A brief overview of financial accounts and balance sheets

Fano Daniele
(Fondazione AIB)

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.


1. Financial accounts and balance sheets: a lively and pertinent matter

“Asset price inflation”, “sustained current account surplus”, “sovereign external debt”, “household net lending”, “corporate leverage”, “financial sector balance sheets” – these are just a few financial terms that we, not only as specialists, but also as concerned citizens, hear on the radio and TV, and read in newspapers, books and blogs. They are all part of the System of National Accounts, more specifically the financial accounts and balance sheets. The use of these technical concepts has become much more widespread since the 2007-09 economic and financial crisis, although their importance was already well-established before.

In a nutshell, financial accounts and balance sheets provide a systematic overview, by economic sector, of assets and liabilities of those economic sectors at a certain point in time. The following main sectors are included: non-financial corporations, financial corporations, government, households, and non-profit institutions serving households. In addition, data on foreign exposures, for example foreign assets owned by the residents of an economy, or the liabilities that residents have incurred towards non-residents, are recorded in the balance sheets of the so-called “Rest of the World”. Assets and liabilities are typically broken down into various “financial instruments”, such as currency and deposits, debt securities and loans, and equity. In addition to providing an overview of the stocks of the various financial instruments, the balance sheets, financial accounts and other “accumulation accounts” show a complete picture of the acquisitions and purchases of financial assets and liabilities, or the changes in stocks due to, for example, holding gains and losses.

There are a wealth of examples of central bankers, government officials, financial and academic experts and others discussing the numerous uses and advantages of the System of National Accounts, and financial accounts and balance sheets.

In the words of Michael Palumbo and Jonathan Parker:

“The implementation of the System of National Accounts (SNA) … has two significant advantages ... First, the SNA are organized according to sectors of the economy defined by economic agents: firms, financial institutions, consumers, governments and the rest of the world. Second, the accounts integrate real and financial information, so that one can track not only production of, income from, and use of output, but also net lending, net borrowing, and net worth by sector” (Palumbo and Parker, 2009).

Financial accounts and balance sheets allow for reality checks. In 2009, the Financial Stability Board under Mario Draghi issued a report stating that “… data gaps are an inevitable consequence of the ongoing development of markets and institutions … Indeed, the recent crisis has reaffirmed an old lesson – good data and good analysis are the lifeblood of effective surveillance and policy responses at both the national and international levels” (IMF, 2009). In response to the document by the Financial Stability Board, the G-20 decided to pursue a strong focus on the systematic implementation of the financial accounts and balance sheets, with the goal of offering a more cohesive and complete set of financial statistics at the macro level (OECD, 2015).

Financial accounts and balance sheets have provided powerful insights that lead to key policy decisions. When explaining why the Federal Reserve engaged in radically new monetary policies, Ben Bernanke explained that “…financial institutions [had] seen their capital depleted by losses and write-downs and their balance sheets clogged” (Bernanke, 2009).

Through financial stability reports regularly published by the IMF and national central banks, the financial accounts and balance sheets provide a way to understand prospective financial risks and measures to be taken to address them. The Bank of England, for example, described how the current account can provide warnings about a country’s financial stability: “A persistent current account deficit could lead to a sudden adjustment in capital flows or depreciation of the exchange rate, with adverse consequences for … financial stability … the composition of capital flows can change over time and vulnerabilities can build quickly, particularly when the deficit is persistently large” (Bank of England, 2015). Another example is the IMF describing their concerns about developments in balance sheets: “But balance sheets have become stretched thinner in many…companies and banks. These firms have become more susceptible to financial stress, economic downturn, and capital outflows. Deteriorating corporate health runs the risk of deepening the sovereign-corporate and the corporate-bank nexus in some key…markets” (IMF, 2015).

In fact, financial accounts and balance sheets not only allow a reader to understand short-term risks, but also more structural and longer term features of economic and financial systems, as shown, for example, in Paoli and Küçük (2016):

“The world has gone through a process of financial globalization over the past decades, with countries increasing their holdings of foreign assets and liabilities. At the same time, countries have started to have a more positive foreign currency exposure by reducing their bias toward holding assets in domestic currency instead of foreign currency.”

Financial accounts and balance sheets can also put events in a broader historical perspective:

“The costs imposed by the financial crises that hit western economies in 2007 have been enormous … [and] include huge rises in public debt … This is the fourth most costly fiscal event of the past 225 years, after the wars with post-revolutionary France and the first and second world wars. Mismanaged finance imposes fiscal costs that are not far short of world wars” (Wolf, 2015).

Figure 1. Gross general government debt
Percentage of GDP

OECD (2017), “Financial Balance Sheets, SNA 2008 (or SNA 1993): Consolidated stocks, annual”, OECD National Accounts Statistics (database), http://dx.doi.org/10.1787/data-00719-en.


The importance of national accounts in understanding major economic events is best captured in the bestseller book titled This Time is Different (Reinhart and Rogoff, 2009), which offers an in-depth historical perspective based on empirical investigation of financial crises in the past centuries with special reference to debt.

Last but not least, financial accounts and balance sheets may trigger thoughts on new intellectual challenges and highlight the need for fresh thinking:

“Failure to foresee either the crisis or the length of the subsequent recession reflects an intellectual failure within mainstream economics – an inadequate focus on the links between financial stability and macroeconomic stability, and on the crucial role that leverage levels and cycles play in macroeconomic developments” (Turner, 2003).

2. A rich and stimulating history

The fact that the interpretation of financial accounts and balance sheets can be difficult and complicated, and focuses on unpleasant numbers such as deficit and debt, likely explains why the accounts are not more popular. But are financial accounts and balance sheets really that complicated or abstruse? Back in 1777, David Hume started his Essays on Commerce and Trade with a surprising warning that can apply to the intricacies (and importance) of financial accounts: “The greater part of mankind may be divided in two classes, that of shallow thinkers who fall short of the truth; and that of abstruse thinkers who go beyond it. The latter class are by far the most rare and, I may add, the most useful and valuable.”

When David Hume was writing his critical essay, rudimentary national accounts figures such as sovereign wealth and international trade estimates had been around for a couple of centuries. Then, as now, such figures gave rise to economic debates and theories. Bullionism, focusing on monetary policy, was superseded by Mercantilism, which had a broader perspective. David Hume, Adam Smith and the French and Italian “laissez-faire” school of economics developed the Classical Economy criticism and fostered an even more complete framework. Further developments in economic thought led to better definitions of economic agents, their interactions, and their grouping into sectors.

The current version of the System of National Accounts, based on international shared principles and standards, is relatively recent. In fact, it was developed during the past century, following the Great Depression and the accompanying urgent need for data to offer support to the US government in crafting economic policies that would steer the economy towards recovery. In the absence of comprehensive national income and output measures, the US Department of Commerce commissioned Simon Kuznets of the National Bureau of Economic Research (NBER) to produce a series on National Income accounts. His research was published in 1934 and the original set of accounts was presented in a report to Congress in 1937, marking the start of the development of comprehensive national income accounts.

World conflict and economic downturns brought policy making to the forefront, and the new “tool box” of national accounts for monitoring economic developments gradually became part of the required information set. While initially used for “back of the envelope” estimates of the impact of alternative policy decisions, national accounts were soon used in ever-more sophisticated models. In his 1940 book How to Pay for the War, John Maynard Keynes used macro accounting to craft an economic policy proposal for addressing the challenge of non-inflationary financing of the war effort. His then-assistant, young researcher and statistician Richard Stone, later became a founding father of the modern System of National Accounts and went on to receive the Nobel Memorial Prize in Economic Sciences for his work on developing an accounting model to track economic activities on both the national and international scale.

Morris Copeland should also be mentioned here; through his analysis of money flows in the six-year period encompassing the recovery from the Depression and the outbreak of World War II, Copeland pioneered the so-called “Flow of Funds Accounts”. His research addressed key theoretical questions pertaining to national accounting: “When total purchases of our national product increase, where does the money come from to finance them? When purchases of our national product decline, what becomes of the money that is not spent? What part do cash balances, other liquid holdings, and debts play in the cyclical expansion of money flow?” (Copeland, 1949). The Flow of Funds reports have since 1952 been published quarterly by the US Federal Reserve and are considered an important element to understanding national accounts.

All of this led up to the current System of National Accounts. As far back as 1952, the OECD (then the OEEC) took the lead in establishing a standardised System of National Accounts within the United Nations Statistics framework (Ward, 2004). Since then, successive waves of improvements under a group of international organisations (OECD, IMF, United Nations, World Bank, and more recently the European Commission) have followed. The latest version is the 2008 System of National Accounts (the “2008 SNA”), which was implemented in most developed countries in 2014. The last decade has also shown a significant improvement in the availability of annual and quarterly national accounts figures for a whole range of countries on a common rigorous basis.

3. Common misconceptions and interpretation errors

The reader should be warned that intuition may be deceiving when analysing financial accounts figures. There are frequent confusions about, for example, the distinction between “stocks” and “flows” or the composition of different parts of the saving balancing item. These distinctions may appear to many as cumbersome refinements, but they are important and will be further addressed in this book.

Misplaced intuition may be reinforced by the fact that, when thinking about figures, we may be looking for confirmation of existing ideas. Often the effort of taking a fresh look at the numbers can be rewarding. For example, one concept that has traditionally been prevalent in economics is that households are net lenders and that corporations are net borrowers, while the other sectors are more or less balanced. The truth is that in many countries, corporations have, in the recent past, acted as net lenders for many years in a row, while governments have been major borrowers and, in the period just before the 2007-09 economic and financial crisis, even households became net borrowers (Fano and Trovato, 2013).

4. Overview of this book

Financial accounts and balance sheets allow us to answer some key questions that are, amongst others, addressed in the various chapters of this book:

  • What are the financial linkages between the various sectors of the economy? How does it all come together in the complete set of accounts? Which financial instruments are distinguished, and what are the main accounting rules? (Chapter 1).

  • Which financial markets can be distinguished? What is the role of the various economic actors? How does the connectedness between sectors and countries play a role in the spread of financial risks? Which risks are involved in investing and borrowing? (Chapter 2).

  • What is the role of banks and other financial corporations, and how do they interact with the rest of the economy? Has their role increased over time? What is “shadow banking”, and what types of new financial corporations have emerged? (Chapter 3).

  • How do we assess households’ ability to accumulate wealth and to incur debt? How is this distributed across household groups? (Chapter 4).

  • What are the sources and uses of funds for non-financial corporations in the era of globalisation? How has the financial behaviour of companies changed over time? (Chapter 5).

  • What are the key indicators for assessing the financial situation of a government? How can government debt be defined and measured? (Chapter 6).

  • How is a national economy connected to the rest of world? How can one evaluate the opportunities and risks of foreign exposures? (Chapter 7).

  • What are the differences between financial and non-financial wealth? Who owns the wealth, and how is it (de)accumulated? How can one arrive at a complete set of balance sheets for the various sectors? (Chapter 8).

  • Why is demography so relevant for understanding financial accounts? What is the role of pension funds and governments in providing retirement resources? (Chapter 9).

  • What lessons can we draw from recent financial crises? How can we monitor and assess the build-up of risks and transmission channels, and what type of statistics do we need to do this? What is the role of, and risks related to, “globally systemically important financial institutions”? (Chapter 10).

  • Which statistics related to the financial accounts and balance sheets are typically compiled and disseminated? What are the uses of financial accounts and balance sheets? What has the academic literature contributed in this area? (Chapter 11).


Bank of England (2015), Financial Stability Report, December 2015, Bank of England, London, www.bankofengland.co.uk/publications/Documents/fsr/2015/dec.pdf.

Bernanke, B. (2009), The Crisis and the Policy Response, the Stamp Lecture, 13 January, London School of Economics, London.

Copeland, M. (1949), “Social Accounting for Money Flows”, Accounting Review, Vol. 24/3, pp. 254-264.

De Paoli, B. and H. Küçük (6 January 2016), “Hedging income fluctuations with foreign currency assets”, Liberty Street Economics blog, http://libertystreeteconomics. newyorkfed.org/2016/01/hedging-income-fluctuations-with-foreign-currency-assets. html?utm_source=feedburner&utm_medium=feed&utm_campaign= Feed%3A+Liberty StreetEconomics+%28Liberty+Street+Economics%29.

Fano D. and G. Trovato (2013), “Patterns in financial flows? A longer-term perspective on intersectoral relationships”, in Public Debt, Global Governance and Economic Dynamism, Springer Verlag, Milan.

IMF (2015), Global Stability Report, October 2015, IMF, Washington, DC, www.imf.org/en/Publications/GFSR/Issues/2016/12/31/Vulnerabilities-Legacies-and-Policy-Challenges.

IMF and Financial Stability Board (2009), Financial Crisis and Information Gaps: Report to the G20 Finance Ministers and to the Central Bank Governors, www.imf.org/external/np/g20/pdf/102909.pdf.

OECD (2017), “Financial Balance Sheets, SNA 2008 (or SNA 1993): Consolidated stocks, annual”, OECD National Accounts Statistics (database), http://dx.doi.org/10.1787/data-00719-en.

OECD (2015), “G20 Data Gaps Initiative (DGI)”, OECD Statistics Newsletter, Issue 63, OECD, Paris, pp. 3-7, www.oecd.org/std/OECD-Statistics-Newsletter-September-2015.pdf.

Palumbo, M.G. and J.A. Parker (2009), “The integrated financial and real System of National Accounts for the United States: Does it presage the financial crisis?”, NBER Working Paper, No. 14663, National Bureau of Economic Research, Cambridge, www.nber.org/papers/w14663.pdf.

Reinhart, C.M. and K.S. Rogoff (2009), This Time is Different, Princeton University Press, Princeton.

Turner, A. (2003), “Debt, money, and Mephistopheles: How do we get out of this mess?”, Occasional Papers (Group of Thirty), No. 87, Washington, DC, http://group30.org/images/uploads/publications/G30_DebtMoney Mephistopheles.pdf.

Ward, M. (2004), Quantifying the World: UN Ideas and Statistics, Indiana University Press, Bloomington.

Wolf, M. (2015), “Indispensable banks need a sturdy ringfence”, The Financial Times, 25 June 2015.