European Commission efforts to strengthen the regulation of financial services in the wake of the credit crunch risk exacerbating the sector’s downturn and adding to the tens of thousands of job losses already forecast, the City of London will warn today.

'Proposed changes could greatly increase the cost of capital across Europe with detrimental effects ar beyond the financial services industry,' said Stuart Fraser, chairman of policy and resources at the City of London.

His comments are targeted, in particular, at amendments to the European Union’s capital requirements directive. These are due to be formally presented by the Commission in the autumn as part of its broader response to the crisis in the financial markets.

Draft proposals have already been circulated in Brussels, and one possible measure could involve tightening the 'originate-to-distribute' model used by banks to devise then off-load securitised products that have been at the heart of the recent crisis. Brussels has suggested that originators should retain capital for at least 10% of the exposures they securitise. This idea has, however, already been attacked by banking organisations.

Financial Times