Fed Report Flags $1.1 Trillion Data Center Debt As Wall Street Names AI Its Biggest Risk

Wall Street contacts surveyed by the Federal Reserve named AI the top risk to the US financial system, and the Fed’s own report shows public debt tied to advanced computing has passed $1.1 trillion.

Key Takeaways

• AI was the most cited risk among 23 market contacts the New York Fed surveyed in September and October
• Their worries were AI stock valuations, AI-powered cyberattacks and complex AI-related financing
• Debt issued for advanced computing passed $680 billion by October 2026, about five times the 2023 total
• The largest US banks have close to $1 trillion of exposure to big tech firms, data center developers and related lenders

The Fed Board published its twice-yearly Financial Stability Report on Nov. 13, based on information available as of Oct. 28. The survey section summarizes what contacts at broker-dealers, banks, investment funds and advisory firms told the New York Fed, and the report says it “should not be interpreted as representing the views of the Federal Reserve.”

In its own analysis, though, the Fed says the “complex interlinkages” between firms in the data center buildout, credit markets, private lenders and special financing vehicles “create vulnerabilities that necessitate close monitoring.”

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What Wall Street Is Worried About

“AI was the top-cited risk,” the report says. In the spring survey, AI ranked third behind geopolitical risks and an oil shock, and mentions of AI rose more than any other risk since then, along with higher long-term interest rates and cyberattacks.

Respondents warned of “a sharp correction in AI-related equities, driven by uncertain returns on large capital expenditures.” Many said “circular financing arrangements, and heavy reliance on debt to fund the AI buildout could amplify losses.”

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On cyber risk, many said “advances in AI are lowering the barrier to sophisticated attacks,” while others pointed to the risk of “unintended damage caused by frontier AI models themselves.”

The Debt Behind The Data Center Boom

The Fed says spending by the five hyperscalers, Amazon, Alphabet, Meta, Microsoft and Oracle, has been tracking the late-1990s telecom boom and “may surpass that of the 1990s telecom cycle relatively soon.” Their strong cash flows meant they needed less debt, “at least until this year.”

Much of the risk sits off the balance sheet. Hyperscalers sign long leases with smaller data center developers, who use those leases to borrow, and chip makers guarantee the resale value of the GPUs used as collateral. Equity stakes on top of those deals create what the Fed calls a “circular financing” dynamic.

Who Holds The Risk

The Fed says the biggest tech firms may absorb losses in a downturn, which would protect the rest of the system. But it also says their exposure “may be substantially larger than suggested by their on-balance-sheet liabilities.”

The tech giants’ own bonds sit mostly with mutual funds, pension funds and insurers. The riskier slices of special-purpose financings are held by high-yield bond funds, life insurers, business development companies and other private debt vehicles, while the big banks’ near $1 trillion of exposure is tested in the Fed’s annual stress test.

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