Financial Account

What is a ' Financial Account'

A component of a country’s balance of payments that covers claims on or liabilities to non-residents, specifically in regard to financial assets. Financial account components include direct investment, portfolio investment and reserve assets, and are broken down by sector. When recorded in a country’s balance of payments, claims made by non-residents on the financial assets of residents are considered liabilities, while claims made against non-residents by residents are considered assets. The financial account differs from the capital account in that the capital account deals with transfers of capital assets. Additionally, the financial account can include claims on land.

BREAKING DOWN ' Financial Account'

The financial account involves financial assets, such as gold, currency, derivatives, special drawing rights, equity and bonds. During a complex transaction that contains both capital assets and financial claims, a country may record part of a transaction in its capital account and the other part in its current account. Additionally, because entries in the financial account are net entries that offset credits with debits, they may not appear in a country’s balance of payments, even if transactions are occurring between residents and non-residents.

Easing access to a country’s capital is considered part of a broader movement toward economic liberalization, with a more liberalized financial account providing the benefit of opening a country up to capital markets. Reducing restrictions to the financial account does have its risks. The more a country’s economy is integrated with other economies around the world, the higher the likelihood that economic troubles abroad may find their way back home. This potential outcome is weighed against the potential benefits: lower funding costs, access to global capital markets and increased efficiency.

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RELATED FAQS
  1. What does a negative balance in the capital account mean?

    Understand what a country's capital account represents and the significance of a negative, or deficit, balance in the capital ... Read Answer >>
  2. What are the components of a financial account?

    Understand what the financial account is and how it relates to a country's balance of payments. Learn about the components ... Read Answer >>
  3. What is the difference between the current account and the capital account?

    Learn how to differentiate between the capital account and the current account, the two components of the balance of payments ... Read Answer >>
  4. What's the difference between the current account and the capital account?

    Learn the difference between the current account and capital account in the balance of payments. Compare and contrast their ... Read Answer >>
  5. How does a capital account illustrate the strength of investment markets for a country?

    Understand what a country's capital account is and how the capital account level can be used to gauge the strength of investment ... Read Answer >>
  6. What transactions are included in a country's balance of payments?

    Learn about the many types of transactions that are recorded in a country's balance of payments, including the current, capital ... Read Answer >>
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