It cites by way of evidence for a likely shakeout if central banks are forced to raise rates faster than expected, the 2013 "taper tantrum", when bond markets were roiled by the prospect of monetary policy normalisation.

Concerned that there is too much complacency across advanced economies after years of near-zero official interest rates, the BIS group has modelled the potential distortions that may be building up.

"Interest rates have been low in the aftermath of the global financial crisis, raising concerns about financial stability," said Dr Lowe.

"In particular, the profitability and strength of financial firms may suffer in an environment of prolonged low interest rates.

"Additional vulnerabilities may arise if financial firms respond to 'low-for-long' interest rates by increasing risk-taking," he said in a preface to the report.

The Basel, Switzerland-based BIS – often dubbed the central bank of central banks – has long warned of the risks of leaving monetary policy loose, with Thursday's report describing how banks and insurance companies are likely to once again be flashpoints in any crisis.

Even though the group says it has found only "relatively limited" amounts of extra risk-taking spurred by low interest rates, they may still be engendering "material risks to financial stability".

The BIS group is particularly worried about what it describes as a scenario in which interest rates "snap back".


"Banks without sufficient capital buffers could face solvency issues, driven by both valuation and credit losses," Dr Lowe said.

Under the snapback scenario, central bank complacency allows inflation to accelerate out of control. Inflation would accelerate by 2 percentage points, forcing policy makers to tighten monetary policy so sharply that short-term interest rates jump by 300 basis points.

In Australia, that would be equivalent to sending the official cash rate from 1.5 per cent to 4.5 per cent.

Ten-year yields would rise by even more, according to the BIS study, as bond market investors demand a greater premium to offset fears of quickening inflation.

"These higher rates induce a recession, but because inflation remains above target, interest rates remain elevated," the BIS says in the report.

Dr Lowe said a key line of defence against such a dramatic downturn is for central banks and regulators to force banks and other financial institutions to put more capital aside for a crisis.

"The first line of defence against these risks should be to continue to build resilience in the financial system by encouraging adequate capital, liquidity and risk management," he said.

"But the report also underscores the need to monitor institutions' exposures in a comprehensive way, including through stress tests."

The BIS' Committee on the Global Financial System is central bank forum for the monitoring and analysis of broad financial system issues.

According to its website, it supports central banks in the fulfilment of their responsibilities for monetary and financial stability by contributing appropriate policy recommendations.