Australian banks have a funding problem and will need to work on shifting their deposit bases and lengthening their maturity profiles, the Australian Prudential Regulation Authority has warned.APRA chairman Wayne Byres said the funding profile of authorised deposit-taking institutions had improved since the financial crisis but the strengthening of liquidity profiles is "less than it might first appear".And Byres said banks could have difficulty meeting the Net Stable Funding Ratio requirements, which take effect in 2018.Speaking at an Actuaries Institute seminar in Sydney yesterday, Byres gave a rundown on the banking sector's progress in meeting the Financial System Inquiry's goal of making them "unquestionably strong".Capital: Byres said the banking sector was well capitalised, with risk-based capital ratios as high as they had ever been."And these higher ratios have been achieved with tighter definitions of what counts as capital," he said.Compared internationally, Australian common equity tier one capital ratios are comfortably in the top half of the spectrum, but will likely need to be higher if they are to retain their relative positioning over time.Leverage: APRA's view is that ratios have not been materially strengthened so far and the Australian banks compare less well to peers on this measureLiquidity: The 30-day Liquidity Coverage Ratio rule, introduced at the start of the year, has improved bank liquidity. Byres said LCR achieved several things: it shifted the measure of liquidity from a one-week test to a one-month test; it eliminated the practice of banks holdings other banks' debts as assets; and it established the Reserve Bank's Committed Liquidity Facility.Funding: The overall funding profile has improved, with ADIs sourcing a much greater proportion of their funding from deposits. However, deposit growth has come primarily from at-call deposits, rather than term deposits, meaning liquidity profiles have been strengthened less than might first appear."And, while the industry has reduced its reliance on short-term funding, wholesale funding and offshore funding, it has not materially reduced its reliance on the form of funding that is most likely and able to run in a crisis - short-term wholesale funding from offshore," Byres said."That might seem paradoxical but as a percentage of total funding, short-term wholesale offshore funding is virtually unchanged from a decade ago."The Net Stable Funding Ratio, which provides a longer-term funding mismatch measure to complement the LCR, is not scheduled for introduction until 2018."Given their funding structures, the largest Australian banks do not easily meet the new standard and, as things stand today, international comparisons are not favourable to them."Some further lengthening of Australian bank maturity profiles is therefore likely to be needed."Assets quality: This is a positive story for the Australian banking sector. There was a notable increase in non-performing loans in the aftermath of the financial crisis but problem loans have since fallen back closer to pre-crisis levels.Earnings: The overall industry return on equity has been little changed, hovering around the 15 per cent mark. But this has masked the divergent returns of the major banks and other ADIs. The majors have restored their returns