BANK funding costs have fallen dramatically over the past two weeks, leaving banks with no excuse not to pass on to customers a cut in the official interest rate, a top Reserve Bank official has said.

Australian banks were among the most profitable in the world, the Reserve's assistant governor for the financial system, Philip Lowe, told a conference in Sydney yesterday.

Although banks had been correct when arguing funding costs had risen for a year, this had become less true in recent weeks after a sharp fall in the cost of money in short-term debt markets. The interest rate on 90-day bank bills - which banks use to raise funds to lend to customers - had fallen by half a percentage point over the past three weeks.

"That's significantly reduced the bank's marginal cost of short-term funding," Mr Lowe said. "That means that there's no obvious reason that the banks could not pass through any change in the cash rate. The funding environment is quite different from what it was just a few short weeks ago."

Mr Lowe's comments were made as Australia's biggest bank, the Commonwealth Bank, reported a record $4.8 billion profit for the year.

Mr Lowe said the combined profits of the big five banks had doubled over the past five years. Even taking into account the credit crunch, profits over the most recent six-month reporting period were up 12 per cent on the level of a year earlier. This compared with the United States and Britain, where bank profits had fallen 70 per cent in the six months to March, compared with a year earlier.

While noting concern over the concentration of market power in the hands of the big banks due to the collapse of several non-bank lenders, Mr Lowe said it was not appropriate for the Government to intervene in the home-mortgage market.

"These changes in the competitive position of different lenders are probably best thought of as cyclical, rather than structural. When conditions improve, as they inevitably will, these lenders will find that their competitive position also improves."