Climate risk exposure and banking competition: Evidence from China’s listed banks

• Climate risk exposure suppresses banking competition in China. • Bank-level climate risk measure developed from city indices. • Digital innovation strengthens competition under climate uncertainty. Climate change poses escalating risks to financial systems; however, the impact of these risks on banking competition remains unclear. Understanding this relationship is crucial, as reduced competition can exacerbate financial fragility and limit credit access, particularly in emerging markets like China. Using data from 42 Chinese listed banks between 2007 and 2022, this study constructs a novel bank-level climate risk exposure index by mapping city-level climate risk indices to the geographic distribution of bank subsidiaries. We demonstrate that greater exposure to climate risk significantly alleviates banking competition. Further analysis reveals that digital innovations, including artificial intelligence (AI) and Fintech, mitigate these adverse effects by enhancing risk evaluation and operational efficiency. Nonetheless, our analysis carries significant implications for policymakers and regulators seeking to balance climate resilience with financial competition and stability in the digital era.