Population aging and bank risk-taking

BIS Working Papers  |  No 1050  | 
15 November 2022



Advanced economies face an unprecedented rise in the population of older adults. Their high savings rate might lead to an abundance of savings and depressed returns, thereby potentially encouraging banks to reach for yield. Our paper investigates the consequences of population ageing for bank risk-taking and financial stability.


Our paper makes two main contributions to the literature. It is the first to empirically investigate the effects of demographic change on bank lending standards and financial stability. In addition, it investigates whether there are geographic spillovers of local population ageing, as banks might reach for yield in other markets.


We find that banks more exposed to ageing counties in the United States relax lending standards as they grant new loans: loan-to-income ratios increase, in particular in counties where banks operate no branches. Banks with greater exposure also see a sharper rise in non-performing loans during downturns, implying an increase in credit risk due to population ageing. Further analysis suggests that these patterns are shaped by two forces: an increase in banks' available funds due to older adults' higher propensity to save in the form of deposits, and a contemporaneous ageing-induced decrease in the local demand for credit.


What are the implications of an aging population for financial stability? To examine this question, we exploit geographic variation in aging across U.S. counties. We establish that banks with higher exposure to aging counties increase loan-to-income ratios, especially where they operate no branches. Laxer lending standards also lead to higher nonperforming loans during downturns, suggesting higher credit risk. Inspecting the mechanism shows that aging drives risk-taking through two contemporaneous channels: deposit in ows due to seniors' propensity to save in deposits; and depressed local investment opportunities due to seniors' lower credit demand. Banks thus look for riskier clients in no-branch counties.

JEL classification: E51, G21.

Keywords: risk-taking, financial stability, low interest rates, population aging, demographics.