Claudia Buch: Financial literacy and financial stability

Speech by Prof Claudia Buch, Vice-President of the Deutsche Bundesbank, prepared for the 5th OECD-GFLEC Global Policy Research Symposium to Advance Financial Literacy, Paris, 18 May 2018.

The views expressed in this speech are those of the speaker and not the view of the BIS.

Central bank speech  | 
25 May 2018
by Claudia Buch
PDF full text
(99kb)
  |  27 pages

Abstract

Financial (il)literacy is an important channel through which financial instabilities can arise. Yet financial liter-acy is not a sufficient condition for financial stability. Even if all actors in financial markets are fully financially literate, they may ignore the impact of their own decisions on the functioning and stability of the financial system. This has implications for academia and central banks. Further analytical work is needed to under-stand the link between micro-decision making and macro-economic outcomes. Academia can also contrib-ute to designing good policy evaluation studies and improving teaching of financial stability. For central banks, acknowledging the role of communication for financial stability is important. While policies related to financial consumer protection and financial stability need to be delineated in order to ensure accountability and transparency, synergies between these policy areas can be exploited. This includes developing com-mon narratives, common data strategies, and frameworks for policy evaluation.

1. Motivation

Well-functioning financial markets can have significant positive welfare implications. For the individual, saving and borrowing allow consumption to be smoothened over time and across states of nature. Wealth can be accumulated over time by the power of compound interest. Differences in financial literacy across individuals can thus be a relevant factor behind differences in wealth across individuals (Lusardi, Michaud, Mitchell 2017). Not least, good financial planning helps ensure financial independence. For society as a whole, well-functioning financial markets contribute to growth, allow innovative projects to be financed, and risks associated with these projects to be shared and diversified.