George Osborne and Mark Carney
The Chancellor George Osborne wrote to Mark Carney about his decision to back down Reuters

The UK chancellor has backed down over his challenge to the European Union's plan to cap bankers' bonuses.

The EU proposed to restrict bonuses to one year's salary, which could be doubled with the approval of shareholders.

The draft legislation is designed to reduce incentives for bankers to take excessive risks following the financial crisis of 2008.

George Osborne intended to appeal the plan in the European Court of Justice (ECJ), but he withdrew his challenge after the court's Advocate General said the appeal should be thrown out.

"I'm not going to spend taxpayers' money on a legal challenge now unlikely to succeed," Osborne said.

"The fact remains these are badly designed rules that are pushing up bankers' pay not reducing it."

The chancellor also wrote to the Bank of England governor, Mark Carney, and stressed that the two should still push for a "system of remuneration that encourages responsibility instead of undermining it".

Labour's Shadow Chancellor, Ed Balls, criticised Osborne over the move and said the decision was "humiliating".

"This is a humiliating climbdown by Osborne," Balls said.

"He should tell taxpayers how much money he has now wasted on this challenge, which we warned him against.

"It shouldn't have taken the EU to act to rein in excessive bonuses, but George Osborne has totally failed to act here in Britain."

Elsewhere, Andrew Tyrie, former chairman of the Parliamentary Commission on Banking Standards and now the chairman of the Treasury Committee, lent support to Carney's calls to regulate fixed pay as well as bonuses.

"The Governor has acknowledged that full implementation of a number of the fundamental reforms proposed by the banking commission is essential — a regulatory and supervisory framework strong enough to ensure that senior individuals can be held to account, remuneration structures that adequately align risk and reward, and reforms to address 'too big to fail' and the implicit taxpayer subsidy," said Tyrie.

"The Governor has also agreed with the banking commission that the EU's crude bonus cap has the absurd and counterproductive consequence of limiting the scope for remuneration to be cut back.

"It is a fundamentally flawed tool that may serve only to push up fixed pay.

"As the banking commission said 18 months ago, improving standards in banking is a big job. There's a lot more to do.

"The Bank of England, as well as the Financial Conduct Authority and the banks themselves, have crucial work ahead in implementing the banking commission's reforms."