George Osborne will not use the taxpayer's stake in Lloyds Banking Group to stop it paying bonuses twice as big as their pay, but will block the Royal Bank of Scotland from paying out bumper bonuses.
Under the European bank bonus cap, banks can only pay bonuses at the same level as pay, but can lift it to twice that with shareholder approval. The government still has a 25% stake in Lloyds and an 80% stake of the Royal Bank of Scotland.
The Royal Bank of Scotland has been told through UKFI, which manages the Treasury stake, that it will not back a resolution to lift the bonus cap at RBS to twice fixed pay, meaning that it will not be proposed to shareholders at its June annual general meeting.
With other banks currently seeking shareholder approval to pay bonuses at twice the level of pay, RBS warned that the decision now leaves it with a "commercial and prudential risk".
The taxpayer-owned bank said: "The board believes the best commercial solution for RBS is to have the flexibility on variable to fixed pay ratios that is now emerging as the sector norm.
"This would also allow RBS to maintain the maximum amount of compensation that could be subject to performance conditions including clawback for conduct issues that may emerge in future. This position was understood during consultation with institutional shareholders."
Shadow Treasury minister Cathy Jamieson said: "George Osborne is in a terrible muddle over bankers' bonuses. He is spending taxpayers' money on a legal fight in Brussels against the bonus cap and yet imposing the minimum cap at RBS.
"The Government has bowed to pressure on RBS and finally admitted that bonuses of two times salary would be unacceptable at what remains a bank in government ownership. They voted against Labour's motion to impose the minimum cap at RBS in January, but have now been forced to reverse their position.
"But, confusingly, at the same time the chancellor is supporting higher bonuses in Lloyds Bank and elsewhere."
Tory MP Andrew Tyrie, chair of the Treasury select committee, criticised Osborne's decision to block RBS' bumper bonuses.
“The Banking Commission concluded that UKFI would increasingly be perceived as a fig leaf to disguise direct government control of RBS," he said.
"Today’s events appear to confirm this. It is difficult to argue that RBS is operating on an arms length, commercial basis, free from Government interference.
“Well structured bonuses can incentivise better performance and behaviour. It is essential that bankers receive rewards only when it is clear that they have been earned. The Banking Commission also concluded that a bonus cap was not the answer. Bonus caps create upward pressure on base salaries, increasing the fixed-cost base. Fundamental reform of the bonus culture is needed - including much longer deferral and much greater scope for pay to be recovered in appropriate circumstances."
A Treasury spokesman said: "We have made clear there will be no rise in the bonus cap for an RBS still in recovery, but a bonus cap at Lloyds that reflects the progress it has made in getting money back for taxpayers.
"A few years ago, bonuses were out of control, banks needed bailing out and the economy was shrinking. Under this Government's long-term economic plan bonuses are down, the banks are recovering and the economy is growing."
Barclays yesterday won the support of shareholders to double bonuses, although many shareholders expressed fury at the bank's "greed" and accused it having a "go-to-hell" culture.