28 February 2013 Last updated at 17:29
David Cameron says regulations need to be flexible enough for UK-based banks to compete internationally
The EU's proposed cap on banker bonuses will drive business away from London, Boris Johnson, the mayor of Europe's biggest financial centre, has said.
He said the move was "self-defeating" and would at best provide "a boost for Zurich and Singapore and New York at the expense of a struggling EU".
EU officials struck a provisional deal on new financial rules overnight.
Under the deal, bonuses will be capped at a year's basic pay, but shareholders can agree to double this cap.
Top bankers and financial traders can earn bonuses multiple times their base salaries. But there has been public outrage over bonuses following the huge bail-outs of banks.
Many voters and political leaders on the Continent - as well as many economists in the UK - blame excessive bonuses in the financial sector for encouraging the risky behaviour that led to the 2008 financial crisis.
"Overall, this is a major achievement for [the European] Parliament, in curbing the culture of quick profit and irresponsible lending that has played such a pernicious role in fuelling Europe's banking crisis,'' said Sharon Bowles, a Liberal Democrat MEP.
'Worst since Diocletian'
The agreement was reached during eight hours of intensive talks in Brussels between members of the European parliament, the European Commission and representatives of the bloc's 27 governments.
The UK, which hosts Europe's biggest financial services centre, was opposed to any caps on bank bonuses and had been trying to rally other governments in the 27 countries in the EU behind its opposition to the bonus cap.
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Analysis
Jonty BloomBusiness correspondent, BBC News
Although a bonus that doubles your annual salary sounds pretty generous to most people, in the cut-throat world of international finance, some at the very top expect a share of the profits they make their employers, and that can sometimes be many times their basic pay.
But there are a limited number of such people. Just on Wednesday, Barclays announced plans to publish the pay bands of its 140,000 staff, only 500 of whom are thought to earn over £1m ($1.5m), although much of that is likely to be made up of bonus payments.
These proposals are also not as draconian as they appear at first sight. Bonuses are limited to a maximum of one year's pay, but that can be increased to two years' pay if shareholders agree. Many banks may well try to soften even that limit by paying far higher salaries in the first place. And they will be allowed to offer bonuses in the form of shares at discounted prices if they are paid out over several years.
But even so, there are those who fear that these proposals, intended to undermine the bonus culture that many blame for the financial crisis in the first place, may instead drive away the so-called rain-makers of the financial system. The elite performers who attract business and profits, and who can and do move easily from bank to bank and from country to country, basing themselves wherever pay and bonuses are highest.
The London mayor argued that the bonus rules would drive talent and investment away from the City to financial centres outside the EU.
"This is possibly the most deluded measure to come from Europe since Diocletian tried to fix the price of groceries across the Roman Empire," claimed Mr Johnson, adding that the decision was likely to further strain the relationship between the UK and Brussels.
Prime Minister David Cameron has promised a referendum on the UK's relationship with the EU if he wins elections due in 2015.
Reacting to the latest agreement, Mr Cameron said the EU should concentrate on tightening up banks in other ways.
"We are absolutely clear that we must be able to implement the Vickers plan in the UK, which in some ways is tougher than regulations that are being put in place in other European countries.
"We want to have this proper ring-fence between retail banks and investment banks and the rules must allow that to happen."
The Vickers plan, based on the Independent Commission on Banking report led by Sir John Vickers, is designed to keep saver and business deposits from being compromised by the more speculative activities typically undertaken by investment banking operations.
Core business
Othmar Karas, the European Parliament's chief negotiator, said: "For the first time in the history of EU financial market regulation, we will cap bankers' bonuses.
"The essence 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."
But Joe Rundle, head of trading at ETX Capital, in London, said the cap would backfire. He told the BBC: "It will drive up fixed salaries to compensate. Businesses that do not need to be inside the European Union will leave. And when banks invest in future divisions, it will be outside the EU."
The deal paves the way for Basel III, an overhaul of banking rules.
The G20 group of rich nations had originally planned to bring in Basel III last month, but that has been delayed to January 2014.
Basel III focuses on a ratio of high-quality capital - called tier 1 - which is needed to cushion it against any future shocks. It will rise to 9% after the rules come into effect.
"This overhaul of EU banking rules will make sure that banks in the future have enough capital, both in terms of quality and quantity, to withstand shocks," said Irish Finance Minister Michael Noonan, who led the negotiations.
Once the proposals are formally agreed it will start the biggest shake-up of the banking system since the global financial crisis.
The lack of solid financial cushions meant that many banks were vulnerable, and eventually required taxpayer-funded bailouts to avoid bankruptcy.
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