Banks which have received capital support from the Government will be required to assess how an increase in mortgage interest rates will affect its arrears position and future capital requirements, the Central Bank said today.

Deputy governor in charge of financial regulation Matthew Elderfield said chief executives and boards of lenders would also be required to “formally reassess” their approach to dealing with unsustainable mortgages as more households fall into arrears.

The move comes as it was reported today Mr Elderfield met the heads of the banks in a series of meetings this week and asked them to stop increasing interest rates on variable interest rate mortgages, which account for about one in four mortgages.

Speaking in Cork, Mr Elderfield said the banks’ boards would also have to review the report on the impact of rate hikes, and approve it, in an attempt to ensure proper attention is given to the potential consequences of such rises.

He said some banks with large amounts of tracker mortgages on their books may find the performing section of their loan book may be unprofitable, due to increased funding costs.

“The increases in SVRs implemented by some banks may thus be going beyond the traditional passing-through of the cost of funds, instead seeking to make-up for what has proved to be an inadequate spread on trackers,” he said.

“The Central Bank does not have the power to set standard variable rates or other interest rates – nor does the government (although as shareholder in many of the domestic banks it does have the opportunity to influence management actions.)

“However, it may be that these actions are, on balance, self-defeating if they push more customers into arrears, adding to the mortgage arrears problem and ultimately costing more in terms of capital.”

Speaking in Cork this afternoon, Mr Elderfield said banks have more capacity to address individual arrears cases following the recapitalisation earlier this year, but warned there was not unlimited financial resources.

The percentage of Irish residential mortgages in arrears of 90 days or more or that have been restructured to ease the burden on borrowers rose to 12 per cent in the second quarter of the year, according to the Central Bank.

The number of restructured loans was 69,800 in June, up from 59,000 in December 2010.

One-tenth of those in negative equity are in deep arrears, Mr Elderfield said, noting that affordability was a key factor in fuelling the rising arrears.

“As it stands, therefore, we do not believe that negative equity is the key driver of mortgage arrears and it is hard to see justification for expensive policy actions directed at negative equity alone,” he said.

“The taxpayer cannot afford – and should not be asked to – write off the negative equity in the housing market or underwrite open-ended debt forgiveness schemes.”

A Government-appointed expert group set up to consider solutions to deal with distressed mortgage borrowers ruled out blanket debt or negative equity forgiveness in a report earlier this week.

The report by the group, led by accountant Declan Keane, recommended "mortgage to rent" social housing schemes where the ownership of homes occupied by distressed borrowers would be transferred to local authorities and then rented to their occupants.

Mr Elderfield said the buy-to-let market was also of concern to the Central Bank, with arrears of 90 days or more growing at a fast rate in this category.

He said the Central Bank was making it part of the revised Consumer Protection Code that lenders must give at least 30 days notice ahead of any increases in standard variable rates.

“These are admittedly limited actions in light of the absence of direct powers by a public authority concerning rate setting,” he said.