Executive summary

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.

The publication begins, in Chapter 1, by situating financial accounts and balance sheets within the broader System of National Accounts reporting system. In Chapter 2, it subsequently identifies the various financial markets for which financial accounts and balance sheets provide a tool for monitoring, analysis and policy making.

The publication continues, in Chapters 3 to 7, with providing an overview of each of the sectors included in the framework of financial accounts and balance sheets: financial corporations, households (including non-profit institutions serving households), non-financial corporations, general government, and the rest of the world (i.e. the financial transactions and positions between the residents of an economy and non-residents).

Chapter 3 on financial corporations provides more details on the roles and functions of these corporations which are in the centre of the financial system, channelling funds from lenders/savers to borrowers/investors. The chapter also discusses the transformation of the financial system in the run-up to the 2007-09 economic and financial crisis, from the “originate-to-keep” to the “originate-to-distribute” model, and the accompanying emergence of securitisation companies and other financial intermediaries.

Chapter 4 focuses on the financial behaviour of households, as consumers, investors in financial and non-financial assets (dwellings), and owners of unincorporated enterprises. It shows that 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 regulation related to pensions and taxes.

The importance of non-financial corporations in the “real” economy is evident in nearly every economic activity. Chapter 5 dwells upon non-financial corporations’ interactions within the financial system, both as borrowers and as lenders. Their investments of available funds across instruments provides important insights into their strategies and their propensity towards risk, while different sources of funding shed light on their key choices, such as the choice of debt or equity or the mix of long-term versus short-term debt.

General government, or more broadly the public sector, plays an important role in the economy. When it comes to finance, they are major borrowers, issuers of securities, and funders of other entities. Chapter 6 gives examples of statistics and indicators for monitoring and analysing government financial behaviour, such as net lending/net borrowing and the composition of government financial assets and liabilities.

The financial relationships with non-residents, the “Rest of the World”, are described in Chapter 7. The external balance of the current and capital accounts are linked to 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. The chapter shows, for example, how persistent imbalances with the Rest of the World may lead to growing international indebtedness, which, sooner or later, needs to be addressed. Standard criteria developed to test external debt sustainability, or thresholds to assess the impact of consistent surpluses, are presented.

Non-financial assets play a crucial role in balance sheets, in addition to financial assets and liabilities. For an economy as a whole, non-financial assets are the most important determinant of net worth, or net wealth, of an economy. Chapter 8 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.

Chapter 9 to 11 describe some broader themes related to financial accounts and balance sheets. First, Chapter 9 deals with the impact of demographic changes on the financial behaviour of the various agents in an economy. They directly affect household saving and wealth accumulation. Government deficit may also be affected as expenditures and revenues often have a close relationship with the demographic structure of a society. The changing ratio between the retired population and the working population may have an impact on the balance sheets of pension funds and may also distort the sustainability of pension schemes, both occupational and social security schemes.

Chapter 10 highlights the usefulness of the framework of financial accounts and balance sheets for understanding financial globalisation, innovation and crises. A more in-depth analysis is provided of countries’ fragilities related to external financial exposures. Furthermore, the build-up of financial risks over time and the contributing roles of international finance and globalisation are analysed in a broader perspective. The chapter also shows how the 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. The importance of integrating a micro, entity-level perspective in the macro approach of the financial accounts and balance sheets is shortly dwelt upon, including international efforts to enhance countries’ statistical frameworks in response to 2007-09 economic and financial crisis.

Finally, Chapter 11 takes the perspective of users of financial accounts and balance sheets, both quarterly and annual. It shows that the interest in financial accounts and balance sheets, both from the perspective of financial stability analysis and the perspective of monetary policy, is a function of specific events and times, with the 2007-09 economic and financial crisis as the most prominent example. The chapter also highlights the use of financial accounts and balance sheets by famous economists, from the early 1950s to today.