George Osborne has been accused of forcing regulators to ditch a review into Britain's banking culture under pressure from the industry's biggest names.
The Chancellor is "bowing" to demands to drop the so-called "banker bashing" probe set up after the Libor rate-rigging scandal, it was claimed.
But Mr Osborne's deputy, Treasury Chief Secretary Greg Hands, insisted that ministers had "no involvement" in the decision by the Financial Conduct Authority (FCA).
The FCA dropped its probe and announced it will instead "engage individually with firms to encourage their delivery of cultural change".
The decision comes after FCA chief executive Martin Wheatley announced in July his decision to quit the post as Mr Osborne refused to renew his contract, which was due to end in March next year.
MPs suggested the Chancellor was behind the decision to drop the review months after it was set up.
Labour's John Mann, who sits on the Treasury select committee, said: "George Osborne is behind it, without any question.
"The cultural issues are what lays at the heart of the financial crisis. It's fundamental. Individuals took irrational risks with other people's money.
"This decision leaves us hugely exposed into the future because it allows the banks to continue to act as they acted before."
He added: "George Osborne is bowing to pressure from the banks. HSBC and Barclays have threatened to leave the country, that is what they are privately threatening."
Conservative Mark Garnier, who also sits on the committee, said he was "disappointed" by the decision.
He told BBC Radio 4's Today programme: "There has always been this great argument that perhaps the Treasury is having more influence over the regulator than perhaps it ought to and certainly, if I was looking for a Machiavellian plot behind what's happened here and the tone of the regulator, then I suppose I would start looking at the Treasury."
Shadow chancellor John McDonnell warned that the move could prove a "dangerous and costly mistake".
He said Mr Osborne "cannot stay silent" on the issue, adding: "It's time he used his influence to keep this review going. Otherwise he's letting down the rest of us who bailed the banks out and also allowing a signal to be sent to carry on regardless.
"Given the scale and severity of the failings in the financial sector and the criminal behaviour shown by some banks, the scrapping of the FCA's review into banking culture sends the wrong message at the wrong time."
Liberal Democrat leader Tim Farron said the decision meant "any hope of change and progress has been dashed, with a very clear return to businesses as usual" in the City.
Mr Hands rejected the claims that Mr Osborne was behind the FCA's decision and lashed out at Labour.
He said: "Ministers had no involvement in, and indeed no advance notice of this decision by the independent regulator.
"To suggest otherwise is utterly false.
"For Labour, whose system led to the banking crisis and the Great Recession that caused such misery to millions of families, to complain now about regulation is risible.
"The system we've introduced - including the independent FCA which makes and accounts for its own decisions - is now fundamentally stronger than it was a few years ago, thanks to the reforms we've made.
"From April, reckless bankers will face up to seven years in jail and we have introduced the toughest system of bankers' pay of any major financial centre in the world.
"The priority for the Government now is implementing the reforms."
In a statement the FCA said: "A focus on the culture in financial services firms remains a priority."
The watchdog added: "We have decided that the best way to support these efforts is to engage individually with firms to encourage their delivery of cultural change as well as supporting the other initiatives outside the FCA."
The move to shelve the root-and-branch examination was described as "disappointing" by Richard Lloyd, executive director of independent consumer experts Which?
He added: "Cultural change doesn't happen overnight, so despite signs of improvement, the FCA must not take their eye off the ball and should continue to clean up the industry."
The FCA previously told banks to sharpen up their efforts to learn lessons from scandals such as foreign exchange and Libor rate-rigging, which have already cost them billions of pounds in fines.
The body said companies' progress in making improvements as part of the review - designed to examine and compare behaviour within the banking sector, including staff pay and complaints procedures - was initially disappointing and improvements "had been uneven" across the industry.
But it also said "some progress had been made on improving oversight and controls and benchmarks" following the scandals involving the benchmark rates in Libor - the interbank lending rate - as well as in foreign exchange and gold markets.
A number of banks have already signalled changes to their operations.
In November, Standard Chartered said it would cut around 15,000 jobs worldwide - although it was not disclosed how many of its 2,000 UK-based staff would be made redundant - as part of a major overhaul.
But the bank said it had no plans to move its headquarters from the UK, given the scale of the restructuring task ahead.
In contrast, the HSBC said it was investigating whether to close its UK HQ in the City, where it has been based for more than two decades.
The Government's attitude to financial services companies is among the factors involved in deciding whether or not to remain in London, the banking giant said.