Can demographic changes affect the way banks operate or even the decline in births create new conditions in the financial system? As strange as it may seem, this question is of concern to banking supervision and, as highlighted in the study by Patrick Montagner, a member of the ECB's Supervisory Board, demographic changes are reshaping the economic foundations on which banks operate. The goal, he says, is not to propose immediate action, but to recognize that the demographic environment in which banks operate is changing and to examine what this means for their long-term viability.
"An aging population tends to save more, borrow less, and prefer lower-risk investments. Fewer younger households mean fewer new mortgages and business loans, while a larger retiree population means greater demand for liquidity and wealth management products."
This transformation, according to the member of the ECB's Supervisory Board, raises a number of questions: "How stable will local financing remain as older people draw on savings and other assets? How might collateral values evolve in areas where population density or housing demand is declining? Could evolving demographic patterns be a new source of vulnerability for the banking system? These are all questions that should be investigated further," he notes.
The study indicates that all EU countries have an average birth rate below the population replacement rate (including Cyprus). The experience of Japan offers a glimpse of what a mature demographic transition might entail. "With one of the oldest populations in the world, Japan has long faced a tighter labour market, rising care needs, and downward pressure on growth."
Europe may not be on exactly the same path, the member of the ECB's Supervisory Board points out, but it will face similar structural challenges as the working-age population peaks and begins to shrink after 2030. "This shift, which began decades ago, is gradual and profound. The average age in the EU is already higher than 44 years and by 2050 one in four Europeans will be over 65."
It takes the view that "fewer young workers are entering the labour market and population growth is increasingly dependent on migration, both from outside and within the EU, as people move towards more dynamic urban centres. These flows of people sustain overall growth but can exacerbate regional disparities, leaving rural and peripheral areas with shrunken populations and labour shortages."
But how can this data affect the financial system? It explains that banks focusing on the provision of traditional retail banking services could face structural problems. Store networks that are optimized for less digitally oriented customers may struggle to attract younger customers who prefer digital channels.
Some banks focused on shrinking rural areas could face pressure. It may be that some of these institutions today enjoy stable funding and strong short-term profitability thanks to the elderly population that constitutes a loyal customer base. However, these customer bases could shrink in absolute numbers, as older age groups age and younger populations migrate.
