elizabeth a duke : research, policy, and the future of financial education speech by ms elizabeth a duke, member of the board of governors of the federal reserve system, at the federal reserve bank of boston, boston, massachusetts, 24 may 2011. the original speech, which contains various links to the documents mentioned, can be found on the us federal reserve system ’ s website. * * * i would like to thank eric rosengren, president of the federal reserve bank of boston, for inviting me to speak to you today. this is the third in a series of conferences on the future of life - cycle saving and investing cosponsored by boston university school of management and the boston reserve bank. the audience here includes leading academics in household finance and consumer financial education, industry practitioners, and policymakers. the work you do every day is critically important to the financial well - being of american consumers and to the overall functioning of our economy. today ’ s topic is a daunting one : how to improve consumers ’ financial education. i hope to set the stage for your discussions by sharing my perspective on recent economic factors and trends in the financial services industry and the impact they have had on consumers, particularly those with low and moderate incomes. i will also give you my thoughts on the role of financial education in facilitating effective decisionmaking and suggest areas where additional research could help shape policies and practices to benefit individual consumers and lead to safe and sustainable economic growth. the case for financial education i certainly don ’ t need to impress upon this audience the importance of financial education. today ’ s consumers are making decisions among increasingly complex financial products and in the context of uncertain economic times. a working knowledge of basic financial terms and concepts can lead to better economic decisions and outcomes for individuals over the course of a lifetime. in addition, there is a clear relationship between individuals ’ financial decisions and the health of our entire economy. the financial crisis and the slow recovery from it has obviously had a dramatic impact on the financial decisions made by american families. many now have fewer financial resources and limited options. the pace and timing of their saving and investing life cycle has also been disrupted. for example, high unemployment levels among recent high school and college graduates, especially among young african americans, means that this demographic likely won ’ t be able to start saving and investing as early in life as previous generations. in addition, starting salaries for recent college graduates have also declined, which means that young americans who are employed will have fewer resources for

finding ways around rules : endemic regulatory arbitrage was at the heart of so - called ‘ shadow banking ’ in the run up to the crisis. • step back to consider the public policy purpose. contrast prudential supervision with securities regulation as traditionally conceived. latter works on basis of : write rules ; check compliance with those rules ; punish breaches. if the rules proved to be flawed, they should still be enforced, for credibility ’ s sake ; but later changes should be made to the rules. bis central bankers ’ speeches • animating spirit of ‘ prudential supervision ’ is completely different. impossible to write down a complete ( or even adequate ) set of binding rules on the financial health of a bank ( or on the substance of the professional competence of bankers ). instead, things like capital ratios or liquidity ratios are really indicators of financial health. • this is reminiscent of an old debate in monetary policy. thirty - odd years ago, policy was meant more or less mechanically to follow targets for broad or narrow monetary aggregates. it didn ’ t work : the economic world was not sufficiently stable. since we adopted inflation targeting, central banks have had an eclectic approach to indicators. we are constrained by a clear medium - term objective ( 2 % cpi target ), but do not use a set of supposedly fool - proof core intermediate indicators. • no more can we write down hard and fast rules on bank balance sheets. • nor, consistent with parliament ’ s wishes, is the prudential regulation authority seeking to achieve a zero failure regime. the failure of individual firms has to be an acceptable outcome so long as they can be wound down in an orderly way. • so the pra ’ s approach to prudential supervision entails making judgments of the kind : • your bank isn ’ t as strong as you think it is • cut back on the risk in your book • i ’ m afraid you ’ re not fit to run the bank • your business could not be resolved in an orderly way if it fails. • this shift from rules to judgment changes the relationship between the regulator and business, and is an important example of what this series of talks is about. • challenge is how to make a judgment - based approach acceptable when we use it in earnest. is our society really ready again for judgments from the old lady? • part of the solution is public law. the bank must follow due process when it deploys its statutory powers, and that is subject to judicial review