George Osborne is preparing to defend the right of British banks to pay large bonuses against EU plans to cap the pay-outs, it emerged last night.
The Chancellor is expected to argue against the crackdown at a meeting of European finance ministers on Tuesday, in spite of a fresh public outcry over the behaviour of bankers in the wake of the rate-rigging scandal.
Mr Osborne will argue that the proposals, to set a maximum 1:1 ratio of bonus to pay, are not the right way to curb City remuneration.
Officials insist that he had taken the same position before details of the Libor rate-fixing scandal emerged, and it has not changed, the Financial Times reported.
But the timing of the meeting is likely to make it politically risky for him to make such a case, with the Chancellor potentially facing the accusation of being in cahoots with bankers despite allegations about their reckless behaviour.
It comes amid outrage that Barclays chief executive Bob Diamond may still be in line for a multi-million pound pay-out following his resignation over rate rigging.
However, those resisting the European move argue that a cap on bonuses will simply result in salaries being given much larger basic salaries instead – increasing fixed costs for businesses.
The Treasury says it has already tackled the issue of excessive pay by curbs on cash bonuses, the wider use of deferred bonuses paid in shares and clawback mechanisms.
Officials are concerned that the proposal could risk pushing up salaries and are yet to be convinced that it is the right course of action.
Last night a Treasury source stressed that the government had not yet reached a final decision on the EU plans, which are not expected to be resolved until later this year.
Bank chief executives have been lobbying officials and politicians to water down or quash the European Parliament initiative to set a maximum ratio of bonus to salary, as part of a draft law on capital rules for financial institutions.
Peter Sands, Standard Chartered’s chief executive, last week reportedly pleaded with David Cameron to oppose the measures, fearing they would drive business to other financial centres such as Hong Kong or New York.
The issue of bonuses is expected to be discussed on the sidelines of the finance ministers’ meeting rather than being a main topic of debate.
While the European Parliament must agree the text of its proposal with EU member states before it becomes law, those behind it believe they are in a stronger position in the wake of the Libor scandal.
Sharon Bowles, chair of the committee handling the talks, said that she was “sure” that the issue had “strengthened parliament’s resolve”.
Philippe Lamberts, the Belgian Green MEP who has led calls for a bonus cap, said the Chancellor would “shoot himself in the foot” if he appeared to defend bankers in the face of public anger.
He told a newspaper: “If [he] wants to make that bet be my guest – we will see who will win.”
Earlier this year it emerged that global investment banks had increased fixed salaries by 37% over four years in order to retain staff in the face of falling bonuses.
In a letter to members of the European parliament, the Association for Financial Markets in Europe, warned that the cap would risk “reintroducing fragility to the European banking system”.
It said that banks with higher fixed costs would “much more likely suffer dangerous losses when revenues drop”.
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