LONDON, Sept 19 (Reuters) - Central banks around the world need to watch for the risk that financial firms are caught out by higher interest rates and the scaling back of bond-buying programmes, a Bank of England policymaker said on Tuesday.
"Macro and micro-prudential policies need to be alert to and anticipate financial stability risks that might arise as rates rise and central bank portfolios stabilize and then decline," Donald Kohn said in speech.
"Stress tests of banks will be an essential tool for spotting risks and building resilience. Particularly as interest rates rise along the yield curve. The curve itself may even twist in unexpected ways, revealing vulnerabilities in asset prices and portfolio choices," he said.
Kohn, a member of the BoE's Financial Policy Committee which sets financial regulation but not interest rates, was speaking at a conference in Basel, Switzerland.
Writing by William Schomberg