Profits of New Zealand banks are likely to come under pressure from the proposed Basel liquidity rules, but on the capital front there will be no impact because banks are already well capitalised, Moody's said in its outlook on the New Zealand banking system.Moody's noted that the new Basel proposals for global regulatory reforms will lead to structural changes in the local financial system because they place more emphasis on stable funding and liquid asset holdings.  As banks move away from their reliance on wholesale funding, their profits will be negatively affected; though from a ratings perspective this will be offset by improved bank funding and liquidity.Currently, the major weakness in the banking system is its heavy reliance on wholesale funding, with a large offshore component, increasing the system's sensitivity to external shocks, Moody's says.Referring to its 2008 stress test for New Zealand banks, Moody's said operating conditions have now improved to such an extent that actual losses that banks will experience during the current credit cycle may not even reach its base case scenario of last year.  The base case scenario sees total losses of 1.8 per cent for banks when unemployment rises to 7.5 per cent, GDP falls by 1.5 per cent and house prices decline by 15 per cent.Under a stressed scenario, banks' tier one ratio would decline by three percentage points, but with the current level of capital that poses no concern, Moody's says.Commenting on banks' efficiency, Moody's said it expects the sector's cost-to-income ratios to trend back towards the long-run averages in the high-40 to low-50 per cent range as further improvement to cost efficiencies are exhausted and operating income remains under pressure. Banks had managed to improve this ratio going into the financial crisis, but slower operating income growth due to lower loan growth and interest margin pressures has now reversed this metric, Moody's says.