ECB warns of 'bubble' in AI stocks as funds deplete cash buffers

FRANKFURT (Reuters) - The European Central Bank warned on Wednesday about a "bubble" in stocks related to artificial intelligence (AI), which could burst abruptly if investors' rosy expectations are not met.

The warning came as part of the ECB's twice-yearly Financial Stability Review, a laundry list of risks ranging from wars and tariffs to cracks in the plumbing of the banking system.

The central bank for the 20 countries that share the euro noted the stock market, particularly in the United States, had become increasingly dependent on a handful of companies perceived as the beneficiaries of the AI boom.

"This concentration among a few large firms raises concerns over the possibility of an AI-related asset price bubble," the ECB said. "Also, in a context of deeply integrated global equity markets, it points to the risk of adverse global spillovers, should earnings expectations for these firms be disappointed."

The ECB noted investors were demanding a low premium to own shares and bonds while funds had cut their cash buffers.

"Given relatively low liquid asset holdings and significant liquidity mismatches in some types of open-ended investment funds, cash shortages could result in forced asset sales that could amplify downward asset price adjustments," the ECB said.

Among other risks, the ECB flagged the euro area was vulnerable to more trade fragmentation - a key source of concerns for policymakers and investors since Donald Trump won the U.S. Presidential election earlier this month.

The President-elect had made tariffs a key element of his pitch to voters during the campaign and several ECB policymakers have said these measures, if implemented, would hurt growth in the euro area.

The ECB also noted euro area governments - particularly Italy and France - would be borrowing at much higher interest rates over the coming decade, strengthening the need for prudent fiscal policies.

(Reporting By Francesco Canepa; Editing by Alex Richardson)