Speaking a day after Westpac showed 400 employees the door, Mrs Kelly refused to speculate on whether the lender would pass on any rate cut by the Reserve Bank of Australia next Tuesday.

Mrs Kelly yesterday echoed other bank executives in stressing that Europe's debt crisis had pushed the cost of raising term funds in offshore wholesale markets to fresh post global financial crisis highs.

``Funding costs are more expensive in the wholesale markets right now than they were at any time over the entirety of the global financial crisis,'' she said.

If banks cannot price risk properly, credit rationing could occur, ``and, therefore, potentially, a credit crunch''.

The big four banks now source around 20 per cent of their total funding from offshore credit markets, down from about 40 per cent three years ago.

The banks' higher funding costs could be offset if home borrowers were charged an extra 13 basis points and businesses an additional 18 basis points on loans, Deutsche Bank estimates.

Mrs Kelly's comments echo the Australian Bankers Association, which on Thursday said banks had absorbed the higher funding costs for the past six months.

The ABA also took aim at the central bank, claiming it could alter the cash rate to drive responses from banks.

``If the banks do not follow a change in the cash rate, the RBA can adjust the cash rate again until commercial interest rates are where the RBA wants them,'' an ABA spokesman said.

The Reserve Bank declined to respond nor would it confirm comments by former domestic markets head John Broadbent that before making its rate decision, the central bank would examine the impact that more expensive long-term funding was having on profits banks gained from loans.

``They will try to understand whether the net interest margin is shrinking or steady,'' he said.