How does banking expansion influence city development and synergy? — A new perspective from government debts

This study exploits the regulatory shock of banking deregulation in China to examine how the geographical expansion of city commercial banks (CCBs) influences regional development and economic synergy. Employing a refined identification strategy, we demonstrate that bank expansion significantly promotes both local economic growth and inter-regional coordination. Specifically, we find that each new sub-branch entry leads to a 0.7 % increase in city-level development. Moreover, we identify a novel transmission mechanism whereby expanding banks support local governments through substantial subscriptions to urban investment bonds, thereby facilitating infrastructure development. Our findings illuminate the institutional linkages between banking institutions and local governments, suggesting that multi-market CCBs serve as an effective policy instrument for addressing local financial volatility and advancing coordinated regional development initiatives. • A refined identification strategy employing geographical distance and relative market size resolves endogeneity in bank expansion analysis. • Each City Commercial Bank branch entry increases city-level development by 0.7 %, with stronger effects in financially constrained regions. • Banking expansion significantly enhances economic synergy among connected cities in CCB networks. • A novel mechanism is identified: CCBs promote urban development through government debt financing, specifically Urban Investment Bond subscriptions. • Each additional CCB branch increases annual Urban Investment Bond issuance by 92-209 million yuan, directly facilitating infrastructure development.