Media playback is unsupported on your device Media caption Ed Miliband says £1m bonus for bankers "should be quite enough"

The government has defended its position on bonuses for bankers at Royal Bank of Scotland.

Both the prime minister and the chancellor said the government had ensured sufficient regulation of bankers and their pay.

Labour has demanded George Osborne block any attempt by Royal Bank of Scotland (RBS) to pay bonuses of up to double its bankers' annual salary.

The government owns 80% of RBS and could block large bonuses.

Under EU rules, from 2015 RBS can only pay bonuses up to 200% of annual salary if shareholders approve the decision.

If it's January, it's time for the traditional disclosure that hundreds of bankers in London are earning considerably more than £1m each

In the Commons Labour leader Ed Miliband pressed the prime minister on whether he would allow RBS bankers to receive bonuses worth double their annual salary.

David Cameron said he would veto any attempt by RBS to increase its overall pay and bonus bill at the investment bank.

However capping the overall bill is not the same as vetoing individual bonuses and the prime minister did not say the government would reject individual pay awards.

As RBS is reducing its headcount across the group, it could still pay 200% bonuses to a dwindling group of investment bankers earning over £1m a year without increasing its overall pay and bonus bill.

Meanwhile Chancellor George Osborne said: "This government has done more than any to bring the banking system back under control".

'Consulting with shareholders'

If RBS did decide to award 200% bonuses next year, shareholder approval would have to be sought at this year's annual general meeting, probably in May.

As it is, fewer than 100 RBS investment banking staff would be affected by the bonus decision, as RBS has reduced the size of its investment banking arm by about three-quarters since 2007.

An RBS spokesman confirmed to the BBC that general discussions about bonuses had been taking place with shareholders, including UK Financial Investments, the body that manages the government's shareholding in the bank.

But he said: "No decisions have been taken yet. We're consulting with our shareholders in the normal way."

Media playback is unsupported on your device Media caption Shadow treasury chief secretary Chris Leslie debates bonuses

Legal challenge

The usual limit for bonuses set by the EU is equivalent to one year's pay, but the new EU rules allow this to be doubled with shareholder approval.

If a bank has its headquarters in the EU, the cap applies to all staff, even if they are stationed in non-EU countries, the British Bankers' Association (BBA) said.

The Treasury had already launched a separate legal challenge arguing against the EU's right to set any limits on banking bonuses at all, saying that such intervention could lead to an increase in base pay and undermine financial stability.

And Bank of England governor Mark Carney told the House of Commons Treasury Committee he agreed with its opposition to bonus caps.

BBC business editor Robert Peston said the situation created an "awkward twist for the government".

He said: "Although pay levels for bankers have fallen... the sums shelled out still look enormous at a time when earnings for the vast majority of households continue to be squeezed.

Branch sales

Media playback is unsupported on your device Media caption George Osborne: "This government has done more than any to bring the banking system back under control"

The BBC's political editor, Nick Robinson, said the move by Labour was part of its attempt to say that the prime minister and his chancellor "stand up for the wrong people".

On Friday, Mr Miliband is expected to flesh out details of a proposal made last year to force the big High Street banks to sell off branches, the BBC understands.

He wants to promote the growth of new banks that could challenge the "big five" - Royal Bank of Scotland, HSBC, Lloyds, Barclays, and Santander.

"We've got to give customers more choice," Chris Leslie told the BBC.

But banking analyst Ralph Silva said: "What makes anybody believe that there's a queue of people willing to buy these branches? New and smaller banks - they don't want more branches, they want more apps. There's no market for branches out there."

He argued competition would only increase if new players, such as supermarkets, and car companies, entered the market.

The BBC's Newsnight reported Mr Miliband may suggest a cap on the size of banks, possibly based on their UK market share.

However, business sources told the programme such an intervention was another example of an anti-business sentiment in the Labour Party.