Britain and US secure agreement that limits on incentives would be impossible to enforce

Britain and America won a battle to stop "unenforceable" new rules to cap bankers' bonuses yesterday as G20 nations struggled to agree on how to keep the global economy on course for recovery.

While France and Germany had pushed strongly for a strict new system to limit payments, London and Washington argued that it would be impossible to police and disguised the greater need for banks to strengthen their finances by holding more capital.

Instead of the idea punted by Paris and Berlin, finance ministers agreed that ways would be sought to ensure bonuses were paid over longer periods – with no upfront cash payments – so they would reward long-term success rather than short-term risk-taking.

Opening the main session of the meeting in London, Gordon Brown, while determined to protect the City of London from unwanted regulation, was eager to show that he would do everything possible to end a culture of lavish and unjustified compensation packages that has angered the public.

"Pay and bonuses cannot reward failure or encourage unacceptable risk-taking," he said. "It is offensive to the general public, whose taxpayers' money in different ways has helped many banks from collapsing and is now underpinning their recovery."

The chancellor, Alistair Darling, insisted that the emphasis should be put on increasing requirements for banks to hold capital rather than imposing an international system of limits to bonuses. If banks put aside more capital, it would place their finances on a more stable footing, encouraging them to retain profits instead of rewarding risk-taking.

Darling said the whole philosophy behind attitudes to paying staff had to change: "We are determined to take action to stop banks or other financial institutions getting themselves into a situation where their pay and reward practices actually encourage people to take risks which bring their institutions into a situation where they could be brought down with catastrophic results."

Ministers agreed in principle that bankers' bonuses should be paid over the long term and that there should be greater transparency about what staff actually received.

Final details of the plans will be thrashed out in the run up to a summit of G20 leaders in Pittsburgh, Pennsylvania, later this month. In the meantime, the Financial Stability Board, the new global regulatory body set up by the G20, will seek ways to improve the transparency of banks' pay structures, and look at how bonuses can be paid over extended periods and how to claw money back from bankers whose bets backfire.

The FSB will also look at aligning bankers' pay with the risks they take so that the sort of gambles that caused the credit crunch in 2007 cannot recur.

Brown, who believes that he can revive his domestic political fortunes if he can win credit for steering the global economy to recovery, warned that the tentative signs of upturn would be at risk if major economies repeated the mistakes of the 1930s and withdrew fiscal stimulus packages too soon.

Citing US and Japanese studies which warn that a premature move towards reducing deficits by cutting back on state spending would be "an error of historic proportions", the prime minister said that countries must co-ordinate their "exit strategy" from recession, and put it into action only when recovery was firmly in place.

Recent indicators have suggested that countries such as Germany, France and Japan have already moved back into growth, producing domestic pressure on governments to scale back spending and concentrate on reducing burgeoning public debt.

But Brown stressed that the positive growth forecasts for 2010 now being issued by institutions such as the International Monetary Fund are based on the assumption that the state support on offer in 2009 will continue to be available next year.

"The stakes are simply too high to get these judgments wrong, so to decide now that it is time to start withdrawing or reversing the exceptional measures we have taken would, in my judgment, be a serious mistake."

In a joint communique, finance ministers heeded the warnings, agreeing that fiscal and monetary policy would remain "expansionary" until recovery was certain.