We document a novel channel through which bank failures affect the economy by increasing the funding costs of surviving banks, thereby further contracting bank credit provision. Using a sample of U.S. bank failures, we find that competitor banks significantly raise deposit rates following a nearby bank failure, even when controlling for local economic conditions and bank fundamentals. The effect is persistent, lasting up to three years, and is stronger following highly publicized failures. At the same time, we observe weaker deposit and loan growth at surviving banks after failures, despite non-bank lending growing in those areas. Consistent with an increase in depositor price sensitivity, we observe price effects for uninsured and insured deposits. Our findings highlight how banking crises propagate indirectly by making funding more expensive, even if remaining banks are safe, thereby constraining credit supply and amplifying economic downturns.