Walker's World: The trouble with banks. LONDON, May 20 (UPI) -- Maligned and unpopular as Europe's bankers are these days, they have certainly been earning their money. Seldom have they had to operate in such a challenging environment. They are seeing jobs disappear, bonuses capped and salaries cut, their profit opportunities dwindle and their most important corporate customers are deserting them in droves. At the same time, the regulations under which they operate are getting tougher, more complex and more confused. Regulators in different countries are imposing different rules and dreaming up new ones every few months. In 2007, the average return on earnings of the 40 largest European banks was 16 percent; today it is around 1 percent. This strong loss of profitability comes in part from a sharp increase of credit risk. Non-performing loans have tripled to almost 7 percent of the loan book. Gross profit margins have been cut by one-third to a bare 2 percent and the extra regulations are increasing costs. With a reduced demand for the euros they collect in deposits, they are having to pay more for the dollars they need to compete in financing trade and are thus being driven out of overseas markets. European banks have slashed cross-border lending $3.7 trillion since 2008 and the International Monetary Fund's latest report says it expects Europe's banks to cut their assets a further $2.8 trillion. Europe's banks are also having to cope with the euro crisis, which wasn't entirely of their making, and with the spasmodic, chaotic policy responses by Europe's dysfunctional political system. Above all, they are living in a new world of central bank authority, in which the world's central banks have changed the terms of finance by issuing some $7 trillion in quantitative easing. Even without going into the almost theological arguments whether this massive pumping of liquidity into the system represents the printing of money or not, we all know the result. Interest rates are at rock-bottom lows, but with Europe's economy stuck in zero or negative growth, there is limited demand from business to borrow the money. Above all, Europe's big corporations are less and less inclined to raise money from banks, as they have traditionally done. Europe's banks used to finance 80 percent of corporate loans. But now that big businesses have learned from their U.S. competitors how to tap the financial markets on their own by issuing corporate bonds, Europe's banks are financing about half of corporate debt, according to a study by France's Societe Generale. And now European companies are also learning from the Americans how to tap the big insurers for finance. In the United States around 80 percent of corporate financing comes from non-bank sources, including insurance. Private corporate bonds are 30 percent of U.S. assets under management, compared to less than 8 percent in Europe. Having learned in the happy years of the global boom how to exploit and enjoy the fruits of globalization, Europeans are now seeing globalization go into reverse. Cross-border capital flows have fallen from $11.8 trillion in 2007 to $4.6 trillion in 2012. Even if European banks were able to retain their former market share, which they are failing to do, the cake is still getting much smaller. It may get smaller yet. Despite lobbying by the Americans, Japanese and Europeans, the new head of the World Trade Organization, the body whose mission is to defend and increase the freedom to trade, is Brazil's Roberto Azevedo. He is not much of a free trader. For the last 15 years as Brazil's voice on the WTO, he has helped block the Doha Round and supported Brazil's own efforts to restrain free movement of capital by blaming the West for so-called "currency wars." Azevedo owes his new job to the strong support of China, India and other developing countries, who see world trade as a zero-sum game in which they prosper by making the West pay. He defeated the Mexican candidate, Herminio Blanco, a real free trader who negotiated the North American Free Trade Agreement, which has seen Mexico prosper in partnership with the United States and Canada while Brazil's more protected economy is faltering. Combine all this with the effects of new banking regulations like Basel III, which hits banks by forcing them to hold more of their capital as reserves, and the planned "ring-fencing" of their retail from their trading and investment operations, plus the inability of Europe's politicians to agree what they mean by the proposed new European banking union, and the environment for bankers is tough. No wonder bankers complain that if the last crisis came from too little regulation, the next one may be triggered by too much of it. Of course, bankers brought much of this on themselves by reckless, selfish and even fraudulent behavior. But as the banks' critics continue to stress the dangers of banks being "too big to fail," it becomes ominously more likely that the result will be a banking system too fragmented and shackled to do its necessary work of turning depositors' savings into profitable investments that drive growth.