Demographic aging not only reshapes labor markets, pension systems, and public finances; it also gradually but fundamentally transforms the structure and risk profile of the banking sector. As the share of older households increases, banks’ business models shift accordingly—relying more on retail deposits, extending fewer loans, holding more securities, and taking on greater interest rate risk.
The first and most immediate effect of population aging concerns bank funding. Older households are, on average, net savers and show a strong preference for safe and liquid assets. In markets with a higher share of older households, banks finance a larger portion of their balance sheets through retail deposits and rely less on market funding and large, uninsured deposits. Deposit-based funding thus becomes both cheaper and more stable.
Notably, in markets with older populations, deposit interest rates tend to be lower, particularly for longer-maturity products such as multi-year time deposits. When policy rates rise, these deposit rates adjust more slowly, widening the spread between the returns on banks’ assets and the interest they pay to depositors. Because older savers are less inclined to “chase” marginally higher yields elsewhere, their deposits are more inert and less sensitive to changes in money market conditions.
On the asset side, population ageing is associated with a clear decline in entrepreneurship and, more broadly, in demand for credit. As local communities grow older, banks extend fewer loans as a share of total assets and instead hold a larger proportion of investment securities, often government bonds or other fixed-income instruments. The decline in lending is particularly pronounced in categories critical to growth and local economic activity, such as small-business lending and mortgage loans.
This shift has important implications for both financial intermediation as well as financial stability. As aging reduces the volume of lending, bank balance sheets increasingly resemble those of bond mutual funds, with banks acting as intermediaries that transform safe, long-duration securities into deposit claims held by older savers.
The stability of deposits held by older savers means that, under normal conditions, these funding structures appear resilient: deposits are less prone to sudden withdrawals, and reliance on market funding is weaker, as wholesale creditors play a smaller role. However, precisely because the deposit base is insured, a larger share of the downside risk from interest rate exposure ultimately falls on deposit insurance schemes and, in turn, the public sector. Population aging, therefore, shifts part of the risk away from markets and toward the institutions of the financial safety net. Moreover, greater holdings of longer-term securities increase interest rate risk.
Demographic changes also interact with monetary policy. Banks’ funding costs respond less to changes in policy interest rates, and deposit volumes are less sensitive to such shifts. As societies age, the traditional bank lending channel of monetary policy may therefore weaken, requiring larger or more persistent policy actions to achieve the same macroeconomic outcomes.
Population ageing is typically analyzed as a challenge for pensions and healthcare, yet it is an equally significant factor for bank balance sheets. As societies grow older, banks gradually transform into institutions with long-duration portfolios and a strong presence of bonds, funded by loyal, risk-averse savers. This transformation will shape the resilience of the financial system and the effectiveness of macroeconomic policy in the decades ahead.
P. Avramidis, Professor at Alba Graduate Business School, The American College of Greece
Based on recent research using U.S. data, published in the Journal of Money, Credit and Banking.