The contraction of the commercial banking market that will result from tighter banking rules makes it imperative that stakeholders in the financial markets get behind the development of a viable Australian corporate bond market, a senior business banker said yesterday.National Australia Bank's group executive business banking, Joseph Healy, said the planned Basel III reforms would make the banking system safer but smaller and more expensive. Speaking at yesterday's Finsia conference in Sydney, Healy said the group that was most at risk of missing out as banks allocated increasingly scarce capital was the small and medium business market."The big issue is how we provide funds to business and at what cost," he said."Under Basel III, we will allocate three or four times more capital per dollar of business lending than we do on home lending. As a result, you could see banks acting rationally but creating distortions."The development of a fixed-income market is going to be critical if business is going to get the funding it needs. "We have been talking about this for a number of years but it is not just for the banks to do. There is a wide stakeholder community that needs to get into this."We are not short of capital in this economy. It is a question of how we allocate it."Westpac Institutional Bank's group executive, Robert Whitfield, agreed: "Our customers have to look to diversify. We are not short of cash in this country and the drivers for the development of a corporate bond market are strong. "We have to free things up and get investors into a wider range of corporate bonds."Perpetual's portfolio manager and credit analyst, Vivek Prabhu, said large corporates had developed a diversified approach to funding since the financial crisis. Speaking at the Fitch Ratings Credit Forum yesterday, Prabhu said: "Corporates have been more active in their balance sheet management since the GFC. Each funding market has its own function: banks for short-term money; the domestic wholesale market for three- to seven-year money; and the offshore market for longer debated debt."The local retail investor market has a role to play and we have seen corporates going to Asian banks."However, few of these avenues for diversification are open to smaller companies.