<p>Climate policy is rapidly reshaping the economic and banking environment. Previous studies have offered valuable insights into its environmental and economic effects; however, they often lack theoretical analyses and the financial risks, particularly those related to bank risk-taking. This study develops a theoretical framework to explain how local climate policy influences bank risk-taking, identifies the channels through which lending structure and green technical innovation are affected. It proposes a technique for measuring the intensity of local climate policy. We test the theoretical assumptions with a dynamic spatial panel Durbin model, a mediated effects model, and a system Generalized Method of Moments (GMM) model, using data from 111 commercial banks across 30 Chinese provinces. The results reveal the following: (1) Local climate policy mitigates bank risk-taking in the short- and long-term, both locally and in neighboring regions; (2) Its long-term mitigating influence exceeds the risk-enhancing effects of financial development and industrial structure; (3) It reduces bank risk-taking by greening bank lending and promoting green technological innovation; and (4) Its effects vary regionally, weakening from east to west and remaining strongest among highly liquid banks. Modest local climate measures contribute to reducing bank risk and achieving climate goals. Our findings shift attention from traditional financial regulation to the regulatory role of government, underscoring the climate-related risks that policymakers must consider. Tailored regional and sector-specific strategies can strengthen green credit, foster green innovation, and enhance bank resilience to climate-related financial risks.</p>