Demographic changes are reshaping the economic foundations on which banks operate, with falling birth rates and ageing populations set to create new conditions in the financial system, according to an ECB Supervisory Board member.
In a study, Patrick Montagner said the goal is not to propose immediate action but to recognise that the demographic environment in which banks operate is changing and to examine what this means for their long-term sustainability.
“An ageing population tends to save more, borrow less and favour lower-risk investments. Fewer younger households mean fewer new mortgages and business loans, while a larger retired population means there is greater demand for liquidity and wealth management products,” he said.
This transformation raises a series of questions, according to Montagner. “How stable will local funding remain as older people draw down savings and other assets? How might collateral values evolve in areas where population density or housing demand declines? Could evolving demographic patterns become a new source of vulnerability for the banking system? These are all questions that should be explored further”.
The study points out that all EU countries show average birth rates below the population replacement rate, including Cyprus. Japan’s experience offers a taste of what a mature demographic transition may entail. “With one of the world’s oldest populations, Japan has long faced a tightening labour market, rising care needs and downward pressure on growth”.
Europe may not follow exactly the same path, Montagner noted, but will face similar structural challenges as the working-age population peaks and begins to shrink after 2030. “This shift, which started decades ago, is both gradual and profound. The median age in the EU is already higher than 44 and, by 2050, one in four Europeans will be over 65”.
He said fewer young workers are entering the labour market and population growth increasingly depends 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 deepen regional inequalities, leaving rural and peripheral areas with shrinking populations and labour shortages”.
How might this data affect the financial system? Banks focused on providing traditional retail banking services could face structural problems, he explained. Branch networks optimised for less digitally oriented customers may struggle to attract younger clients who prefer digital channels.
Some banks focused on shrinking rural areas could face pressures. Today, some of these institutions may enjoy stable funding and strong short-term profitability thanks to an elderly population forming a loyal customer base. However, these customer bases could shrink in absolute numbers as older age groups age further and younger populations migrate.
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