Reviving Community Banking By Lifting Barriers To New Banks

Americans have far fewer banks to choose from than they once did. The American banking industry has consolidated, with the number of U.S. banks falling from more than 8,000 to less than 5,000 between 2000 and 2014 alone. By 2023, the number of Federal Deposit Insurance Corporation (FDIC) insured banks had further decreased to 4,641, marking a substantial decline despite the U.S. population growing significantly during this period.

Besides mergers and acquisitions, there has been a downturn in the formation of new banks, known as “de novo” banks. In 2007, 181 new bank charters were issued, but from 2010 to 2023, an average of fewer than six new charters were issued annually, according to Sen. Cindy Hyde-Smith, author of a new bill aimed at removing regulatory barriers and fixing these problems. Year by year, banks have found it more advantageous to go through a merger and acquisition process, further reducing the number of total banks.

Congress hit the banking industry with the expansion of the Bank Secrecy Act after 9/11 and the enactment of the Dodd-Frank Act in 2010. Stringent compliance requirements, many stemming from Dodd-Frank, made banking more difficult than ever before. Cumbersome regulations like the Currency Transaction Report (CTR) regime and Suspicious Activity Reports (SARs) added needless regulatory complexity.

This presents a real problem for consumers, small businesses, and entrepreneurs, as fewer community banks means limited access to credit for small businesses and farmers, in turn stifling economic growth and innovation. Community banks provide about 36% of all small-business loans and hold around 80% of all agricultural loans. Yet, alarmingly, according to data from the FDIC, the number of U.S. community banks dropped by 46% over the last two decades.

Homeownership rates could also be affected by overly stringent bank regulations, curtailing more lending options for families hoping to purchase a home. One study found that U.S. state banking deregulations from 1980s to early 1990s increased the number of bank branches in states that deregulated, which in turn increased renters’ likelihood of becoming homeowners.

Our elected representatives can play a pivotal role in fixing the problem they created. Rep. Andy Barr’s “Promoting New Bank Formation Act”, which passed the House Financial Services Committee in April, could be a step towards increased competition in the banking industry.

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