Drawing upon the theory of comparative advantage of small and medium-sized banks, this paper employs pollution data from industrial enterprises in China spanning 2000 to 2014. Utilizing the establishment of urban commercial bank branches in counties as a quasi-natural experiment, we investigate the impact of the development of small and medium-sized banks on industrial enterprises' pollutant emissions and the underlying mechanisms of this effect. Our findings reveal that the establishment of urban commercial bank branches in counties significantly reduces wastewater and sulfur dioxide emissions from enterprises, a result that remains robust across various tests. Further heterogeneity analyses show that this pollution reduction effect is more pronounced for small and medium-sized, more finance-constrained, start-up firms, and firms located in areas with low carbon pilots and higher levels of marketisation. The analysis of the impact mechanism suggests that the establishment of urban commercial banks achieves this reduction by increasing enterprise output, thereby diluting pollution intensity, and fostering green technological innovation, which enhances pollution treatment capabilities. Additionally, our research highlights that government intervention significantly influences the pollution reduction effect of urban commercial banks and the mode of this influence.
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