Population Aging and Bank Risk-Taking

Abstract

This paper provides first evidence that population aging affects banks' risk-taking. Exploiting geographic variation in the change in seniors across counties, we first show that higher savings by seniors lead to an increase in deposits. We then establish that banks more exposed to aging counties increase the supply of credit while relaxing their lending standards. They 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.

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

JEL Classification: G21, E51