The prospect of a tough government crackdown on bankers' pay and bonuses has receded as a result of Vince Cable's weakened position in the Cabinet.
The Business Secretary is leading demands for strong action but is embroiled in a power struggle with George Osborne, the Chancellor, who is worried bankers could relocate abroad if Britain acts unilaterally.
Conservative ministers believe the scales have tipped decisively in Mr Osborne's favour now that Mr Cable's standing has been diminished by the controversy over his outspoken remarks about Rupert Murdoch. One said: "Vince Cable has not got the clout he had 48 hours ago."
There is also growing optimism in the City of London that Mr Cable will lose his battle with Mr Osborne.
Although Nick Clegg dismissed claims by some Tory and Labour MPs that Mr Cable was a "lame duck", one Liberal Democrat source admitted: "It's very damaging to his cause on the banks."
The difficulties between the parties will come under greater scrutiny today after other Liberal Democrat ministers were caught on tape expressing their personal animosity towards David Cameron and Mr Osborne in the latest round of disclosures in the Daily Telegraph.
Paul Burstow, the Care Minister, told its undercover reporters: "I don't want you to trust David Cameron." Andrew Stunell, the Local Government Minister, complained he did not know where Mr Cameron stood on the "sincerity monitor". David Heath, Deputy Leader of the Commons, said Mr Osborne had "a capacity to get up one's nose". The Transport Minister Norman Baker admitted: "I don't like George Osborne very much."
Mr Cable's allies yesterday insisted the decision to strip him of his media regulation powers may not affect his campaign to rein in the banks. "He is still responsible for corporate governance," one said. Mr Cable may use that role to force banks to disclose the number of people paid more than £1m a year.
But the Chancellor, who favours European-wide rules on disclosure, believes that Mr Cable could not take such action without the backing of Mr Cameron, Danny Alexander, the Chief Treasury Secretary, Mr Clegg and Mr Osborne. One insider involved in the discussions said: "It could now depend on whether Nick Clegg pushes this. We have had rhetoric [aimed at the banks] from him and David Cameron in recent days but it's unclear whether he [Mr Clegg] will go to the stake in the way that Vince Cable was doing." Mr Osborne opposes Mr Cable's proposal to single out the Royal Bank of Scotland and the Lloyds Banking Group for special treatment because taxpayers have a stake in them. The Chancellor is also unlikely to increase the £2.5bn a year he plans to levy on the banks.
In his remarks to the Telegraph reporters, Mr Cable acknowledged the split between the Coalition partners. He said he had been involved in a "big argument" over the banks, with the Liberal Democrats' calls for a "very tough approach" being opposed by "our Conservative friends".
Yesterday Mr Cameron came under fire from Tory MPs for failing to sack Mr Cable. Sir Christopher Chope, secretary of the 1922 Committee, said: "The Prime Minister will have to assess whether propping up the Liberal Democrats is in the long-term best interests of the Conservative Party and the country."Reuse content