Green Credit Policy and Environmental Outcomes in China: The Critical Role of Local Banks in Pollution Reduction and Innovation

ABSTRACT This research assesses the role of local banks in the environmental consequences of the green credit policy (GCP) implementation in China. Utilising a sample of 297 cities from 2010 to 2017 and employing a difference‐in‐difference model, the study examines whether cities with local banks experience a significant reduction in environmental pollution post‐GCP implementation. The 2012 introduction of GCP serves as an exogenous shock, revealing that cities with local banks show a substantial decrease in pollution levels, thereby supporting Porter's hypothesis and relationship banking theory. Mechanism analysis indicates that local banks contribute to pollution mitigation by promoting innovation. Besides, the role of local banks in pollution reduction is more pronounced in cities with higher levels of foreign direct investment and economic development. Overall, our findings underscore the importance of supporting local banks in their green credit initiatives to achieve significant environmental benefits.