Commonwealth Bank of Australia (ASX: CBA) has warned significantly higher funding costs will impact banks in the short to medium term underscoring the challenge ahead for the deposit deficient sector.

"Funding costs are now significantly higher for Australian banks than they were prior to the GFC, and this is likely to remain an issue for all banks in the short to medium term," CommBank chief executive Ralph Norris said in a statement.

CBA, like other banks, is replacing cheap debt raised before the global financial crisis with debt priced at up to 10 times higher margins. But it is among the worst hit, thanks to its exposure to mortgages.

The country's top mortgage lender also cautioned the environment remains "challenging" given economic uncertainty and fragile business and consumer confidence.

"Recent uncertainty over the pace of recovery in the United States and Europe highlights the downside global economic risks still in play," CBA chairman David Turner said.

"Evidence of these is a slowing in the underlying momentum of our business at the end of the 2010 financial year. This has continued into the current year, with underlying credit growth in Australia slow, particularly so for business lending, where our customers remain cautious."

CBA is expected to brief investors on margins in the first quarter on Nov 15 at its quarterly trading update. Shares in the bank fell 51 cents, or 1 per cent, to $50.44 in early trading, while the overall market traded flat.

With Reuters