Abstract: The traditional credit model centered on collateral preference is a major cause of financial resource misallocation and the path dependence of“high credit, high pollution”. In contrast, the institutional opening of the financial sector, through the introduction of foreign banks, generates competitive effects and technological spillovers, driving a shift in domestic banks’ credit allocation from reliance on static collateral toward a dynamic assessment focused on future cash flows and technological potential. Using the gradual opening of China’s banking sector as a quasi-natural experiment and employing Chinese industrial firm data combined with information on foreign bank entry, we find that foreign bank entry significantly reduces firms’ sulfur dioxide emissions while also achieving output growth and efficiency gains. Mechanism analysis confirms that the emission reduction effect operates mainly through two channels: promoting technological innovation and optimizing firms’ asset structures, which verifies the central role of the credit allocation shift. This effect is more pronounced among technology-intensive firms and those with strong traditional financial advantages (e.g., large firms and state-owned enterprises). These findings provide theoretical and empirical support at the micro-mechanism level for coordinating high-level financial opening with a green transformation of development patterns, demonstrating that institutional opening centered on the alignment of rules and standards is an important pathway to enhance the green efficiency of financial resource allocation.

Key words: financial openness, foreign banks, credit allocation, pollution reduction, technological innovation