Board of Governors of the Federal Reserve System

Chairman Akaka, Ranking Member Johnson, and members of the Subcommittee, thank you for inviting me to submit a statement for the record. As April is Financial Literacy Month, I am pleased to highlight the importance of financial literacy to a stable and healthy economy and to describe some of the Federal Reserve System's efforts to help Americans make informed financial decisions.

The recent crisis demonstrated the critical importance of financial literacy and good financial decisionmaking, both for the economic welfare of households and for the soundness and stability of the system as a whole. Good financial choices depend on reliable and useful information, presented in an understandable way. Essential components of personal financial management include an understanding of how to budget strategically, use credit, save to build personal wealth, and shop for and choose suitable financial products.

The Federal Reserve recognizes that informed, educated consumers not only achieve better outcomes for themselves but, through careful shopping for and use of financial products, help to increase market efficiency and innovation. Our approach to assisting consumers to successfully navigate the financial marketplace has been three-pronged: First, we have worked diligently to foster financial and economic education. Second, we conduct research on consumer decisionmaking that helps to identify what works in financial education and informs the regulatory process. Third, in recognition that basic financial knowledge is not sufficient to safeguard people from fraud and deceptive practices, we have promulgated strong consumer protection rules and consumer-tested required financial product disclosures to ensure they present information clearly and in a useful format. We vigorously enforce consumer protection laws to ensure that providers of consumer financial products act fairly and comply with the spirit and letter of the rules.

Financial and Economic Education
In our dynamic and complex financial marketplace, financial education must be a life-long pursuit that enables consumers of all ages and economic positions to stay attuned to changes in their financial needs and circumstances and to take advantage of products and services that best meet their goals. Well-informed consumers, who can serve as their own advocates, are one of the best lines of defense against the proliferation of financial products and services that are unsuitable, unnecessarily costly, or abusive.

Financial Education from the Federal Reserve
The Federal Reserve has provided unbiased, credible, research-based financial information and educational materials, in print and on the Internet, for many years. We offer publications--in both English and Spanish--that provide consumers tips on a broad range of topics, from avoiding mortgage foreclosure scams to managing a checking account. More recently, the Federal Reserve Board has developed interactive webpages with up-to-date information on regulatory changes that affect consumer financial products and services. These webpages offer information in plain language and in an easy-to-understand format; they also provide links to calculators, additional resources, and other relevant material. The Board's "What You Need to Know" series provides user-friendly information and tools about new terms, disclosures, and protections for credit card accounts, overdraft protection programs, gift cards, credit decisions and credit scores, and notices of mortgage transfers.¹ Since the series webpage was launched in February 2010, more than 366,000 web views have been logged, with 60 percent of those visits for credit card information.

The Federal Reserve Banks, through their Community Affairs offices, have developed financial education materials and programs on topics that range from establishing banking accounts to building wealth. For example, the Federal Reserve Bank of Chicago, as part of Financial Literacy Month, offers free classes and activities during its "Money Smart Week." In events developed in cooperation with local organizations and firms, young people and adults learn about financial matters ranging from opening a savings account to applying for a mortgage. Several Federal Reserve Banks are also actively involved in "Bank On" programs that help cities and financial institutions bring unbanked and underbanked consumers into the financial mainstream by educating them about the benefits of having a bank account and using other banking services.

Exposing young people to financial concepts is particularly important. Students can be particularly vulnerable to the temptations of taking on excessive debt, such as credit card debt. And the earlier that young people can develop basic financial skills, the more likely it is that they will make good financial decisions when they become adults. The Federal Reserve is committed to helping teachers and schools work more effectively with students as they develop their financial literacy. For example, the Federal Reserve provides a financial and economic education website with a variety of resources for teachers, and students of various ages and knowledge levels.² The site offers educational games, classroom lesson plans, online publications, and multimedia tools. Federal Reserve Banks offer teachers professional development opportunities to improve their ability to teach personal finance topics. A number of Federal Reserve Banks also organize personal finance essay, video, and academic competitions for students. We encourage students and teachers to visit Federal Reserve Bank learning centers and museums, which feature interactive exhibits about many aspects of banking, the financial system, and the economy.

Collaboration in Financial Education
In addition to conducting its own programs, the Federal Reserve collaborates with numerous organizations and agencies that educate and counsel individuals from a broad range of audiences. Our long-standing partnership and role on the board of NeighborWorks America supports homebuyer, foreclosure, and mortgage modification counseling to lower-income consumers and communities. We have helped these and other organizations--such as American Savings Education Council, Junior Achievement, the Council for Economic Education, the National Endowment for Financial Education, and America Saves--develop, implement, and evaluate personal finance awareness and education programs. In addition, we have worked with the Jump$tart Coalition, American Library Association, the AARP, the National Council of La Raza, the National Association of School Boards, and the Congressional Black Caucus to increase awareness of our financial and economic education resources.

We also collaborate with other federal government agencies on education and outreach initiatives. Since 2004, the Board has participated in the Financial Literacy and Education Commission (FLEC), which is composed of representatives from 22 federal agencies and coordinates financial education resources offered by the federal government. To support the FLEC's mission, Board staff members have served on Commission task forces to develop its website, national strategy, and research agenda.

Research and Evaluation
As part of our policy research mission, the Federal Reserve dedicates considerable resources to the study of consumer economics and consumer behavior. Our work includes the development of valuable new data and empirical studies in these areas. For example, for many decades the Board's Survey of Consumer Finances has provided one of the most important sources of information on the assets, debts, and wealth of American households.³ The Federal Reserve has also developed substantial expertise in assessing and drawing policy conclusions from a range of consumer financial data, such as data from credit records or data on mortgages provided by lenders under the Home Mortgage Disclosure Act.

The Federal Reserve has been involved in studying the efficacy of financial education in helping people make better financial decisions. For example, several years ago, researchers in the Board's Division of Consumer and Community Affairs joined with Army Emergency Relief to conduct a longitudinal study of the effect of a two-day financial education program on soldiers' financial management. In general, studies show that financial education for young adults is most effective when it is both timely and relevant. At the same time, research has also provided important insight into other factors that contribute to the development of personal financial skills, such as general education levels, family experiences and parental influence, access to financial services (for example, having a savings account while growing up), and income level.⁴ These findings underscore the importance of early and ongoing education as well as experience with financial products in helping people make good financial choices.

We have also analyzed alternative approaches to financial education. For example, the economic education staff at the Federal Reserve Bank of Philadelphia investigated the effectiveness of a personal finance course that uses a specific curriculum, "Keys to Financial Success." This semester-long course is taught by teachers who attended a 30‐hour training course. A 50-question exam administered before and after the course showed that students who took the course had a statistically significant increase in their personal finance achievement, compared with a control group of students of the same age who were not exposed to the program.⁵ 

Consumer Protection Regulation and Enforcement
Although financial education is a critical first line of defense, it is not a substitute for strong and effective regulations that safeguard consumers against abusive and fraudulent practices. The Board has been the primary federal agency charged with writing rules governing consumer financial products, and in recent years, we have issued rules for mortgages, credit cards, student loans, and overdraft protection programs, among others. We have also maintained a robust compliance program to ensure that banks under our purview adhere to these rules.

As you know, our consumer-protection rulemaking authority and our consumer-protection supervisory and enforcement authority over some of the nation's largest financial institutions will transfer to the Bureau of Consumer Financial Protection, pursuant to the Dodd-Frank Wall Street Reform and Consumer Protection Act. The Board will retain some relevant rule-writing authorities (for example, under the Community Reinvestment Act) as well as supervisory authorities for smaller financial institutions that we also regulate for safety-and-soundness purposes. We are working closely with the Department of the Treasury and the new Bureau to facilitate the necessary transfers of authorities and personnel.

Regardless of how the regulatory and supervisory responsibilities are distributed, a comprehensive approach--one that includes education, research, and regulation--remains essential to ensuring that consumers receive adequate protections and that markets for consumer financial products function well. The Board will work collaboratively with the Bureau and other agencies to help individuals and families make the best choices for their financial futures.

For your reference, I am attaching some examples of financial literacy programs and outreach that are available from the Federal Reserve.

Appendix A: Federal Reserve Community Affairs Outreach (39 KB PDF)

Appendix B: Federal Reserve Youth Education (53 KB PDF)
 

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1. See Board, "What You Need to Know Series." Return to text

2. See the Federal Reserve Education website . Return to text

3. The Board's Survey of Consumer Finances. Return to text

4. See Catherine Bell, Daniel Gorin, and Jeanne M. Hogarth (2009), "Does Financial Education Affect Soldiers' Financial Behaviors?" paper presented at the Federal Reserve System Community Affairs Research Conference, held in Washington, April 16-17, www.kansascityfed.org/publicat/events/community/2009carc/Hogarth.pdf; Catherine Bell and Jeanne M. Hogarth (2010), "Better Deals on Wheels: The Effects of Financial Education on Car Buying ," Federal Reserve Bank of Minneapolis, Community Dividend, April; Catherine J. Bell, Jeanne M. Hogarth, and Daniel R. Gorin (2009), "Teaching for the Test, and Life Is the Final Exam," paper presented at the annual conference of the Association for Financial Counseling and Planning Education, held in Scottsdale, Ariz., November 18-20; and Catherine J. Bell, Daniel Gorin, and Jeanne M. Hogarth (2010), "What Makes a Good Money Manager Good? Insights from an Evaluation of an Education Initiative," paper presented at the 56th Annual Conference of the American Council on Consumer Interests, held in partnership with the Federal Reserve Bank of Atlanta, Atlanta, Ga., April 14-16. Return to text

5. See Andrew T. Hill, Bonnie T. Meszaros, and Brian Tyson (2011), "Evidence of Student Achievement in a High School Personal Finance Course," paper presented at the Allied Social Science Associations conference, held inDenver, Colo., Jan. 6-9. Return to text