But even if all deposits were guaranteed, small- and medium-size banks would face challenges. Banks make their money by taking in deposits, paying interest on them, and either lending that money out or investing it in longer-term and riskier assets that generate a higher return. As interest rates increase, banks should theoretically benefit from the higher returns on their assets because those rates reset when the market rates increase. But some banks hold assets with yields that don’t increase, and in fact fall, when market rates rise. And in a rising interest-rate environment, banks face pressure to pay higher interest on deposits; otherwise, depositors will take their money to better-paid money-market funds. The consequence is lower profit margins—a big problem for smaller banks.

Longer-term, the outlook is worse. Even if the current crisis passes without more bank failures, smaller banks will find themselves subject to much stricter regulation. Regulation has become very costly for all banks, but it is especially burdensome for small banks with fewer resources to devote to compliance. That’s one reason for the now-reviled regulatory change in 2018 that relieved smaller banks from the burdens of Dodd–Frank. Small- and medium-size banks likely will face more regulation, which will make them less profitable and spell more consolidation in the future.