Financial Account (BOP): A Beginner Guide

What Is a Financial Account?

The Financial Account records the flow of financial assets and liabilities between a country and the rest of the world. And individuals, organizations, and the government may own or owe these assets.

Financial assets that residents own in other countries are assets in the accounting. On the other hand, financial assets that foreigners own inside the country are liabilities, according to accounting principles.

Examples of financial assets are precious metals (ex. gold,) foreign currencies, derivatives, special drawing rights, bonds, and stocks.

The Financial Account with the capital account and the current account are components of the balance of payments.

Financial Account Subaccounts

This account has two subaccounts.

• Domestic ownership of foreign assets: These are foreign bank deposits and securities abroad owned by residents.
• Foreign ownership of domestic assets: These are bank deposits to domestic banks and securities owned by foreign organizations, individuals, and governments.

A subaccount has three parts: private-owned, government-owned, and central bank reserves.

The financial account increases if foreign money flows into the country. And it decreases if money flows from a country into foreign countries.

What Is the Net Financial Account?

The net financial account reflects the difference between domestic ownership of foreign assets and foreign ownership of domestic assets.

In other words, it shows the difference between what foreigners own inside the country and what residents of a country own in the rest of the world.

This account changes if there is an increase or decrease in domestic-owned and foreign-owned assets.

For example, if a U.S. citizen buys Chinese government bonds, it is a financial asset flow from the U.S. to China. Thus, it increases U.S.-owned foreign assets abroad (in this case, China) and decreases the financial account of the U.S. by a negative value.

In the above example, if we look from American eyes, there has been an increase in domestic ownership of foreign assets and a decrease in the financial account of the USA.

The following table shows the top 10 countries with a Financial Account surplus.

The below table shows the top 10 countries with a Financial Account deficit.

Final Words

A financial account deficit means the economy is growing and attracting foreign investment. So, it is not necessarily a bad thing.

But it can be a bad thing.

It is a bad thing if using this money, a country imports more than it exports. It means that this country with a deficit sells its assets and consumes.