Chancellor George Osborne will launch a fresh assault on capping bankers' bonuses today at the first formal negotiations on the plan between Europe's finance ministers.
The meeting in Brussels will consider a provisional proposal pushed last week by MEPs and backed by the European Commission. It adds strict limits on salaries to a wider scheme forcing banks to increase liquidity and set aside more money to give extra help to small business.
British officials have protested that the cap on bonuses - a maximum of a year's salary or double that if explicitly approved by shareholders - was never part of the terms of the "Capital Requirements Directive " being negotiated.
But under pressure from MEPs, Ireland, currently holding the EU presidency, agreed to the move to avoid a deal collapsing on a Directive which amounts to the biggest shake-up of the European banking system since the economic crisis began.
Now Mr Osborne is stepping up the battle to stop the deal in its tracks by warning it 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.
Unless reversed by EU ministers, the new accord is due in force at the start of next year as another weapon in the armoury to stabilise banks against future economic shocks.
But the Chancellor says trying to peg bankers' bonuses by EU decree should not be part of the plan.
One government official said the UK recognised that "bank staff should be remunerated sensibly but not exorbitantly" but this sentiment should not be part of the proposed new EU capital requirements rules.
Britain's claim that the move on bonuses would put EU banks at a competitive disadvantage weakened a little before the talks when Switzerland backed the idea of curbs on bankers' remuneration packages.
But last week the Federation of European Employers (FedEE) questioned whether a Europe-wide curb on bankers' pay exceeded EU powers.
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And EU officials in Brussels are speculating that the UK may try to invoke a little-used "national interest" defence to block a majority agreement.
The so-called "Luxembourg Compromise" allows a member state to block a majority decision being taken if an issue is deemed to seriously affect "a very important national interest". If the plea is accepted by the others, a decision is deferred until a solution is found acceptable to all.
So far there is no sign of such a move by the Chancellor, but last night his opposition to the bank bonus cap was endorsed by the Policy Exchange think tank, whose financial policy expert James Barty said in a statement:
"Capping bonuses is likely to force banks to pay a higher proportion of compensation as salary. That has the effect of raising the fixed costs of a bank, meaning that they are more vulnerable to any downturn, as it is much harder to cut salaries than bonuses when things go wrong.
"There has been much progress in recent years in introducing clawback on deferred bonuses so bankers have to pay back money if things go wrong. By capping bonuses you actually reduce the amount of money that can be clawed back."
He added: "Finally the legislation will put Europe and the UK at a competitive disadvantage. Most senior executives at banks can almost choose where they want to work. Would they really choose London over New York if they ended up being paid less, which presumably is the objective of the legislation?"
