The 2007-09 financial and economic crisis started with a collapse in the US housing market which triggered defaults on subprime mortgages. The trouble quickly spread to other financial markets, leading to great financial instability and multiple defaults of financial corporations, not only in the United States but throughout the world. This in turn ushered in the deepest recession since the 1930s. Economic growth turned significantly negative in many countries and unemployment rates increased sharply, especially among younger people. An important indirect impact was the sovereign debt crisis in Europe, with Greece as the most prominent example.

Understanding Financial Accounts provides a non-technical explanation of all aspects of financial accounts and balance sheets, allowing users of these statistics to gain a good understanding of the topic. Each chapter uses practical examples to explain key concepts in the framework of financial accounts and balance sheets in a clear and accessible way.

Concepts from financial accounts and balance sheets are part of everyday policy debates as well as academic research. This chapter introduces financial accounts and balance sheets by placing these concepts within the framework of the System of National Accounts (SNA), and also offers a short account of the origins and developments of the SNA, up to 1952, when the OECD (then the OEEC) took the lead in establishing international standards for macroeconomic statistics within the United Nations statistics framework. Finally, this chapter provides an overview of the key questions this book attempts to answer.

Financial accounts and balance sheets play an important role in the system of national accounts, focusing on the accumulation and stocks/positions of financial assets and liabilities. This chapter starts with an overview of how the financial accounts and balance sheets are embedded in the system of national accounts, how they are an intrinsic part of a comprehensive and fully consistent accounting system, governed by various accounting identities. It also explains how this results in a set of interrelated accounts which show how different sectors in a country interact with each other, and how the balances of assets and liabilities change over time. The chapter also includes some further guidance on the definitions of sectors and financial instruments, and accounting rules which guide the recognition and valuation of assets and liabilities.

This chapter describes the financial markets as a key to understanding financial systems: capital markets for shares and bonds, money markets, foreign exchange markets, derivatives markets, and other markets related to deposits, loans and pooled investment. For each of these markets, the focus is on their purpose and major players, and on financial intermediation activities. The chapter also describes the construction of tables that illustrate the interconnectedness between institutional sectors, and provides a brief description of the risk elements within the financial system and the ability of the financial accounts and balance sheets to capture such information.

Financial corporations are at the centre of the financial system, channelling funds from lenders/savers to borrowers/investors. Although a large part of the funds is channelled through financial corporations, savers can also finance investment directly (for example, households granting loans to an enterprise). Savers may place their funds with a bank in order to benefit from the higher liquidity of a deposit, or purchase investment fund shares as a convenient way to diversify their assets. Even if savers buy securities on the stock market, they typically make use of a security broker or other so called “financial auxiliaries”. This chapter explains the role of the different types of financial corporations in the economy, how they are evolving and how they can be analysed.

This chapter explains the financial behaviour of households as consumers, investors in financial and non-financial assets (dwellings), and owners of unincorporated enterprises. At the aggregate level, households are typically net “savers” and net lenders. This means that they provide funds to other domestic sectors and to non-residents. The creation and the structure of households’ financial wealth depends on several factors, such as the level of and change in disposable income and saving, the financial system, market conditions, and regulations related to pensions and taxes. To fully comprehend the relevant data, it is also important to understand the measurement of the relevant statistics, and to clarify what is actually meant with “households”. Data sources and compilation routines as well as the statistical standards of the 2008 System of National Accounts (2008 SNA) are addressed in this chapter, with the aim to show which conclusions can be drawn from the data – and which cannot.

Non-financial corporations are responsible for a large share of the economic activity in most advanced economies. They produce goods and services, they invest, and they employ a large share of a country’s labour force. Their importance in the “real” economy is evident in nearly every economic activity. This chapter focuses on non-financial corporations’ interactions within the financial system, both as borrowers and as lenders. Their investments of available funds across instruments may provide important insights into their investment strategies and their propensity towards risk. Conversely, different sources of funding for non-financial corporations shed light on their key choices, such as the choice of debt or equity or the mix of long versus short-term debt. This chapter further provides insights on non-financial corporations’ balance sheets, and on the indicators that can be derived from them. It also addresses key conceptual and operational issues, such as the differences between the System of National Accounts (SNA) and corporate or business accounting.

Governments play important roles in the economy. In the financial accounts and balance sheets, these include being major borrowers, issuers of securities, and funders of other entities. The chapter first dwells upon the delineation of the general government sector and the public sector, which includes general government and public corporations, both of which have separate economic roles. Governments often have complex structures, which give rise to specific classifications (for example, budgetary and extra-budgetary) and levels (for example, central, state, and local). This chapter also provides more detail on government deficit, financial assets owned by government and the various definitions of government debt, including the pitfalls when comparing such data internationally. It also deals with consolidation issues and some other specifics concerning the valuation of financial assets and liabilities, and the assessment of sustainability of government finance.

The accounts for the “Rest of the World”, which record the transactions and positions of residents of a country with non-residents, are key to understanding many domestic and international economic developments. According to economic literature, the balance of current and capital transactions with the Rest of the World is linked with the growth and international competitiveness of an economy, through the impact of issues such as productivity, costs of production factors, product/market diversification, tariff regimes, development of the financial system, as well as other factors such as the ageing of population, the propensity to save and the trade openness of the country. This chapter discusses the interpretation of persistent imbalances, and its relationship with the international investment position or the indebtedness of a country, including the composition of such foreign exposures. Standard criteria and thresholds to test external debt sustainability are also discussed.

Non-financial assets play a crucial role in economic developments. Investments in these assets provide the fundamentals for the future growth potential of an economy. They can be financed from internal sources, primarily saving, or they may require additional external financing in the form of the incurrence of debt or the issuance of (additional) equity. Accounting for non-financial assets, in addition to the measurement of financial assets and liabilities, is necessary to arrive at a full and complete assessment of stocks/positions, as recorded on a balance sheet. For an economy as a whole, non-financial assets are the most important determinant of net worth, or net wealth, of an economy. This chapter describes the place of non-financial assets in the system of national accounts, and their delineation, ownership and valuation. Attention is also paid to the distribution of non-financial assets and net worth across institutional sectors, and their evolution over time.

Many OECD countries are facing pronounced demographic changes, primarily in the form of ageing populations. It is therefore important to not only understand these effects, but to also monitor and analyse their impact on macroeconomic developments. This chapter explains the effects that demographic changes may have on the economy. It starts by explaining how households’ income, consumption and saving vary across age groups and how demographic changes can affect the saving ratio and the net worth of the household sector as a whole. It then analyses the link between demographic changes and governments’ finances and how the sustainability of government finances can be assessed in the light of changing populations. Finally, this chapter discusses the various ways in which pension systems are organised across countries, how they are recorded in the system of national accounts, and how the resulting data can (not) be used to assess their financial sustainability.

highlights the usefulness of the framework of financial accounts and balance sheets for understanding financial globalisation, innovation and crises. Developing further on , it provides a more in-depth analysis of countries’ fragilities when it comes to financial exposures. The chapter offers a wider perspective on the build-up of financial risks over time and the contributing roles of international finance and globalisation. It shows how the framework of financial accounts and balance sheets can be mobilised to analyse financial crises, drawing in particular on recent episodes of stress and considering the impact of leverage and financial innovation. After underlining the importance of integrating a micro, entity-level perspective in the macro approach of financial accounts and balance sheets, this chapter concludes by reviewing the international efforts undertaken to enhance countries’ statistical frameworks in response to the 2007-09 economic and financial crisis.

This chapter takes the perspective of users of the macro framework of financial accounts and balance sheets. Different frequencies, quarterly versus annually, may be more or less appropriate depending on the questions raised by these users. Thus, portfolio shifts may be better captured through quarterly financial accounts and balance sheets, whereas annual data may provide more accurate information for structural types of analysis. The interest in financial accounts and balance sheets is also a function of specific events and times. Undoubtedly, the 2007-09 economic and financial crisis has increased the demand for financial accounts and balance sheets, both from a general macroeconomic point of view, and from the perspective of financial stability analysis and monetary policy. This chapter highlights the latter use of financial accounts and balance sheets for policy purposes, and also discusses the use of financial statistics by famous economists, from the early 1950s to today.