Community bankers in unison have said their banks should not have to pay the special insurance assessment the FDIC plans to levy to cover the $22 billion cost of the Silicon Valley and Signature bank failures. Late last month, the Biden Administration said it agrees with the bankers. The FDIC’s special assessment proposal is due in May.

The bankers are running the same playbook that worked in the last crisis: “We did not create the problem; so, we should not have to pay to fix it.” The 2010 Dodd-Frank Act, as amended, exempts community banks from many of the law’s most costly requirements, like writing living wills that lay out how to liquidate the business in a crisis. Independent Community Bankers Association CEO Cameron Fine was famously effective lobbying Congress to win that result. After all, every member of Congress has at least one of the nation’s nearly 5,000 community banks in his or her district.

The bankers’ position is understandable as a matter of human sentiment. In today’s environment though, it is not in their, or our, economic interest to exempt a numerically large class of financial institutions from helping replenish the FDIC Bank Insurance Fund.

Deposits in U.S. banks were $17.6 trillion at February month-end.[1] A $22 billion special FDIC assessment equates to $0.00125 per dollar of deposits—one tenth of one cent—if spread across the entire deposit base. More than $6 trillion of deposits are held at four banks: JPMorgan, Wells Fargo, Bank of America and Citibank. The next 25 largest banks collectively hold roughly $5 trillion. So, if the FDIC apportions a $22 billion assessment among only the 30 largest banks, the cost will be $0.002 per dollar of deposits they hold. That is $10 per $5,000 of deposits, less than a third of what most banks charge retail depositors for a checking account overdraft. In other words, hardly enough for customers to notice, especially if the assessment is payable over several years.

The community bankers’ objection is virtue signaling, not a financial imperative for their institutions or customers. Potential adverse consequences could ensue. Would larger banks extract a price for bearing the burden alone? Suppose they impose higher pricing for liquidity lines of credit they provide to smaller banks. Or share less of the interest rate spread on loan participations they sell to smaller banks. Or extract higher fees for services they provide smaller banks, like facing letters of credit. The ways to get even are many.

The FDIC too might extract a price for community banks’ standing aside. Suppose the FDIC insures community bank deposits up to $250,000 while offering $1 million of insurance to depositors at systemically important financial institutions (SIFIs in the Dodd-Frank acronym). What would that do to deposit flows?

Exempting community banks from an FDIC special assessment could feed public perception that community banks are held to a lower standard of safety and soundness. Some members of Congress and media outlets attributed the problems at SVB and Signature to their being “regional” banks not subject to Dodd-Frank requirements applicable to SIFIs. That misinformation tanked share prices of financially sound regional institutions like Key and Huntington national banks. Misperception became painful reality—quickly.

Most fundamentally, the premise of FDIC insurance—or any insurance scheme—is that by spreading risk and losses, all members of the insured group absorb losses in amounts that are tolerable, avoiding a cascade of failures induced by panic. The more finely risks and losses are parsed, the less likely the whole insured community will be willing to bear them.

We already have a large and growing shadow banking system, which now includes thousands of fintech companies whose risks are poorly understood and nowhere quantified. Who knows what hand grenades are tucked inside their picnic baskets? Exempting community banks for sharing losses heads us in the wrong direction. Rather, we should cast a wider net, bringing all institutional participants in the financial economy into the risk and loss sharing scheme of financial system insurance.

[1] https://www.ceicdata.com/en/indicator/united-states/total-deposits#.