The hidden cost of losing your community bank: disruptive innovation

In July, the 21st Century ROAD to Housing Act became law, carrying a provision that drew almost no attention. It directs federal banking regulators to run a two-year pilot that makes it easier to charter new community banks — with particular attention to rural areas — and gives banks chartered between 2026 and 2028 a phase-in period to meet capital requirements. Congress has decided the country needs more small banks.

Bank regulators are moving the other way. Bank mergers hit a four-year high in 2025, and both the Office of the Comptroller of the Currency and Federal Deposit Insurance Corp. have rolled back merger review rules that slowed the process. Washington is now trying to seed community banks with one hand while clearing the path to absorb them with the other.

Whether that tradeoff is worth making depends on a question that the banking consolidation debate has mostly skipped. The debate has focused almost entirely on competition and consumer prices. It has largely ignored something harder to measure and easier to lose: innovation.

Our recent research examined the relationship between banking consolidation and innovation across all 50 states from 1994 to 2020. We found that the issue is not simply whether a banking market is concentrated. What matters is whether a handful of very large banks dominate it.

In those markets, something specific happens: the kind of innovation that gets funded........

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