The Obama administration proposed new regulations for large banks last Thursday. The news sent shares of large banks tumbling.

At the same time, astute investors pivoted to the community bank sector. The government, in concert with the Federal Reserve, is setting the table for little banks to thrive.

• New to investing? Start here.
  

Names like Glacier Bank (GBCI), a small bank in Montana, FirstMerit Corp. (FMER) in Ohio, or First Niagara Financial (FNFG) in New York all jumped in value as investors acknowledged the shift in the competitive landscape. (In addition to small community banks, I really like these Top 10 Stocks for 2010.)

The rotation makes complete sense. The near meltdown of the global financial system required a bailout of epic proportion. We cannot afford to be in such a situation again.

The rules are changing so that small will be encouraged to grow while large banks will be forced to stay small.

Oh, and don’t forget about the Obama proposal to tax large banks and financial institutions. The admirable effort to generate a rate of return on taxpayer risk will do more damage to the investment potential of the larger banks.

I would not be surprised to see a period of divestitures and spinoffs as this drama unfolds. At the same time, I expect the regional banks to thrive in the near term.

Look no further than the action on Thursday. Here is a chart of the last five days of trading. You can clearly see the divergence of the regional bank index versus the large bank index.

This will be no one-day trend. Our system of capitalism is not entirely free of interference. Investors can make big money knowing how that interference will impact investments down the road.

Given the state of regulations, the steep yield curve and bias against the large banks community banks can be expected to do quite well. I have five regional banks that I really like here.

Related Articles:

• 5 small banks for MainStreet Investors
• Citigroup isn't worth your time
• Brewing up a business success