Lord Oakeshott has stood down as a Lib Dem Treasury spokesman after criticising the government's bank deal.
Ministers and the four main banks have agreed to increase loans to businesses from £179bn to £190bn this year, with lending to small firms up 15% to £76bn.
But Lord Oakeshott branded Treasury negotiators "incompetent" and demanded "radical surgery" to cut City bonuses.
The government defended the deal, but Labour said the peer had been sacked for "daring to tell the truth".
Outlining the long-awaited agreement, Chancellor George Osborne formally ruled out imposing a bonus tax, despite pressure from Labour.
Lord Oakeshott, a former City financier who advised Business Secretary Vince Cable while the Lib Dems were in opposition, said there was no guarantee of there being a net increase in lending to small business, and that the pay disclosure measures had not gone far enough.
The public were entitled to ask why the bosses of RBS Group and Lloyds Group, which were bailed out by the taxpayer at the height of the banking crisis, would still be getting huge bonuses, he told the BBC.
He added: "Whether those are paid in cash or shares, they still mostly come out of our pockets. I see the agreement says they have to wait two more years to cash in.
"A multi-million pound bonus is still a multi-million pound bonus whether you have to wait two years to buy the yacht."
"We have done the best we can to get the best deal but I don't think it is a good deal," he said.
"And I am bound to say I think the Treasury's negotiating tactics have not been very good. They have got an awful combination of arrogance and incompetence.
"Most of them couldn't negotiate their way out of a paper bag and this has not been as tough a deal as it should have been."
But Treasury sources hit back at the peer, telling the BBC "he doesn't even know what he's talking about".
'Reflection of reality'
Lib Dem Chief Secretary to the Treasury Danny Alexander said the "mutual agreement" for Lord Oakeshott to step down had been the "right decision".
Lord Oakeshott had felt "unable to support" the government's arrangement with the banks, he added.
Mr Osborne has defended the package, saying it will boost economic recovery.
Mr Cable described the agreement as "reasonable" and insisted that it would provide a "substantial" boost in lending to small firms.
However, he has said that the bonuses being paid to RBS boss Stephen Hester and outgoing Lloyds Group chief executive Eric Daniels are "extraordinarily large".
Andrew Tyrie, chairman of the Treasury select committee, said the deal was a "reflection of reality".
He added that ministers did not want to do anything to hamper the chances of getting the best deal for the taxpayer when the state-controlled banks are eventually sold back into private ownership.
For Labour, shadow chancellor Ed Balls said: "It is symbolic of the shambolic and panicked way that the chancellor has gone about agreeing this weak and toothless deal with the banks, that the Liberal Democrat Treasury spokesman in the House of Lords has been sacked this evening.
"It is a sad commentary on this Tory-led government that Lord Oakeshott has been forced to pay the price for daring to tell the truth."