The banks started to fail once they had to admit to losses, as in forced to write off bad Greek loans. This caused a bank run and capital controls were put in place, violating the foundation of the Euro, that within the currency no capital controls shall be used.

Initially Cyprus asked a sum of €17 Billion to bail out its government and banks. The plan by the EU Troika was to put a levy on Cypriot failing banks, which meant everyone must take a loss, including insured depositors, since the ECB wanted the loan to Cyprus government (who would give it to banks as bailout) to be secured. This did not go well since insured deposits are to be protected in accord with modern banking. Instead the Cypriot failing banks got nothing, while the Cyprus Government gets the €10 Billion bailout with harsh consequences.

Cyprus is only getting €10 Billion to bail out the Government, where €7.5 Billion of the €10 Billion will go to re-finance maturing bonds held with the ECB, all while the loan is provided by the ECB. This results to the ECB kicking the can down the road, for someone else to deal with in couple years. The financing for the banks has to be found elsewhere (taken from uninsured depositors).

The fact EU let the banks fail, along with EU Finance Minister's comments that Cyprus is a template for rest of Europe, has scared depositors elsewhere in Europe. Bank crises from now will likely hit uninsured depositors, who are now looking to move their money into safer locations. This has caused cash outflows from the World's oldest bank, Italy's Monte dei Paschi di Siena (MPS), who is in trouble with 2x bailouts already completed, and Slovenia who is currently denying need for help, even though the math says different.



Cyprus Crisis Data Source: Spiegel





