remarks by luigi federico signorini at the presentation of the bank of italy ’ s report on economic developments in lombardy luigi federico signorini deputy governor of the bank of italy milan, 5 july 2017 italy has emerged from the longest and deepest recession in peacetime memory. slow and hesitant at first, the recovery is gradually strengthening, and for two years now the trend has been clearly positive. of course, the road ahead is still long and fraught with uncertainty. notwithstanding its recent growth, italy ’ s gdp remains seven percentage points below the level of early 2008. spain ’ s is about to reach that level, while france and germany have already outstripped it by five and eight points respectively. nor should the risks on the horizon be underestimated. and yet, even taking account of the lost ground that will be difficult to make up, recent economic developments have been undoubtedly favourable. in the first three months of this year italy ’ s gdp grew by 0. 4 per cent, exceeding the expectations of the leading forecasters. exports have continued to expand. in the last few years the growth in italian export sales has outpaced that in demand from outlet markets. this was not the case between 1999 and 2009, when italian firms struggled to keep up with competition from emerging economies and even from the other developed countries. the improved export capacity of italian firms has been especially important as it has supported gdp growth in the most testing times of the crisis. since 2010 italy ’ s market shares have stabilized. since 2013 there has been a surplus on the current account of the balance of payments. italy ’ s net foreign debtor position has diminished rapidly in recent years, from 25 per cent of gdp in 2013 to 15 per cent at the end of last year. the investment - to - gdp ratio had shed five percentage points since 2007, when in 2014 it hit a postwar low of 17 per cent. the fall in investment was one of the most conspicuous signs of the crisis : the poor economic outlook discouraged it and its collapse in turn lowered gdp and productivity, making the outlook even worse and triggering a vicious circle. years of low investment led to fixed capital not being renewed, lowering production capacity and contributing to weak gdp growth on the supply side too. however, little by little since 2014 investment has recovered, though the trends by sector and type vary greatly. purchases of capital goods – machinery, equipment and transport equipment – have risen by almost 11 per cent in the last three years : as a share of gdp

their mutual interaction, produce strong amplification effects. this has been luminously shown by danielsson and shin in their seminal article on " endogenous risk ", based on the now famous parable of the millennium bridge. extreme events and modern finance with slight exaggeration, a case can be made that modern finance has been built, in practice, if not in theory, on implicit tolerance and widespread ignorance of extreme events. the use of models models are extensively used to assess risks and price assets. nearly all models are based on the prevalence of " normal " ( gaussian ) distribution as the basic tool. this means that abrupt changes in prices or risk have a very low probability. the fallacy of this assumption has been clearly shown by mandelbrot for stock prices, and it has been further demonstrated in many recent ( and non recent ) episodes for other asset prices and risk premia. examples of the use of normal distribution in financial modelling would include the following : • the most frequently used tool for risk measurement ( var ) frequently ignores " fat tail " risks. many var measures are calibrated according to the expected loss of a portfolio under normal circumstances. models with " fat tail " distributions are available, but seldom used, due to lack of reliable data over a sufficient period of time. • implied volatilities are usually extracted from option pricing, based on normal distribution. they are then used as inputs into trading strategies and models. as a result, the assumption of normal distribution widely " contaminates " the pricing, risk assessment and investment strategies across a whole range of markets and instruments. • finally, the pricing of many structured products is based on historical correlations among asset prices, with the assumption that those correlations are stable and do represent the ordinary state of nature. on the contrary, experience has shown that those correlations can change radically during a crisis, frequently collapsing to one, and take price movements to the extreme ends of the probability distribution. procyclicality many changes have been introduced in recent years to accounting and capital regimes in order to make them more risk sensitive. the benefits in terms of increased transparency and better risk management are very significant. those same changes, however, may contribute to create new amplification mechanisms inside the financial system. this is referred to as a " procyclicality " issue, by which we usually mean the tendency of financial system to accentuate fluctuations in real and financial variables around their trend. but