By Stephen Senior of the Bank’s G10 Financial Surveillance Division and Robert Westwood of the Bank’s Monetary and Financial Statistics Division.
This article looks at developments in the UK external balance sheet in the wider context of the UK economy and financial system. UK net external liabilities increased sharply in the late 1990s. This largely reflected changing asset values, including exchange rates, rather than financial flows. The currency composition of UK external assets and liabilities means that, other things being equal, a falling exchange rate would reduce UK net external liabilities via valuation changes. In addition, the way foreign direct investment is valued could mean that UK external assets are significantly underestimated. The article also analyses the impact of banking sector business on the UK external balance sheet. UK external short-term debt is large because of the scale of international banking activities. A comparatively small proportion of this is carried out by UK-owned banks.