Liberty Bank in Middletown, Connecticut has been keeping its promises since 1825 — including one made to a depositor who put in $26 and never came back. 150 years later, the descendants of the depositor discovered $32K in accrued interest. That kind of multigenerational trust is what community financial institutions (CFIs) are built on, and it's that very legacy that makes launching the next one worth fighting for.
CFIs play a significant role in providing services to their local communities, maintaining strong ties that can last generations. Funding local small businesses, that may otherwise be overlooked by larger institutions, can help their communities thrive.
A shrinking CFI footprint and a lack of new formation can put the diversification of the US financial system at risk.
The decline of de novo
Before the 2008 financial crisis, 100 or more financial institutions launched each decade in the US. In 1984 alone, 412 new financial institutions opened. The cadence has since slowed to a trickle. Since 2010, the number of de novo – newly chartered – financial institutions opened has averaged less than six per year. Three de novos have opened so far this year, while just four opened in 2025. The total number of bank charters has gone from around 8,500 in 2008 to roughly half that number.
The stark drop and stagnation of de novo formation coincides with a rapidly evolving financial landscape. Some of the key contributors to the decrease include mergers and increased competition from fintechs and other nonbank lenders. Mergers and acquisitions alone have led to decreased competition and expanded the reach of large national financial institutions, which can lead to branch closures and higher fees.
The decline has caught the attention and concern of the Federal Reserve, the FDIC, and state lawmakers. A less diversified financial banking system means less service access, credit availability, and lending opportunities for small businesses, rural areas, and underserved communities. Some states are already taking matters into their own hands to encourage more de novo formations to reverse these trends.
Tax credits
Oregon proposed a new law this year to provide a tax incentive to de novo financial institutions in the state. Under the law, which passed unanimously by state lawmakers, qualifying de novo financial institutions can receive up to $1MM annually in state tax credits for three consecutive years, which would greatly offset the hefty startup costs.
The move aims to counter Oregon’s “banking desert,” which has seen the number of locally headquartered financial institutions dwindle from 50 to 12, pending an acquisition of the 13th by a bigger bank. The last time an Oregon-based financial institution chartered was in 2007.
“This legislation sends a clear signal that Oregon wants new community banks,” says Scott Bruun, president and CEO of the Oregon Bankers Association. “For experienced banking teams and investors interested in starting a new institution, this law helps improve the economics of organizing a bank and…expanding locally based financial institutions.”
Tax exemption
Oregon’s law was modeled after legislation passed almost unanimously in 2021 by Ohio. The bill offers a tax exemption to newly chartered financial institutions for the first three years, resulting in annual tax savings between $100K and $400K.
Since the legislation went into effect, six de novos have formed in Ohio.
The bill’s author, Derek Merrin, said that he is “excited” that Oregon looked to his legislation as a model. "The issue we were trying to address in Ohio is a national problem," Merrin says. "We don't need three or four banks running the United States. Community banks help inject competition and really serve a lot of small [markets] where the big banks are just never going to open up operations."
Government assistance
Last year, Congressman Andy Barr (R-KY-6) introduced the Promoting New Bank Formation Act, which would require federal banking agencies to establish a three-year phase-in period for de novo financial institutions to comply with federal capital standards. Among additional provisions, the bill would also provide regulatory relief for de novo rural CFIs.
The American Bankers Association supports the legislation, stating that it “expands banking access for both individuals and small- and medium-sized businesses.”
The Independent Community Bankers Association (ICBA) believes that Congress should introduce legislation to provide tax incentives for de novo formation, as well as phase its capital requirements to make it easier for de novos to raise capital. This would help offset initial costs and encourage charters in banking deserts.
Whether additional states adopt similar incentives remains to be seen, but the actions taken by Ohio and Oregon suggest growing recognition that de novo formation matters. While no single policy is likely to reverse decades of industry consolidation on its own, these efforts represent a tangible step toward encouraging new locally based financial institutions.
At the federal level, proposals from lawmakers and industry groups indicate that the conversation is expanding beyond state capitals. As policymakers continue to explore ways to support new charter formation, CFIs will be watching closely to see what approaches gain traction.
