Europe’s demographic shift: what could it mean for banking supervision?

25 November 2025

By Patrick Montagner, Member of the Supervisory Board of the ECB

The pace of demographic change is accelerating across the world. Fertility rates are falling almost everywhere, including in regions where they were once growing fast. A replacement rate of 2.1 births per woman is needed for a population to remain stable without migration. But when fertility rates drop to around 1.5, as they have in many European countries, each successive generation shrinks by approximately a quarter relative to the previous one. This trend, which has long been evident in advanced economies, is now spreading to middle and low-income countries too.^[1]

Demographic shifts are reshaping the economic foundations on which banks operate. 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.

This transformation raises a number of questions. 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.

Chart 1

Total birth rate per EU country, 2023

(live births per woman)

A new demographic landscape

Japan’s experience offers a glimpse of what a mature demographic transition might entail. With one of the world’s oldest populations, Japan has long faced a tightening labour market,^[2] rising care needs and downward pressure on growth.

Europe may not follow the exact same path, but it will face similar structural challenges as the working age population peaks and begins to contract 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.^[3] Fewer young workers are entering the labour market, and population growth is increasingly dependent on migration, both from outside the EU and within it, 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.

Migration patterns make this picture even more complex. Net migration into the EU exceeded 2 million people in 2024, helping to offset natural population decline.^[4] However, migration flows, including those within the EU, are highly uneven, as they often concentrate in major metropolitan areas. Other regions, by contrast, experience natural decline and see younger cohorts emigrating to other parts of the EU.

This migration within the EU exacerbates regional inequalities, leaving some areas facing a double demographic squeeze: fewer births and a steady exodus of people of working age.^[5] The result is a patchwork of demographic situations across the EU, with potential implications for regionally concentrated banking markets.

The macroeconomic impact and transmission channels to the financial sector

Demographic change affects a range of macroeconomic variables, many of which have implications for the financial sector. A shrinking working age population slows potential growth, while labour shortages could increase wages and compress profit margins. In turn, productivity may suffer if firms invest less or face difficulty replacing retiring workers.

And household behaviour evolves too. As people age, they shift from accumulation to decumulation of savings, adjusting consumption and investment patterns. Housing markets are directly affected by this: in regions with more older homeowners and fewer young buyers, real estate prices may stagnate or decline, affecting collateral values and household wealth. By contrast, cities to which migrants are moving may see a greater demand for housing, illustrating how demographic change can both weaken and amplify local imbalances.

At the same time, public finances come under pressure as health and pension spending rises. This can affect sovereign risk and, indirectly, banks’ balance sheets through the sovereign-bank nexus^[6]. None of these dynamics are new, but together they form a slow-moving current that can shape financial conditions for decades.^[7]

Potential implications for banks’ business models

From a microprudential perspective, demographic shifts raise questions about the sustainability of banks’ business models, which can vary significantly by region and banking model. On the asset side, retirees paying off their debt and fewer younger borrowers could lead to lower demand for mortgages in ageing regions, particularly in rural areas where population numbers are falling. This, in turn, could put downward pressure on property valuations, affecting collateral quality and potentially increasing loan-to-value ratios.^[8]

On the liability side, the situation is more nuanced. Older depositors currently provide stable funding and take a conservative approach to financial decisions. However, as retirees use their savings and younger cohorts migrate to urban centres or switch to digital competitors, deposit bases in certain markets may come under pressure. This is particularly the case for institutions with a strong presence in regions where the population is shrinking.

In this context, banks that focus on providing traditional retail banking services could face structural headwinds. Branch networks optimised for less digitally oriented customers may struggle to attract younger clients who prefer digital channels. Cost-to-income ratios could deteriorate as fixed costs are spread across a shrinking customer base. Meanwhile, institutions that can adapt to the “silver economy” – for example, wealth management, decumulation advice and integrated retirement planning – may find new revenue streams, though this requires strategic refocusing and capabilities that not all institutions possess.

The challenge is that demographic risks are concentrated in specific regions and banking models. Some banks concentrated in depopulating rural areas could face pressure, as could domestic lenders in countries subject to emigration and population shrinkage. Some of these institutions can enjoy stable funding and solid short-term profitability thanks to ageing, loyal customer bases. However, three risk channels merit particular attention. First, customer bases could shrink in absolute terms as older cohorts age out and younger populations migrate. Second, succession planning within these banks could pose a challenge where their leaders and – in the case of cooperative banks – owners are older. And third, banks’ ability to adapt may vary, as digital transformation requires investment and expertise that smaller, regional banks may struggle to deploy at the necessary pace.

Lessons from climate and nature risk supervision

The parallels between demographic risks and climate risks are instructive. Both types of change are slow, predictable and structural. Both affect asset values, sectoral profitability and the allocation of capital across the economy. And both have regional dimensions, potentially exacerbating inequalities and reinforcing each other: regions vulnerable to climate-related physical risks often overlap with those facing demographic decline, compounding pressures on local economies and real estate values.

Just as supervisors learned to analyse climate transition scenarios, they may also need to interpret demographic trajectories in the future – not to predict population numbers, but to understand how social and economic shifts could affect the banking system, and some banks in particular.

From observation to reflection

ECB Banking Supervision has not yet adopted any specific framework to address demographic risks, and it would not be appropriate to do so hastily. Nevertheless, understanding how demographic shifts might interact with banks’ business models, income structures and asset valuations over time seems increasingly relevant.

Should we expect certain business lines, such as mortgage lending or consumer finance, to contract structurally? How might demographic patterns influence the pace of digitalisation or the extent of consolidation within the banking sector? Are some regions more exposed than others? What can we learn from countries like Japan, which are already exposed to this shift?

Asking these open questions early may help supervisors and banks to anticipate gradual shifts before they become sources of financial fragility. Europe’s demographic transition will unfold over decades, but its economic consequences are already visible in labour shortages and evolving consumer behaviour.

The aim here is not to prescribe immediate action, but simply to acknowledge that the demographic environment in which banks operate is changing, and to ask what that means for their long-term sustainability. Understanding the implications of ageing populations for banks may help ensure that the financial sector remains adaptable as Europe navigates a new demographic era.

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