America’s community banks are disappearing and forming more infrequently. These local lenders once dotted every city and small town, offering small business loans, farm credit, and personal banking services. But over the past two decades -- particularly since the Dodd-Frank financial overhaul was signed into law 15 years ago on July 21, 2010 -- the number of community banks has nearly halved under the weight of federal regulations not properly designed for them.
As we observe the unhappy 15th anniversary of Dodd-Frank, however, there is some good news. Federal Reserve Governor Michelle Bowman, recently confirmed by the Senate to also hold the job of Vice Chair for Supervision at the Fed, is calling for a rollback of red tape strangling community banks. Bowman argues for a tailored regulatory approach to reverse this trend of closures and revitalize community banking. She has stressed that enhancing supervision need not mean more rules; it means tailored rules for banks of all sizes. Bowman’s proposed approach is centered around reducing compliance costs for banks, enabling them to better serve their customers and run their businesses.
In her speech at Georgetown University in June, Bowman stated that the focus of banking regulators needs to be on managing risk effectively, rather than eliminating risk entirely. One of Bowman’s top priorities will be promoting a specific regulatory and supervisory framework for community banks, which the Fed defines banks as holding less than $10 billion in assets.
Community banks have been bearing the burden of disproportionate regulation. Dodd-Frank’s passage in response to the 2008 global financial crisis increased dramatically the number of rules banks must follow, which smaller banks were ill-equipped to handle. An FDIC study found that from 2008 to 2019, community banks were found to be subject to 157 final rules and programs.
Academic research also shows Dodd-Frank disproportionately harmed smaller financial institutions. A study by researchers Marshall Lux and Robert Greene from the John F. Kennedy School of Government at Harvard University points the finger at Dodd-Frank for accelerating the decline of America’s community banks. Lux and Greene found that since Dodd-Frank's passage, community banks shares of U.S. commercial bank assets – including business loans -- declined in the four years since the law’s passage "at a rate almost double that between the second quarters of 2006 and 2010.”
There are now fewer banks for consumers to choose from and a shrinking market share. In 2003, there were 7,620 community banks and in 2022, there were only 4,000 community banks. Fewer banks are forming, too. Only 54 de novo banks—newly created banks—have been chartered since 2010, compared to the more than 1,300 chartered between 2000 and the financial crisis.
A key reason for this sharp decrease in new bank formation is a post-crisis FDIC rule requiring de novo applicants to raise upfront capital equal to 8% of projected assets in year seven. This was a hurdle that, according to the Independent Community Bankers of America, “effectively prevented” new bank formations. The FDIC changed the upfront capital policy to a slightly more manageable three-year projection in 2016. This rule, however, still vastly exceeds the requirements in place before Dodd-Frank and can be an insurmountable burden in rural and lower-income communities where outside capital is scarce.
Bowman sees the dearth of new banks as nothing less than a systemic risk. In a speech last year at a regional banking convention, she stated: “The absence of de novo bank formation over the long run will create a void in the banking system, a void that could contribute to a decline in the availability of reliable and fairly priced credit, the absence of financial services in underserved markets, and the continued shift of banking activities outside the banking system.”
Community banks still matter; their role is vital and personal to American communities. Small but mighty, they are valuable lenders, offering 30% of commercial real estate loans, 36% of small business loans, and 70% of agricultural loans. They tailor financial solutions to the unique needs of their local population and businesses, empowering local communities—whether in rural areas or big cities. Their strength lies in long-standing relationships with borrowers. Unlike large banks that rely heavily on automated models, community banks operate as “relationship bankers”, using local expertise to tailor credit solutions.
Further erosion of the presence of these crucial lenders through disproportionate regulation significantly hinders local communities’ access to capital. Community banks have repeatedly demonstrated their ability to manage risk effectively and maintain strong balance sheets, proving they can thrive in a well-calibrated environment. What they need is a revised, regulatory framework tailored to their unique business model—not one only JPMorgan Chase or Citi can handle.
Bowman is pushing several supervisory reforms to better manage risk and tailor rules appropriately. One is to make more efficient and transparent the process of applying for a de novo charter and allowing opportunities for these banks to exit through healthy mergers and acquisitions. At the 2024 Community Banking Research Conference, Bowman also criticized the hidden cost of supervision and guidance, citing the tendency of the examination processes to over-emphasize non-core and non-financial risks which have inappropriately harmed smaller lenders.
Bowman recognizes clear guidance and a framework expressly applicable to community banks and their risks are essential for a competitive financial sector. If Washington continues its “one-size-fits-all” regulatory approach, more community banks will suffer, leaving small towns and rural businesses with fewer options for essential financing that local communities rely on to grow and prosper. Like Bowman, Congress and leaders of other financial regulatory bodies must pledge to reverse this trend so that 15 years from now, community and de novo banks and their consumers will be thriving.
