The Effects of an Aging Population on the Structure of Bank Assets and Liabilities

Mon, 01 Jan 0001 00:00:00 +0000

Using 2001-2022 annual data on U.S. commercial and savings banks matched with county-level demographic data, this paper shows that banks operating in areas with older populations—measured by the deposit-weighted proportion of seniors (individuals over 65) in the counties where the bank has branches—issue more retail deposits and less wholesale funding, pay relatively lower retail deposit rates with greater stickiness across maturities, and experience smaller deposit withdrawals when market interest rates rise. On the asset side, these banks hold significantly more securities and fewer loans (particularly small business and residential mortgage loans) with longer maturities, substantially raising their asset-liability maturity gap. These findings are consistent with a lifecycle model in which seniors demand risk-free retail deposits as an investment vehicle while exhibiting lower borrowing demand, combined with the localization of banks’ deposit-taking and lending. The paper instruments for a bank’s senior exposure using projected county-level senior population shares constructed from historical state-level fertility rates and county-level cohort change rates by race and sex, mitigating concerns about endogenous bank location relative to contemporaneous economic conditions.

Summary based on a working paper version, AI-assisted and human-reviewed. See the linked published article for the authoritative version.

In depth

Q1. How is a bank’s exposure to seniors measured, and why is this measure preferred?

A bank’s ’exposure to seniors’ is defined as the deposit-weighted senior population share of all counties where the bank operates branches, using each county’s deposits at that bank as weights; this measure is preferred because it captures the bank’s actual demographic exposure to older depositors while accounting for the relative importance of each local market to the bank. The paper instruments for this measure using projected county-level senior population shares derived from historical demographic data (state-level fertility rates by race, historical county-level cohort change rates by race and sex), which are orthogonal to the contemporaneous economic conditions that could cause population migration and confound the results.

Q2. How does senior exposure affect retail deposit rates and stickiness?

Banks with greater senior exposure pay significantly lower interest rates on retail time deposits, and the spread between an equivalent-maturity competitive market rate and the bank’s retail deposit rate widens by more as market rates rise, indicating greater deposit rate stickiness; this effect is especially pronounced at longer maturities (24- and 60-month CDs), where seniors’ preference for deposits as an investment vehicle rather than a transaction account gives banks greater market power. Moreover, these banks’ deposits are less likely to be withdrawn when the Federal Funds Rate rises, despite lower and slower-adjusting deposit rates, consistent with seniors’ lesser sensitivity to interest rate differentials (limited recall in monitoring rates, as in Kahn, Pennacchi, and Sopranzetti 1999).

Q3. How does senior exposure affect the composition and maturity of assets?

Banks exposed to more seniors hold significantly more securities and fewer loans—particularly small business loans and residential mortgages—and choose securities and loans with much longer maturities, which substantially raises their asset-liability maturity gap. The lifecycle model predicts this: in markets with older populations, the demand for loans is lower (seniors are net savers, and local businesses benefit from greater labor supply in younger areas), leaving the bank’s retail deposit surplus to be invested in securities. The long-maturity asset allocation is supported by the bank’s stable retail deposit base, which is less sensitive to market rate movements (increasing the effective duration of deposits beyond their stated maturity).

Q4. What are the macroeconomic implications as populations age?

The paper’s findings predict economically important changes in banks’ future asset-liability structures as U.S. populations age: aggregate bank loan-to-asset ratios should decline, security-to-asset ratios rise, retail deposit shares increase, wholesale funding shares decrease, and the banking system’s aggregate asset-liability maturity gap should widen—with corresponding implications for banks’ interest rate risk exposure and the transmission of monetary policy through the bank lending channel. The demographic shift is projected to continue: the U.S. share of the population over 65 is predicted to reach 22% by 2050, while the EU’s share is projected at 28% and China’s share of those over 60 is projected at 40% in 2050, making these dynamics relevant across advanced economies.

Key concepts

bank exposure to seniors : the deposit-weighted proportion of individuals over age 65 in the counties where a bank has branches; the paper’s key explanatory variable, capturing how much of the bank’s deposit base is drawn from an older population. deposit rate stickiness : the slower adjustment of retail deposit rates to changes in equivalent-maturity competitive market interest rates; greater stickiness implies a widening of the deposit rate spread as market rates rise; found here to be more pronounced for banks with higher senior exposure. asset-liability maturity gap : the difference between the bank’s asset average maturity and its deposit average maturity; measures the bank’s exposure to interest rate risk; found here to be significantly larger for banks with higher senior exposure due to longer-maturity assets and stable retail deposit funding.