Recent decades have seen the rise in government debt turn into a global phenomenon, and yet few studies have explained it from the perspective of bank deregulation. Using joint-equity bank branch entry after bank deregulation as a shock and as a proxy, this study examines the impact of bank deregulation on local government debt in China. We find that joint-equity bank entry leads to a 13.75% increase in local government debt per capita. The mechanism analysis shows that the effect is not only driven by an increase in loan supply but also by a rise in government debt demand relevant to the real estate market. Further analysis shows that a cross-industry crowding-out effect of local government debt on private firms exists, and that this effect may offset the effect of infrastructure investment growth in regional economic growth.