Impact of Population Aging on the Financial Sector

This paper investigates the main channels through which population aging affects the financial sector. Based on the results, we conjecture possible changes in the structure of the financial sector due to the aging. Empirical evidence from international panel data shows that population aging is associated with a higher growth rate of household net assets and does not suppress household debt growth. In addition, the insurance, pension and asset management industries are expected to increase their shares in the financial sector. Furthermore, population aging causes lower longer-term interest rates which leads to a flatter yield curve, while it affects stock prices positively because of higher asset demand by households. To complement the international panel data analysis, we also implement a simulation of household balance sheets based on Korea-specific data, ‘The Survey of Household Finance and Living Conditions.’ The main findings are as follows. First, the financial industry is expected to keep growing until the late 2020s thanks to increasing household financial assets, which would also contribute to higher long-term financial asset demand. Second, aging-induced low economic growth and low interest rates together with flattened yield curves will likely lead to lower profitability for financial institutions. Third, under low interest rates, households would increase their stock or fund investments to seek higher yields. Fourth, if elderly-headed households keep their asset allocations biased towards real assets, population aging could increase the concentration of household assets into real assets. These findings imply that the supply of long-term bonds needs to be increased to meet increased demand from the financial institutions where households accumulate their assets. Furthermore, financial institutions should diversify their income sources and strengthen their risk management to cope with lower profitability. Finally, authorities need to help households to reduce liquidity and price risk related to real estate by making reverse mortgages more accessible.