iii standing committee on foreign and european community affairs and xiv standing committee on eu policies brexit : the possible economic and financial effects testimony of luigi federico signorini, deputy governor of the bank of italy chamber of deputies rome, 26 april 2017 mr chairman, honourable members of parliament, i would like to thank the committees for inviting the bank of italy to comment on the united kingdom ’ s exit from the european union. i will begin with a brief description of some well - known institutional aspects and then make some comments on the possible economic ( for the united kingdom, europe and italy ) and financial repercussions. at this point in time, my observations can only be preliminary ones. institutional aspects : negotiations, exit and future relationships following the agreements reached in lisbon in 2007, an article was added to the treaty on the european union – the constitutional basis of the eu – which explicitly provides for the possibility that a member state might wish to withdraw, and regulates the relative procedure. this is article 50, now well - known after being invoked for the first time by the uk on 29 march in prime minister may ’ s letter to the president of the european council. article 50 envisages four phases. the first one, already completed, requires the outgoing member state to notify the european council of its intention to withdraw from the european union. the other steps are as follows : the commission is given a mandate to negotiate the withdrawal agreement according to the guidelines unanimously established by the council ; the commission conducts the negotiations on the withdrawal agreement ; and both parties approve the agreement. the united kingdom will not participate in the council ’ s decisions ; aside from that, it will retain meanwhile all the rights and obligations arising from its eu membership. given the geographical proximity, the long, shared history and the deep - seated economic integration of the uk with the rest of europe, there is a great deal of discussion on both sides as to how the withdrawal will take place and what relations will be established afterwards, with comparisons made between hard and soft brexits, concepts that have yet to be clearly defined. in principle there are two separate but related negotiations. one concerns the exit agreement as such, to which the procedure of article 50 refers. it should cover issues such as the position of people and firms that live and work in the eu, thanks to the current freedom of movement, but will find themselves on the other side of what will again become an international border in all respects in 2019 : this applies to british citizens

and other insured depositories. in those earlier periods, declines in asset prices created considerable financial and economic stress – the losses produced failures of many depositories and severely impaired the capital and lending capacity of others. at the same time, the growth of hedge funds clearly presents risk - management challenges to participants in financial markets. if those risk - management challenges are not addressed successfully, problems in the hedge fund sector could pose risks to the broader financial system. for example, when the hedge fund long - term capital management ( ltcm ) nearly failed in september 1998, market participants were concerned that ltcm's losses would force liquidation of its very large positions in a wide range of financial markets, which could amplify price movements and erode market liquidity. indeed, the primary factor that induced ltcm's counterparties and creditors to recapitalize the institution was their fear that liquidation of ltcm's positions would adversely affect the value of their own trading positions and their exposures to other counterparties. in recent months, many market participants have expressed concern that a widening of credit spreads from relatively narrow levels could lead to hedge fund losses that would make funds unwilling or unable to maintain their existing positions, thus potentially eroding market liquidity. such circumstances could pose significant challenges to hedge funds'counterparties and creditors and perhaps to other market participants. thus far, however, the repricing of credit risk does not appear to have imposed significant strains on the financial system. limiting potential systemic risks from hedge funds since the ltcm episode, policymakers have continued to discuss the best approach to limiting potential systemic risks from the activities of hedge funds. in the immediate aftermath of the episode, the pwg studied the implications for financial stability and published its conclusions in april 1999 in a report entitled " hedge funds, leverage, and the lessons of long - term capital management. " 6 the report concluded that the episode had posed a threat to financial stability as a result of a breakdown in market discipline by its creditors and counterparties, which allowed ltcm to become leveraged excessively. the report concluded that the most effective means of limiting systemic risk from hedge funds was to reinvigorate market discipline. to that end, the pwg made various recommendations, which were directed primarily at enhancing credit risk management by hedge funds'creditors and counterparties. late last year, the pwg reassessed how best to address the challenges posed by the continued growth of the hedge fund sector. the