NEW YORK (MarketWatch) — Europe is a lot closer than you might think.

No, I’m not talking about some new sale on airfare. I'm talking about your bank account.

In less than six months our personal wealth has gone from having some, but mostly indirect, connection to Europe, to being held hostage by the Angela Merkels, Nicolas Sarkozys, Mario Draghis and Mario Montis.

European Central Bank President Mario Draghi Reuters

Moreover, it’s not just our wealth, it’s our ability to attain credit and earn interest on our assets. Europe has long put a squeeze on the world’s financial markets. Now it’s putting our personal finances at risk.

Simply put, Europe’s banks look to be on the brink of collapse.

Don’t take my word for it. The Bank for International Settlements issued its quarterly report on Monday. And the outlook is more than just gloomy.

“The intensification of the euro-area sovereign-debt crisis went hand in hand with banking-sector weakness,” BIS researchers observed. “While bank funding problems had manifested themselves throughout the year, policy makers and market participants increasingly turned their attention to issues of bank solvency.”

And “participants” did not like what they found. Standard & Poor’s downgraded two French banks, four Spanish banks, seven Italian banks and three Greek banks.

Moody’s Investors Service was more aggressive, slashing the previously “strong” financial systems. It downgraded three German banks, three British banks, and two U.S. banks.

Moreover, BIS noted that without “external support” or government intervention, many banking systems would be much lower. Germany’s would be triple-B, rather than single-A, French banks would be single-A, rather than double-A and U.S. banks would be high triple-B’s rather than high single-A’s on Moody’s scale.

European lenders could be at risk

BIS points out that part of the problem is bank debt, nearly $2 trillion needs to be refinanced before 2014. Some 13% is owed to governments from the last round of bailouts. European central banks have loaned 600 billion euro to banks as inter-bank lending has dried up.

“The cost and terms of credit deteriorate,” BIS researchers wrote.

All very interesting, you might be thinking, but what does this have to do with me?

For one, if European banks fail or need massive bailouts, U.S. institutions will be in trouble. We’ve already seen U.S. financial giants such as Morgan Stanley MS, +2.35% , down 43% year to date, and Jefferies Group Inc. JEF, +0.55% , down 52%, pay a price in the market for their perceived exposures to the sovereign crisis.

But we’ve also seen failures like MF Global and Belgium’s Dexia Bank. In the latter’s case, it was actual losses on sovereign debt that forced emergency bailouts and nationalization. In the former, it was simply a downgrade that triggered a stampede of margin calls.

These failures have been disruptive to the world’s financial system, but it will be nothing compared with what would happen if a bank the size of, say, Italy’s UniCredit Spa (UCG) or France’s BNP Paribas (BNP) should require drastic action.

Already, the European crisis has resulted in tighter U.S. credit, and less liquidity for stocks and bonds. “Securities dealers tightened terms on securities financing and reduced their market-making activities,” BIS found, a conclusion backed up in the U.S. market by a Federal Reserve survey in October of 20 big securities dealers. It found that financing asset-backed securities, corporate bonds and equities is becoming more expensive and requiring more collateral.

So what does this mean for the average American? For one, the outlook for investment is not good. Brokerages are doing less market-making and less lending to investors. That means there are fewer buyers and sellers to trade with.

Secondly, banks are in desperate need of cash for reserves. That means they’re unlikely to lend more, or pay interest on deposit accounts. Even though interest rates appear to be falling, the number of people actually getting credit on those terms is shrinking.

That’s what’s happening now, but it could get worse very fast. The markets on Monday reacted poorly to another summit of European leaders aiming to fix the crisis. If confidence isn’t restored, banks will soon hit a cash crunch.

What happens next would be a panic. Some banks may not survive. And if you think it will stay contained in Europe, BIS has news for you: we live in an era of “global spillovers,” the bank said.

Ultimately, that could mean European bank woes would trigger a global recession not unlike our financial crisis of 2008. U.S. banks will be stung, if not by their holdings in suspect sovereign debt, then in their indirect holdings in private hedge funds, pension firms, insurance and credit-default swaps. If it sounds familiar, that’s because it was the same toxic mix that gave us American International Group Inc. AIG, +0.87% , Lehman Brothers, and ultimately at $1.2 trillion in government guarantees to the market.

For the little guy that meant lost jobs, lost credit, foreclosures and a world of economic hurt. That’s why Europe is nearer than you might think. It doesn’t get any closer to home than losing your home.