B-RISK Program

Offering a holistic approach to manage sovereign balance sheet risks

Balance Sheet Risk Management (B-RISK) Program

  • The B-RISK Program offers a holistic approach to manage sovereign balance sheet risks and opportunities to minimize vulnerabilities to external economic shocks.

    The Program convenes the expert know-how of the Treasury, other centers within the World Bank Group as well as other international financial institutions.

    The World Bank Treasury, which manages IBRD’s approximately US$200 billion debt portfolio and issues bonds and notes in more than 21 currencies, has substantial experience and knowledge in asset and liability management. This expertise includes practitioner advice; management of $150 billion in assets of the World Bank Group, central banks, pension funds, sovereign wealth funds and other multilateral organizations; innovative financial solutions (i.e. derivatives, catastrophe bonds); and outstanding execution services backed by market insight and global coverage.

    Leveraging Treasuries’ asset and liability management know-how, the Program helps sovereigns develop as well as implement, an overarching strategy for managing the potential risks from outflows and opportunities from inflows.

    B-RISK Program is modular and operates on a fee-for-service basis.

  • Module I – Expert Advice

    An advisory engagement usually begins with an assessment, which includes an evaluation of capacity and institutional issues, and reform recommendations. Focus areas of expert advice include:

    • Legal and organizational framework
    • Strategy design
    • Operational framework
    • Coordination with monetary and fiscal policies
    • Integration of cash and debt management 

    Module II - The B-RISK Learning

    The B-RISK Learning module provides hands-on training and workshops, discussion meetings with senior and executive staff, South-South experience sharing, and internships at the World Bank Treasury on different areas of sovereign asset and liability management.

    Module III - Liability Management Operations 

    • Assessment: evaluation of the exposures of debt portfolio to changes in market risk variables.
    • Design: design and execution of transactions such as buy-backs, debt-swaps and derivatives.
    • Liability management: managing the market risk of the debt portfolio.

    Module IV - Asset management operations

    • Assessment: assessment of the impact of different spending rules and asset allocations.
    • Design: design, selection and execution of transactions.
    • Asset management: overall asset management support and the management of foreign currency cash balance in coordination with the World Bank’s Reserves Advisory and Management Program (RAMP).

    Module V – Just-in-time Support (JITS)

    We support the clients with specific requests on technical issues or are at the early stages of needs assessment.

    Our Approach

    • Modular: B-RISK is a fee-for-service based program, customizable by choosing the type and number of modules.
    • Coaching: B-RISK provides long-term programmatic support “from assessment to implementation”.
    • One Stop Shop: B-RISK provides clients with management as well as training support.
    • Expert practitioner driven: B-RISK experts are seasoned practitioners with hands-on experience.
  • There is no standard asset and liability management (ALM) framework for sovereigns which can be adopted by all countries. Therefore, based on the objectives of the sovereign and the country specific conditions, ALM framework may differ depending on the country context.

    Starting from 1990s, some of the developed countries adapted the ALM approach, widely used by financial intermediaries, to the sovereign balance sheet management. New Zealand has become one of the pioneers to introduce a comprehensive ALM approach, while countries like Denmark adopted ALM in a narrow scope. A decade later, some of the emerging countries such as Turkey initiated ALM framework with a sub-portfolios approach.

  • In almost every country, the institutions that manage the assets of a sovereign are different than the bodies that oversee the liabilities, often with mandates to optimize their specific deliverables. But the sound macroeconomic management requires many entities with different mandates to coordinate seamlessly, to deliver economic growth and to provide resiliency against economic shocks.  Having a holistic view of the sovereign balance sheet paints a complete picture for analyzing and managing the potential risks and opportunities for the government.

    What is sovereign asset and liability management approach?

    Sovereign asset and liability management is the process of managing the use of assets and cash flows to meet the government’s financial obligations at the lowest possible cost with a prudent level of risk. This approach requires analyzing the mismatches in currency and interest rate composition, for natural hedges and duration of the cash flows, and over time, choosing the assets and liabilities with matching characteristics and/or employing financial derivatives to enable sovereigns to more effectively manage their risk to achieve identified, desired risk levels.

    What should be in a sovereign's balance sheet?

    Assets and liabilities in a sovereign’s balance sheet, very much depend on the country context. Among the assets, governments may account for stocks such as cash reserves (domestic and international), sovereign wealth funds, equity in state-owned enterprises and subnational entities as well as other fixed financial assets. They may account for inflows such as tax revenues and non-tax revenues, onlending flows, receivables, even the present value of future income. Among the liabilities, they may include sovereign debt, government expenditures, pensions, government guarantees, legal claims, deposits in commercial banks, currency in circulation and other commitments.  There is no cookie cutter approach to look at a sovereign's balance sheet and managing the associated risks.

    What are sovereign balance sheet risks?

    Balance sheet vulnerabilities stem from mismatches between the financial characteristics of assets and liabilities. The most often experienced mismatches are currency composition, interest rate basis and duration between assets held by the government and its liabilities. Mismatches in the inflows and outflows are particularly significant and can lead to a higher probability of financial crisis.

    Foreign currency mismatches have resulted in financial crises in numerous countries, including Mexico in 1994, Brazil in 1999, Russia in 1998, and Argentina in 1998-2002. Following the global financial crisis, sovereign balance sheets became more complicated; constraints in external markets, issuance of short-term debt and increase of foreign reserves have all contributed to sovereigns carrying higher risks.

    How to manage sovereign balance sheet risks?

    After analyzing the mismatches between assets and liabilities, the financial characteristics of the current and future cash flows can be hedged, using financial derivatives to help smooth the budgetary impact of shocks on debt servicing costs, while ensuring return optimization. 

  • Papers

    Forums, Workshops, Seminars

    Presentations

    • Plenary session on SALM - Video - 201
    • Plenary session on SALM - Video - 201