What is a financial account

Routes to finance

Definition: The financial account is a measure of the increase or decrease in international ownership of assets. Owners can be individuals, corporations, the government, or their central bank. Assets include direct investment, stocks like stocks and bonds, and commodities like gold and hard currency.

The financial account is part of a country's balance of payments. The other two parts are the capital account and the checking account.

The capital account measures financial transactions that do not affect income, production or savings. Examples of this are international transfers of drilling rights, trademarks and copyrights. The current account measures international trade in goods and services as well as net income and transfer payments.

The financial account has two main sub-accounts. The first is domestic ownership of foreign assets. When this increases, it adds to the financial account. The second sub-account is foreign ownership of domestic assets. When this increases, it will be withdrawn from a country's financial account.

The financial account contains information on the change in total international assets held. You can find out if the amount of assets held has increased or decreased. It doesn't tell you how much is currently held in the assets.

The two sub-accounts of the financial account

The components of the financial account are largely identical in each sub-account.

The only difference is whether the asset is owned by a country or a foreigner. But when the government is involved, special terms are used on some of the assets it owns. Therefore, the components of the financial accounts in each of the two main sub-accounts should be checked.

1. Domestic ownership of foreign assets: This sub-account is further broken down into three types of property: private, state and central bank reserves.

Regardless of which company owns the overseas asset, increases add to a surplus in the financial account.

Private owners can be individuals or companies. Your assets include:

  • Deposits with foreign banks.
  • Loans to foreigners.
  • Securities of foreign companies.
  • Foreign direct investment.
  • Commodities such as gold that are held in other countries.

Government holders can be federal, state, or local. Most of the foreign assets are owned by the federal government. Its assets can include any of the above, with gold and foreign currencies usually being held in reserve. This component also includes the government's reserve position in the International Monetary Fund.

The nation's central bank can own all of the above except for the reserve position in the IMF, and it owns currency swaps with other central banks. (Sources: "Balance of Payments," New York Federal Reserve Bank. "Checking Account," Bureau of Economic Analysis.)

2. Foreign ownership of domestic assets: This sub-account is further broken down into two types of property: private and foreign official assets. When foreigners increase their ownership of a country's assets, it adds to the funding deficit.

These domestic assets include:

  • Deposits from foreigners held in the country's banks.
  • Loans from foreign banks to domestic banks.
  • Foreign private purchases of a country's government bonds (such as US Treasury Notes).
  • Company securities, such as stocks and bonds, owned by foreigners.
  • Foreign direct investment such as reinvested earnings, stocks, and debt.
  • Other debts to foreigners.
  • Hard assets like gold and other commodities.
  • The country's currency.

Official foreign assets include:

  • All of the above assets held by foreign governments or foreign central banks.
  • Net domestic currency shipments to foreign governments or foreign central banks.

The financial accounts measure the change in international ownership of assets. This should not be done with the income, such as B. interest and dividends, paid on the assets owned.

This is measured by the current account.

How the financial account is part of the balance of payments

The financial account is an important part of the balance of payments. If the financial account has a sufficiently large surplus, it can help to make up for a trade deficit. It's not really a good thing. It means that the country is selling its assets to pay for the purchase of foreign goods and services. It's like selling your land to buy groceries. You'd better invest in this land by farming to grow your own food. It is not sustainable to sell all of your assets for something consumable.

What is the balance of payments?

  1. Current account
    • What is a current account deficit?
      • U.S. current account deficit
    • trade balance
      • What are imports and exports?
        • U.S. Imports and Exports Summary
          • U.S. imports
            • U.S. imports by year for top 5 countries
          • U.S. exports
      • What is a trade deficit?
        • The US trade deficit
          • U.S. Trade Deficit by Country
          • U.S. Trade deficit with China
  2. Capital account
  3. Financial account