David Cameron today threatened the banks with higher taxes if they failed to rein in lavish bonuses.
The Prime Minister signalled a new focus on banking sector tax revenues, saying that unpopular decisions on bonuses would make it difficult to keep a regime "that they might favour".
His comments backed Deputy Prime Minister Nick Clegg's warning that the Government would not stand on the sidelines if banks refused to restrain their pay levels.
Mr Cameron insisted the banks had to understand the "political context" to the issue of bonuses, given that the banks were bailed out by taxpayers who are now feeling the pinch.
The British public found it "very galling" to see bankers paying themselves "unjustified bonuses", he said.
"We have had to bail out the banks and use taxpayers' money in a difficult economic situation and I do believe in social responsibility, that people have to think of their responsibilities when they make these decisions.
"And of course every decision like that the banks make makes it more difficult to keep a tax regime that they might favour.
"I think we have to start thinking more about the revenue we raise from banks. What we want is strong and sustainable revenues so that we can put those to good use."
Mr Clegg used an interview with the Financial Times to issue a call for "visible restraint" in the forthcoming bonus round.
"The banks should not be under any illusion, this Government cannot stand idly by," he said.
"It is wholly untenable to have millions of people making sacrifices in their living standards, only to see the banks getting away scot-free."
The rhetoric on the banks provoked a hostile reaction from the City and some scepticism as to what action the Government could take unilaterally to curb excess.
Government sources however played down the likelihood of any immediate announcement.
Chancellor George Osborne and Business Secretary Vince Cable are meeting chief executives of the major banks next week for talks in which excessive bonuses and lending to small businesses will be high on the agenda.
However, Business Department officials said it was one of a regular sequence of meetings and had not been called specifically to call for restraint.
Mark Field, the Tory MP for the City of London, accused Mr Clegg of making an "idle threat" and urged the coalition against "banker-bashing".
"When you hear some of the rhetoric from coalition politicians talking about rebalancing the economy, it is code for a bit more banker-bashing," he said.
"We need leadership from the Government to make the case for the importance of financial services to this country.
"We have seen Nick Clegg today and Vince Cable in the past ratcheting up that rhetoric about bankers but it has to be said there have been one or two Conservative politicians in the coalition who have also allowed it to be known that they are very much in favour of banking levies and putting the banking industry in its place."
The Lord Mayor of London, Michael Bear, also said political rhetoric about bonuses risked undermining confidence in the financial services sector.
"People are starting to worry because what is important to any business is predictability, stability and confidence," he said.
"If you undermine any of these, they will think: Well, actually, should we still be here? We don't want to wake up in a period of time and find that we have lost the golden goose."
He added: "If they brought in legislation on bonuses or brought in an extra tax all of a sudden, that would undermine the confidence of people doing business here, and that's really counter-productive."
Shadow chancellor Alan Johnson accused Mr Clegg of using the issue of bankers' bonuses to appeal to Liberal Democrats and to try to put the row over tuition fees behind him.
"Nick Clegg's hot air on bankers' bonuses is designed to rehabilitate a tarnished reputation," he said.
"But he is Deputy Prime Minister in an administration that will not even apply regulations that Labour introduced requiring banks to notify the public about individual bonuses in excess of £1 million.
"And today we've learnt that Lib Dem and Tory MEPs have been encouraged to push for softer European rules on bonuses.
"Another day, another broken promise from this Tory-led Government and its Lib Dem frontman."
Strict European rules designed to curb bankers' bonuses will not apply to most financial institutions in the UK, it emerged today.
Under a code issued today by City watchdog the Financial Services Authority, all but the biggest banks will be exempt from certain guidelines laid out last week by the Committee of European Banking Supervisors (CEBS).
The lower-tier firms, such as smaller banks, hedge funds and asset managers, will not have to apply a tighter cap on the proportion of bonuses paid in cash, as put forward by CEBS, the FSA said.