LUXEMBOURG - For Wolfgang Schäuble, the world is sometimes a pretty simple place. Cyprus, for example, just had the wrong business model. Those were the words the German Finance Minister used to explain the problems that that European Union island nation is experiencing now.

According to Schäuble, the Mediterranean state counted too much on its banks and allowed its financial sector to get bloated. And indeed Cyprus’s banking sector, with its 47 billion euros in deposits, is two-and-a-half times the size of the country’s 18-billion-euro economy.

But Schäuble’s explanation is flawed: the beautiful island nation of 800,000 inhabitants is not the only country in the euro zone with a ramped-up financial industry. In no less than 10 countries, the volume of bank deposits totals more than real economic value – sometimes several times more.

Heading the list is not Cyprus, but the Grand Duchy of Luxembourg. The tiny country brings in less than 44 billion euros from its goods and services, yet its banks boast a whacking 227 billion euros in deposits, which is to say over five times the GDP.

Malta and its 7-billion-euro economy is home to nearly 12 billion in deposits. Other countries with significant deposits are the Netherlands, Spain, Belgium and Portugal. Even Germany’s 3.1 trillion euros in bank deposits exceed actual economic performance.

The uproar over proposed bank account levies in Cyprus brought to the surface the dangers of financial overreach. If the financial crisis put the security of bank investments to the test, now the issue is deposits.

What bank clients had in savings and checking accounts had been considered the solid part of the banking business, up until now. That’s changing now. After seeing small-timers in Cyprus expected to ante up, bank account holders everywhere have seen their security depleted. Particularly in crisis countries like Spain or Italy, this could lead bank customers to withdraw their funds out of fear of being asked to bail out the banks or indeed the state.

In both countries, you have a precarious public financial situation face-to-face with considerable private wealth. That’s a situation that could push highly indebted governments to see a source of revenue, and consequently fuel account-holder anxiety.

U.S. investment bank Goldman Sachs calculated how much governments could make if they levied or taxed bank account holders. The results show that such a move would be particularly lucrative for the Spanish government: with an 8.5% tax on savings, Madrid could rake in 129 billion euros.

Ready to cause pain

That would wipe out 15% of public debt in one fell swoop. In Portugal too, the move could be attractive from the government point of view: according to Goldman calculations, by imposing a 8.5% tax the government could take in nearly 18 billion euros.

The dangers are, however, significant. For account holders, such a tax would amount to an abuse of confidence – bank deposits in the EU are guaranteed to up to 100,000 euros per customer.

With the imposition of a tax or levy, the government would get its hand on account holders’ purse strings. Even just a rumor that such a move was in the offing would probably result not only in capital flight but a possible full-on bank run.

How quickly uncertainty can take hold was demonstrated in Greece. From a high of 244 billion euros in the winter of 2009, bank deposits have shrunk to just 156 billion. That’s over one third less.

Even Spain’s much larger economy experienced a meltdown of deposits during the crisis, from 1.7 trillion euros in the summer of 2011, to as low as 1.49 trillion. The volume of Spanish deposits has now stabilized at 1.5 trillion euros.

The present situation has the mighty rating agencies flustered, and they are in the process of changing the way they rate a bank’s creditworthiness. "In the future we will be taking a more critical look at deposits," says Vincent Truglia, a former director of Moody's. It used to be that customer savings were widely considered a solid form of financing. For the euro zone, that’s now been put into question, he said.

His former employer had already fired a warning shot about the long-term effects of a levy: "The Cyprus package is negative for all European account holders," says Bart Oosterveld, Managing Director of the New York rating agency.

European politicians have now established that they are prepared, if necessary, to cause account holders some financial pain. The logic goes like this: if the previously sacrosanct customer’s neck is on the line, it sends a warning signal to bond creditors financing the banks. And to Oosterveld that by no means only applies to the creditors of Cypriot banks – it applies to all other Old World banks as well.

An immediate consequence is that the connection between public finances and the financial sector will now be very much on investors’ radars. They will be casting particularly critical eyes not only on customer deposits but the volume of bank business.

Here again, Luxembourg takes the lead. If you add up all the balance sheets, the banks of this tiny state are leveraged to GDP by a factor of 22. Would Wolfgang Schäuble approve?