Should Old Folk Really Smile All the Way to the Bank? How Population Aging Relaxes Bank Lending Standards

49 Pages Posted: 5 Aug 2019 Last revised: 12 Jan 2022

See all articles by Sebastian Doerr

Sebastian Doerr

Bank for International Settlements

Gazi Kabas

University of Zurich - Department of Banking and Finance; Swiss Finance Institute

Steven Ongena

University of Zurich - Department of Banking and Finance; Swiss Finance Institute; KU Leuven; NTNU Business School; Centre for Economic Policy Research (CEPR)

Date Written: January 6, 2022

Abstract

Does population aging affect bank lending? To answer this question we exploit geographic variation in population aging across U.S. counties to provide the first evidence on its impact on bank risk-taking. We find that banks more exposed to aging counties experience deposit inflows due to seniors' higher savings rate. They consequently extend more credit, but relax lending standards: Loan-to-income ratios increase and application rejection rates decline. Exposed banks also see a sharper rise in nonperforming loans during downturns, suggesting that population aging may lead to financial instability. These results are in line with an increase in savings and a decline in investment opportunities induced by population aging.

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

JEL Classification: G21, E51

Suggested Citation

Doerr, Sebastian and Kabas, Gazi and Ongena, Steven R. G., Should Old Folk Really Smile All the Way to the Bank? How Population Aging Relaxes Bank Lending Standards (January 6, 2022). Swiss Finance Institute Research Paper No. 20-62, Available at SSRN: https://ssrn.com/abstract=3430184 or http://dx.doi.org/10.2139/ssrn.3430184

Sebastian Doerr (Contact Author)

Bank for International Settlements ( email )

Centralbahnplatz 2
CH-4002 Basel
Switzerland

HOME PAGE: http://www.sdoerr.com

Gazi Kabas

University of Zurich - Department of Banking and Finance ( email )

Schönberggasse 1
Zürich, 8001
Switzerland

HOME PAGE: http://https://sites.google.com/view/gazikabas/home

Swiss Finance Institute ( email )

c/o University of Geneva
40, Bd du Pont-d'Arve
CH-1211 Geneva 4
Switzerland

Steven R. G. Ongena

University of Zurich - Department of Banking and Finance ( email )

Schönberggasse 1
Zürich, 8001
Switzerland

Swiss Finance Institute

c/o University of Geneva
40, Bd du Pont-d'Arve
CH-1211 Geneva 4
Switzerland

KU Leuven ( email )

Oude Markt 13
Leuven, Vlaams-Brabant 3000
Belgium

NTNU Business School ( email )

Norway

Centre for Economic Policy Research (CEPR)

London
United Kingdom

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