America Has Lost 2,000 Community Banks – Here’s Why That’s Alarming

Before 2008, the United States was chartering more than 100 new banks per year. Last year, that number was fewer than four.

OCC Comptroller Jonathan Gould called it “embarrassing.” He is right — and if you care about small businesses, rural economies, or the basic health of the financial system that underpins them, you should be alarmed, too.

The Vanishing Act No One Is Talking About

The collapse in new bank formation is only half the story. Since 2010, half of all banks with less than $1 billion in assets have been wiped off the map. Not merged into something stronger. Not replaced by a better alternative. Gone. The communities they served — the farmers who needed a crop loan, the restaurant owners who needed a line of credit, the families who needed a mortgage in a county too small to matter to a national bank — were left to find their way without them.

From 1984 to 2020, the total number of commercial banks in the United States fell by nearly 70%, from more than 14,000 to around 4,400. Community banks — those with under $10 billion in assets — went from over 8,300 to roughly 4,277 over just the two decades between 2000 and 2020. And the trend has continued since. This is not a natural market correction. It is the compounding result of a regulatory environment that made it prohibitively difficult to start a bank and increasingly burdensome to run a small one.

The CFPB has noted that community banks are three times more likely than larger institutions to locate their offices outside metro areas, and that they hold the majority of banking deposits in rural and micropolitan counties across the country. At last count, more than 600 U.S. counties — nearly one in five — had no physical banking presence other than a community bank. When those institutions disappear, so do the banking relationships, the credit access, and ultimately the small businesses and jobs that depended on them. As the CFPB has documented, bank consolidation has directly contributed to the growth of “rural banking deserts” — places where capital simply does not flow the way it should.

What’s Actually Driving the Decline

It would be convenient to blame economics or that small banks can’t compete — that technology, scale, and efficiency have simply made the community banking model obsolete. The evidence does not support that narrative.

Community banks remain profitable. As of late 2024, they were posting a 1.01% return on assets and nearly 10% return on equity — solid by any measure. They are not failing because they cannot compete on merit. They are disappearing because the regulatory and supervisory environment has made it irrational to start a new one, and increasingly exhausting to run an existing one.

Comptroller Gould has been blunt about this diagnosis. In a recent address, he laid out the problem plainly: the OCC has not, in all cases, lived up to its own licensing manual, which calls for a preliminary conditional approval on new bank charter applications within 120 days of a complete filing. That standard was quietly abandoned in the years following the 2008 financial crisis, as regulators — understandably spooked by the failures of that era — essentially stopped approving new banks. What began as post-crisis caution calcified into institutional inertia. Eighteen years later, the pipeline for new bank formation has nearly run dry.

Beyond chartering, the day-to-day supervisory burden on existing community banks has grown in ways disconnected from actual risk. The MRA — or Matter Requiring Attention — became, in Gould’s words, the “automatic default mechanism” for all regulatory feedback, even when the finding didn’t warrant a formal write-up. Non-statutory, Washington-generated policy requirements were layered onto examiners’ checklists regardless of a bank’s actual risk profile. The result: community bank executives spending enormous time and energy on compliance theater rather than on serving customers.

What the OCC Is Doing to Reverse It

Gould’s undertaken an effort to dismantle the accumulated regulatory overreach of the past decade and a half. The list of actions the OCC has taken, either independently or alongside the Fed and FDIC, includes:

The agency has created a dedicated community bank supervision group. It has proposed revisions to the Community Bank Leverage Ratio. It has eliminated non-statutory, non-CAMELS-related supervisory policy requirements that Washington was imposing on examiners without regard to individual bank risk profiles. It has revised BSA/AML examination procedures and eliminated unnecessary data collection requirements targeting community banks. It has finalized a licensing rule to expedite approvals for new activities and business combinations. It has introduced a simplified CRA strategic plan. It has amended model risk management guidance to clarify that it should not be mechanically applied to smaller institutions. And it has reduced assessments. All of that in seven and a half months.

The underlying philosophy is as important as the specific actions. Gould has reoriented the OCC around what he calls “material financial risk” — the idea that examiners should be laser-focused on CAMELS ratings, risk assessments, statutory requirements, and enforcement work, and nothing else. If an OCC examiner is doing something that doesn’t fall into one of those categories, Gould wants to know about it.

On new bank formation specifically, the OCC has chartered its first full-service national bank in nearly four years — a symbolic but meaningful signal of intent. The goal, as Gould has framed it, is to restore a level of risk tolerance sufficient to “sustain and celebrate” new banks being formed in this country again. The target is a return to ordinary course — not a radical departure, but a recovery of what normal was supposed to look like before 2008 turned caution into paralysis.

The AI Opportunity: Leveling the Playing Field

One of the more forward-looking threads in Gould’s recent remarks involves artificial intelligence — and it speaks directly to one of the core structural disadvantages community banks face.

Large banks can marshal billions of dollars to invest in technology, hire armies of software engineers, and build sophisticated systems for risk management, compliance, and customer service. A community bank, by contrast, is typically run by people already wearing a dozen hats. Adding “software engineering” to that list is not a realistic option.

Gould sees AI as a potential equalizer — a technology that could give smaller institutions access to analytical and operational capabilities that have historically been the exclusive domain of the largest banks. But he has also been clear that this opportunity could easily be squandered if supervision is not thoughtfully calibrated. If model risk management guidance is applied to community banks the same way it is applied to a trillion-dollar institution, AI adoption at small banks will be chilled before it ever gets started. The OCC is actively working to ensure that doesn’t happen — that the benefits of new technologies remain available to banks of all sizes, not just the ones with the deepest pockets.

What a More Dynamic Banking System Could Mean

The case for reversing community bank consolidation is not sentimental. It is economic.

Community banks provide roughly 81% of all commercial bank farm real estate debt. They are the primary credit source for agricultural producers. They account for a disproportionate share of small business lending relative to their asset size. In rural America — where nearly a third of households lack reliable home internet access and physical branches remain essential — they are often the only financial institution in the county.

A banking system that continues to consolidate toward a handful of mega-institutions will not serve those communities. A national bank headquartered in Charlotte or New York does not have — and cannot replicate — the local knowledge that a community banker in rural Tennessee or central Nebraska carries in their head. That knowledge is what allows a loan officer to look past a down quarter and understand that a particular farmer has survived thirty years of drought cycles and will survive this one too. It is not capturable in a credit score. It does not transfer to an algorithm.

Restoring a healthy rate of new bank formation — getting back toward something in the range of what existed before 2008 — would mean more credit flowing to underserved communities, more competition in local markets, and more financial resilience in the parts of the country that need it most. As Gould has put it, his job as Comptroller is not to tell banks what is best for them. It is to open as many options as possible — and to give banks the space to choose paths that are right for their communities.

For a sector that has lost half its smallest institutions in fifteen years, more options cannot come soon enough.