The UK, and more specifically The City, is one of the world’s most important financial centres – some would argue that it is the most important centre. For this to continue and develop, foreign financial institutions need to be encouraged to have a London, or UK base, and the UK is keen to see non-EU banks with a UK presence.
Given the ever-increasing importance of China as an economic superpower, the Yuan (or Renminbi) is bound to play a greater role in international trade – certainly in the vast arena of Asian trade. For the Yuan to become a global currency, the Chinese will need to allow it to float freely, something that they are clearly not prepared to do at the moment. The City is the world’s most importance Forex hub with trading above the $2.2 trillion per day, so naturally the UK wants to position itself at the centre of Yuan trading which means accommodating Chinese banks.
There is already a well-established regulatory basis for retail and commercial banks within Europe, but the global financial crisis exposed the risk to governments (i.e. Joe Public, the tax payer) associated with troubled or failed banks and the need to protect individual customers (individual EU bank deposits are guaranteed up to a ceiling of €100000). Indeed, the UK government had to cover the deposits of retail account holders based in the UK when Iceland’s banks failed.
The UK plans to make foreign (non-EU) banks that wish to do retail business in the country adhere to stricter rules set by the Prudential Regulatory Authority (PRA), but branches of foreign banks not taking public deposits would not face such restrictions. However, acceptable safeguards would need to be in place where the bank is based.
Speaking on the BBC’s Today Programme, Andrew Bailey deputy governor of the PRA said: "We are much more comfortable if branches from overseas are conducting wholesale business, that is things like trade finance. We are much less comfortable if they are taking deposits from the retail market in the UK and that is born out of difficult experiences we had in the height of the crisis."