The European Union will cap bankers' bonuses, which critics say played a major role in driving the global financial crisis, as part of new tougher rules on the banking sector.
The accord was struck early Thursday after the European Parliament and the EU's current Irish presidency agreed how to implement Basel III, an internationally-agreed set of regulations which tighten capital requirements in the hope of preventing any repeat of the 2008 banking collapse.
"For the first time in the history of EU financial market regulation, we will cap bankers' bonuses," said MEP Othmar Karas, the negotiator for the parliament.
Parliament had wanted to limit any bonus to not more than a banker's fixed annual salary but agreed it could be twice the size, on the condition that shareholders formally approved such a payment.
Karas told a press conference later that if a wider EU political agreement could now be reached, Basel III could come into force in the EU in January 2014, one year past the original deadline.
Basel III was supposed to have been implemented from January this year but the timetable slipped steadily as the banks and some EU member states, notably Britain, baulked at the new rules, saying they would undercut management incentives and make the banks reluctant to lend.
Basel III notably requires the banks to build up their capital buffers and reserves but in doing so, they argue, they have less money left to lend to businesses now struggling in a deep economic slump.
In November, the United States said it too would not make the January 2013 target date.
Karas played down the importance of the bonus issue but in the event it has attracted most of the headlines and is particularly sensitive for Britain, home to one of the world's biggest financial markets in London.
The key issue is "that from 2014, European banks will have to set aside more money to be more stable and concentrate on their core business, namely financing the real economy, that of small- and medium-sized enterprises and jobs," Karas insisted.
British Prime Minister David Cameron said Thursday he would "look carefully" at the deal, staunchly defending London's role and insisting his own plans for bank reform were in some respects tougher than those in the EU.
"We have major international banks that are based in the UK but have branches and activities all over the world. We need to make sure regulation put in place in Brussels is flexible enough to allow those banks to be competing and succeeding while being located in the UK," he warned.
Irish Finance Minister Michael Noonan said the accord will bolster the EU banking system and financial stability as a whole while restrictions on bonuses will curb excessive risk-taking.
"During the financial crisis, European taxpayers had to recapitalise banks. This overhaul ... will make sure that banks in the future have enough capital ... to withstand shocks. This will ensure that taxpayers across Europe are protected into the future," Noonan said in a statement.
The accord "includes restrictions on bankers pay to make sure that pay practices do not lead to excessive risk-taking," he noted.
European Parliament President Martin Schulz welcomed the deal as making the banking system "safer, more stable and transparent" so as to prevent a repeat of a crisis which crippled the global economy.
"The cap on bonuses is a ground-breaking measure that in my view will make the economic system fairer and safer. Exuberant bonuses often provided a wrong incentive for financial markets, encouraging risky behaviour and short-term, purely speculative investment," Schulz added.
Thursday's accord will now be submitted for approval to EU finance ministers meeting next week, with further negotiations on implementation of Basel III expected to be very tough.