For the architects of the Cyprus bailout – the German government and the International Monetary Fund – there was no doubt that the central aim of the shock therapy was to bring down an oversized banking sector that was failing. That applied especially to the Bank of Cyprus, the island's biggest and Laiki, the number two. The latter was essentially insolvent, surviving on a liquidity lifeline from the European Central Bank.

Christine Lagarde of the IMF wanted both banks, representing half of the Cypriot banking sector, closed down. In the end Laiki is being closed down with its bond and shareholders facing huge losses and €4.2bn (£3.6bn) in deposits looking lost. Bank of Cyprus will become a shadow of its former self, deposits frozen pending restructuring and downsizing and wealthy depositors facing losses probably of 30%-40%.

A "casino economy", said the French government. "A dysfunctional business model," said the Germans of the Cypriot economy. With a banking sector seven times Cypriot gross domestic product, Lagarde insisted this was unsustainable and that it would be more than halved to around three times GDP by 2018. In a time of embryonic eurozone bank supervision, with the European Central Bank being made the supervisory authority for all eurozone banks, the statements from Berlin and Lagarde bore the hallmark of a new policy aimed at taming financial services and getting bloated banking sectors under tight control.

Which explains why several small countries are trembling at the prospect of what might be in store. Malta, Luxembourg and Cyprus are the three smallest countries in the EU and the eurozone. Cyprus's days as an offshore tax and banking haven are now numbered. Relative to GDP, tiny Malta's banking sector is even bigger. Its finance minister sat next to his German and Cypriot counterparts at the first Cyprus bailout meeting in Brussels 10 days ago and was extremely chastened by what he witnessed. After experiencing Wolfgang Schäuble, the German finance minister, up close, he wrote an article in the Malta Times saying God help his country if it encounters similar problems in the eurozone.

Then there is Luxembourg, which along with Austria, is the eurozone's biggest champion of banking secrecy. The wealthiest country in the EU and second smallest, Luxembourg's banking sector exceeds its GDP by a whopping factor of 23. The big difference, of course, is that these are not Luxembourg banks, but subsidiaries of the European and US banking giants, with Germany and France to the fore. Nonetheless Jean Asselborn, the Luxembourg foreign minister, warned Berlin on the eve of the Cyprus bailout that it needed to watch its words, that no one was complaining that the German car or arms industries were too big.