Why Banks Are Hedging Against the AI Lending Boom

Banks are pouring billions into loans for AI data centers and infrastructure, but they’re rushing to protect themselves from potential blowups. Take Oracle: banks are financing huge construction loans like a $38 billion package and an $18 billion loan for facilities in Texas, Wisconsin, and New Mexico. At the same time, trading in credit default swaps (CDS) on Oracle debt jumped to $8 billion over nine weeks ending November 28, up from $350 million the year before, per Barclays data cited by Bloomberg.

The Scale of the Lending

Tech giants like Oracle, Meta, Alphabet, and Microsoft are raising massive debt to build out AI. Global bond issuance hit $6.46 trillion this year, with hyperscalers and utilities eyeing at least $5 trillion in spending on data centers. Morgan Stanley figures cloud companies will drop $3 trillion on infrastructure through 2028, with debt covering about half after cash flow takes the rest, according to their Fortune-reported research.

Morgan Stanley itself arranged $27 billion in debt and $2.5 billion in equity for Meta’s Hyperion data center in Louisiana, plus led junk-bond deals for TeraWulf, Cipher Mining, and Applied Digital. JPMorgan says issuers will hit every major debt market, and payoffs could take years—or never come.

Risks Driving the Hedge

Banks worry about overexposure to a few big names in a possible bubble, as Germany’s financial watchdog warns. CDS costs for Oracle debt are at Global Financial Crisis peaks. Microsoft CDS, for a AAA-rated firm, costs 34 basis points annually for $10 million protection—double mid-October levels and 50% wider than Johnson & Johnson’s 19 basis points, notes Saba Capital’s Andrew Weinberg.

A major outage last week stopped CME Group trading, spooking lenders—Goldman Sachs paused a $1.3 billion bond sale for data center operator CyrusOne.
Overcapacity, power shortages, and unproven profits from AI investments.
Bank of England flags US tech valuations like dotcom era levels, with AI growth fueled by trillions in debt—half from external sources mostly debt. A correction could hit lending hard due to ties between AI firms and credit markets, per their financial stability report.

Jamie Dimon of JPMorgan told the BBC he’s more worried than most about a market drop.

How Banks Are Hedging

CDS let banks buy insurance against defaults, shifting risk to others. Morgan Stanley is talking significant risk transfers (SRTs)—selling credit-linked notes covering 5-15% of loan portfolios. They’re eyeing an SRT for AI infrastructure loans, with private firms like Ares Management interested. Banks are also bundling tech CDS into baskets and Citadel Securities markets hyperscaler bond baskets, per IFR.

Allspring’s Mark Clegg says banks know the overinvestment worries and want to offload risk. SRT sales could grow 11% yearly through 2027, per Bloomberg Intelligence.

Protection sellers like Saba see value: spreads price in bad news, so even downgrades might not hurt.