Liquidity risks took prominence last year following bank failures in the United States and the collapse of Credit Suisse in Europe.
Addressing the steering committee of Italy's banking association ABI, European Central Bank Governing Council member Fabio Panetta warned bankers against complacency in a situation in which higher rates have led to strong earnings without driving borrowers' default rates up significantly.
"Things cannot go well indefinitely. I don't want to play the prophet of gloom but it's when things go well that we need to pay attention," he said on Wednesday.
"The first point of attention is liquidity ... when banks implode it's always because of liquidity. The trigger point for any tensions, or crisis, is liquidity." he said.
As the ECB unwinds exceptional expansionary measures and shrinks its balance sheet, banks need to have "realistic" contingency plans, Panetta, who took the top job at the Bank of Italy in November, said.
Panetta, who used to sit on the ECB's executive board, said he had examined the liquidity plans which European and Italian banks submit to supervisors outlining their funding strategies.
"They all rely on the possibility of increasing deposits when necessary down the line ... this cannot work, it's just not possible for everyone to do so at the same time," he warned.
"We need funding plans that are realistic and spell out clearly how to get short-term and longer-term liquidity."
A lag in deposit costs has allowed banks in Italy and other European countries to book record profits as they increased lending rates but failed to reward depositors.
"Be aware that it's just a matter of time. You will start once again competing for liquidity and having to pay more for it," Panetta said.
(Reporting by Valentina Za, editing by Sharon Singleton)
