The financial account measures the changes in the number of foreign assets held by residents of a country. Residents include individuals/families, businesses, and the government. A country’s financial account is one of the three components of its balance of payments.
The balance of payments, as the name suggests, is simply the way a country accounts for its financial welfare, including all income coming into the country, as well as looking at its trade with foreign countries and the success or failures of foreign and domestically-held assets.
Exploring the Financial Account
Assets measured within the financial account include everything from direct investments to commodities (such as precious metals, like gold, or foreign currency) and securities (such as bonds or stocks).
The financial account works in combination with the current account – which acts as a metric for international trade – and the capital account – which is a metric for all financial transactions that don’t actively have an impact on production, savings, or income – with all three completing the system of balance of payments for a country.
The financial account does not reveal the total number of assets held by a country. However, it does act as a record of the changes in the amount or value of assets being held by a country’s residents. It simply shows whether the number of assets held increases or decreases in total value.
The Two Subaccounts of the Financial Account
There are two subaccounts or sections within the financial account:
1. Foreign ownership of domestic assets
The foreign ownership subaccount is broken into two parts: private assets and foreign official assets. When residents of a foreign country own assets in the domestic country, the financial account records a decrease.
Domestic assets that may be owned by foreigners include loans made from foreign to domestic banks, deposits made by foreigners to domestic banks, corporate securities (i.e., stocks/bonds), and foreign debt. Foreign official assets can be any of the assets already mentioned; however, they must be held by a foreign government or central bank.
2. Domestic ownership of foreign assets
The domestic ownership subaccount specifies three types of ownership. Private owners are individuals or businesses and can have assets that include foreign loans, deposits at banks in other countries, or direct investments made into other countries. Government owners are either at the local, state, or federal level, though the federal government is the primary type of government asset owner.
Finally, the central bank of a country can own foreign assets, which include all of the assets mentioned above, except for a reserve position in the International Monetary Fund (IMF), an asset that is uniquely held by government owners.
Despite the fact that the financial account does not give a solid number of total foreign assets held, it is important in the way it functions both to reveal increases or decreases in the number of assets held by a country, and in its role as one of the three metrics used in the balance of payments system.