Followers of banks must shift the focus of their analysis back to the asset side of the balance sheet and pay less regard to the ebb and flow of the composition of bank funding, a senior Reserve Bank of Australia executive told an industry conference yesterday.Guy Debelle, assistant governor for financial markets, said that one consequence of the financial crisis was that "the pendulum has swung too far in focusing on liabilities." "Such a swing is evident in the proposed change to Standard & Poor's ratings' methodology for the global banking system. The proposed new methodology shifts the assessment of financial strength of an institution markedly towards funding and away from asset quality."Debelle argued that "asset quality should still be paramount and should be given a far larger weight than liabilities in assessing financial strength, along with the extent of leverage (and capital)."The crux of my argument today is this: if I am a creditor of a bank, my due diligence should be spent mostly on assessing the asset side of the bank's balance sheet in determining whether or not I will get repaid in full. "If asset quality remains high, I should be confident of being repaid."Debelle acknowledged that financial institutions were, thanks to market and ratings agency sentiment, "much more in a liability-driven world. So, the structure and maturity profile of liabilities does bear close analysis. "But the bank's ability to refinance its maturing liabilities still fundamentally depends on the asset portfolio. An investor's decision as to whether it will be willing to lend to the institution will be based on its credit assessment of the institution's assets. If there are doubts about the quality of that asset portfolio, a bank will find it considerably more difficult to obtain more funding."Debelle did, nevertheless, take time in his speech to consider some aspects of funding flows, and highlighted one that might confound a common assumption."One noteworthy development that has generally escaped attention is that banks have raised less of their wholesale funding from offshore than has matured over three of the past four quarters. That is, in net terms, the banks have been repaying their foreign liabilities."Today's chart, which draws on the National Financial Accounts published by the Australian Bureau of Statistics, highlights this trend.Debelle raised one point about banks' risk management practices in hedging their foreign liabilities."If a liquidity issue were to arise around this funding, it is of critical importance that the foreign-currency denominated funding is fully hedged into Australian dollars, which indeed it is."The RBA, he noted, can address "an Australian dollar liquidity issue".