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Sovereign Asset and Liability Management: An E-Learning Training Course
II. Rationale
III. The Conceptual Balance Sheet
IV. Contingent Liabilities




Sovereign risk management has traditionally focused on managing assets and liabilities in an independent manner.  This practice may mitigate risks to assets and liabilities individually, but it fails to address collective risks.  History has demonstrated that the failure to match financial characteristics of assets and liabilities in a joint manner increases the risk profile of the sovereign.  From this perspective, a more comprehensive framework for managing asset and liabilities, Sovereign Asset and Liability Management (“SALM”), has emerged.

Asset and liability management is the ongoing process of formulating, implementing, monitoring and revising strategies related to assets and liabilities to achieve the organization’s financial objectives, given the organization’s risk tolerances and other constraints”  (SOA, 2003).  While the joint management of assets and liabilities has been greatly utilized in the private sector in industries such as banking and insurance, the implementation of a combined asset and liability management framework at the sovereign level has not been the standard practice. 

For more, see the ORACLE White Paper on “Asset and Liability Management: An Overview”.

“[Sovereign] asset and liability management captures the idea that, as far as possible, the entire [government] balance sheet (i.e. both assets and liabilities), should be included in the risk analysis so as to assess the overall risk exposure.  This makes it possible in principle to limit the risk by matching the risk characteristics of respective assets and liabilities.  In this way, one side of the balance sheet hedges another” (OECD, 2005).  The International Monetary Fund (“IMF”) and numerous countries have acknowledged the importance of extending risk analysis and management to all assets and liabilities.  In July 2010, the Stockholm Principles were developed.  The Stockholm Principles state, “the scope of debt management should be defined in a way that also accounts for any relevant interactions between the nature of financial assets, explicit and implicit contingent liabilities, and the structure of the debt portfolio.”

For more, see the International Monetary Fund’s Stockholm Principles, “Guiding Principles for Managing Sovereign Risk and High Levels of Public Debt”.

The objective of the first module is to provide a general overview of SALM and its fundamental concepts. Section I provides foundational definitions, Section II presents the rationale for developing the SALM framework, and Section III introduces the conceptual balance sheet, SALM objectives and constraints, and contingent liabilities; contingent liabilities will be discussed in greater detail in Module II.