Community-scale banks (aka credit unions) are a better idea for local-regional communities (aka cities and towns and agricultural regions) because their managers have to live with their clients.

Take a community of 100,000 families, in an economic system where they're all collecting income and paying bills and so on. The idea behind a bank is that they hold the community's money securely while making their own money by providing loans at a greater interest rate than the interest rate they pay out to their depositors. Fundamentally, this means the bank is dependent on the fact that customers don't try to withdraw all their money at once (as the above dynamic means the bank is never able to meet this demand).

FDIC guarantees by governments are intended to bolster this customer trust, as if everything goes sour the deposits (to a certain limit) are guaranteed. The important point is that the regional bank has a profit model based on giving successful loans to individuals and small businesses for things like houses, cars, business expansion, etc. The bank will of course want to know a fair amount about the people they are loaning to (drug addicts are not good bets, etc.) in order to ensure they get paid back.

I hear people laughing in the background about the naivete of this picture in the modern American financial system. Since this post is already a bit long, go watch the movies "Margin Call" and "The Big Short" to get an idea of what's actually been going on.