Community Banks Lose Ground as Big Lenders and Crypto Win Deregulation Favors

Community banks are losing political influence in Washington as deregulatory wins flow primarily to the largest financial institutions and the rise of cryptocurrency threatens their deposit base, potentially restricting vital credit access for small businesses and rural economies.

Why Are Community Banks Losing Influence in Washington?

Major regulatory victories during the second Trump administration have largely benefited national lenders with trillions in assets, according to over a dozen current and former community bankers and lobbyists. Meanwhile, the legislative push to integrate cryptocurrencies into the mainstream financial system poses a more significant threat to smaller institutions than to their larger counterparts.

The fading influence of community banks correlates with a dramatic decline in their numbers. Over the past two decades, more Americans have gravitated toward major Wall Street lenders, shrinking the community banking sector's footprint in the national economy.

It is incredibly frustrating to watch, particularly right now, where there are opportunities for community banks to take full advantage of who is in leadership at the regulators and in Congress. Instead, we have just opted to sit on the sidelines.

Preston Kennedy, former president and CEO of Louisiana's Bank of Zachary and a longtime ICBA board member, expressed the frustration felt by many in the sector. Losing sway in Washington could accelerate the decline of smaller banks, depriving rural America and small businesses of essential credit, which carries broader economic implications.

How Do Community Banks Differ from Mega-Lenders Economically?

Community banks, defined as institutions with less than $10 billion in assets, play a disproportionate role in local economic development. Better Markets, an advocacy group, calculates that community banks direct 75 percent of their deposits back into local economies through loans. In contrast, the largest banks lend out just 40 percent of their deposits. A significant share of community bank lending supports small businesses.

Research also indicates that community banks maintain higher lending volumes during economic downturns compared to larger institutions, providing a critical stabilizing function during times of financial stress.

What Deregulatory Wins Are Big Banks Securing?

Regulators have proposed slashing capital requirements and lowering leverage requirements for the largest banks, potentially saving them up to $60 billion, according to calculations by Federal Reserve Governor Michael Barr. Agencies have also allowed banks to take on substantially more lending capacity. With extensive regulatory staff and flexible balance sheets, these benefits disproportionately boost the largest banks' bottom lines.

Concurrently, post-crisis supervision mechanisms designed to subject big banks to extra scrutiny are being weakened. Stress testing and subjective assessments by on-site regulators have softened. The Office of the Comptroller of the Currency now subjects only the most massive banks to heightened scrutiny, effectively lowering standards for most other large banks.

While community banks have secured some victories, such as eased data-collection burdens from the Consumer Financial Protection Bureau and exemptions from paying for the rescue of larger banks that failed in 2023, their smaller balance sheets limit their ability to capitalize on new capital and leverage rules to the same extent as larger institutions.

Is the ICBA Failing Community Banks?

Internal friction is growing within the industry. Many community bankers blame the leadership of the Independent Community Bankers of America (ICBA), their primary trade group, for being too conciliatory toward big banks and too timid in Washington.

We are not taking advantage of the opportunities to leverage our capital in Washington and being certain that we are being vocal.

Noah Wilcox, president, CEO and chair of Grand Rapids State Bank in Minnesota and a recent ICBA board member, highlighted the sector's frustration. However, ICBA president and CEO Rebeca Romero Rainey disagrees with this assessment.

We are at the table, as much or more than we have been before.

The disagreement reflects a leadership style shift. Multiple sources described former ICBA head Cameron Fine, who retired in 2017, as militant and willing to clash with bigger banks after the 2008 financial meltdown. Romero Rainey, his successor, is perceived as more conciliatory and less vocal.

Everyone is getting lumped together as banks, and ICBA is missing out on using their size and power to differentiate themselves. A $500 million bank operating in rural Iowa is lumped together with JPMorgan Chase.

Anne Balcer, a former ICBA chief of government relations now with Community Bank Advisory Services, argued that the current strategy fails to leverage the unique position of community banks. ICBA board chair Alice Frazier countered that certain legislative battles, such as the crypto fight and opposition to citizenship data collection, require unified action across the industry.

How Does Cryptocurrency Threaten Community Banks?

A sweeping cryptocurrency bill currently under consideration on Capitol Hill highlights the vulnerability of community banks. Banks of all sizes are fighting a bipartisan deal that could allow crypto companies to offer rewards programs paying annual percentage yield to customers holding stablecoins.

The cryptocurrency industry has invested massive sums in Washington lobbying. If rewards programs are permitted, customers could move their deposits out of traditional banks and into stablecoins. Community banks are particularly exposed in this fight because their bottom lines rely more heavily on deposits than those of bigger banks.

Yet, the ICBA has chosen to align its strategy with trade associations representing larger lenders, jointly issuing press releases and coordinating strategies. Critics argue this lumps community banks together with Wall Street giants, diluting their distinct economic role.

What Does the Data Show About Community Bank Decline?

Consolidation in the banking industry has significantly eroded the community banking sector over the past two decades. Data from the Federal Reserve, FDIC and Better Markets reveals a clear trend.

• In 2007, over 6,000 banks held less than $10 billion in assets, accounting for 30 percent of U.S. deposits.
• In 2025, only around 4,000 such banks exist, holding just 17 percent of the country's deposits.
• Banks with more than $100 billion in assets now make up 67 percent of total deposits, up from 46 percent in 2007.

Representative Frank Lucas (R-Okla.) noted that as the number of community banks declines, fewer voices are expressing opinions across the country, requiring those that remain to be louder and more engaged.

Can Community Banks Regain Their Regulatory Voice?

The future of community banking depends on whether the sector can effectively differentiate itself in regulatory debates. Christopher Williston, president and CEO of the Independent Bankers Association of Texas, framed the core issue facing the industry.

We have to come back to the basic question: Is the voice of community banking truly regarded and being respected in today's debates?

Without strategic changes in how community banks advocate for their distinct economic role, their relative importance in Washington could continue to wane, with tangible consequences for local economic development and small business access to credit.

Will Crypto Regulation Reshape Local Banking?

The intersection of cryptocurrency regulation and traditional banking presents a pivotal test for community banks. If stablecoin rewards programs draw deposits away from local lenders, the credit availability for small businesses and rural communities could contract further, accelerating the consolidation trend already evident in the data.

Are Deregulation Benefits Equally Distributed?

The current regulatory environment disproportionately favors institutions with the balance sheet flexibility to capitalize on eased capital and leverage requirements. While community banks receive nominal regulatory relief, the structural advantages of scale allow the largest banks to translate deregulation into significantly greater financial gains, widening the competitive gap.

The Federal Reserve and the Federal Deposit Insurance Corp. declined to comment. The Office of the Comptroller of the Currency did not respond to requests for comment.