The Australian Greens' proposal to restrict bank interest rates poses problems, according to a leading market research agency.

The Greens Party this week introduced suggestions for laws restricting the ability of banks to raise their rates in excess of those by the Reserve Bank of Australia (RBA).

In a first step, the party has proposed legislation that would give the Australian Prudential Regulatory Authority (APRA) power to prevent mortgage rate rises that exceed increases in the banks' financing costs. Ultimately, the party seeks to introduce laws that would prohibit the major banks from raising their rates in excess of RBA cash rate increases.

But Petter Ingemarsson, Senior Analyst at research agency Datamonitor said there are several problems with the suggested solution although it could provide respite for stressed mortgagors and prove popular with the public.

"Bank funding costs are difficult to calculate, and have in recent years diverged from the traditional yardstick of the cash rate," he said.

"As the RBA cash rate has become less correlated with bank funding costs, tying bank rates to the indicator rates would be less than optimal.

"Moreover, the Australian banking system has proved remarkably resilient in the face of the global financial crisis, and excessively restrictive legislation could weaken the financial system."

Still, Mr Ingemarsson thinks Australian lenders should do something about their rates.

According to him, "it remains clear that banks need to carefully evaluate the political ramifications of their pricing."

Two weeks ago RBA increased the cash rate by 25 basis points to 4.75 per cent, in a move that took the market by surprise. Following this rate rise, all of the four major Australian banks have raised their mortgage rates. CBA was the first major bank to announce an increase, with ANZ, NAB and Westpac following suit shortly. However, the banks have incurred a heavy backlash from the public, due to raising their rates in excess of the 25 basis point RBA increase.