THE proposed cap on bailed out bankers' pay by the EU, which could see executives at the Royal Bank of Scotland and other banks banned from £1 million-plus salaries, will not work, the Chancellor has said.

The Chancellor said he was "not in favour of the EU's broader caps on wages because I don't think they are going to be very effective and they are going to make it more difficult to claw back money when things go wrong".

The cap – part of the EU's crackdown on financial sector pay – comes into force next month.

Under the reforms, senior executives at banks, which have been bailed out by the taxpayer, will be able to earn no more than 15 times higher the national average salary or 10 times the wages of the average worker at the bank. Bonuses will also be capped at twice the fixed salary.

Britain voted against the proposed cap but the tougher conditions might make it harder for Mr Osborne to restructure RBS, which includes finding a successor to Stephen Hester as chief executive. Mr Hester, who is due to be replaced by the end of the year, received a £1.2m salary last year,

It is estimated that if the new pay curbs were introduced fully, then senior RBS staff, including the new chief executive, would see their total pay, together with bonuses and share awards, capped at around £471,000; 15 times the UK average salary.

Reforms the Coalition was intent on pushing through in the Banking Bill would, he explained, mean that "people who have been in charge when a bank fails, (that) the Government should be able to go in and seize their pay and their back pay and their pension entitlements".

He added: "That's going to require legislation but we don't want to have a government in the future faced with the same problems which the previous government faced with Fred Goodwin".