Angered by the impact of austerity European MEPs with the exception of Britain have agreed a 1:1 cap on bonuses. The maximum bonus that could be paid would be one year’s salary.

A late concession was achieved by Britain increasing the ratio to 2:1 with shareholder approval.

The move has been touted as making banks safer and discouraging excessive risk taking. Will it achieve this? In short I think the answer is no.

What it is likely to achieve is significant increases in base salaries, raising fixed permanent costs. This could trigger even higher capital requirements, which in turn will restrict the ability to lend. The increase in fixed costs unrelated to profitability and performance will eventually transfer to customers.

The shape of pay will change with a shift in emphasis to non performance related benefits with clawback almost impossible, and deferred pay incentivising good behaviour much more difficult to achieve.

Another effect often missed is that enormous amounts of personal income tax are paid on these bonus pools, increasingly so in recent years, as the top rate of tax in the UK for instance hit 50%, and planning options to mitigate tax were significantly cut back. Tax receipts will fall with corporation tax currently levied at much lower rates. An overall significant loss to exchequers short of cash!

Bonus systems in banks were introduced post Big Bang and became widespread in high inflation periods. The idea was to keep a lid on fixed costs and not to provide a gravy train for bankers.

The action of the European Parliament is likely to have the opposite effect of that intended, seriously harming Europe’s competitiveness as a banking centre, and see a relocation of talent to New York, Hong Kong and Singapore.

The urge to hit back and punish bankers is likely to punish ordinary voters as the overloading of the European banking system with crushing capital levels and excessive controls weighs on an industry which will increasingly have trouble attracting talent.

Europe is doing a pretty good job of accelerating its decline; in Asia and the US, I fear they will be popping the champagne corks, and laughing all the way to the bank.