A fresh banking crisis in Italy could spark a devastating “doom loop” that threatens UK financial stability, the Bank of England has warned.

Bank officials are concerned that problems affecting Italian lenders could spread across the Eurozone and eventually be transmitted to the UK economy through French and German banks, which have massive exposure to Italy.

Big French banks own tens of billions of Italian sovereign debt. BNP Paribas had €9.8bn (£8.7bn) at the end of 2017, BPCE had €8.5bn and Crédit Agricole €7.6bn. UK financial institutions own very little Italian debt but they have “much higher claims on countries with close links to Italy, including France and Germany.”

“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,” the Bank said.

Yields on sovereign debt in Italy have spiked after political uncertainties in the country, rising to the highest levels in over four years in October, after the coalition government published a draft budget which included tax cuts and spending increases.