Banking On Demography: Population Aging and Financial Integration

Abstract

This paper argues that an integrated financial sector mitigates negative effects of population aging. We show that U.S. counties with an aging population see an increase in local deposits, reflecting higher saving rates of seniors. Banks use these deposits to increase credit supply. Using detailed data on mortgage lending, we find that banks channel deposits from aging counties towards counties with a younger population. We find no evidence that banks engage in risky lending: they lend less to counties with a high share of sub-prime borrowers or low incomes, and do not lend disproportionately to low-income borrowers. The increase in credit supply has real effects. Counties with a higher market share of aging-exposed banks see an increase in house prices and building permits, as well as in firm formation. Results are robust to controlling for bank and county characteristics through granular fixed effects and instrumenting local aging with casualties during World War II.

Keywords: Demographics, population aging, financial integration, mortgage lending, house prices

JEL Classification: E44, G20, G21, J11