Exploring Consumers' Financial Fragility in Europe - Over-indebtedness, rainy days funds and the role of financial literacy

This study analyzes financial fragility, defined as a financial status where a subject is exposed to a risk that is not prepared to afford and could have negative consequences. Using data from a 2015 survey on three European countries (Sweden, Italy and Spain) the extreme use of borrowing (overindebtedness), and the lack of funds for emergencies (so called "rainy days") are analysed in order to investigate the presence of specific groups within the population that are more likely to sink in a financial fragile status. The role of financial literacy in explaining such phenomena is taken into account. Results from different regression models confirm the positive role of financial literacy on financial fragility. Individual with more financial knowledge are on average less likely to be overindebted and less likely to lack funds for emergencies. The explanatory power of financial literacy increases when it is measured by items that are more related with debt, compared with the case of financial literacy measures that involve a broader set of topics. This study confirm the positive role of financial literacy on financial behaviors, and the role of financial literacy as an effective consumer protection tool.