Eva Zamrazilová, CNB Board Member
The Second Child and Youth Finance International (CYFI) Regional Meeting for Europe and Central Asia
Financial inclusion and education for children and young people
Frankfurt, 4th November 2013
Thank you very much for your kind invitation, I am happy to be here and feel honoured to be able to present some of my views on the topic of financial literacy.
In the USA, where the latest crisis originated, an advisory body to the president has identified financial illiteracy as one of the main causes of the current financial crisis. I can only agree that an absence of financial literacy, supported by a lack of common sense, must have been an underlying factor.
However, there is – if I may be a touch sarcastic – a more positive aspect to this state of affairs. Before the crisis, many people considered financial literacy to be a topic of marginal importance. The crisis has changed many things, one of them being attitudes to financial literacy. In fact, financial literacy has become a very widespread activity with involvement of many institutions. Here I would like to point out that in the course of 18 months of its existence, the Movement has already spread to more than hundred countries and has reached more than 18 million children. This great progress has been made possible through aligning the efforts of countries and organizations to work together toward the same goals, one of which is increasing the financial literacy of children and youth all over the world.
Central banks and supervisory authorities are currently involved in financial education on a number of levels. In many cases, the mandates of central banks have been extended to include financial stability, and wise management of personal finances is a necessary condition for the financial stability of the household sector. As a macroeconomist and supervisor, I realise that being able to weather shocks not only contributes to financial stability at the individual level, but also increases stability at the macroeconomic level. Supervisory institutions – be they part of the central bank or standalone authorities – are engaged in promoting financial literacy as well. Consumer protection on the financial market is also becoming an integral part of supervisory work. Supervision of financial institutions cannot deliver full protection of the consumer. It cannot protect people from every single pitfall in the financial market. It cannot take care of everything. It cannot prevent every unfair practice, and nor should it. If we want to have a free and functioning financial market, at least half of the work is down to individuals themselves. Just like the police cannot catch every pickpocket and must warn people to mind their personal belongings, so consumer protection institutions must guide people towards behaving sensibly on the financial market. Unfortunately, people do not always behave sensibly, not only because financial products are getting more and more complex and difficult to understand, but also because of wrong patterns of behaviour. Consumers often put themselves at risk out of recklessness, ignorance or disinterest.
The experience of the Czech Republic is that the originally conservative pattern of behaviour of Czech consumers has changed. I dare say the same has happened in most of the new EU Member States. We are getting richer but more and more of our households are not able to make ends meet. Households are getting deeper and deeper into debt, lured by all sorts of attractive new products and services and by easy access to various types of credit. Household insolvency, which in the worst-case scenario can put the financial stability of the entire economy at risk, is increasingly common.
So, there is now quite a wide consensus that financial literacy is a real issue. A growing number of public institutions are aware that we need an effective system of economic and financial education at all school levels, as well as a financial literacy toolkit for various target groups.
The Czech National Bank has been actively promoting financial education for a number of years now. It was also given consumer protection powers in 2008. From the very outset, the CNB Board has regarded financial literacy promotion as an integral part of this work. We have supported two financial literacy textbooks for primary schools. We have organized seminars for teacher to be able to use these textbooks. We communicate as actively as we can.
Together with the Ministry of Finance and the Ministry of Education, Youth and Sports, the Czech National Bank is responsible for the “National Financial Education Strategy”. Three years ago, in partnership with the Ministry of Finance, we implemented a project to survey the financial literacy of the adult population based on a representative sample of citizens. One of the aims of this survey was to identify weak spots on which we should focus our educational activities. Our survey provided important insights into both knowledge and attitudes. Some of the findings were quite encouraging, but others were cautionary.
One serious cautionary finding of the 2010 Financial Literacy Survey was that almost half of the respondents did not understand certain clauses of contracts relating to financial products they were interested in. Even more seriously, half of them ended up signing the contract anyway. This illustrates the role of ignorance and recklessness.
Our survey also clearly proved the vital importance of financial education for young people. By comparison with the overall population, young people are well informed on average. They have a good knowledge and are well capable of searching for information on the internet. However, they generally have a greater tendency towards what we economists call moral hazard. Compared to the older generation they are much more reckless. They have greater risk tolerance, plan less for the long term, have less control of their finances, and are more often late in paying their bills and other payments.No wonder, as they are under pressure to conform and keep up with the Joneses. They are under marketing pressure to buy various tempting products and services.
Therefore, no matter how well we know the technical parameters of a financial product, we are not protected from making bad decisions. Bad decisions stem from bad attitudes, such as taking too much risk, overestimating our future situation, and believing that things will turn out okay.
I am happy to say that financial literacy has become a standard part of our school curriculum. At the level of primary education financial literacy was introduced in September 2013. I am convinced that it is crucial to start with personal finance education as soon as possible. We have to realise that people with basic education and some kind of apprenticeship will no longer have a chance to be properly and systematically educated about the financial literacy issues, if the subject is not part of the basic school curriculum. And our 2010 survey has clearly indicated the vulnerability of people with only basic education in terms of both knowledge and attitudes. Knowledge and basic computational skills may be learned at school, but this is only a necessary and not a sufficient condition for good financial decisions. Financial literacy must be combined with healthy attitudes, responsibility, prudence and common sense. It will not be easy to persuade young people to steer clear of moral hazard. It is vital to work not only with schools and families, but also with all the other players with whom young people come into contact in their free time. And here I would like to stop and thank the Movement and the ECB once again for being so active in this field and also for organising this excellent event.