The Reserve Bank of New Zealand is encouraging banks to seek covered bonds as a source of funding and is developing a policy on this option. RBNZ is aware that banks may need to seek alternative wholesale funding or new funding opportunities as retail deposits may not grow sufficiently to allow banks to meet the regulator's new targets for a "core funding ratio" for banks.The minimum CFR for banks - which is largely retail deposits plus some other liabilities - is currently 65 per cent. The RBNZ said this is expected to rise in two stages to 75 per cent by mid-2012. RBNZ, however, said the plan will be under review as it will first study funding market conditions and banks' experience in complying with the initial requirement."If that (CFR) is putting pressure on funding costs and financial markets generally, then we would moderate and calibrate that transition path," deputy governor Grant Spencer said. KPMG estimates the rise in CFR to 75 per cent within the next two years could add 50 basis points to banks' funding costs and push up borrowing costs for households and business by around NZ$1.5 billion a year.Separately, RBNZ noted in its Financial Stability review that it sees scope for a flexible core funding ratio as a tool of macroeconomic policy. This means in a credit-based housing boom, the minimum CFR requirement could be raised, and then reduced to normal again once credit and housing pressures eased. However, at the present time, RBNZ said it doesn't "have any particular expectations" for the discretionary use of CFR.