(Reuters) - The European Parliament approved a new EU law on Wednesday to stop banks from awarding excessive bonuses that would encourage too much short-term risk taking.

EU finance ministers are set to endorse the rules when they meet next Tuesday.

The pay curbs come into force in January 2011.

Following are the main elements of the new rules that amend the bloc’s existing capital requirements directive.

BONUS CURBS

* For the first time bank pay will come under the scope of the EU’s bank capital rules.

* The curbs are more specific and tougher than the recommendations on limiting bank pay agreed last year by the Group of 20 countries and already being applied in the EU.

* The law gives national regulators in the 27-nation bloc binding powers to take action against banks that fail to comply with the new rules, such as requiring extra capital.

* Only 30 percent of a total up front bonus may be paid in cash and only 20 percent of large bonuses -- which will be defined collectively by the EU’s national bank supervisors.

* At least half of a bonus must be paid in a mix of contingent capital -- funds that can be used when a bank is in trouble -- and shares, which must be retained for an appropriate period.

* At least 40 percent of a bonus must be deferred for 3-5 years, rising to 60 percent for a large bonus.

* There must be a claw back mechanism if the bonus was paid for performance that turned out to be weaker than predicted.

* The curbs will apply to senior management, risk takers, controller functions and any employee whose remuneration puts them in the same pay bracket at senior management. They would not apply to commission on selling bank products.

* Curbs on bonuses at bailed out banks will be stricter.

* The rules will also apply to foreign banks operating in the EU and to subsidiaries of EU banks in non-EU countries.

* Each bank must set a maximum limit on the size of staff bonuses, which must be proportional to salary. Bank supervisors will check to see if the evaluation is appropriate.

TRADING BOOKS * The new law also requires banks to hold more capital against securities which repackage other securities, known as resecuritization.

* The tougher rules on resecuritization will be phased in between 31 December 2011 and 31 December 2013.