ALM is a risk management approach that examines the combined risks of assets and liabilities over time under different possible future scenarios. The main idea is that risk can be contained or mitigated by matching the financial features (e.g. interest rate characteristics) of assets and liabilities by hedging one side of the balance sheet with the other. Governments worry about their liabilities because of the financial and economic costs that result from an unexpected increase in debt servicing flows. This means that in general the emphasis is on the liability side and that therefore a comprehensive ALM approach is not being implemented. However in recent years more and more countries are managing their liabilities more consistently with the characteristics of their public assets.
Because of the nature of government assets, the application of the traditional ALM framework to the analysis of risk of sovereign debt is more complex. Unlike for example the financial assets of banks, many public assets lack the exogenous and explicit financial features that are at the core of risk identification and quantification in the traditional ALM framework. For example, the variability of the stream of government revenues and expenditures is in part endogenous, because they are responsive to macroeconomic policies. This feature makes it very difficult to determine (the variability of) the responses to changes in inflation, interest or exchange rates.
This policy area covers all the issues related to the adoption and implementation of the ALM approach to public debt management.
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