Financial Account

What is a ' Financial Account'

A financial account is a component of a country’s balance of payments that covers claims on or liabilities to nonresidents, specifically with 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 nonresidents on the financial assets of residents are considered liabilities, while claims made against nonresidents by residents are considered assets.

BREAKING DOWN ' Financial Account'

Providing a tracking mechanism for shifts in international asset ownership, the financial account consists of two subaccounts. The first is concerned with the domestic ownership of foreign assets, such as foreign bank deposits and securities in foreign companies, and the second is concerned with the foreign ownership of domestic assets, such as the purchase of government bonds by foreign entities or loans provided to domestic banks by foreign institutions.

Capital and Current Accounts

The financial account differs from the capital account in that the capital account deals with transfers of capital assets. Transactions in the capital account have no impact on a country’s production levels, rate of savings, or overall income.

A reflection of the country’s current trade balance combined with net income and direct payments, the current account serves to measure imports and exports of goods and services. When combined with the financial and capital accounts, the three accounts form the country’s balance of payments.

Transaction Recording

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 nonresidents.

Risks and Benefits of Increased Access

Easing access to a country’s capital is considered part of a broader movement toward economic liberalization, with a more liberalized financial account opening a country up to capital markets. Reducing restrictions to the financial account does have its risks, however. 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.