Community Banks Under Regulatory Siege

Community banks have been the backbone of our nation’s growth throughout history.

Many small- to mid-sized local businesses across rural and suburban America were and continue to be backed by local community banks. They have been there during tough recessionary times, making certain local businesses had working capital to maintain their enterprises. They have been there in boom times when merchants and storekeepers grow into bigger offices and buildings, and hire more workers.

The National Chamber of Commerce lauds community banks for often being the initial source of funding for new ideas and innovation.

Historically, community banks were often created by local individuals pooling their money to obtain a charter with the intent of serving friends, neighbors, businesses, churches and other institutions. Local folks deposited their money in the local bank, which in return made loans on local projects, which helped the community grow and thrive, leading to more deposits, more loans, more growth.

That’s the core of the American free-enterprise system: Communities banding together to finance their own futures.

According to the U.S. Small Business Administration’s Office of Advocacy, 99.9% of American businesses are small (500 or fewer employees). They employ 46% of American workers. They account for over 43% of the country’s annual GDP, and 61% of job growth since 1995. Much of this has been made possible by community banks.

Unfortunately, they are disappearing. America had 8,315 community banks in 2000. Today there are about 4,100. Why? Technological advances have forced much of it. Smaller institutions without the capital to purchase the advanced operating systems needed in today’s world of finance are forced to merge with larger banks that can.

But other factors are also at play. Community banks have been under regulatory siege for the past 25 years, says Michelle Bowman, a Federal Reserve governor who has been nominated as the board’s vice chairman in charge of bank supervision. The former Kansas state bank commissioner explains that one of the “greatest threats” to community banking is the cumulative impact of new regulations and the changed expectation in supervision.

For example, new and modified bank regulations added over 5,000 pages to the books in 2024 alone. It’s a problem that has been going on for years. In 2004, a study presented to Congress showed that complying with just 13 federal regulations cost about $3.2 billion, or 24% of all community banks’ before-tax profits.

Since then, regulations have only mounted, particularly since the 2008 financial crisis and subsequent recession, which was sparked by speculators on Wall Street and at the country’s biggest banks. Community banks didn’t cause that crisis, but cumbersome regulations aimed at big banks’ nefarious actors and bad practices applied equally to small banks. Big banks could afford to hire more lawyers, auditors and compliance officers. Community banks? Not so much.

Many have given up and sold out, merging with larger banks that often don’t completely understand the dynamics of the communities they serve. And those that do remain are spending an increasing chunk of their capital on onerous regulations meant to rein in big banks.

Ultimately, this all means fewer loans for local entrepreneurs, innovators, and homeowners. Your friends, your neighbors, your kids.