The Bank of England (BOE) is discovering the downside of being the City of London's chief watchdog.

The central bank is under pressure from financial institutions to set up a currency swap with the People's Bank of China.

Such a move would help to boost London as a center for trading offshore renminbi. However, worrying about the city's competitiveness also risks blurring the BOE's main objective of preserving financial stability.

The BOE is now being drawn into the campaign. Setting up a currency swap with its Chinese counterpart would allow the BOE to lend renminbi in London if the market dried up. Even if the swap remained unused, its existence would help reassure banks that do not have easy access to renminbi to do more business in the Chinese currency.

Banks argue that, without the BOE's support, renminbi will be traded elsewhere and the City of London will suffer. But that is the concern of the government, not the central bank. One of the reasons Britain's soon-to-be-defunct Financial Services Authority failed as a regulator was because it was instructed to worry about competitiveness as well as financial stability. The BOE should resist such confusion.

The author is Peter Thal Larsen, a Reuters columnist.