments come in a new BIS Bulletin, and follow a warning in June that historic investment booms causing "economy-wide recessions" offer "instructive parallels" to the AI boom. The Switzerland-based BIS is the central banks' bank. Its shareholders include the Reserve Bank of New Zealand with a 0.6% stake. 

"The parallel with the telecommunications boom of the late 1990s is instructive: upstream equipment vendors such as Lucent and Nortel financed network operators so that the operators could buy the vendors’ equipment. This meant that part of the equipment vendors’ reported sales was being funded by the vendors themselves," BIS says. 

"For a time, as operators expanded their networks, equipment orders also expanded and vendors booked both the sales and loans as assets. However, when operators’ own revenues failed to materialise or slowed, they could neither repay the loans nor sustain the equipment purchases."

"Equipment vendors then sustained both financial losses and a loss of sales. Such dynamics may also play out in AI if revenue growth and end user demand fall short of firms’ expectations. Amid heightened AI-driven global equity valuations, this could drive significant financial market volatility," says BIS.

The article points out that when a supplier finances a customer, part of the supplier’s revenue growth reflects its own capital investment, rather than organic final demand. This makes it more difficult for investors, lenders and regulators to figure out what part of the current AI boom is based on organic demand. 

BIS says between 2021 and 2025, 29% of AI firms’ investment deals by value featured a target company that was also an AI firm, while 55% of incoming investments in AI firms came from other AI firms.  And of all the AI-to-AI investment deals between 2021 and 2025, 16% by deal count, and 46% by value, also involved commercial supply chain relationships between the investor and target firms. 

"Circular investment relationships reflect key economic features such as the need to secure critical inputs and the presence of information asymmetries, yet they entail macroeconomic risks and increase opacity," BIS says.

It also makes the point that circular relationships can increase correlations between firms’ commercial and financial exposures, creating potential to amplify spillovers during times of stress.

"An investor that is also a supplier is exposed to the same counterparty twice: a shock to the customer reduces both the value of the equity stake and future product revenues. Because circular deals are concentrated among a small number of very large firms in the upstream layers of the supply chain, adverse shocks could propagate through commercial and financial channels simultaneously, potentially amplifying contagion," BIS says. 

"These risks may be magnified by the growing use of private credit and special purpose vehicles to finance AI infrastructure, which can create hidden leverage and interconnected exposures that amplify financial stress during downturns."

BIS goes on to say circular arrangements tend to be opaque, making monitoring and regulatory supervision difficult. 

"Many of the firms involved in AI are private and may disclose limited information. Even where firms are publicly listed, deal terms can often be complex, mixing cash investments with long-term purchase commitments and guarantees on the value of the underlying assets."

"Residual value guarantees are one example, where the guarantor pledges to cover any shortfall in an asset’s worth, such as chips or data centre equipment, after a fixed period," BIS says. 

"These contingent commitments sit off balance sheet and only materialise during a downturn – when a guarantor is least able to absorb them. As such, reported deal values may not capture the whole picture, and headline figures can differ substantially from disbursed amounts. Moreover, many of these firms reside in different sectors and jurisdictions, making it difficult for a single supervisor or regulator to monitor these risks."

BIS notes investment in AI has reached "an extraordinary scale."

"The largest AI firms collectively plan to spend hundreds of billions of dollars on AI infrastructure in 2026, and capital expenditure on AI has become macroeconomically significant in many economies. A meaningful share of this capital flows through firms that serve simultaneously as suppliers of inputs and investors in firms that buy those inputs. When financing relationships and commercial relationships overlap, a 'circular' investment structure emerges."