Population Aging and Bank Risk-Taking

Abstract

The population aged 65 and older will grow at an unprecedented pace over the next decade in most advanced economies. But what does population aging imply for banking? Exploiting geographic variation in the change in seniors across U.S. counties, we show that higher savings by seniors lead to a local increase in bank deposits. We then establish that banks more exposed to aging counties increase the supply of credit while relaxing their lending standards. Exposed banks increase loan-to-income ratios by more and have lower application rejection rates. They also see a sharper rise in nonperforming loans during the Great Recession. Risk-taking is more pronounced among banks with lower capital ratios, in more competitive markets or where banks operate no branches. These findings are robust to the inclusion of bank and county controls, granular fixed effects, and to an instrumental variable strategy. Our results suggest that population aging detrimentally affects financial stability.

Keywords: Demographics, population aging, risk-taking, financial stability

JEL Classification: G21, E51