Can environmental protection and banking development be synergized?—an analysis based on the low-carbon city pilot in China

The low-carbon city (LCC) pilot policy is significant in tackling carbon emission reduction and environmental protection. Several studies have demonstrated that LCC policy dramatically decreases air pollution in cities for environmental preservation, while there is a shortage of research on banking development. Using city-level data from 2005 to 2018 in China, we examine the impact of the LCC pilot policy on the growth of the banking sector by using a difference-in-difference (DID) model and analyze the underlying transmission mechanism. The empirical result demonstrates that the construction of LCC significantly impedes the growth of the regional banking sector, and the conclusions above hold up to a battery of tests. First, the LCC policy drastically reduces the scale of industries in the pilot cities, including secondary industry output, tertiary industry output, fixed asset investment, and fixed asset balance. Second, the LCC policy encourages industrial reorganization in the pilot cities, as demonstrated by a change in market demand from high carbon-emitting enterprises and non-state-owned enterprises to low carbon-emitting enterprises and state-owned enterprises, respectively. The results indicate that the LCC policy produces credit risk at enterprises and conveys it to banks, resulting in a retarding effect on banking development.