Sovereign Risk and Asset and Liability Management: Conceptual Issues
IMF Working Papers, October 4, 2012
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Bibliographic details
- Authors: Udaibir S Das, Miss Yinqiu Lu, Michael G. Papaioannou, Iva Petrova
- Published: October 4, 2012
- Series: IMF Working Papers
- DOI: https://doi.org/10.5089/9781475511833.001
Overview
- Country practices towards managing financial risks on a sovereign balance sheet continue to evolve.
- Crisis periods and their legacy on sovereign balance sheets reaffirm the need for strengthening financial risk management.
- The paper discusses salient features embedded in the current generation of sovereign asset and liability management (SALM) approaches, including:
- objectives;
- definitions of relevant assets and liabilities;
- methodologies used in obtaining optimal SALM outcomes.
- The paper seeks to lay the ground for further policy and analytical work on SALM.
SALM framework and portfolio perspective
- Elements from SALM approaches are used to develop an analytical SALM framework intended to become an operational instrument for:
- formulating asset management strategies at the sovereign level;
- formulating debtor liability management strategies at the sovereign level.
- From a portfolio perspective, the SALM approach can:
- help detect direct and derived sovereign risk exposures;
- analyze the financial characteristics of the balance sheet;
- identify sources of costs and risks;
- quantify the correlations among these sources of risk.
Institutional requirements and implementation
- The paper outlines institutional requirements for implementing an SALM framework (institutional detail is described in the paper).
Key findings and emphases
- Strengthening financial risk management on sovereign balance sheets is an ongoing need reinforced by each crisis period.
- A unified SALM framework can integrate asset and liability management to better detect and quantify sovereign risk and its correlations across the balance sheet.