“Don’t look now, but there’s something funny going on at the bank, George.” Thus small-town banker George Bailey, portrayed by James Stewart in the 1941 classic "It’s a Wonderful Life," learns of a run on his family bank. In the scene that follows, Bailey manages to assuage a mass of panicked townspeople, addressing them by name as he underscores the deep interconnection of bank and community.  

“Your money’s in Joe’s house,” he tells one spooked depositor. “That’s right next to yours, and then the Kennedy house and Mrs. Macklin’s house and a hundred others.”

Quaint as that image may seem, the community bank remains central to American financial life. But after decades of consolidation and deregulation-driven mega mergers, community banks are declining faster than ever. In 1994, community banks loaned about twice as much money as the five largest banks. Now, the reverse is true. Again, there's something funny going on at the banks.  

new study from Harvard’s Kennedy School of Government shows that the decline in community banks has only accelerated since the Dodd-Frank law on financial reforms passed in 2010. The study's authors suggest that the regulatory regime designed to challenge "too big to fail" has only strengthened it -- that community banks, largely innocent in the subprime mortgage crisis, are collapsing under regulations aimed at banking giants. But how much is the Dodd-Frank Act really to blame?  

Authors Marshall Lux and Robert Greene compiled FDIC data on 20 years of lending patterns. Since Dodd-Frank passed, the share of banking assets controlled by community banks has declined by 12 percent -- nearly double the rate of decline in the previous four years. “Community banks’ vitality has been challenged more in the years after Dodd-Frank than in the years during the crisis,” the authors wrote.  

The banking industry has leapt on the report to condemn Dodd-Frank. “The threshold of profitability has been raised by the regulations,” Wayne Abernathy of the American Bankers Association, which lobbies for banks large and small, says. “I don’t think think Dodd-Frank is the sole reason, but it’s a major accelerant.”  

Not everyone in community banking sees Dodd-Frank in the same light. “It’s a misnomer to think that all of its provisions apply in a uniform way,” Mitria Wilson, vice president of government affairs for the nonprofit Center for Responsible Lending, says. The organization’s affiliate Self-Help, one of the largest nonprofit community development lenders in the nation, hasn’t been hamstrung by reforms, Wilson says. “We’re still making loans.”

Wilson notes that many Dodd-Frank regulations (about half) haven’t been implemented and numerous small-bank exemptions already apply. While the Harvard study cites accelerated decline between 2010 and 2014, it was only last year that community banks began facing tougher new mortgage regulations.

“It’s difficult to isolate the causes of why community banks are consolidating and failing at the rate that they are right now,” says Wilson.

She’s not alone in her reservations. “Maybe the loss in market share shouldn’t be all attributable to increased regulation by Dodd-Frank,” Chris Cole, Vice President of the Independent Community Bankers Association (ICBA), which represents 6,500 small banks, says. Still, he says the study “vindicates our legislative agenda,” which includes exempting community banks from numerous Dodd-Frank provisions.

In a recent ICBA survey, nearly three-fourths of community banks reported that they’d scaled back mortgage lending due to increased red tape. Consumer and commercial loans, though, suffered more from weak borrower demand.

Both critics and advocates of broader Wall Street reforms agree that community banks have what Federal Reserve Board Governor Daniel Tarullo called “a special significance to local economies.” Community banks provide half of the nation’s small business loans and 77 percent of its agricultural loans.

And, true to the neighborly image Jimmy Stewart immortalized as George Bailey in 1941, community banks play an essential role in residential mortgages. A 2013 paper found that since 2009, mortgages at community banks default at a rate of less than a quarter of a percent -- about one-fifteenth the overall rate.

With dozens of Dodd-Frank regulations yet to be finalized, the stakes are high for community banks. In January the Consumer Financial Protection Bureau agreed to ease mortgage obligations for smaller lenders, one of a number of similar actions in past months. This week, the Senate is holding hearings on “regulatory relief” for these banks.

But as these debates get underway, divisions in the banking industry again come into play. "The big banks are going to keep using the small banks as cover for their special rollbacks.” Sen. Elizabeth Warren, D-Mass., a proponent of tough regulations, declared in Senate hearings Tuesday.

Wilson sounds a similar concern. “Industry proposals either benefit everybody or they benefit institutions with a much different footprint than community banks,” she says.

Still, Wilson supports recommendations that would make bank examinations less frequent at smaller institutions and exempt thousands of banks from the Volcker rule, which set limits on how banks invest their assets. Abernathy and Cole of the banking associations also rate these as top priorities.

“Regulators have to understand the way community banks do business,” Wilson says. “But that’s a far cry from exempting institutions with $47 billion in assets from the Volcker rule.”