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.

What caused the decline?

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.

The bill — a companion version of which has been introduced in the Senate by Sen. Cindy Hyde-Smith, R-Mississippi — proposes a 3-year moratorium on the excessively high capital standards that were designed for large institutions like JP Morgan and American Express.

This moratorium is part of a phased strategy, requiring federal banking agencies to issue rules that provide a 3-year phase-in period for smaller financial institutions to meet any federal capital requirements. Easing these stringent capital requirements will give rural community banks the breathing room they need to grow and thrive, making it more affordable for new banks to get their footing in the market.

The bills will also allow banks to “request to deviate from a business plan that has been approved by the appropriate federal banking agency.” Most banks are required to submit strategic or business plans to regulators for consideration. This bill will make the process less rigid, giving banks greater flexibility to develop innovative financial technologies.  

Federal regulations need to be updated to reflect the realities of modern banking and keep pace with our growing economy. This bill could allow more de novo banks to spring forth around the country and help usher in an age of prosperity. The time is now ripe for Congress to increase competition in the banking sector to both give consumers more options and dissipate capital concentration from banks that are seemingly too big to fail.

Patricia Patnode is a research fellow at the Competitive Enterprise Institute, where Ari Patinkin is a research associate