Britain's Financial Services Authority has this week tightened its controls on overseas banks seeking to take deposits in London. Instead of allowing them to open branches, the watchdog is trying to pressure them to set up subsidiaries that are locally regulated but have their own access to capital and cash. However, this move, in co-ordination with similar measures by the US Federal Reserve, could backfire for the British capital's highly vaunted status as an international financial centre.
A letter sent by the Association of Foreign Banks to the UK Treasury on behalf of Chinese banks this year complained about what they regarded as excessively demanding liquidity requirements and said the banks were finding it increasingly difficult to operate in Britain.
Since the financial crisis in 2008, major Chinese banks have emerged as the world's biggest by market value. Several have set up offices in London.
However, the drive to tighten regulation is pushing them to consider transferring business, and management of their European operations, away from London, according to the letter. It disclosed that one bank already channelled three times more business through Luxembourg than London.
While US banks are permitted to have scores of branches in Britain, the British authorities have turned down the application from four Chinese banks to convert their offices into branches. By contrast, Luxembourg has allowed the Bank of China and the Industrial and Commercial Bank of China to establish fully fledged branches. The letter from the Association of Foreign Banks said these branches "will be used to build up a network of European branches that would almost certainly have previously been run out of London".
All this could put an end to London's dreams of becoming the European centre for Chinese banking.
The British move is part of the reaction to the financial crisis which exposed the vulnerability of many Western financial institutions.
Bank secrecy is being slashed in the European Union, in Switzerland and Liechtenstein. In tandem, the US has gradually been increasing pressure on Swiss banks to make tax avoidance by US taxpayers more difficult.
However, industry insiders and analysts say the latest moves by the UK financial authority are likely to adds costs for foreign financial institutions based in London. They could lead to a fragmenting of the services market and drive banks to withdraw from Britain's capital.
This could create opportunities for other places, and any other contenders for the role of an international financial centre should mull over the lessons of these developments.
Donald Gasper is a Hong Kong-based journalist and commentator