Strong in-group bonds may promote mental health across development. Violence exposure influences social information processing biases and may also relate to social categorization processes. We examined associations of violence exposure with psychopathology and behavioral and neural indices of implicit and explicit in-group bias after minimal group assignment in children followed longitudinally across three time points from ages 5 to 10 years old (n = 101). In a pre-registered analysis, violence exposure was associated with lower implicit in-group bias, which in turn was associated prospectively with higher internalizing symptoms and mediated the longitudinal association between violence exposure and internalizing symptoms. Violence-exposed children did not exhibit the negative functional coupling between the left vmPFC and left amygdala when classifying in-group vs. out-group members that was observed in children without violence exposure. Reduced implicit bias for one’s in-group may represent a novel mechanism linking violence exposure with the development of internalizing symptoms.