The time has come for financial institutions to prepare for an environment with rising interest rates, a Bundesbank board member told CNBC on Thursday.
Many risk managers have focused on credit and liquidity risks, but they need to insert interest rate risks into the equation too, Andreas Dombret, an executive board member of the German Bundesbank, said.
"Let's face it, there are quite a number of risk managers who have never seen interest rates rise and who have never seen the interest rate risk and even thought about (it) and have concentrated on credit risk and have concentrated on liquidity risk, so it's about time to prepare for a potential change," Dombret said.
The former vice-chairman of Bank of America's European global investment unit explained that the German central bank is taking interest rate rises "very seriously" and is "actively" working with German banks to ensure that changes to
"Should there be sharp rises in interest rates that of course would be a challenge for any bank," Dombret said.
Members of the German central bank have been critical of the low interest rate environment in the euro zone, arguing this is hurting banks' balance sheets. Earlier this month, Bundesbank President Jens Weidmann, called on the European Central Bank to start tightening its monetary policy.
Preparing for a hard Brexit
Another risk that banks face is Brexit and the uncertainty surrounding the future of the financial services industry.
"Everything I hear and read looks like a hard Brexit, I don't have any indications of anything else, so it is a scenario we have to take very seriously as the baseline scenario of what's going to happen," Dombret told CNBC.
He advised banks that are interested in working in the European Union and do not have a license to actively look for ways that will allow them to perform their services in the EU. He added that it is important to guarantee that European firms and the public can continue accessing the "very, very good" services offered by the City of London.
"Let's not forget that the City of London, which is the dominant financial center in our area will remain to be a very dominant financial center," Dombret said.
"I think that in the first half of this year all decisions will be made with regard to relocations but of course these are only partial relocations and I also believe that it would not only be Frankfurt benefiting from that but other cities also would have their fair share," he added.