European banking linkages into the Australian and New Zealand banking sectors are skewed uncomfortably for the International Monetary Fund."The vulnerabilities of the New Zealand financial system are largely associated with concentrated exposures to the real estate and agriculture sectors, dependence on wholesale funding, and the similar business models of the four Australian subsidiaries," the IMF wrote in a Financial System Stability Assessment of New Zealand."Inward cross-border spillovers from distressed G-SIBs to New Zealand banks are significant. The analysis suggests that Australian banks have become increasingly exposed to European banks," it said.The IMF was warmer, but careful, on other funding dependencies."Banks have also reduced their reliance on non-NZD funding to below 20 per cent of total liabilities. While this development mitigates concerns over vulnerability to FX risk and increases the availability of foreign currency swap counterparties, pushing down hedging costs, banks might be vulnerable to risks related to hedging techniques under a stress event. "As New Zealand's banks looking for offshore funding use mostly the primary market, funding liquidity on global markets is relatively more important than market liquidity. "Yet, heightened volatility in global financial markets may contribute to a pick-up in wholesale funding spreads."Fitch Ratings, in a commentary yesterday emphasised that "Australian banks' funding and liquidity profiles remain weaknesses relative to many international peers."