How does digital economy development affect banking competition? Evidence from a spatial spillover perspective

This is the authors' abstract. We don't add key points for this paper.

Regional digital economy development lowers the cost of providing banking services across geographical distance, but its effect on local banking concentration is not unidirectional. Using nearly 820,000 commercial bank branch records and a provincial digital economy index for 31 Chinese provinces from 2013 to 2023, this paper applies a spatial Durbin error model to distinguish the absorption of local digital resources, exposure to neighboring digital capacity, and unobserved regional shocks. Local digital economy development is significantly associated with greater banking concentration, suggesting that digital resources may initially reinforce the competitive advantages of incumbent institutions. By contrast, digital economy development in neighboring regions is associated with lower local concentration, reflecting the external competitive pressure created by greater cross-regional service capacity. A three-regime model and bank-type decomposition further show that digital competition follows distinct financial-geographical pathways: local digitalization is more closely associated with the expansion of city commercial banks, whereas neighboring digitalization more often facilitates the cross-regional entry of nationwide joint-stock banks, potentially generating greater openness across bank categories alongside increased concentration within categories. The digital economy therefore reshapes not merely the degree of banking competition, but also the spatial direction from which competition enters and the organizational carriers through which it operates. Provincial banking concentration should consequently be interpreted in the context of cross-regional digital linkages.