The Bank of England has warned that a banking crisis in Italy could trigger a "doom loop" which could threaten the financial stability of the UK.
Officials from the BoE have voiced concerns that a problems with Italian lenders could spread across the eurozone and hit the UK economy through French and German banks, The Telegraph reports.
Both French and German lenders have huge exposure to Italy; BNP Paribas had some €9.8bn (£8.7bn) of exposure to Italian sovereign debt at the end of 2017, BPCE had €8.5bn and Crédit Agricole had €7.6bn, accord to The Telegraph.
Though the UK does not have much direct exposure to Italy, its connection to French and German banks is stronger, so the contagion could eventually hit the UK financial system.
The Bank said: "Although direct UK banking exposures to Italy are low, if financial strains were to spread across the euro area, there could be a material risk to UK financial stability."
Italian government debt already sits at some 130% of GDP, more than double the limit of 60% set by the European Union, and there are concerns this could lead to a "doom loop" that could see financial issues triggering problems with sovereign debt, and vice versa.
Italian bad debt already accounts for a quarter of bad loans in the eurozone, while yields on Italian government bonds have spiked recently as the country is rocked by political uncertainty.
However, on a positive side for the UK, last week the latest bank stress tests conducted by the BoE showed that all seven of UK's key lenders are ready to withstand a "deep" recession beyond the impact of Brexit alone.
Headed up by Penny Kyle
Ex-Standard life manager Angela Burns
Latest news and analysis
Talking Strategies: The number of companies in Asia with higher payout ratios have grown since the mid-1990s, but some investors remain wary of searching for income in Asia and Japan. In this video, Jupiter's Jason Pidcock and Dan Carter explain why this...