MEPs approve strict bonus limits for bankers

Strict limits on the size of bank bonuses should be in force next year after final approval of bonus caps by MEPs.

The European Parliament endorsed bonus restrictions as part of a wider scheme forcing banks to increase liquidity and set aside more money to give extra help to small businesses – delivering the toughest EU banking rules so far in a "banking union" governing 8,200 banks in 27 countries.

UK opposition failed to stop a deal between EU governments last month to cap bonuses at a maximum of twice their annual salaries. With the law in force only from the start of next year, however, it will not apply to 2013 bonuses.

Chancellor George Osborne had warned the move would drive banking business away from the EU and, crucially for the UK, away from the City of London as the EU's leading financial capital. Critics have also warned it will just encourage banks to boost salary rates to compensate for curbing bonuses.

But the Liberal Democrat MEP Sharon Bowles, who steered the deal through the European Parliament, insisted a bonus cap was needed across the European banking sector.

"Realignment of the pay/bonus ratio to reasonable proportions reduces perverse incentives to risky behaviour even if total pay stays the same," she said.