The problem is that the 'local banking concerns' have a reporting obligation to a foreign tax authority, the IRS, regardless of the size of the depositor. It is a regulatory burden to them and unless they are already setup to handle it, they take the easier path of rejecting the account. As for deposits in local currency, it is the depositor, who is required to identify themselves by citizenship when opening the account, that is the problem. Sure, one can claim local address but almost every nation makes it a crime to hide national status.
If I am a citizen of the U.S. and I work in a foreign country (say, Austria), I can see why the foreign bank would have a different set of rules for me as a foreign citizen. However, if I am a citizen of the U.S. and I am also a citizen of Austria, I'm not sure what difference it makes to the Austrian government or an Austrian bank if I report to them that I'm an Austrian citizen and just leave it at that. Would it be a crime in Austria to "hide national status" in that case if I also happen to hold citizenship in another country where the Austrian government has no jurisdiction?
Having been through this myself, I can see exactly why foreign banks operate the way they do. In my case I was dealing with this long before the FATCA was implemented, so I'm not sure I understand why this has become an issue right now.