If the European banking system were the setting for a Spaghetti Western film, the settlers would be circling their wagons in preparation for an attack.What that means concretely is that around the world banks are increasingly seeking to protect their assets by cutting back on cross-border lending into other countries. Their international loans dramatically declined from last quarter, according to data released by the Bank for International Settlements. Financial jitters stemming from the Eurozone crisis and slowed growth in Asia have made banks decide it is safer to keep their money close to home to avoid the risks they see internationally. The wagons are circling because bankers right now think the dangers are high.This circling of the wagons has dramatic repercussions throughout the financial system. The effect, especially for small business, is to make credit hard to get and expensive — even as central banks around the world are reducing interest rates. Monetary policy is loose, but credit is tight: this is not a recipe for success.Emerging markets in the developing world will also feel the pinch, as much of their capital comes from foreign investors. The ‘working capital’ they use to fund their ongoing business activities traditionally comes from bank loans, and the reduction in lending from large multinational banks has severe consequences for many of these companies.In Europe, where euro fears have accelerated the financial repatriation process, the risk is for a balkanization of what was on track to become a thoroughly integrated EU financial market. The absence of German and French banks from hard hit credit markets in countries like Spain, Portugal and Greece will lead to an even deeper depression than government austerity alone could impose.A panic of banks, which is what looks to be happening in Europe, is less dramatic but about as dangerous as an actual bank run. As banks bring their money closer to home, Europe is coming closer to its hour of decision.