The domestic financial system is “not that exposed to AI” should the surging AI company valuations see a correction in the markets but it is “important” to really understand how a shock in the US might transmit to Europe and Ireland, the governor of the Central Bank of Ireland Gabriel Makhlouf has said.
Mr Makhlouf was speaking at the Central Bank’s latest financial systems conference in Dublin where he said that from a financial stability perspective “stretched valuations remain a concern” and that a correction in the market “would not be a surprise”.
“Indeed, corrections have been a feature of other historic infrastructure booms”, he said.
Last week, the chief economist at Apollo Global Management — one of the largest investment firms in the world — said that despite significant investments into AI over the last few years, so far it has provided “zero pay-off” to companies in the US outside of the seven largest tech firms.
Speaking to reporters at the conference Mr Makhlouf said the Central Bank has done work on the exposure of the domestic financial system to a correction and found it is “not that exposed to AI”.
He said if a correction occurs it will happen first in the US and the “important thing for us is to really understand the transmission channels that would transmit whatever shock happened in the US across to Europe and to the rest of the world”.
“We’re paying very close attention to that.. Being vigilant and being ready, I think, is the most important thing.”
On whether a correction in AI valuations might impact Irish corporation tax receipts, Mr Makhlouf said he doesn’t believe it will impact pharmaceutical companies that much but how it affects the tech sector “would be a different question”.
Mr Makhlouf said that one of the things he will be looking at following the US elections this week is what happens at the State level in relation to data centre expansion, which he said would be an “interesting issue for us in terms of the global economy”.
He said it is possible that the growing backlash to data centres in the US could “hypothetically” lead to a “massive shift against further development of data centres” which would “absolutely impact on the valuation of you know AI investments”
“That correction that I talked about could be triggered by that. But we are speculating,” he said.
Last week, the president of the European Central Bank Christine Lagarde announced that she was stepping down from her position in February before her term officially ends in October.
When asked about possible replacements for Ms Lagarde, and specifically about whether the current chief economist at the ECB Philip Lane should be in line for the role, Mr Makhlouf said: “I think Philip would be great, but I don’t know whether legally doing a further term on the executive board is possible”.
“I think Ireland should support the best candidate and if you’re trying to draw me into picking somebody, I’m not going to. The names that are mentioned are all absolutely credible people,” he said.
The former central bank governors of the Netherlands and Spain, Klaas Knot and Pablo Hernandez de Cos, are currently seen as frontrunners to replace Ms Lagarde.
Mr Lane’s tenure at the ECB is due to end on May 31. Executive board members of the ECB are appointed by the leaders of the 21 eurozone countries.