The composition of major Australian banks' funding is improving, but only slowly, Fitch Ratings said yesterday.Fitch downgraded three of the big banks in February, citing their dependence on offshore wholesale funding markets as the main reason for the move.Commonwealth Bank, National Australia Bank and Westpac were cut from AA to AA-, while ANZ's rating was left at AA-.A Fitch financial institutions' director, Tim Roche, told delegates at the group's credit forum, held in Sydney yesterday, that the funding position of the local banks was improving, with higher levels of customer deposits and less reliance on short-term wholesale funding.Roche said: "We see improvement but it will take time for the banks to address this."However, this improvement has been offset by Fitch's "slightly more negative view" on the wholesale funding markets. It believes the risk of a dislocation in these markets has increased in recent months.On other issues that may affect ratings, Roche said regulation was a two-edged sword. "We will get a stronger banking system through regulatory change but lower profits may be one consequence of getting there."To the extent that lower profits hurt investor confidence, there may be some ratings impact."Roche said weak demand for credit was beneficial in allowing banks to adjust their funding mix without putting pressure on the asset side of the business.However, Fitch was watching to see if weak demand prompted the banks to weaken credit underwriting standards in pursuit of growth.He said the big concerns with smaller financial institutions were concentration risk and competitive pressure."We have been looking at the exposure of regional banks and smaller institutions to certain regions. Smaller institutions are more susceptible to industry-specific downturns."We are also looking at how they are positioning themselves to compete against the majors. When loans are growing at 10 per cent everyone gets a slice of the pie. But it may not be easy for them to respond if the big banks use price competition to grow share in a tight market."