Osborne set to be the boss of banking – to the great relief of the industry

It looked like a dream come true to the many critics of the banking sector: Vince Cable appointed as business secretary to lead efforts to reform an industry that has done so much damage to UK plc.

Sadly, a dream is all it appears to have been. It's now quite clear that the whip hand remains with the Treasury and all those bold ideas about reining in the banking industry and curbing its addiction to paying fat bonuses regardless of whether they are deserved, might well now be consigned to the long grass, or tangled up in Whitehall tape. Vince will have a voice, but will it be heard? A call to the press office of his Department for Business Innovation and Skills on the issue yesterday was swiftly routed in the direction of Number 11.

George Osborne, the Chancellor, will chair the Cabinet Committee on banking reform, which will establish an "independent commission" to report on the banking industry and the possibility of laws to force the split of plain vanilla activities such as deposit-taking and issuing cheque books from the sort of financial roulette indulged in by some investment banks.

A statement has been issued to "clear up" any misunderstanding and throw a bone to Mr Cable, who appeared to think he would be the driving force behind banking reform during the heady first couple of days of the Coalition. It says that the "membership and terms of reference for the independent commission, and the government's response, would of course have to be agreed jointly between the Chancellor and the Secretary of State for Business Innovation and Skills, as well as with other members of the Committee".

And Mr Osborne was at pains to stress that he "will wish to work jointly and closely with the Secretary of State for BIS, given his interest and expertise in this area and the links with BIS's responsibilities for trade, competitiveness, competition policy, consumer protection and other matters". So there's a bone or two. But Mr Osborne's the boss.

The banking industry is quietly breathing a sigh of relief about this. Mr Osborne may have proposed a levy on the industry during the heat of the election campaign – something that Mr Cable also advocated, thus making the Labour Government look weak on banking, weak on the causes of banking. But the Commission might give him breathing space to hold off in the hope of an international deal, along the lines proposed by the International Monetary Fund, which advocates two new taxes on the industry, one to fund any future bailouts with a second so called "FAT" to be assigned to Government coffers. And Mr Osborne will likely veto some of Mr Cable's more radical proposals, not least the suggestion that bankers' bonuses be limited to just £2,500. The very suggestion was enough to have them talking about abandoning the "loyal toast" to the Queen at City dinners in favour of whatever the equivalent is in Zurich.

In the meantime, the banking industry is gearing up for an intensive lobbying effort, headed by Angela Knight, if that is, it can keep the former Tory Treasury minister in post given the continued rumours that she is on the shortlist to be among a bevy of new peers that will need to be created to ensure that the Coalition's legislative programme is not stalled by the Upper House.

The BBA is so far playing a cautious game. Yesterday it would only say: "We look forward to engaging with the commission and to learning more details of how it will be constituted. We would hope the commission looks at the full programme of global banking reform and includes in its remit an analysis of the cumulative costs of the (reform) measures taken so far and the measures proposed for the future."

Nonetheless, the industry remains in a skittish mood. Barclays, Royal Bank of Scotland and even the mighty HSBC would all suffer badly in the event of new rules to prohibit deposit-takers from involvement in investment banking.

They will be hoping that the commission comes out against such a move or that it, perhaps, suggests barring them only from "proprietary" trading – using their own money to make bets on the financial markets, something that almost every bank you care to speak to at the moment claims not to do.