The Central Bank has been accused of "using a sledgehammer to crack a nut" as penny banks are being forced to close over money laundering fears.
Concerns were raised over "some kids who had a lot of money" saved up over the space of a year, a senior source said.
This Christmas will see the end of many penny banks which helped rural community members save hundreds of thousands of euros from January until mid-November every year.
A voluntary-run organisation, local people gave their time to collect savings from people on a weekly basis and an annual cheque was then issued to all members before Christmas.
However, the penny bank has now become a victim of its own success as it drew the attention of the financial watchdog.
Councillors have described the closures as "devastating", particularly for elderly people who used the savings club as a means of putting money away for grandkids.
Paddy Kavanagh, a Fine Gael councillor in Enniscorthy, Co Wexford, said a whole institution shouldn’t be forced to close because a small number of people were believed to be abusing the system.
"It’s another blow to community effort. Certain organisations use it to fundraise and it also provides a service for people who want to save without the complication of the banks," he said.
"It’s over-regulation gone wrong if you ask me. We saw this week how the EU is investigating a number of money laundering cases at banks in different countries but you don't see them closing down the banks," he added.
"The majority of people volunteering at the penny banks know most of the people in their community and would know if something is right or wrong. The Central Bank are ruining it for ordinary people trying to save a few quid."
Independent councillor for Wexford David Hynes tabled a motion calling on the Government to prevent the Central Bank from closing penny banks and it was unanimously supported.
"I'm in my 70s and since I was a boy, people have saved their money this way. They were there long before the Credit Unions even came into existence," Cllr Hynes said.
"The spurious idea that the Central Bank came out with to increase regulation is ridiculous as it's a bank that fell asleep at the wheel during the worst economic collapse and now they're going after small community projects. We're talking about kids saving pennies and a few euros here.
"Rural communities have already been hit hard with the closure of post offices, garda stations and pubs and now this is another thing that is being taken away."
A newsletter from the penny bank committee in New Ross, Co Wexford described the closures as a huge loss to communities across Ireland.
"The committee regrets to announce that due to Central Bank regulations St Mary's Penny Bank will not be open in January 2019.
"A 'bank business' is defined in law as 'accepting sums of money from the public in the form of deposits or other repayable funds. The penny bank comes under that definition and therefore requires a licence to operate.
"Such licences are not used by penny banks therefore the committee has no option but to close this facility at the end of 2018," the letter reads.
Insurance companies advised various penny banks that the Central Bank required detailed information about people using the service because it is now regarded as a financial institution.
Among the requirements made from the Central Bank were requests for photo ID and proof of address of all people saving in the penny bank.
As a result, insurance almost doubled and it was no longer feasible to run the operation on a voluntary basis.
A spokesperson for the Central Bank said: "Financial institutions, including credit unions, must ensure that they are compliant with the customer due diligence requirements of the Criminal Justice (Money Laundering and Terrorist Financing) Act 2010 (the 2010 Act).
"Section 33 of the 2010 Act requires that appropriate customer due diligence is undertaken to ensure that an entity has a means to identify and verify the identity of its customers.
"The 2010 Act would therefore require that the identity of all savers in a savings club is known, with appropriate customer due diligence undertaken by the financial institution (such as a credit union)."