Author: Hun Jang(Bank of Korea)

<Abstract>

This study empirically examines the impact of population aging on financial stability. Constructing an unbalanced panel of 7,148 banks across 38 OECD countries over 27 years, we find that deeper demographic aging undermines banks’ capital adequacy and lowers their Z-Scores, thereby exerting a negative effect on financial stability. These adverse effects arise because slower growth, higher interest-expense burdens, and compressed net interest margins erode profitability, prompting banks to loosen risk standards in an effort to offset mounting losses. The impact is especially pronounced for smaller banks and those with greater exposures to property-secured mortgages. Our findings imply that policymakers should address underlying structural challenges, chiefly by boosting productivity and raising fertility, while systematically assessing aging-related risks, establishing tailored supervisory standards and support measures for vulnerable banks, and developing financial products and services that enhance liquidity for older households.