I have worked with a number of banks and credit unions. One of the biggest challenges on the regulatory side is that of unintended consequences. Lawmakers create a policy meaning to spare regional banks/credit unions, but ultimately they get carried along because their 3rd party providers have to comply (core processors, Visa, etc.), which pass along those costs/rules inevitably to the smaller organization.

Pros: Capital would be lent more efficiently as region's know their markets/customers better. Generally better service. Possibly fewer loan losses due to knowing the local market better.

Cons: The largest drawback is that of security, as many regional banks/credit unions are amazingly insecure. Cost to the consumer would probably go up slightly in the form of higher loan rates and lower savings rates, but it could easily be argued large banks aren't distributing these savings anyway.

The most amazing piece I've seen was when TARP money was given to the banking industry with the goal of it being lent to consumers and businesses. Instead the capital was used to fuel M&A within the banking industry which ultimately lead to fewer jobs.