By Mhairi Burnett of the Bank's Monetary and Financial Statistics Division and Mark Manning of the Bank's Domestic Finance Division.
This article, one in an annual series, examines the United Kingdom's financial transactions with the rest of the world, paying particular attention to the implications for financial stability. In recent years, the United Kingdom's stocks of external assets and liabilities have increased considerably, and each now exceeds £3.5 trillion. This is three times UK GDP and around a third of the United Kingdom's total financial assets. The monetary financial institutions (MFI) sector accounts for approximately half of the external balance sheet, reflecting both the international orientation of UK-owned banks and the cross-border activities of foreign-owned UK-resident banks. The article begins with a conceptual discussion of how external positions might affect financial stability, before turning to recent developments. The principal focus is on the MFI and private non-financial corporate (PNFC) sectors, in which the largest external positions exist. The discussion draws upon data from a variety of sources, including the Pink Book, sectoral financial balance sheets, the Bank of England and the IMF.
Financial stability and the United Kingdom's external balance sheet