Jeb Hensarling, an economics fellow at the Cato Institute, was chairman of the House Financial Services Committee from 2013 to 2019. Michael Solon is a senior fellow at the Hudson Institute.
New banks used to be a sign of America’s economic vitality, bringing with them new businesses and new depositors. But over the past 16 years, bank-formation rates have collapsed.
Thank the 2010 Dodd-Frank Act. It was supposed to primarily regulate banks that were “too big to fail,” preventing a repeat of the 2008 financial crisis. But Dodd-Frank has also handicapped small banks and discouraged new bank creation. The regulations remain a burden across the entire banking sector, needlessly depressing the economy.
During debate, the bill’s sponsors insisted that small banks would be protected. Sen. Christopher J. Dodd (D-Connecticut) said small community banks “were never a source of the problems in the residential mortgage market at all.” Rep. Barney Frank (D-Massachusetts) said that Dodd-Frank was “far better and more responsive to the needs of small banks” than an alternative bill. Years later, however, Frank would admit that “small banks are spending too much money to show that they are in compliance” with regulations.
The regulatory burden on small banks became so great that new banks (formally known as “de novo banks”), which often start with only around $20 million in assets, have stopped forming. According to our analysis of data from the Federal Deposit Insurance Corporation, from 1990 until the 2008 financial crisis, an average of 149 new banks were chartered per year. After Dodd-Frank became law, that number plummeted to just five per year between 2011 and 2025. Consequently, the number of account holders at small banks has collapsed. De novo banks had an average of 4.9 million accounts annually between 2000 and 2007. That dropped to about 500,000 between 2011 and 2025.
Small banks feel more of the pain of federal regulations. Initial capital needed to launch de novo banks has more than doubled since Dodd-Frank — from $11.8 million to $29.6 million. Four years after Dodd-Frank passed, the Federal Reserve reported that banks with less than $100 million in assets have regulatory compliance costs of 8.7 percent of noninterest expenses, compared with the 2.9 percent compliance cost of larger banks. Unsurprisingly, FDIC Chairman Travis Hill observed that “the de novo rate has fallen off a cliff.”
Plummeting bank fertility is joined by rising bank fatalities. Since Dodd-Frank, 149 more banks have failed than have formed. For every 100 banks that merged, liquidated or failed between 1990 and 2008, 32 banks started. That number fell to 3.4 banks from 2009 to 2024.
Since fewer small banks exist, their unique qualities are also disappearing. Community banks tend to engage in relationship banking, and familiarity with their borrowers allows them to support companies that may have strong potential but weak financials. These banks also provide 40 percent of small-business lending despite holding only around 13 percent of banking assets.
Businesses need these banks. Many Fortune 500 companies initially had to rely on financing from small banks as opposed to institutions such as JPMorgan Chase, Citibank or Bank of America. Walmart’s founder, Sam Walton, described funding the company’s expansion by borrowing from local banks. He said that eventually left him indebted to “practically every bank in Arkansas and southern Missouri.” Walmart was not unique. Early on, Federal Express (now FedEx) looked to nearby Worthen Bank of Little Rock, and Starbucks worked with local Rainier Bank in Seattle.
Small banks are also important to the overall economy because they discover banking innovations that help drive competition and efficiency. In 1999, First Internet Bank pioneered digital banking. In 2008, Live Oak Bank of Wilmington, North Carolina, built one of the largest digital banks serving small businesses. Just two months ago, Dallas-based Augustus Bank received a provisional banking charter and is hoping to become the “first clearing bank for the AI era.”
Much more of that is needed. Lawmakers understand that these banks are valuable. To help rebuild de novo and community banking, the House in July passed the Main Street Capital Access Act, sponsored by Rep. French Hill (R-Arkansas). The legislation better tailors regulations to bank size, eases capital requirements for smaller banks and provides a three-year regulatory phase-in for de novo banks. The bill passed in the House by an almost 2-1 bipartisan margin.
Congress has undeniable evidence of Dodd-Frank’s harm. As the Senate continues to debate the issue of affordability, it needs to realize that rising wages depend on a growing economy, which in turn depends on a healthy banking sector. The Senate has an opportunity to follow the House’s lead and pass one of the few bipartisan measures left in this Congress that can actually help the economy.
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