EXPORT-IMPORT 

BANK

Recent Growth 

Underscores Need for 

Continued 

Improvements in Risk 

Management

Report to Congressional Committees

March 2013

GAO-13-303

United States Government Accountability Office

GAO
United States Government Accountability Office

Highlights of GAO-13-303, a report to 

congressional committees

March 2013

EXPORT-IMPORT BANK

Recent Growth Underscores Need for Continued

Improvements in Risk Management

Why GAO Did This Study

Ex-Im helps U.S. firms export goods 

and services by providing a range of 

financial products. The Export-Import 

Bank Reauthorization Act of 2012

increased the statutory ceiling on the 

agency’s total exposure to $140 billion 

in 2014. The act also requires GAO to 

evaluate Ex-Im’s growth and the 

effectiveness of its risk management. 

This report discusses (1) how Ex-Im’s 

business changed in recent years and 

possible reasons for these changes;

(2) how Ex-Im determines credit 

subsidy costs, loss reserves and 

allowances, and product fees, and how

these processes account for different 

risks; (3) how Ex-Im's financial portfolio 

has performed and the budgetary 

impact of its programs; and (4) the 

extent to which Ex-Im has a 

comprehensive risk-management

framework. To address these 

objectives, GAO analyzed Ex-Im’s 

financial data, policies and procedures, 

and processes for calculating program 

costs and loss reserves. GAO also 

interviewed Ex-Im officials and other 

entities involved in export financing.

What GAO Recommends

Ex-Im should (1) assess whether it is 

using the best available data for 

adjusting the loss estimates for longerterm transactions to account for global 

economic risk, (2) retain point-in-time 

performance data to compare the 

performance of newer and older 

business and to enhance loss 

modeling, (3) report stress testing 

scenarios and results to Congress, and 

(4) develop benchmarks to monitor and 

manage workload levels. Ex-Im agreed 

with each of these recommendations.

What GAO Found

From fiscal year 2008 to fiscal year 2012, the U.S. Export-Import Bank’s (Ex-Im) 

outstanding financial commitments (exposure) grew from about $59 billion to 

about $107 billion, largely in long-term loans and guarantees. Factors associated 

with this growth include reduced private-sector financing following the financial 

crisis and Ex-Im’s authorization of direct loans—a product not offered by export 

credit agencies in some other countries—to fill the gap in private-sector lending. 

Ex-Im’s processes for determining credit subsidy costs, loss reserves and 

allowances, and fees account for multiple risks. To implement the Federal Credit 

Reform Act of 1990 and other requirements, Ex-Im calculates subsidy costs and 

loss reserves and allowances with a loss model that uses historical data and 

takes credit, political, and other risks into account. Consistent with industry

practices, Ex-Im added factors to the model in 2012 to adjust for circumstances

that may cause estimated credit losses to differ from historical experience.

Opportunities exist to further improve the model. For example, Ex-Im uses a 1-

year forecast of certain bond defaults to predict possible changes in loss 

estimates from changed economic conditions. However, a short-term forecast 

may not be appropriate for adjusting estimated defaults for longer-term products. 

Ex-Im’s fees are generally risk-based and, for medium- and long-term products 

(about 85 percent of Ex-Im’s exposure), guided by international agreements that 

set minimum fees that account for credit and political risk. 

As of December 2012, Ex-Im reported an overall default rate of less than 1

percent. However, Ex-Im has not maintained data needed to compare the 

performance of newer books of business with more seasoned books at 

comparable points in time, a type of analysis recommended by federal banking 

regulators. Also, without point-in-time data showing when defaults occur, the 

precision of Ex-Im’s loss model may be limited. Ex-Im has been self-sustaining 

since 2008 and has generated receipts for the government. But, because Ex-Im’s 

portfolio contains a large volume of recent transactions, the long-term impact of 

this business on default rates and the federal budget is not yet known. 

Ex-Im has been developing a more comprehensive risk-management framework

but faces operational risks. Ex-Im manages credit and other risks through 

transaction underwriting, monitoring, and restructuring. Ex-Im also started 

addressing recommendations by its Inspector General (IG) about portfolio stress 

testing, thresholds for managing portfolio concentrations, and risk governance. 

GAO’s review of internal control standards and industry practices indicates that 

the IG’s recommendations represent promising techniques that merit continued 

attention. Ex-Im has not yet made plans to report its stress test scenarios and 

results to Congress, although doing so would aid congressional oversight and be 

consistent with internal control standards for effective external communication. 

Ex-Im faces potential operational risks because the growth in its business volume 

has strained the capacity of its workforce. Ex-Im has determined that it needs 

more staff, but it has not formally determined the level of business it can properly 

manage. GAO internal control standards state that agencies should develop a 

risk-management approach based on how much risk can be prudently accepted.

Without benchmarks to determine when workload levels have created too much 

risk, Ex-Im’s ability to manage its increased business volume may be limited.

View GAO-13-303. For more information, 

contact Mathew J. Scirè at (202) 512-8678 or 

sciremj@gao.gov.
Page i GAO-13-303 Export-Import Bank

Letter 1 

Background 5

Ex-Im’s Business Grew Substantially in Recent Years Due to 

Market Conditions and Other Factors 11

Ex-Im Uses Modeling to Estimate Subsidy Costs and Reserves, and 

Accounts for Multiple Risks in These Processes and in Setting 

Fees 20

Ex-Im Reported a Default Rate under 1 Percent and Generated 

Receipts, but the Long-Term Budgetary Impact Is Uncertain 30

Ex-Im Faces Operational Risks from Its Growing Portfolio 38

Conclusions 50

Recommendations for Executive Action 51

Agency Comments and Our Evaluation 51

Appendix I Objectives, Scope, and Methodology 53

Appendix II Comments from the U.S. Export-Import Bank 58

Appendix III GAO Contact and Staff Acknowledgments 61

Figures

Figure 1: Ex-Im Total Exposure, Fiscal Years 1990-2012 11

Figure 2: Ex-Im Annual Authorizations by Product Type, Fiscal 

Years 2006-2012 12

Figure 3: Ex-Im Annual Authorizations by Region, Fiscal Years 

2006-2012 13

Figure 4: Ex-Im Annual Authorizations by Sector, Fiscal Years 

2006-2012 14

Figure 5: U.S. and Euro Area Bank Lending Standards, Calendar 

Years 2006-2012 16

Figure 6: Corporate Bond Risk Premiums, Calendar Years 2006-

2012 17

Figure 7: Impaired Assets as a Percentage of Total Exposure, Fiscal 

Years 2008-2012 34

Figure 8: Direct Loan and Loan Guarantee Subsidy Reestimates, 

Fiscal Years 1992-2012 37

Contents 
Page ii GAO-13-303 Export-Import Bank

Figure 9: Ex-Im Authorization and FTE Levels, Fiscal Years 2006 - 

2012 48

Abbreviations

CBO Congressional Budget Office

CLS Country Limitation Schedule

COSO Committee of Sponsoring Organizations of the 

 Treadway Commission

CRO chief risk officer

ECA export credit agency

Ex-Im U.S. Export-Import Bank

FASAB Federal Accounting Standards Advisory Board

FCRA Federal Credit Reform Act of 1990

FTE full-time equivalent

IACPM International Association of Credit Portfolio 

 Managers

ICRAS Interagency Country Risk Assessment System

IG inspector general

IIF Institute of International Finance

OECD Organisation for Economic Cooperation and 

 Development

OMB Office of Management and Budget

OPIC Overseas Private Investment Corporation

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Page 1 GAO-13-303 Export-Import Bank

United States Government Accountability Office

Washington, DC 20548

March 28, 2013

The Honorable Tim Johnson

Chairman

The Honorable Mike Crapo

Ranking Member

Committee on Banking, Housing, 

 and Urban Affairs

United States Senate

The Honorable Jeb Hensarling

Chairman

The Honorable Maxine Waters

Ranking Member

Committee on Financial Services

House of Representatives

The U.S. Export-Import Bank (Ex-Im) helps U.S. firms export goods and 

services by providing a range of financial products including direct loans, 

loan guarantees, and insurance, particularly during times of economic 

crisis when private financing is not available. In the wake of the 2007-

2009 financial crisis, Ex-Im’s business volume grew substantially, 

reaching about $36 billion in new authorizations in 2012.1

 

1

All years in this report are federal fiscal years unless otherwise indicated. An 

authorization is an export financing transaction for which Ex-Im has granted credit 

approval.

Additionally, in 

May 2012, Congress enacted the Export-Import Bank Reauthorization Act 

of 2012 that increased the agency’s exposure limit—that is, the total 

outstanding value of all direct loans, loan guarantees, and insurance 

policies that Ex-Im cannot exceed—from $100 billion in 2011 to $140 

 
 

Page 2 GAO-13-303 Export-Import Bank

billion in 2014.2 As of the end of 2012, Ex-Im’s total exposure was about 

$107 billion.3

Ex-Im’s charter requires the transactions the agency authorizes to have a 

reasonable assurance of repayment. To comply with this requirement, ExIm must manage the wide variety of risks associated with providing export 

financing. The recent growth in Ex-Im’s exposure has heightened interest 

in ensuring that Ex-Im has proper controls in place to minimize these risks 

while meeting the needs of U.S. exporters. Furthermore, a report issued 

in September 2012 by Ex-Im’s Inspector General (IG) identified 

weaknesses in Ex-Im’s risk-management policies and procedures and 

made several recommendations for improvement.4 As with any credit 

institution, Ex-Im expects that some portion of the credit it offers will not 

be repaid, and it estimates these future losses to establish loss reserves 

and allowances reported in its financial statements and to comply with 

federal budgeting requirements in the Federal Credit Reform Act of 1990 

(FCRA).5 FCRA requires that before entering into direct loans or loan 

guarantees, Ex-Im must have budget authority for its “credit subsidy 

costs”—broadly speaking, estimates of net losses on a present value 

basis, excluding administrative costs. Ex-Im collects fees and, if 

applicable, interest payments from obligors, which (among other cash 

flows) are incorporated into estimates of credit subsidy costs.6

 

2

Pub. L. No. 112-122, 126 Stat. 350 (2012). The act increases the exposure limit to $120 

billion in 2012, $130 billion in 2013, and $140 billion in 2014. The increases in 2013 and 

2014 are conditional upon Ex-Im meeting certain reporting and analysis requirements and 

maintaining a default rate of less than 2 percent. The act also required Ex-Im to submit a 

business plan to Congress by September 30, 2012, that, among other things (1) estimated 

the appropriate exposure limits for 2012, 2013, and 2014; (2) justified the estimates; and 

(3) analyzed the potential for the increased or decreased risk of loss as a result of the 

estimated exposure limits. The act requires us to review and report on the business plan 

by June 1, 2013. Pub. L. No. 112-122 §4, 126 Stat. 351, 352 (2012).

3

Ex-Im’s exposure represents the value of authorized transactions (including unfunded 

commitments totaling $36 billion), minus amounts that already have been repaid or 

cancelled.

4

Office of the Inspector General, Export-Import Bank of the United States, Report on 

Portfolio Risk and Loss Reserve Allocation Policies, OIG-INS-12-02 (Washington, D.C.: 

September 2012).

5

Pub. L. No. 101-508, 104 Stat. 1388 (1990).

6

We use the term “obligor” to refer to entities that are contractually obligated to make 

payments to satisfy the terms of an Ex-Im export credit product. 
 

Page 3 GAO-13-303 Export-Import Bank

The Export-Import Bank Reauthorization Act of 2012 required GAO to 

evaluate Ex-Im’s growth and the effectiveness of its risk management. 

This report discusses: (1) how Ex-Im’s business changed in recent years 

and possible reasons for these changes; (2) how Ex-Im determines credit 

subsidy costs, loss reserves and allowances, and product fees, and how 

these processes account for different risks; (3) how Ex-Im’s financial 

portfolio has performed and the budgetary impact of its programs; and (4) 

the extent to which Ex-Im has a comprehensive risk-management 

framework.

To address these objectives, we reviewed a range of data and 

documentation and interviewed officials from Ex-Im and other 

organizations involved in credit financing. More specifically, to examine 

changes in Ex-Im’s business, we analyzed data on Ex-Im’s financial 

exposure from 1990 through 2012 and authorizations from 2006 through 

2012. To identify possible reasons for trends in Ex-Im’s business activity, 

we reviewed a variety of Ex-Im documents—including the agency’s 

annual reports, competitiveness reports, and strategic plan—and 

analyzed data on global credit market conditions. We also interviewed ExIm officials, representatives of industry trade associations and research 

organizations, and officials from the export credit agencies (ECA) of 

Canada, France, Japan, and the United Kingdom.

To examine how Ex-Im determines subsidy costs, loss reserves and 

allowances, and product fees, and how these processes account for 

different risks, we reviewed relevant requirements and guidance, 

including FCRA, Office of Management and Budget (OMB) Circular No. 

A-11, and federal financial accounting guidance. We examined 

information on the tools and processes Ex-Im uses to determine subsidy 

costs and loss reserves and allowances, including Ex-Im’s loss estimation 

model, and interviewed Ex-Im officials about their implementation. We 

also reviewed international agreements that govern fees charged by 

ECAs and reviewed Ex-Im analyses used to support fee adjustments. 

Further, we interviewed officials from the four foreign ECAs cited 

previously and officials from other selected U.S. federal credit agencies 

about their practices for estimating costs, reserving for losses, and setting 

fees.

To assess how Ex-Im’s financial portfolio has performed and the 

budgetary impact of its programs, we analyzed Ex-Im’s default rates by 

product type and for the portfolio as a whole. We examined end-of-fiscalyear data for 2006 through 2012 and data as of December 31, 2012. We 

also reviewed federal banking regulator guidance on monitoring default 
 

Page 4 GAO-13-303 Export-Import Bank

rates. Additionally, we examined an Ex-Im analysis of the funds it 

received and sent to the Department of the Treasury (Treasury) from 

1990 through 2012. We reviewed supporting information in appropriation 

acts, the President’s budgets, and Ex-Im’s financial statements for the 

same years and determined Ex-Im’s analysis was reasonable.

To assess the extent to which Ex-Im has a comprehensive riskmanagement framework, we reviewed Ex-Im’s practices for managing 

risks at the transaction and portfolio levels. We reviewed a 2012 report by 

the Ex-Im IG on portfolio risk management and determined what actions 

Ex-Im had taken in response to the report’s recommendations. We also 

identified relevant criteria in our internal control standards and from 

practices identified by financial industry groups. In addition, we reviewed 

information related to potential operational risks stemming from trends in 

Ex-Im’s business volume and workload. We limited our work in this area 

to Ex-Im’s human capital management. We analyzed Ex-Im data on the 

number of full-time equivalents (FTE) and the number and dollar volume 

of transactions authorized from 2006 through 2012. Additionally, we 

interviewed Ex-Im officials, foreign ECA officials, and officials from other 

federal credit agencies about risk-management practices. To assess the 

reliability of the data we used, we reviewed information related to data 

elements and controls, performed electronic testing for obvious errors in 

accuracy and completeness, compared data to published documents, and 

interviewed knowledgeable officials about the data. We concluded that 

the data elements we used were sufficiently reliable for purposes of 

describing Ex-Im’s growth, financial performance, and workload. 

Appendix I provides more information on our scope and methodology.

We conducted this performance audit from June 2012 to March 2013 in 

accordance with generally accepted government auditing standards. 

Those standards require that we plan and perform the audit to obtain 

sufficient, appropriate evidence to provide a reasonable basis for our 

findings and conclusions based on our audit objectives. We believe that 

the evidence obtained provides a reasonable basis for our findings and 

conclusions based on our audit objectives.
 

Page 5 GAO-13-303 Export-Import Bank

Ex-Im, the official ECA of the United States, is an independent agency 

operating under the Export-Import Bank Act of 1945, as amended. Its 

mission is to support the export of U.S. goods and services overseas, 

thereby supporting U.S. jobs. Official ECAs are organizations that provide 

export credits with explicit government backing, where either the 

government or the government-owned ECA assumes all or a portion of 

the risk. Export credits are financing arrangements designed to mitigate 

risks to buyers and sellers associated with international transactions. 

Buyers and sellers in international transactions face unique risks, such as 

foreign exchange risk, difficulties in settling disputes when damages to 

shipments occur, or instability in the buyer’s country. For these reasons, 

private lenders may be reluctant to finance a buyer’s purchase of foreign 

goods or finance a seller’s operations. Export credit products are meant 

to facilitate international transactions by mitigating these risks.

An international agreement, the Organisation for Economic Cooperation 

and Development (OECD) Arrangement on Officially Supported Export 

Credits (the OECD Arrangement), governs various aspects of U.S. and 

other member countries’ ECAs.7

Congress has placed specific requirements on Ex-Im’s operations. For 

example, Ex-Im’s charter states that it should not compete with the 

private sector. Rather, Ex-Im’s role is to assume the credit and country 

risks that the private sector is unable or unwilling to accept. In addition, 

Ex-Im must submit annual reports to Congress on its actions to provide 

The OECD Arrangement aims to provide 

a framework for the use of officially supported export credits; promote a 

level playing field, where competition is based on the price and quality of 

the exported goods and not the financial terms provided; and provide 

transparency over programs and transactions. For example, the OECD 

arrangement sets minimum transaction fees. Participants include 

Australia, Canada, the European Union, Japan, South Korea, New 

Zealand, Norway, Switzerland, and the United States. The OECD 

Arrangement applies to officially supported export credits with repayment 

terms of 2 years or more.

 

7

The OECD is an organization of 34 industrialized countries, operating by consensus, that 

fosters dialogue among members to discuss, develop, and refine economic and social 

policies and provides an arena for establishing multilateral agreements.

Background 

Ex-Im’s Mission, Financing 

Products, and Risks
 

Page 6 GAO-13-303 Export-Import Bank

financing on a competitive basis with other ECAs, and to minimize 

competition in government-supported export financing. Furthermore, ExIm must make available at least 20 percent of its authorized aggregate 

loans, loan guarantees, and insurance (export financing) each fiscal year 

for the direct benefit of small businesses. Congress also has given Ex-Im 

instructions on the share of its financing for environmentally beneficial 

exports, including renewable energy, and to expand the promotion of its 

financing in sub-Saharan Africa.

Ex-Im offers a number of export financing products, including direct loans, 

loan guarantees, and export credit insurance. Ex-Im makes fixed-rate 

loans directly to international buyers of goods and services. These loans 

can be short-term (up to 1 year), medium-term (more than 1 year up to 7 

years), or long-term (more than 7 years). Ex-Im also guarantees loans 

made by private lenders to international buyers of goods or services, 

promising to pay the lenders if the buyers default. Like direct loans, loan 

guarantees may be short-, medium-, or long-term. Additionally, Ex-Im 

provides export credit insurance products that protect the exporter from 

the risk of nonpayment by foreign buyers for commercial and political 

reasons. This allows U.S. exporters the ability to offer foreign purchasers 

the opportunity to make purchases on credit. Credit insurance policies 

can cover a single buyer or multiple buyers and can be short- or mediumterm. Insurance policies are also available to cover lenders and exporters 

that finance purchases by foreign buyers. Ex-Im’s short-term insurance 

covers a wide range of goods, raw materials, spare parts, components, 

and most services on terms up to 180 days.8 Medium-term insurance 

policies protect longer-term financing to international buyers of capital 

equipment or services, covering one or a series of shipments. Financing 

under medium-term insurance policies generally can extend up to 5 

years.9

Some of Ex-Im’s short-term products are geared toward U.S. small 

businesses that have the potential to export but lack sufficient funds to 

support export efforts and include direct loans and loan guarantees to 

provide these businesses with working capital. Working capital loans are 

 

8

According to Ex-Im, in exceptional cases, exports under these policies may be covered 

on terms up to 360 days.

9

According to Ex-Im, in exceptional cases, exports under these policies may be covered 

on terms up to 7 years. 
 

Page 7 GAO-13-303 Export-Import Bank

fixed-rate loans that provide exporters with 6- or 12-month revolving lines 

of credit. Working capital guarantees generally cover 90 percent of the 

principal and interest on a loan made to an exporter by a private lender. 

The guarantees are typically 1 year, but can extend up to 3 years and be 

used on a single transaction or on a revolving basis. Ex-Im delegates the 

authority for underwriting most of these transactions directly to Ex-Imapproved private-sector lenders.

Ex-Im’s long-term products are often used in project finance transactions, 

what Ex-Im terms “structured finance” transactions, and aircraft 

transactions.

10

 

10Although the term “structured finance” sometimes refers to the use of securitization, ExIm uses it to describe transactions that are “structured” in the sense that they are based 

on an existing balance sheet and use risk mitigation tools such as credit enhancements.

These transactions involve complicated financing 

arrangements, and Ex-Im has separate divisions to handle them. These 

transactions also generally involve a direct loan or loan guarantee and 

their value is usually greater than $10 million. Project finance is an 

arrangement in which Ex-Im lends to newly created project companies in 

foreign countries and looks to the project’s future cash flows as the 

source of repayment instead of relying directly on foreign governments, 

financial institutions, or established corporations for repayment of the 

debt. The projects involve a large number of contracts for completion and 

operation. Project finance transactions have repayment terms up to 14 

years (18 years for renewable energy transactions) and typically include 

the financing of development of a new facility in a foreign country, such as 

a factory or power plant, or significant facility or production expansions. 

Most of Ex-Im’s project finance transactions have been oil and gas and 

power sector projects. In structured finance transactions, Ex-Im provides 

direct loans or loan guarantees to existing companies located overseas 

based on these companies’ balance sheets plus credit enhancements, 

such as escrow or reserve accounts, subject to Ex-Im’s control; special 

insurance requirements; and letters of credit pledged to Ex-Im through a 

bank or other third party. Structured finance transactions generally have 

repayment terms of 10 years (12 years for power transactions). Among 

others, Ex-Im has completed structured transactions for oil and gas 

projects and air traffic control, telecommunications, and manufacturing 

entities. Finally, Ex-Im provides long-term direct loans and loan 

guarantees that support the purchase of aircraft. Ex-Im uses external 

advisers to assist in arranging project finance, structured finance, and 
 

Page 8 GAO-13-303 Export-Import Bank

aircraft transactions. These advisers can include financial, legal, 

technical, insurance, market, and environmental consultants.

Ex-Im faces multiple risks when it extends export credit financing. These 

risks include credit, political, market, concentration, foreign-currency, and 

operational risks, which are defined as follows:

• Credit risk. The risk that an obligor may not have sufficient funds to 

service its debt or be willing to service its debt even if sufficient funds 

are available.

• Political risk. The risk of nonrepayment resulting from expropriation of 

the obligor’s property, war, or inconvertibility of the obligor’s currency 

into U.S. dollars.

• Market risk. The risk of loss from declining prices or volatility of prices 

in the financial markets. Market risk can arise from shifts in 

macroeconomic conditions, such as productivity and employment, and 

from changes in expectations about future macroeconomic conditions.

• Concentration risk. Risk stemming from the composition of a credit 

portfolio. Concentration risk comes into being through an uneven 

distribution of credits within a portfolio. Ex-Im faces three types of 

concentration risk:

• Industry concentration. The risk that events could negatively affect 

not only one obligor but also many obligors in the same industry 

simultaneously.

• Geographic concentration. The risk that events could negatively 

affect not only one obligor but many obligors simultaneously 

across a country or region.

• Obligor concentration. The risk that defaults from a small number 

of obligors will have a major adverse impact on the portfolio 

because they account for a large share of the portfolio.

• Foreign-currency risk. The risk of loss as a result of appreciation or 

depreciation in the value of a foreign currency in relation to the U.S. 

dollar in Ex-Im transactions denominated in that foreign currency.

• Operational risk. The risk of loss resulting from inadequate or failed 

internal processes, people, and systems, or from external events.
 

Page 9 GAO-13-303 Export-Import Bank

In 1990, to more accurately measure the cost of federal credit programs, 

Congress enacted FCRA, which requires agencies that provide domestic 

or international credit, including Ex-Im, to estimate and request 

appropriations for the long-term net losses, or subsidy costs, of their 

credit activities.11 Credit programs incur subsidy costs when estimated 

payments by the government (such as loan disbursements or claims paid 

on defaulted loans) exceed estimated payments to the government (such 

as principal repayments, fees, interest payments, and recoveries), on a 

net present value basis over the life of the direct loan or loan guarantee, 

excluding administrative costs.12

FCRA requires that agencies have budget authority to cover credit 

subsidy costs before entering into credit transactions. For their annual 

appropriation requests, agencies estimate credit subsidy costs by 

cohort.

Credit programs have a positive subsidy 

when the present value of estimated payments by the government 

exceeds the present value of estimated payments to the government 

(collections). When credit programs have a positive subsidy cost, they 

require appropriations. Conversely, negative subsidy programs are those 

in which the present value of estimated collections is expected to exceed 

the present value of estimated payments.

13

 

11FCRA was enacted as part of the Omnibus Budget Reconciliation Act of 1990 (Pub. L. 

No. 101-508).

To estimate their subsidy costs, credit agencies estimate the 

future performance of direct loans and loan guarantees. Agency 

management is responsible for accumulating relevant, sufficient, and 

reliable data on which to base these estimates. To estimate future credit 

performance, agencies generally have models that include assumptions 

about defaults, prepayments, recoveries, and the timing of these events 

and are based on the nature of their credit programs. In addition to 

assumptions based on agencies’ programs, agencies also must 

incorporate economic assumptions included in the President’s budget for 

credit subsidy calculations. An agency’s credit subsidy costs can be 

expressed as a rate. For example, if an agency commits to guarantee 

loans totaling $1 million and has estimated that the present value of cash 

12As discussed later in the report, Ex-Im receives annual appropriations for administrative 

costs but is required to reimburse the appropriated amount to Treasury using the 

negatives subsides it generates. 

13A cohort generally refers to all the credits an agency is committing to providing or 

guaranteeing in a given fiscal year.

Budgetary Treatment of 

Federal Credit Programs
 

Page 10 GAO-13-303 Export-Import Bank

outflows will exceed the present value of cash inflows by $15,000, the 

estimated credit subsidy rate is 1.5 percent.

Under FCRA, agencies generally must produce annual updates of their 

credit subsidy estimates—known as reestimates—of each cohort based 

on information about the actual performance and estimated changes in 

future credit performance. This requirement reflects the fact that 

estimates of credit subsidy costs can change over time. Beyond changes 

in estimation methodology, each additional year provides more historical 

data on credit performance that may influence estimates of the amount 

and timing of future cash flows. Economic assumptions also can change 

from one year to the next, including assumptions on interest rates. When 

reestimated credit subsidy costs exceed agencies’ original credit subsidy 

cost estimates, the additional subsidy costs are not covered by new 

appropriations but rather are funded from permanent, indefinite budget 

authority.14

In addition to estimating credit subsidy costs for budgetary purposes, ExIm calculates future credit losses for its annual audited financial 

statements. Ex-Im’s financial statements are prepared according to 

generally accepted accounting principles in the United States applicable 

to federal agencies. These principles require Ex-Im to follow Federal 

Accounting Standards Advisory Board (FASAB) guidance when 

establishing loss allowances for direct loans and loss reserves for loan 

guarantees or insurance transactions to cover future credit losses.

 

14Permanent budget authority is budget authority that is available as the result of 

previously enacted legislation and is available without further legislative action. Indefinite 

budget authority is budget authority that, at time of enactment, is for an unspecified 

amount. 
 

Page 11 GAO-13-303 Export-Import Bank

Ex-Im business activities grew substantially in recent years. From 1990 

through 2012, Ex-Im’s financial exposure grew by more than 250 percent 

(or about 120 percent after adjusting for inflation), with most of the growth 

occurring after 2008 (see fig. 1).15

Figure 1: Ex-Im Total Exposure, Fiscal Years 1990-2012

From 1990 through 2007, Ex-Im’s 

exposure grew from about $30 billion to $57.5 billion—an average annual 

increase of just under 4 percent. From 2008 through 2012, Ex-Im’s 

exposure rose from $58.5 billion to $106.6 billion—an average annual 

growth rate of more than 16 percent.

Note: We used the gross domestic product price index to adjust for inflation with fiscal year 2012 as 

the reference year.

Most of Ex-Im’s recent growth occurred through its long-term loan 

guarantee and direct loan products. Overall, annual Ex-Im authorizations 

rose from $14.4 billion in 2008 to $35.8 billion in 2012 (see fig. 2). Over 

the same period, annual authorizations for long-term products grew from 

$8.5 billion to $26.6 billion—a more than three-fold increase—and 

 

15We used the gross domestic product price index to adjust for inflation with fiscal year 

2012 as the reference year.

Ex-Im’s Business 

Grew Substantially in 

Recent Years Due to 

Market Conditions 

and Other Factors
 

Page 12 GAO-13-303 Export-Import Bank

accounted for almost 75 percent of the authorizations Ex-Im made in 

2012. In particular, annual authorizations for new project and structured 

finance transactions, almost all of which used long-term loan guarantees 

and direct loans, increased from $1.9 billion in 2008 to $12.6 billion in 

2012, or almost half of the long-term authorizations that Ex-Im made in 

2012.

Figure 2: Ex-Im Annual Authorizations by Product Type, Fiscal Years 2006-2012

By region, annual authorizations grew most rapidly in Asia and Oceania 

(see fig. 3). For example, Ex-Im authorizations for export financing to Asia 

grew from $3.6 billion in 2008 to $13.5 billion in 2012, an increase of 

about 275 percent. Overall, Asia accounted for almost 38 percent of ExIm’s authorizations in 2012. Financing for exports to Oceania, which

accounted for a smaller portion (about 9 percent) of Ex-Im’s 2012 

authorizations, rose even more sharply—from about $1 million in 2008 to 

$3.2 billion in 2012.
 

Page 13 GAO-13-303 Export-Import Bank

Figure 3: Ex-Im Annual Authorizations by Region, Fiscal Years 2006-2012

Note: Ex-Im defines Asia as the region stretching from the Pacific Rim to the Middle East including 

countries such as the United Arab Emirates, Saudi Arabia, Vietnam, and China. Oceania includes 

pacific island nations such as Australia, New Zealand, and Papua New Guinea. “Other” includes 

transactions that cannot be allocated to a single region–for example, those that involve more than 

one buyer.

By industry sector, financing for aircraft industry exports was the single 

largest source of authorizations in recent years, but authorizations in 

other sectors grew more quickly (see fig. 4). Aircraft-related 

authorizations grew from $5.7 billion in 2008 to $11.9 billion in 2012—an 

increase of about 110 percent—and accounted for about one-third of ExIm’s authorizations in 2012. Over the same period, authorizations in the 

service sector rose more than 20-fold—from $229 million to $5.3 billion—

and represented 15 percent of Ex-Im’s authorizations in 2012. 

Additionally, authorizations increased by more than 400 percent in the 
 

Page 14 GAO-13-303 Export-Import Bank

power utilities sector (from $0.6 billion to $3.1 billion) and by more than 

130 percent in the oil and gas mining sector (from $1.8 billion to $4.2 

billion). The power utilities sector and oil and gas mining sector accounted 

for 9 percent and 12 percent of Ex-Im’s 2012 authorizations, respectively.

Figure 4: Ex-Im Annual Authorizations by Sector, Fiscal Years 2006-2012

Ex-Im officials and all of the representatives from industry trade 

associations and research groups we interviewed agreed that reduced 

availability of private-sector financing after the 2007-2009 financial crisis 

was the leading factor contributing to increased demand for Ex-Im 

financing. For example, officials from Ex-Im’s Policy and Planning Group 

and industry representatives told us that the growing reluctance of 

commercial banks to provide export financing in the wake of the financial 

crisis was a primary driver of Ex-Im’s growth. They explained that the 

financial crisis diminished the availability of commercial lending and that 

Ex-Im’s Growth Was 

Associated with the 

Reduced Availability of 

Private-Sector Financing 

and Its Authorization of 

Direct Loans
 

Page 15 GAO-13-303 Export-Import Bank

Ex-Im provided financing to fill the void. Officials from the foreign ECAs 

we contacted described similar effects on their business activity. For 

example, officials from the ECAs in Canada and France explained that as 

commercial banks withdrew from the trade finance market, their own 

export credit activities grew as they made efforts to fill the resulting gap.

Officials from Ex-Im, industry trade and research organizations, and other 

ECAs we interviewed, also said that the ongoing and future 

implementation of international banking standards further limited privatesector financing, contributing to growth in ECA activities. For example, 

officials cited the Basel Committee on Banking Supervision “Basel III” 

standards for banking institutions that include risk-based capital and other 

requirements. As of December 2012, U.S. regulators were preparing to 

finalize rules for implementation of these standards.

16 Ex-Im’s 2011 report 

to Congress on export credit competition notes that the transition to Basel 

III practices would require most banks to increase prices for export and 

other types of financing, and consequently, direct loans from ECAs 

became the preferred mechanism for some long-term trade deals.17

Commercial bank lending trends in the United States and Europe broadly 

demonstrate the reduced availability of private-sector financing during the 

2007-2009 financial crisis, including for U.S. small businesses. As shown 

in figure 5—which shows the percentage of lenders that tightened or 

eased credit standards at different points in time—credit standards 

generally tightened during the financial crisis. Following the crisis, more 

U.S. banks began to ease rather than tighten credit standards, while more 

All 

five representatives from industry trade associations and research groups 

with whom we discussed this issue agreed that the ongoing 

implementation of Basel regulations could further constrain private-sector 

export financing in the already tightened lending environment following 

the financial crisis. Similarly, officials from Canada’s ECA noted that their 

business increased partly in response to banks’ plans for implementing 

Basel requirements.

 

16We have previously reported that regulations such as the Basel III requirements could 

increase the cost and reduce the availability of credit due to the increase in capital 

requirements. See GAO, Dodd-Frank Act: Agencies’ Efforts to Analyze and Coordinate 

Their Rules, GAO-13-101 (Washington, D.C.: Dec. 18, 2012).

17Export-Import Bank of the United States, Report to the U.S. Congress on Export Credit 

Competition and the Export-Import Bank of the United States for the Period January 1, 

2011 through December 31, 2011 (Washington, D.C.: June 2012). 
 

Page 16 GAO-13-303 Export-Import Bank

banks in the euro area continued to tighten standards, though not as 

dramatically as they had during the crisis.18

Figure 5: U.S. and Euro Area Bank Lending Standards, Calendar Years 2006-2012

Note: The y-axis in the figure is the percentage of banks in the respective surveys that tightened 

credit standards minus the percentage of banks that eased credit standards. A positive number 

indicates more banks tightened standards than eased standards.

In emerging markets, following the onset of the 2007-2009 financial crisis, 

perceptions of risk and the cost of credit in corporate bond markets also 

jumped—dramatically for higher-risk borrowers. As shown in figure 6, risk 

premiums for corporate bonds spiked in late 2008 and early 2009 and 

remain above precrisis levels.

 

18The euro area comprises the 17 European Union countries that have introduced the 

euro since 1999: Austria, Belgium, Cyprus, Estonia, Finland, France, Germany, Greece, 

Ireland, Italy, Luxembourg, Malta, The Netherlands, Portugal, Slovenia, Slovakia, and 

Spain.
 

Page 17 GAO-13-303 Export-Import Bank

Figure 6: Corporate Bond Risk Premiums, Calendar Years 2006-2012

Note: The Bank of America-Merrill Lynch bond indices include bonds with a maturity of 1 year or 

more.

Ex-Im and officials from industry trade associations and foreign ECAs 

noted the significance of Ex-Im’s direct loan product to Ex-Im’s recent 

growth. For example, in its 2011 report to Congress on export credit 

competition, Ex-Im noted the competitive advantage that direct loans—a 

product not offered by some other ECAs—gave Ex-Im and other ECAs 

with similar products. As previously shown in figure 2, long-term direct 

loan authorizations grew from $356 million in 2008 to almost $12 billion in 

2012. Representatives from industry trade associations noted that ExIm’s ability to offer direct loans helped Ex-Im to fill the gap in privatesector lending following the financial crisis and implementation of more 

stringent banking regulations. Other ECAs also pointed to direct lending 

as contributing to their ability to fill financing gaps following the recent 

financial crisis. Of the four foreign ECAs we interviewed, two (Canada 

and Japan) had existing direct lending capability prior to the 2007-2009 

financial crisis. Both agreed that their capability to make direct loans was 

an important factor in their ability to fill trade financing gaps. 
 

Page 18 GAO-13-303 Export-Import Bank

Ex-Im officials and representatives from industry trade associations and 

research groups identified other possible drivers of Ex-Im’s business that 

may have contributed to the recent growth trend. These include increased 

demand for U.S. goods and services from emerging markets, increased 

production by significant Ex-Im customers, Ex-Im’s outreach efforts to 

small businesses and key export markets, and Ex-Im’s response to 

growing competition from foreign ECAs. First, Ex-Im has suggested that 

demand for U.S. exports, particularly from industrializing emerging 

markets (such as in Asia), adds to demand for Ex-Im services. For 

example, as shown previously in figure 3, Ex-Im authorizations in Asia 

grew more than 275 percent from 2008 through 2012. While Ex-Im 

activity in some emerging markets did grow in recent years, we did not 

find evidence of a positive correlation between Ex-Im activity and U.S. 

exports. For example, Ex-Im’s highest growth came in 2009, when total 

U.S. exports and U.S. exports to emerging markets were falling.

Second, Ex-Im officials also said that increased production by Boeing, ExIm’s primary aircraft exporter, contributed to authorization growth. 

Officials emphasized that while Ex-Im’s significant activity in the airline 

sector has contributed to Ex-Im’s recent growth, they did not expect 

growth in the aircraft sector to continue at the same high rate, because 

the commercial market for aircraft finance is beginning to recover and 

implementation of a 2011 international agreement among OECD ECAs 

may result in ECA financing being less competitive than commercial 

financing.19

Third, according to Ex-Im officials, Ex-Im’s efforts to offer small business 

products and increase awareness of available export financing assistance 

also may have been a factor in its recent growth. Ex-Im recently launched 

several new small business products and opened four new regional 

Export Finance Centers throughout the United States to support small 

business exporters.

Nonetheless, for 2012, aircraft represented 33 percent of new 

authorizations—the single largest industry Ex-Im supports.

20

 

19The 2011 aircraft sector agreement is an annex of the OECD Arrangement on Officially 

Supported Export Credits. It provides a framework for the predictable, consistent, and 

transparent use of officially supported export credits for the sale or lease of aircraft and 

other related goods and services, setting out the most favorable terms and conditions on 

which officially supported export credits may be provided by participants in the agreement.

These efforts stem from Ex-Im’s mandate to make 

20In 2012, Ex-Im opened regional Export Finance Centers in Atlanta, Georgia; 

Minneapolis, Minnesota; and Seattle, Washington. Ex-Im opened an additional center in 

Detroit, Michigan, in January 2013.
 

Page 19 GAO-13-303 Export-Import Bank

available at least 20 percent of annual authorizations to small businesses. 

Ex-Im officials explained that outreach efforts are important because 

meeting the 20 percent small business requirement has been increasingly 

difficult as Ex-Im’s overall portfolio has grown. In addition to its small 

business outreach, Ex-Im has been identifying private-sector and publicsector buyers, financial institutions, and key governmental agencies for 

each of nine foreign “key markets” where it expects U.S. export growth to 

be strongest in the near future.21

Lastly, according to Ex-Im and representatives from industry trade 

associations and research groups, Ex-Im’s activity may continue to grow 

in response to increased competition from other ECAs, particularly those 

in non-OECD countries, but none of the other ECAs we spoke with 

suggested that this was a significant factor. Ex-Im’s 2012 Annual Report 

emphasizes the importance of its role in ensuring that U.S. exporters 

have a fair opportunity to compete with foreign exporters. While the 

OECD Arrangement governs various aspects of U.S. and other member 

ECAs’ activities, non-OECD ECAs sometimes offer financing terms more 

favorable than the terms permitted under the OECD Arrangement. Ex-Im 

can respond to foreign competition in export financing by notifying OECD 

that it is meeting terms offered by other ECAs in order to preserve U.S. 

exporters’ competitiveness. But, because these ECAs are not beholden to 

the transparency requirements of the OECD Arrangement, it can be 

difficult to confirm the terms and conditions of non-OECD ECA export 

financing transactions. Some representatives from industry trade 

associations and research groups we interviewed agreed that Ex-Im’s 

response to competition from non-OECD ECAs, particularly China, may 

have been, and likely would continue to be, a significant factor in 

increased Ex-Im activity. Others, such as officials from the Berne Union (a 

In its 2010-2015 strategic plan, Ex-Im 

cites these country outreach efforts as a way to focus limited Ex-Im 

resources in areas with high potential for furthering the agency’s mission 

of supporting exports and the jobs they provide. Ex-Im selected the key 

markets based on a number of factors, including the size of the export 

market for U.S. companies, projected economic growth, anticipated 

infrastructure demand, and the need for Ex-Im financing. According to ExIm officials, some of these efforts already have produced new 

transactions in markets such as Brazil.

 

21Ex-Im has identified Brazil, Colombia, India, Indonesia, Mexico, Nigeria, South Africa, 

Turkey, and Vietnam as “key markets.” 
 

Page 20 GAO-13-303 Export-Import Bank

worldwide association for export credit and investment insurers) noted 

that while competition based on financing terms might be a significant 

determinant for a small number of international trade transactions, 

importers primarily base purchase decisions on the equipment or services 

that best meet their needs. None of the officials from the four foreign 

ECAs we interviewed suggested that increased competition was a 

significant factor in their own or Ex-Im’s activity growth.

Ex-Im uses a loss estimation model to estimate credit subsidy costs and 

loss reserves and allowances. This model accounts for various risks and 

underwent a major update in 2012, but opportunities exist for additional 

improvements. Ex-Im’s product fees account for credit and political risk 

and are guided by international agreements and internal analyses.

Ex-Im uses a loss estimation model to build the agency’s credit subsidy 

estimates in the President’s budget as well as for calculating loss

reserves and allowances reported in Ex-Im’s annual financial statements. 

The model includes quantitative and qualitative factors to account for 

various risks facing the agency. In 2012, Ex-Im made several adjustments 

to the model to better account for uncertainty associated with a growing 

portfolio and changing economic conditions. However, opportunities exist 

for additional improvements.

The model considers historical data, as well as qualitative information, to 

estimate loss rates on Ex-Im’s transactions—that is, the percentage loss 

that Ex-Im can expect for each dollar of export financing. Mathematically, 

the loss rate is the probability of default times the loss given default.22

 

22The probability of default is the probability that an obligor will default on its payment 

obligations as contractually stipulated in a financing document during a specified period. 

The loss given default is the credit loss incurred if an obligor defaults on its payment 

obligations. The loss amount is net of recoveries.

ExIm’s current model uses historical information on loan guarantee and 

Ex-Im Uses Modeling 

to Estimate Subsidy 

Costs and Reserves, 

and Accounts for 

Multiple Risks in 

These Processes and 

in Setting Fees

Ex-Im Overhauled its Loss 

Model in 2012

Loss Estimation Model
 

Page 21 GAO-13-303 Export-Import Bank

insurance transactions authorized from 1994 through 2011.23

As previously noted, risk ratings are a key variable in the loss model. ExIm underwriters assign the ratings, which are based on assessments of 

credit, political, and market risks.

This 

information includes the default and loss history of those transactions as 

well as variables that are predictive of defaults and losses, including 

transaction amount and length, obligor type, product type, and “risk 

rating”—a numerical risk score that Ex-Im assigns to each transaction. 

The model calculates a loss rate for each Ex-Im risk rating and product 

type.

24 Ex-Im’s risk ratings range from 1 (least 

risky) to 11 (most risky). These risk ratings are determined partly through 

the Interagency Country Risk Assessment System (ICRAS), a working 

group that includes Ex-Im and other federal agencies involved in 

providing international credit.25 According to Ex-Im, for each country, 

ICRAS ratings are based on entities’ (1) ability to make payments as 

indicated by relevant economic factors, and (2) willingness to pay as 

indicated by payment record and political and social factors. There are 

two types of ICRAS ratings—one for foreign government (sovereign) 

borrowers and one for private-sector entities in foreign countries. For 

transactions with foreign governments, Ex-Im officials apply the ICRAS 

sovereign-risk rating. For transactions with private-sector entities, Ex-Im 

officials assign risk ratings based on the ICRAS private-sector rating and 

potentially other information such as obligor financial statements and 

ratings of the obligors by credit rating agencies.26

 

23Because Ex-Im does not have a large history of direct loans, Ex-Im uses the equivalent 

loan guarantee loss rate for each direct loan it authorizes. According to Ex-Im, this is 

appropriate because the nature of the direct loan and loan guarantee transactions are the 

same and they undergo the same underwriting process. 

24Ex-Im does not assign risk ratings to short-term insurance in multibuyer transactions or 

to working capital transactions. All long- and medium-term transactions and short-term 

insurance in single-buyer transactions are assigned risk ratings. 

25ICRAS was established in 1991 to create uniformity in risk assessment among the 

federal agencies involved in providing international credit. The ICRAS working group is 

chaired by OMB and includes representatives of the federal credit agencies with 

international credit programs, as well as the Department of State, the Department of the 

Treasury, the Federal Deposit Insurance Corporation, and the Board of Governors of the 

Federal Reserve System.

26Additional information on how Ex-Im develops risk ratings is discussed later in this 

report.
 

Page 22 GAO-13-303 Export-Import Bank

The loss rates produced by the model are used to estimate future cash 

flows, which, in turn, are used to determine credit subsidy costs contained 

in the President’s budget and to calculate loss reserves and allowances 

reported in Ex-Im’s annual financial statements. To estimate the subsidy 

costs of future transactions as part of the annual budget process, Ex-Im 

uses the loss rates to help determine cash inflows (such as repayments, 

fees, and recoveries) and outflows (such as claims) for the book of 

business it expects in the upcoming year. Because the cash inflows and 

outflows occur in the future, they must be discounted to determine their 

net present values. To do this, OMB guidance requires Ex-Im to enter 

cash flows into OMB’s credit subsidy calculator, which generates the 

original credit subsidy cost estimate for that book of business.27 In 

accordance with FCRA, the discount rates in the OMB credit subsidy 

calculator are based on interest rates for U.S. Treasury securities.28

Ex-Im also uses the estimated future cash flows to calculate loss reserves 

or allowances—financial reporting accounts for estimated losses—for 

each transaction at authorization. The total loss reserves and allowances 

are reported in Ex-Im’s annual financial statements. Each year, Ex-Im 

adjusts the loss reserve or allowance amount for each transaction using 

updated estimates of future cash flows, which consider the impact of 

actual credit performance and estimated changes in future credit 

performance.

 

27As required by FCRA, Ex-Im annually reestimates credit subsidy costs for prior books of 

business using loss rates updated to reflect actual credit performance and estimated 

changes in future credit performance. The credit subsidy calculator is the discounting tool 

issued by OMB for agencies to calculate credit subsidy costs. 

28OMB, Circular No. A-11, Part 5, Federal Credit (2011). The Congressional Budget Office 

(CBO) has proposed an alternative discounting method for federal credit programs to 

account for the market risk or uncertainty associated with federal credit transactions. 

Under the approach proposed by CBO, cash flows would be discounted using marketbased discount rates rather than discount rates based on Treasury securities, and would 

generally result in higher estimated credit subsidy costs for direct loan and loan guarantee 

programs. However, CBO and OMB have raised issues that would need to be carefully 

considered as part of any decision to adopt this approach. For example, both OMB and 

CBO have noted that federal agencies likely would face several administrative challenges 

in implementing the alternative method, including needing to train staff or hire staff with 

the right technical skill sets, and improving financial accounting systems and modeling 

capabilities. OMB also has raised conceptual issues about the suitability of this method for 

federal credit transactions. See CBO, Fair-Value Accounting for Federal Credit Programs

(Washington, D.C.: March 2012) and Fair-Value Estimates of the Cost of Federal Credit 

Programs in 2013 (Washington, D.C.: June 2012), and OMB, Analytical Perspectives: 

Fiscal Year 2013 Budget of the U.S. Government (Washington, D.C.: 2012), 393-399.
 

Page 23 GAO-13-303 Export-Import Bank

In addition to the risks discussed previously, the loss model also accounts 

for the foreign-currency risk Ex-Im faces from its transactions 

denominated in a foreign currency. In 2012, Ex-Im authorized about $1.7 

billion in guarantees denominated in a foreign currency, or about 5 

percent of its total authorizations for that year. According to an Ex-Im 

official, the loss model uses a methodology that captures the cost of 

buying a foreign currency at a particular time in the future.29

Ex-Im adjusts the loss estimation model annually to enhance the reliability 

of loss rates used to estimate subsidy costs and calculate loss reserves 

and allowances. In 2012, Ex-Im made several adjustments to both 

implement recommendations from external auditors and the Ex-Im IG and 

to make the model more flexible for the various types of transactions in its 

portfolio. Among other things, Ex-Im changed how it used its historical 

dataset and added several qualitative factors.

Therefore, 

Ex-Im factors this cost into the credit subsidy cost and the related loss 

reserve or allowance at the time it authorizes a transaction denominated 

in a foreign currency and updates it during the reestimate process. In 

addition, an Ex-Im official told us that Ex-Im adjusts its loss reserves 

monthly to reflect changes in currency exchange rates.

Due to data limitations, Ex-Im’s model does not control for the age of 

transactions in estimating the probability of default, potentially reducing 

the precision of the estimates.30

 

29Ex-Im officials told us the methodology is a variant of a commonly used option pricing 

model.

Ex-Im changed how it used the dataset 

underlying the loss model, which helped to mitigate this limitation. 

Specifically, to help avoid underestimating the probability of default, Ex-Im 

removed transactions authorized in 2012 from the dataset because these 

transactions generally did not have enough time to default. Ex-Im also 

excluded any long-term transactions that were within 3 years of the 

obligor’s first payment. In addition, Ex-Im removed all transactions that 

had not been disbursed as of June 30, 2012, because some transactions 

are never disbursed and therefore never have the opportunity to default. 

According to Ex-Im, these changes were made so the dataset more 

accurately reflected the nature of its defaults. An Ex-Im report on the 

30As discussed later in this report, Ex-Im does not maintain historical, point-in-time data on 

the performance (e.g., default status) of its transactions. As a result, the model is not able 

to use historical default data to control for when a transaction might default based on its 

age. 

Recent Enhancements to the 

Model
 

Page 24 GAO-13-303 Export-Import Bank

2012 changes to the loss model stated that these adjustments increased 

the percentage of defaulted transactions in the dataset—from 14 percent 

to 19 percent for loan guarantee transactions and from 11 percent to 14 

percent for insurance transactions. From a dollar perspective, the 

adjustments increased the loss rate for transactions in the dataset from 

0.9 percent to 1.2 percent for loan guarantees and from 6.2 percent to 6.9 

percent for insurance transactions.

Consistent with audit recommendations and industry best practices, ExIm also incorporated five qualitative factors into the loss model in 2012 to 

adjust for circumstances that may cause estimated losses to differ from 

historical experience. Ex-Im added these factors in recognition of the 

substantial growth in Ex-Im’s portfolio in recent years and of the potential 

differences between its historical loss experience—on which the 

quantitative part of the model is based—and future loss experience. 

According to Ex-Im, the five qualitative factors enhance the reliability of 

the model by better accounting for uncertainty in loss expectations. Four 

of the five qualitative factors Ex-Im added to the model in 2012 increased 

the estimated loss rate, and therefore increased the related loss reserve 

and allowance amounts for some transactions.

The five qualitative factors are as follows:

• Minimum loss rate. Ex-Im established minimum loss rates for products 

that historically had very low losses and therefore would have very 

low estimated loss rates based solely on historical data. According to 

Ex-Im, they added this factor to recognize that although some 

segments of the data may have low (or zero) historical loss rates ExIm should not forecast no losses in the future. The minimum loss rates 

affected sovereign and other public-sector transactions of long terms 

with good risk ratings and some short-term insurance transactions 

with good risk ratings. Ex-Im’s 2012 report on the loss model stated 

that the addition of this qualitative factor increased loss reserves and 

allowances by 2 percent.

• Global economic risk. This factor attempts to account for some market 

risks associated with changes in international economic and business 

conditions that may affect Ex-Im’s portfolio and make future losses 

differ from historical losses. First, Ex-Im uses a 1-year forecast from 

Moody’s of default rates on speculative-grade corporate bonds to 
 

Page 25 GAO-13-303 Export-Import Bank

predict an Ex-Im default rate.31

• Portfolio concentration risk, including the three factors of region 

concentration, industry concentration, and obligor concentration in the 

aircraft portfolio. Ex-Im added these three qualitative factors to adjust 

loss rates to account for uncertainties associated with growing 

concentrations in its portfolio.

Ex-Im then compares this rate with ExIm’s historical default experience. If the estimated default rate is 

greater than Ex-Im’s historical experience, Ex-Im increases its loss 

estimate in proportion to the difference between the estimated default 

rate and its historical experience. For 2012, this factor did not result in 

an adjustment to Ex-Im’s loss model.

32 Conceptually, the region and industry 

concentration factors treat each growing region and industry as if it 

were an entity that was issuing debt—making the entity more risky 

and potentially lowering its credit rating. Ex-Im used certain credit 

rating agency methodologies to develop synthetic ratings for each 

“entity” and used these ratings to adjust loss rates for transactions in 

the corresponding regions or industries. Ex-Im’s 2012 report on the 

loss model stated that the addition of the region concentration factor 

and the industry concentration factor increased loss reserves and 

allowances by 7 percent and 13 percent, respectively. Ex-Im also 

developed a concentration factor for obligors in the aircraft sector, 

which accounted for 46 percent of Ex-Im’s exposure at the end of 

2012. For example, this factor increases the loss rate for an aircraft 

transaction if the estimated loss given default (based only on the 

market value of the aircraft and the transaction amount) is larger than 

the loss given default predicted by the model (which incorporates 

other factors). Ex-Im indicated that the addition of the obligor 

concentration factor increased loss reserves and allowances by 0.8 

percent.

 

31Specifically, Ex-Im created a regression model using Moody’s Analytics historical default 

rates on speculative-grade corporate bonds from 1994 through 2011 and Ex-Im’s 

historical claim count rates (a measure of defaults) to determine how Moody’s Analytics 

default rate might translate into an Ex-Im default rate.

32In cases in which concentration is high but not growing, Ex-Im would not make an 

adjustment using the region and industry concentration qualitative factors.
 

Page 26 GAO-13-303 Export-Import Bank

Notwithstanding recent enhancements to the loss estimation model, 

opportunities exist for additional improvements to the model, as well as 

Ex-Im’s model development and validation processes. Ex-Im’s 

independent financial statement auditor and Ex-Im’s IG have made recent 

recommendations designed to improve Ex-Im’s loss modeling process. In 

conjunction with its audit of Ex-Im’s 2012 financial statements, Ex-Im’s 

independent financial statement auditor reviewed the loss model and 

found it to be reasonable overall. However, the auditor recommended 

additional improvements to Ex-Im’s loss modeling process, including (1) 

considering enhancements to the adjustment for global economic risk by 

using economic data or related indicators that would better predict the 

overall impact to the portfolio; (2) conducting analysis to determine events 

that trigger defaults; (3) identifying and monitoring industry-specific 

drivers of risk; and (4) having an independent department or service 

provider test the accuracy of the model. Ex-Im officials stated they would 

take these recommendations into consideration as they update the model 

for the next fiscal year. Additionally, in its September 2012 report, the ExIm IG recommended that Ex-Im design and implement a formal 

governance framework that defines roles and responsibilities for financial 

models and includes policies and procedures for validating models. Ex-Im 

agreed with the recommendation and noted that it has begun developing 

a formal governance framework for financial models. Also, Ex-Im said that 

it will conduct external validations of future financial models.

As previously discussed, Ex-Im incorporated a qualitative factor into the 

model to adjust the loss estimates to account for uncertainty related to 

potential changes in global economic conditions. The factor uses a 1-year 

forecast of bond defaults to make this adjustment. According to Ex-Im, 

the bond default rates originally forecasted each year correlated with ExIm’s observed default rates between 1994 and 2011. In addition, Ex-Im 

officials said the 1-year forecast was appropriate because Ex-Im will use 

subsequent 1-year forecasts in annual updates to the loss model. 

However, a 1-year forecast may not capture the uncertainty associated 

with Ex-Im’s longer-term transactions, and the use of subsequent shortterm forecasts does not address this limitation. FASAB guidance for 

federal credit agencies states that agencies should develop cash flow 

projections for their transactions based upon the best available data.33

 

33Federal Accounting Standards Advisory Board, Federal Financial Accounting and 

Auditing Technical Release 6: Preparing Estimates for Direct Loan and Loan Guarantee 

Subsidies under the Federal Credit Reform Act (January 2004).

Opportunities Exist for 

Improvements to the Loss 

Estimation Model
 

Page 27 GAO-13-303 Export-Import Bank

One-year forecasts may not represent the best available data for 

transactions that span multiple years. As a result, Ex-Im may not be 

making the appropriate adjustment to the estimated future losses, which 

could lead to underestimation of loss rates, credit subsidy cost estimates, 

and the related loss reserves and allowances for financial reporting 

purposes. 

Ex-Im’s fees for medium- and long-term products account for the credit 

and political risk associated with each transaction and are guided in large 

part by the OECD Arrangement, which establishes guidelines for 

determining “minimum premiums”—fees to cover the risk of not being 

repaid—and minimum interest rates that participant ECAs charge.34

Ex-Im’s pricing structure for medium- and long-term products (about 85 

percent of Ex-Im’s exposure) includes the following:

ExIm officials told us that the “exposure fee” they charge is generally the 

minimum premium required by the OECD Arrangement, but that the 

OECD Arrangement allows them to increase this fee if they deem that the 

minimum premium does not cover the risk of a transaction. Ex-Im also 

charges the minimum interest rate required by OECD, but can charge 

above that rate.

• Exposure fees. These fees cover the credit and political risks 

associated with a direct loan, loan guarantee, or insurance 

transaction. Ex-Im generally sets these fees at the level of the OECD 

minimum premium.

• Commitment fees. These fees are a flat percentage per year of the 

undisbursed portion of a direct loan or loan guarantee that Ex-Im 

charges to encourage the obligor’s use of the credit. These fees are 

not meant to cover the risk of nonrepayment and are not guided by 

the OECD Arrangement.

 

34The first OECD agreement on risk-based premium rates, in 1997, established a set of 

minimum premium rates to reflect country credit risk. A new agreement, effective as of 

September 2011, expanded on this earlier agreement by including buyer credit 

(commercial) risk, as well as country-based risk. 

Ex-Im’s Fees Are Guided 

by International 

Agreements and Internal 

Analyses
 

Page 28 GAO-13-303 Export-Import Bank

• Interest rates on direct loans.35

To determine the OECD minimum premium for a direct loan, loan 

guarantee, or insurance transaction, Ex-Im must take several aspects of 

the transaction into account, including the following:

The OECD Arrangement specifies a 

minimum interest charge of 1 percentage point above the U.S. 

Treasury rate for a security of comparable length.

• Obligor’s country. OECD established a system for classifying the risk 

associated with transactions in different countries. OECD classifies 

the countries using a scale from 0 (least risky) to 7 (most risky), and 

Ex-Im applies the relevant country classification for each 

transaction.36

• Obligor’s credit risk. OECD established a framework for classifying 

obligors based on credit risk and provides guidelines to assist 

participant ECAs in doing so. Using the guidelines, Ex-Im places each 

obligor into one of eight classifications, which range from better-thansovereign credit quality (least risky) to weak credit quality (most risky). 

Ex-Im uses the obligor’s recent financial information and other 

information, such as the obligor’s industry position and ratings by 

credit rating agencies, to assign a credit risk classification.

These classifications take into account risks associated 

with a country’s financial, economic, and political situation, as well as 

the historical payment experience of ECAs that are members of 

OECD and that have provided credit in the country.

• Other characteristics affecting the risk of nonrepayment. In 

determining minimum premiums, Ex-Im also must take into account 

the type of export financing product, the length of the transaction, and 

the percentage of the overall credit amount for which Ex-Im is 

responsible in the event of nonpayment. Additionally, the application 

of risk-mitigation techniques, such as obligor credit enhancements, 

reduces the minimum premium.

For specific types of medium- and long-term transactions, different 

procedures apply. For example, for obligors in high-income OECD 

countries, high-income euro area countries, or countries with an OECD 

 

35The interest rates for loans for which Ex-Im provides a guarantee are determined by the 

lender and are not subject to OECD requirements. 

36These classifications are separate from the ICRAS ratings discussed previously. 
 

Page 29 GAO-13-303 Export-Import Bank

country risk classification of 0, the OECD Arrangement requires ECAs to 

set fees based on available market information and the characteristics of 

the underlying transaction.37 This is achieved by using prices of certain 

comparable private-sector products, or “market benchmarks,” to help set 

fees. The OECD Arrangement specifies seven products that participant 

ECAs may use for this purpose, including certain corporate bonds and 

certain credit default swaps.38 According to OECD, the level of country 

risk is considered negligible for these countries, and the credit risk 

associated with transactions in these countries is predominantly related to 

the credit risk of the obligor. In addition, Ex-Im sets fees for its aircraft 

transactions according to a separate OECD agreement, updated in 2011, 

specifically for the aircraft sector.39

The fee structures for Ex-Im’s short-term products are not covered by the 

OECD Arrangement or any other international agreements and differ by 

export financing product, as follows:

This agreement provides guidance on

the commitment fees to be charged in aircraft transactions. According to 

Ex-Im, when the updated agreement is fully implemented in 2013, Ex-Im’s 

fees for these transactions will rise substantially.

• Working capital. Ex-Im generally charges a fee of 1.75 percent of the 

direct loan or loan guarantee amount. Ex-Im does not factor political 

risk into its fees for this product because the obligors are U.S. 

exporters. Ex-Im also generally does not differentiate between the 

credit risk of different obligors.

• Short-term insurance. Ex-Im’s fees include a premium that is based 

on the length of the credit, the type of entity purchasing the export 

(i.e., a foreign government, financial institution, or nonfinancial 

institution), and the OECD country risk classification for the country of 

 

37The OECD Arrangement identifies high-income countries as those countries that the 

World Bank has defined as high-income based on per capita Gross National Income.

38Credit default swaps are bilateral contracts, sold over-the-counter, that transfer credit 

risks from one party to another. A seller, which is offering credit protection, agrees, in 

return for a periodic fee, to compensate the buyer if a specified credit event, such as 

default, occurs. 

39Sector agreements have been reached for sectors including nuclear power plants, 

renewable energies and water projects, and ships. Some of these agreements have 

different rules for minimum interest and premium rates and maximum repayment terms 

than those that apply to standard transactions through the OECD Arrangement. 
 

Page 30 GAO-13-303 Export-Import Bank

the obligor. Some short-term insurance programs also factor into the 

premium amount the credit risk of the obligor.

In 2011, Ex-Im conducted internal analyses to help ensure that the fees it 

charges are sufficient to cover losses. For instance, Ex-Im officials told us 

that in 2011 they determined that the credit subsidy rate for the working 

capital program was positive by 9 basis points (0.09 percent), indicating 

that fee levels for this program were not sufficient to cover losses. As a 

result, in 2012 Ex-Im raised fees for the working capital program from 1.5 

percent to 1.75 percent (or 25 basis points) of the direct loan or loan 

guarantee amount to avoid the need for an appropriation to cover the 

credit subsidy costs. Similarly, Ex-Im officials said the 2011 analysis 

showed that one of Ex-Im’s short-term insurance products had a positive 

subsidy cost. In response, Ex-Im implemented a more risk-based fee 

structure to increase fees and make the product credit subsidy costneutral. Ex-Im officials said that they will conduct similar product analyses 

on an annual basis. Whether recent fee changes will avoid the need for a 

future credit subsidy will depend on the extent to which future losses are 

consistent with Ex-Im’s historical experience.

Ex-Im calculates and reports default rates for its portfolio, but it has not 

maintained data useful for assessing the performance of newer books of 

business. Ex-Im has been self-sustaining for appropriations purposes 

since 2008, but its long-term budgetary impacts are uncertain.

Ex-Im Reported a 

Default Rate under 1 

Percent and 

Generated Receipts, 

but the Long-Term 

Budgetary Impact Is 

Uncertain 
 

Page 31 GAO-13-303 Export-Import Bank

As of December 31, 2012, Ex-Im reported a default rate for its active 

portfolio of 0.34 percent. Ex-Im defines the active portfolio as those 

transactions for which the maturity date has not been reached or that 

have reached maturity but are still within the time frame during which a 

claim can be submitted.40 Ex-Im calculates the default rate as the sum of 

net claims paid on loan guarantees and insurance transactions and 

unpaid past due installments on direct loans divided by disbursements.41

As of December 31, 2012, Ex-Im’s reported default rate varied by product 

type, region, and industry. For example, default rates were 0.14 percent 

for short-term products (working capital loan guarantees and insurance), 

7.50 percent for medium-term products (direct loans, loan guarantees,

and insurance), and 0.20 percent for long-term products (direct loans and 

Ex-Im’s default rate declined steadily from about 1.6 percent as of 

September 30, 2006, to just under 0.3 percent as of September 30, 2012, 

before edging up slightly by the end of the calendar year. However, this 

downward trend should be viewed with caution because Ex-Im’s portfolio 

contains a large volume of recent transactions that have not reached their 

peak default periods. Recent transactions have had limited time to default 

and may not default until they are more seasoned. For example, 

according to Ex-Im, the peak default period for long-term loan 

guarantees—which represent almost 57 percent of Ex-Im’s 2012 

exposure—is about 3.9 years after authorization. As of the end of 2012, 

about 53 percent of Ex-Im’s active long-term guarantees (in dollar terms) 

had been authorized within the last 4 years. Therefore, the ultimate 

impact of Ex-Im’s recent business on default rates is not yet known.

 

40To determine the transactions in the active portfolio, Ex-Im adds 120 days to the 

maturity date for working capital loan guarantee and loan transactions, 240 days for shortterm insurance transactions, and 150 days for all other types of loan guarantee and 

insurance transactions to account for the period during which a claim can be submitted for 

different types of products. 

41Ex-Im developed this calculation of the default rate in response to a provision in the 

Export-Import Bank Reauthorization Act of 2012, which requires Ex-Im to report default 

rates to Congress quarterly. (Pub. L. No. 122-122, § 6, 126 Stat. 350, 353 (2012)). For

certain short-term products, the total amount disbursed can exceed the recorded 

authorization amount because the products provide revolving credit. For these products, 

Ex-Im used the disbursed amount to calculate default rates whether or not disbursements

exceeded the authorization amount. According to Ex-Im, limiting the disbursed amount to 

the authorization amount in the calculation would have increased Ex-Im’s overall default 

rate as of December 31, 2012, by less than one one-hundreth of a percentage point. An 

Ex-Im official said that the agency’s future default rate calculations would use the 

authorization amount in cases where the disbursed amount was higher.

Ex-Im Has Not Maintained 

Data Useful for Assessing 

the Performance of Recent 

Business 
 

Page 32 GAO-13-303 Export-Import Bank

loan guarantees). Among all products, the default rate ranged from a low 

of 0.07 percent for working capital loan guarantees to a high of 8.74 

percent for medium-term insurance.42 Across regions, default rates 

ranged from 0.002 percent in Oceania to 0.58 percent in Asia. Across ExIm’s largest industry sectors, default rates ranged from 0 percent in oil 

and gas to 0.71 percent in manufacturing.43

A technique called vintage analysis is useful for examining the 

performance of growing portfolios, but Ex-Im has not maintained the data 

necessary to conduct such analysis. Vintage analysis separates and 

compares the performance of seasoned cohorts and newer cohorts at 

comparable points in time (for example, a certain number of years after 

authorization). This technique can help evaluate the credit quality of 

recent business by comparing the early performance of these cohorts 

with the early performance of older cohorts. As such, it can provide early 

warning of potential performance problems in newer business. Federal 

banking regulator guidance suggests that banks conduct vintage analysis 

to help manage growing portfolios. For example, the Federal Deposit 

Insurance Corporation’s Risk Management Manual of Examination 

Policies states that loan review and monitoring analysis should consider 

the effects of portfolio growth and seasoning and that vintage analysis 

can be used to do this. In addition, interagency guidance from federal 

banking regulators states that reporting from management information 

systems should include vintage analysis and that such analysis helps 

management understand historical performance trends and their 

implications for future default rates.44

 

42As of the end of 2012, the dollar amount of medium-term insurance transactions 

represented less than 1 percent of the dollar amount of Ex-Im’s active authorizations.

Although Ex-Im information systems 

produce quarterly performance snapshots of individual cohorts, the 

systems overwrite the snapshots with each quarterly update, according to 

Ex-Im officials. Because Ex-Im has not retained historical cohort-level 

performance data, it is unable to compare the performance of different 

cohorts at comparable points in time. Ex-Im officials said that they use 

43Ex-Im’s four largest industries represent 89 percent of its active portfolio. They are 

aircraft, manufacturing, oil and gas, and utilities-power projects. 

44Office of the Comptroller of the Currency, Federal Deposit Insurance Corporation, Board 

of Governors of the Federal Reserve System, and Office of Thrift Supervision, Interagency 

Guidance on Asset Securitization Activities (Washington, D.C.: December 1999). While 

Ex-Im is not bound by this guidance, it faces similar challenges to regulated private 

financial institutions in managing risks.
 

Page 33 GAO-13-303 Export-Import Bank

several tools to provide early warning of performance problems, including 

monitoring individual transactions of more than $1 million, maintaining an 

Obligors of Concern List, and analyzing monthly and annual trends in 

claims.45

Another measure of portfolio performance is the proportion of creditimpaired (impaired) assets to Ex-Im’s total exposure. Ex-Im defines 

impaired assets as delinquent direct loans, loan guarantees, and claims 

with an amount of $50,000 or more past due at least 90 days; 

rescheduled direct loans, loan guarantees, and claims; or nondelinquent 

direct loans, loan guarantees, and claims above a certain risk rating.

However, by not maintaining the information necessary to 

conduct vintage analysis, Ex-Im’s ability to understand the early 

performance of recent cohorts and implications of this performance on 

future default rates may be limited. Additionally, as previously noted, the 

lack of point-in-time performance data may reduce the precision of ExIm’s loss estimation model.

46 A 

substantial portion of Ex-Im’s impaired assets are from transactions that 

preceded the implementation of credit reform in 1992.47

 

45Ex-Im’s Obligors of Concern List includes credits rated as impaired due to political, 

commercial, operational, or technical events or acts of god. 

For example, 

from 2008 through 2012, pre-credit reform transactions accounted for 

about 50 to 60 percent of impaired assets each year. As a percentage of 

total exposure, Ex-Im’s impaired assets generally declined over that 

period (see fig. 7). In 2008, Ex-Im had about $3.4 billion in impaired 

assets, which represented approximately 6 percent of total exposure at 

that time. In 2010, the corresponding figures were about $4.4 billion and 

5.8 percent. In 2012, impaired assets were approximately $2.6 billion, or 

about 2.5 percent of Ex-Im’s total exposure for that year. Again, the trend 

in this performance measure should be interpreted cautiously, because 

Ex-Im’s portfolio was growing during this period, which resulted in more of 

its portfolio being of recent vintage.

46Ex-Im does not pay claims on all impaired assets because some are restructured prior 

to default. In addition to the examples cited, impaired assets also consist of credits 

qualifying for debt forgiveness and rescheduling from the Paris Club or under the Heavily 

Indebted Poor Countries initiative. A rescheduled claim occurs when Ex-Im has paid a 

claim on a transaction with an underlying sovereign loan guarantee, but a claims 

receivable exists that has not been written off.

47According to Ex-Im officials, pre-credit reform impaired assets include loans to former 

sovereign entities that Ex-Im does not have the authority to write off. 
 

Page 34 GAO-13-303 Export-Import Bank

Figure 7: Impaired Assets as a Percentage of Total Exposure, Fiscal Years 2008-

2012

Ex-Im has been self-sustaining since 2008. Each year, Ex-Im is 

appropriated a specified amount of funds for administrative costs and 

credit subsidy costs.

48

 

48Although Ex-Im’s overall portfolio historically has had a negative subsidy rate, Ex-Im 

receives annual appropriations for transactions anticipated to have positive subsidy costs. 

Ex-Im appropriation acts for 2000 through 2012 require subsidy appropriations to be 

obligated within 3 years of appropriation and administrative appropriations to be obligated 

within 1 year of appropriation. 

However, since 2008, appropriation acts have 

required Ex-Im to repay appropriated funds dollar-for-dollar with offsetting 

collections so that the result is a net-zero appropriation. Ex-Im’s offsetting 

collections are generated by transactions that are initially estimated to 

result in negative credit subsidies when fees collected from obligors are 

estimated to be greater than estimated losses (net of recoveries). For 

example, for 2012, Ex-Im was appropriated about $90 million for 

Ex-Im’s Long-term 

Budgetary Impacts Are 

Uncertain
 

Page 35 GAO-13-303 Export-Import Bank

administrative costs and $58 million for credit subsidy costs and also 

authorized to retain up to $50 million in offsetting collections.49

According to Ex-Im, since the implementation of FCRA, it has sent about 

$5.8 billion more to Treasury than it has received in appropriations.

That year, 

Ex-Im generated about $1 billion in collections. With these funds, Ex-Im 

reimbursed Treasury for the appropriation of administrative costs. In 

addition, Ex-Im retained $108 million—the $58 million for credit subsidy 

costs plus the $50 million in retained offsetting collections—for obligations 

occurring within the next 3 years. Unlike the administrative costs 

appropriation, which Ex-Im must repay in the same year as received, ExIm has 3 years to repay the credit subsidy appropriation and obligate the 

$50 million it retained in offsetting collections. The remaining collections, 

roughly $800 million, were sent to Treasury.

50

From 1992 through 2012, Ex-Im was appropriated about $9.8 billion for 

credit subsidy costs and administrative costs. Over the same period, ExIm sent about $15.6 billion to Treasury as a result of credit subsidy 

reestimates ($12 billion), cancelled authority ($1.6 billion), returned 

collections ($1.3 billion), and rescissions ($675 million).51

Ex-Im annually reestimates credit subsidy costs for its direct loan 

(medium- and long-term loans) and loan guarantee (medium- and longterm loan guarantees, short- and medium-term insurance, and working 

capital) programs.

About $1.7 

billion of the $5.8 billion net return to Treasury occurred from 2008 

through 2012.

52

 

49Pub. L. No. 112-74, 125 Stat. 1190 (2011).

As shown in figure 8, since the implementation of 

FCRA, the annual subsidy reestimates for the direct loan and loan 

guarantee programs generally were downward (that is, more favorable 

than previously estimated). According to Ex-Im officials, the substantial 

50We determined that Ex-Im’s figures for appropriations received and amounts sent to 

Treasury were reasonable based on our analysis of Ex-Im appropriations acts, budget 

appendixes, and financial statements from 1992 through 2012.

51The $12 billion in credit subsidy reestimates is the net of upward and downward 

reestimates. A rescission is a cancellation of budget authority previously enacted by

Congress. Rescissions may be made across all government programs or may be directed 

towards a single agency or program. The rescission amount listed here represents 

rescissions directed to Ex-Im. 

52Ex-Im includes insurance products in the loan guarantee category for purposes of 

reporting credit subsidy estimates. 
 

Page 36 GAO-13-303 Export-Import Bank

downward reestimates in the early- to mid-2000s were due primarily to a 

switch from standard loss rates prescribed by OMB to loss rates that 

reflected Ex-Im’s historical experience, which tended to be lower. Ex-Im 

officials attributed the upward reestimates in 2010 to changes they made 

that year in their loss estimation model to account for increased loss 

experience in 2009 and uncertainty stemming from the global financial 

crisis. Ex-Im officials said that the upward reestimates for 2011 and 2012 

for direct loans stemmed from declines in obligor interest rates, which 

reduce estimated cash flows.53

 

53More specifically, the upward reestimates result from the particular way in which Ex-Im 

had defined loan cohorts and how interest rate changes are incorporated into subsidy cost 

reestimates. Through 2012, Ex-Im defined a loan cohort by the year in which funds for the 

transactions were appropriated rather than the year in which Ex-Im authorized and 

obligated funds for the loans. For example, because Ex-Im receives multiyear 

appropriations, a loan for which Ex-Im authorized and obligated funds in 2011 could be 

funded with 2008 appropriations. For annual reestimation purposes, the loan would be 

included in the 2008 cohort and reflect forecasted 2008 discount rates. But, because 

obligor interest rates were lower in 2011 than they were in 2008, the difference in the 

interest rates contributes to an upward reestimate. According to OMB guidance, once a 

cohort is at least 90 percent disbursed, rates prevailing during the disbursement period, 

instead of forecasted discount rates, are used, which could contribute to a decrease in the 

subsidy cost estimate. According to Ex-Im, the agency has reconfigured its accounting 

systems to organize all of its cohorts based on obligation year, beginning with the 2014 

budget. As a result, future reestimates should not reflect distortions due to the issue 

described above. 

In addition, Ex-Im officials said they 

expected further upward reestimates due to modeling changes they made 

in 2012, including the addition of the qualitative factors discussed 

previously. These modeling changes will be reflected in the subsidy 

estimates and reestimates in the 2014 budget.
 

Page 37 GAO-13-303 Export-Import Bank

Figure 8: Direct Loan and Loan Guarantee Subsidy Reestimates, Fiscal Years 1992-2012

Note: Amount for 2012 is estimated.

The extent to which Ex-Im will continue to send more funds to Treasury 

than it receives in appropriations and permanent, indefinite budget 

authority will depend partly on future credit subsidy reestimates. Credit 

subsidy estimates are based, in part, on economic assumptions that are 

uncertain and can change from year to year. In addition, the estimates 

are developed using Ex-Im’s loss estimation model, which is not intended 

to capture the impact of unexpected economic scenarios that could 

substantially affect Ex-Im’s losses. Therefore, changes in underlying 

assumptions or adverse economic events could result in upward subsidy 

reestimates that may require drawing on permanent and indefinite budget 

authority.
 

Page 38 GAO-13-303 Export-Import Bank

Ex-Im uses a number of risk-management techniques throughout the 

different stages of a transaction, which include underwriting, monitoring 

and restructuring, and claims and recovery. In January 2013, Ex-Im 

completed a comprehensive revision of its policies and procedures 

manual that covers each stage.

Ex-Im manages risks through the underwriting process in several ways. 

First, Ex-Im produces a Country Limitation Schedule (CLS) that specifies 

the types of transactions eligible for financing in each country and the 

conditions under which they are eligible. For example, in some countries, 

Ex-Im will not provide financing because the credit and political risks are 

deemed to be too high or because of legal prohibitions. In countries 

where Ex-Im does business, Ex-Im may only provide financing for 

transactions of certain durations or for either public- or private-sector 

borrowers. Ex-Im has basic eligibility requirements for obligors. For 

example, an obligor must not have been suspended or debarred from 

doing business with the U.S. government and may be required to have 

been in the same line of business for a specified number of years. 

Requirements for obligors also vary by product type and transaction 

length.

For transactions that meet CLS and eligibility requirements, Ex-Im 

assigns a risk rating used to determine whether there is a reasonable 

assurance of repayment. As previously discussed, the ratings range from 

1 (least risky) to 11 (most risky). For transactions conveying the full faith 

and credit of a foreign government, Ex-Im officials apply the ICRAS 

sovereign risk rating. ICRAS ratings for sovereign obligors are based on 

macroeconomic indicators, such as indebtedness levels, balance-ofpayments factors, and political and social factors. For most private-sector 

transactions, Ex-Im officials use the private-sector ICRAS rating as a 

baseline and adjust that rating depending on their assessment of the 

obligor’s creditworthiness and other factors. ICRAS ratings for privatesector transactions in a country are based on qualitative and quantitative 

assessments of the depth of private-sector business activity in a country, 

the strength of private-sector institutions, foreign exchange availability, 

political stability, and other factors. Ex-Im officials assess obligors’ 

Ex-Im Faces 

Operational Risks 

from Its Growing 

Portfolio

Ex-Im Uses Various 

Techniques to Manage 

Transaction Risks

Underwriting
 

Page 39 GAO-13-303 Export-Import Bank

creditworthiness by reviewing information including financial statements 

and corporate credit ratings. For more complex transactions, Ex-Im 

considers additional information to develop the risk rating. For example, 

for project finance transactions, Ex-Im considers the allocation of risk 

among project participants, the financial strength of the project, and 

market pricing of project inputs and outputs.54 Ex-Im generally does not 

authorize transactions with risk ratings over 8.55

In addition to the CLS and risk rating, Ex-Im uses other processes, 

standards, and conditions in underwriting transactions. Examples of these 

include the following:

• Due diligence process. Ex-Im reviews information related to the 

integrity of the transaction and the character and reputation of the 

participants. For example, Ex-Im determines whether it has had 

adverse prior experience with a participant or if the participant 

presents a risk due to poor references or investigations by local legal 

or regulatory authorities.

• Collateral standards. As applicable, Ex-Im requires assets to secure 

the transactions and prefers the asset value to exceed the loan value 

in most transactions. For example, working capital loan guarantees 

must be secured by raw materials, finished goods, accounts 

receivable, or other specified assets. Additionally, each Ex-Im aircraft 

transaction is secured not only by the aircraft being financed under 

that transaction, but also by any other aircraft Ex-Im is currently 

financing for the obligor.

• Risk-sharing conditions. These conditions require lenders and 

exporters to share a percentage of the credit risk with Ex-Im. For 

example, for working capital loan guarantees, Ex-Im guarantees 90 

percent of the principal and interest on a loan issued by a private 

lender. In the event of a claim, Ex-Im reimburses the lender for 90 

percent of both the outstanding principal balance of the loan and 

accrued interest, and the lender is responsible for the remaining 10 

percent.

 

54For example, inputs and outputs for a power plant project could be coal and electricity, 

respectively.

55As previously discussed, the risk ratings are used in estimating loss rates, but are not 

used for determining product fees.
 

Page 40 GAO-13-303 Export-Import Bank

Ex-Im monitors the performance of all medium-term direct loan, loan 

guarantee, and insurance transactions and long-term direct loan and loan 

guarantee transactions above $1 million to help contain risk. Ex-Im 

conducts ongoing reviews of these transactions to identify and address 

any deterioration in credit quality before the obligor defaults. This includes 

assessment of the operating environment and financial condition of the 

obligor to determine whether or not there have been changes that might 

increase or decrease credit risk. Ex-Im updates a transaction’s risk rating 

at least annually to reflect any changes in credit risk, which, in turn, 

affects the estimated credit subsidy cost and loss reserve or allowance 

associated with the transaction.56

Ex-Im uses a different monitoring approach for some short-term 

transactions. For example, for working capital loan guarantees, Ex-Im 

conducts examinations of lenders that have “delegated authority,” 

meaning that the lenders can underwrite transactions on Ex-Im’s behalf. 

During these examinations, Ex-Im reviews a sample of loans to determine 

if lenders have been complying with Ex-Im’s credit policies, including due 

diligence steps. According to Ex-Im officials, lenders considered higherrisk (for example, due to their volume of problem loans and claims 

history) receive a more in-depth review than lower-risk lenders. Lenders 

that fail these examinations have their delegated authority suspended.

Specific monitoring activities include 

evaluating the capacity of obligors to repay their debts, reviewing the 

value of pledged collateral, and staying abreast of actions by the obligor 

to respond to adverse market changes, and on-site visits at crucial project 

milestones (as applicable). Through the monitoring process, Ex-Im 

develops a Watch List, which tracks transactions that show signs of 

impairment, and an Obligors of Concern List, which tracks transactions 

that are impaired. These transactions are subject to more frequent 

monitoring than other transactions. In addition, monitoring staff share 

these lists with the Office of the Chief Financial Officer and other senior 

management to keep them informed of emerging credit issues.

57

 

56Risk ratings for short-term insurance in single-buyer transactions are not updated 

because the transactions are either repaid or a claim is filed within 1 year. A higher risk 

rating results in a greater credit subsidy cost and loss reserve or allowance. 

The Ex-Im IG has reported that its investigations have indicated a lack of 

due diligence efforts by some lenders that offer loans guaranteed by Ex57According to Ex-Im, no lenders failed the 156 examinations conducted from 2008 

through 2012.

Monitoring and Restructuring
 

Page 41 GAO-13-303 Export-Import Bank

Im.58 Further, in 2012, Congress directed Ex-Im to improve and clarify its 

due diligence procedures.59

Ex-Im restructures transactions with credit weaknesses to help prevent 

defaults and increase recoveries on transactions that do default. 

According to Ex-Im, restructuring can involve substantial revision of 

transaction terms and conditions.

In response, Ex-Im officials said they 

expected to have the revised procedures completed by the summer of 

2013.

60

Ex-Im pays claims when a loan that it has guaranteed or an insurance 

policy that it has issued defaults.

For example, in 2012, Ex-Im 

restructured a defaulted project finance transaction into a direct loan with 

the implicit backing of a foreign government. Restructuring can also 

involve the addition of credit enhancements such as extra collateral or 

third-party guarantees. According to Ex-Im, the agency restructures as 

many as eight transactions per year. According to Ex-Im officials, the 

agency is developing a dedicated restructuring team to help reduce the 

workload of staff currently responsible for both monitoring and 

restructuring tasks. In addition, they indicated that restructuring staff 

inform underwriting staff of trends in credit deteriorations or problems with 

particular borrowers to help ensure that any lessons learned are applied 

to future transactions.

61

 

58Office of Inspector General, Export-Import Bank of the United States, Semiannual 

Report to Congress – October 1, 2011 to March 31, 2012 (Washington, D.C.: 2012). 

Ex-Im tries to minimize losses on 

claims paid by pursuing recoveries. For example, Ex-Im takes steps to 

collect on the assets of the obligors, which can include the collateral 

backing a transaction. For all products combined, Ex-Im’s recovery rate—

the total amount recovered divided by the total amount of claims paid plus 

recovery expenses—was about 50 percent on average from 1994 through 

2012. In addition, when Ex-Im pays a claim for a loan guarantee that is 

59Pub. L. No. 112-122 §7, 126 Stat. 350, 354 (2012).

60Ex-Im also reviews and, as appropriate, approves routine waiver and amendment 

requests such as extensions of disbursement and coverage dates. According to Ex-Im, 

the agency makes decisions on as many as 20 requests per month. 

61Payment of claims for insurance and working capital loan guarantee transactions is 

conditional upon transaction participants’ compliance with Ex-Im requirements such as 

underwriting policies, deadlines for filing claims, payment of premiums and fees, and 

submission of proper documentation. Ex-Im’s guarantee on medium- and long-term loan 

guarantees is unconditional, meaning Ex-Im must pay submitted claims. 

Claims and Recovery 
 

Page 42 GAO-13-303 Export-Import Bank

denominated in a foreign currency, Ex-Im manages its foreign-currency 

risk by purchasing the foreign currency to pay the claim to the lender and 

then seeks recovery on the U.S. dollar equivalent, which represents the 

obligor’s debt obligation. This policy effectively shifts the foreign-currency 

risk from Ex-Im to the obligor after a claim has been paid.

In September 2012, the Ex-Im IG issued a report on Ex-Im’s management 

of risk at the overall portfolio level.62

The Ex-Im IG recommended that Ex-Im develop a systematic approach to 

stress testing its portfolio that would be conducted at least annually as 

part of the process for reestimating credit subsidies. A stress test is a 

“what-if” scenario that is not a prediction or expected outcome of the 

economy. Stress testing is one tool to measure the vulnerability of 

portfolios to unexpected losses—that is, losses associated with extreme 

yet plausible events. The IG stated that in light of concentrations in ExIm’s portfolio, stress testing would provide Ex-Im information on how its 

portfolio would react to shocks in financial markets. Ex-Im agreed to 

implement this recommendation.

On the basis of industry best 

practices, the report made a number of recommendations to improve ExIm’s portfolio management in areas such as stress testing, portfolio 

concentrations, and risk governance. Our review of federal internal 

control standards and industry practices suggests that the IG’s 

recommendations in these areas represent prudent risk-management 

techniques. Ex-Im has begun to implement some of the IG’s 

recommendations and is in the process of analyzing others to determine 

their applicability to Ex-Im and the risk-management benefits that could 

be gained from them.

Stress testing is consistent with our internal control standards and 

industry practices. For example, our internal control standards state that 

agencies should have adequate mechanisms to identify risks arising from 

external factors and analyze the possible effects of these risks.63

 

62OIG-INS-12-02.

In 

addition, in its best practices manual on credit portfolio management, the 

63GAO, Standards for Internal Control in the Federal Government, GAO/AIMD-00-21.3.1

(Washington, D.C.: November 1999) and Internal Control Management and Evaluation 

Tool, GAO-01-1008G (Washington, D.C.: August 2001). 

Ex-Im Has Started 

Developing a More 

Comprehensive RiskManagement Framework

Stress Testing
 

Page 43 GAO-13-303 Export-Import Bank

International Association of Credit Portfolio Managers (IACPM) states that 

institutions should conduct stress testing to inform management about the 

portfolio’s vulnerabilities and to establish the portfolio’s sensitivity to risk 

factors.64 Similarly, guidance from regulators of federal financial 

institutions notes that the recent financial crisis underscored the need for 

banking organizations to incorporate stress testing into their riskmanagement practices.65

Ex-Im officials stated that they have conducted ad hoc stress tests in the 

past, but have been developing a systematic approach. This approach 

will involve assessment of (1) how the entire portfolio or portions of the 

portfolio would be affected by extreme economic events and (2) the 

impact that particular adverse scenarios may have on specific obligors. 

Ex-Im officials told us that they will first stress test the aircraft portfolio, 

which accounts for about 50 percent of the agency’s exposure. According 

to Ex-Im, the stress test results will be included in a quarterly internal 

report on the financial status of Ex-Im’s portfolio. Ex-Im officials stated 

that the results of the stress testing will be used to inform the loss 

modeling process and will be used by senior management in making 

decisions about the agency’s resource allocations and strategic planning 

efforts. Ex-Im officials also indicated that they intend to share their stress 

testing and loss modeling methodologies with other federal credit 

agencies so that others may benefit from Ex-Im’s efforts.

Furthermore, the foreign ECAs and U.S. federal 

credit agencies with which we spoke conduct stress testing on their 

portfolios. For example, officials from one ECA told us that they conduct 

stress tests every 6 months using scenarios related to current world 

issues to determine the impact those scenarios would have on obligors.

Ex-Im has not yet made plans to report its stress scenarios and stress 

test results to Congress. Such reporting could help Congress oversee ExIm’s activities by providing additional information on Ex-Im’s risk 

exposure. Through provisions in the Export-Import Bank Reauthorization 

Act of 2012, Congress has required Ex-Im to provide analysis of the 

 

64IACPM, Sound Practices in Credit Portfolio Management (New York, N.Y.: 2005).

65Board of Governors of the Federal Reserve System, Federal Deposit Insurance 

Corporation, Office of the Comptroller of the Currency, Guidance on Stress Testing for 

Banking Organizations with Total Consolidated Assets of More Than $10 Billion, SR 12-7 

(Washington, D.C.: May 2012). While Ex-Im is not governed by this guidance, it provides

useful criteria for assessing Ex-Im’s activities because the agency faces similar challenges 

to regulated private financial institutions in managing risks.
 

Page 44 GAO-13-303 Export-Import Bank

agency’s default rates and risk of loss associated with its increased 

exposure limits.66 Information on Ex-Im’s stress testing would 

complement that analysis by disclosing the magnitude of losses that ExIm could face under adverse scenarios. Additionally, reporting such 

information would be consistent with our internal control standards, which 

indicate that communications with external parties, including Congress, 

should provide information that helps them better understand the risks 

facing the agency.67

As previously discussed, Ex-Im’s portfolio is concentrated in certain 

industries, regions, and obligors. These concentrations expose Ex-Im to 

the risk associated with negative events in those market segments. In 

light of these concentrations, the Ex-Im IG recommended that Ex-Im 

implement “soft portfolio concentration sublimits”—that is, informal 

thresholds for the portion of total exposure within different segments of 

the portfolio. The IG recommended that Ex-Im set the soft portfolio 

sublimits by industry, geography, or transaction risk rating and use them 

as internal guidance to inform future pricing and portfolio riskmanagement decisions (e.g., ways to diversify the portfolio). According to 

IG officials, the establishment of soft portfolio sublimits (as opposed to 

hard limits) would help Ex-Im manage portfolio concentrations without 

restricting its ability to meet exporters’ demand for financing or adversely 

affecting Ex-Im’s competitiveness with other ECAs.

Portfolio sublimits represent one technique for managing a “risk 

appetite”—that is, the amount of risk an institution is willing to accept. 

Setting a risk appetite is consistent with our internal control standards, 

which state that agencies should develop an approach for risk 

management based on how much risk can be prudently accepted.68

 

66Pub. L. No. 112-122, §§ 4, 6, 126. Stat. 350, 351, 353 (2012). 

Additionally, industry best practices identified by the Committee of 

Sponsoring Organizations of the Treadway Commission (COSO), the 

Institute of International Finance (IIF), and IACPM cite the establishment 

of risk appetite, including through portfolio sublimits, as a sound risk67GAO/AIMD-00-21.3.1 and GAO-01-1008G. 

68GAO-01-1008G. 

Portfolio Concentration 

Management 
 

Page 45 GAO-13-303 Export-Import Bank

management practice.69

As of December 2012, Ex-Im had not established soft portfolio sublimits. 

However, Ex-Im officials said that they were evaluating whether this 

practice was suitable for the agency in light of potential implications for 

Ex-Im’s ability to meet client demands and competitiveness with other 

ECAs. Given the potential benefits of this risk-management practice, 

following through on this evaluation will be important for Ex-Im. 

Furthermore, if it determines that soft portfolio sublimits are appropriate, 

following industry guidance for setting a risk appetite will also be 

important. For example, guidance issued by COSO in January 2012 

states that in developing a risk appetite an institution should consider its 

existing risk profile (current level and distribution of risks); risk capacity 

(the amount of risk that an organization is able to support); risk tolerance 

(the acceptable level of variation an organization is willing to accept); and 

stakeholders’ attitudes towards growth, risk, and return.

Some organizations with which we spoke, 

including the Overseas Private Investment Corporation (OPIC) and two 

foreign ECAs, set a risk appetite by establishing limits on the volume of 

financing they provide to different industries, countries, or obligors. 

Setting a risk appetite can help senior management determine the point 

at which the institution’s exposure has reached a level that may require 

implementation of additional risk controls.

70

In its September 2012 report, the Ex-Im IG also stated that Ex-Im’s risk 

governance structure was not commensurate with the size, scope, and 

strategic ambitions of the institution.71

 

69COSO is a joint initiative of five professional associations dedicated to providing thought 

leadership through the development of frameworks and guidance on enterprise risk 

management, internal control, and fraud deterrence. IIF is a global association of financial 

institutions that supports the financial industry in prudently managing risks.

Among other things, the IG noted 

that Ex-Im lacked an official responsible for managing the full spectrum of 

risks facing the agency and developing risk-management strategies. The 

IG recommended that Ex-Im create the position of chief risk officer (CRO) 

to oversee the design and implementation of an enterprisewide riskmanagement function.

70Larry Rittenberg and Frank Martens, Enterprise Risk Management: Understanding and 

Communicating Risk Appetite, report prepared for COSO (January 2012).

71Governance refers to the actions and processes by which an institution exercises 

authority and makes and implements decisions. Risk governance applies the principles of 

governance to the identification, assessment, management, and communication of risks. 

Risk Governance
 

Page 46 GAO-13-303 Export-Import Bank

Industry best practices and corporate governance principles of the Basel 

Committee on Banking Supervision highlight the importance of having 

focal points for all the activities required to manage enterprisewide risks. 

For example, best practices published by IIF state that financial firms 

should assign responsibility for risk management to an officer at a senior 

level, in most cases a CRO. The Global Association of Risk Professionals 

has indicated that the typical roles of a CRO include establishing riskmanagement policies and procedures consistent with entitywide policies, 

reviewing and approving models used for pricing and risk measurement, 

measuring risk on a global basis as well as monitoring exposures and 

changes in risks, and communicating risk-management results to senior 

management. OPIC and some foreign ECAs with which we spoke have 

CROs and cited benefits of this function, including risk assessment that is 

independent from other business functions. For example, OPIC officials 

said that OPIC’s CRO function is carried out by a small unit led by a 

Director of Risk Management that reports directly to the agency’s Chief 

Financial Officer. 

Ex-Im does not have a centralized CRO function and instead distributes

responsibilities for risk management to several parts of the organization, 

including the Office of the Chief Financial Officer, Office of General 

Counsel, Credit Management Group, and Credit Policy Committee. For 

example, the Office of the Chief Financial Officer’s responsibilities include 

loss modeling, determining credit subsidy estimates, and portfolio 

monitoring. The Office of General Counsel’s responsibilities include 

conducting due diligence on transaction participants to manage 

reputational risk and assisting in documenting transactions. The Credit 

Management Group takes the lead in reviewing and recommending broad 

credit policy and underwriting standards. Finally, the Credit Policy 

Committee is responsible for formulating, coordinating, and making 

recommendations to Ex-Im’s Board of Directors in the areas of country 

risk, sovereign and private-sector risk, changing or modifying CLS, and 

addressing other risk issues.

As of February 2013, Ex-Im officials told us that they were analyzing the 

possibility of establishing a more centralized CRO function. The officials 

said that in performing this analysis, they were reviewing other 

organizations that have a CRO, including OPIC, the World Bank, the 

International Finance Corporation, and the African Development Bank. 

Careful consideration of the potential benefits of a CRO function and the 

extent to which the agency’s current structure comprehensively 

addresses enterprisewide risks is critical given Ex-Im’s growing financial 

exposure. Further, taking into account the potential expansion of its risk-
 

Page 47 GAO-13-303 Export-Import Bank

management activities, such as the implementation of soft sublimits and 

regular stress testing, will be important for Ex-Im’s analysis.

In addition to the three recommendations discussed previously, the IG 

recommended that Ex-Im: (1) develop a systematic approach for 

modeling portfolio risk, including identifying appropriate qualitative risk 

factors; (2) with the assistance of external experts, implement a formal 

framework for the use of financial models, including procedures for model 

validation; (3) review risk metrics and reporting procedures to enhance 

transparency and to better inform key stakeholders; and (4) amend its bylaws to provide for oversight of an agencywide risk-management function 

by Ex-Im’s Board of Directors. Ex-Im has taken actions to address the 

first three of these recommendations. As already noted, Ex-Im 

incorporated qualitative risk factors into its loss estimation model. In 

addition, Ex-Im hired a contractor to serve as an external expert in 

reviewing and analyzing Ex-Im’s loss estimation model and plans to 

conduct external validation of future financial models. Ex-Im also began 

issuing a quarterly default report and is identifying portfolio management 

best practices—including risk metrics and reporting procedures—through 

a review conducted by subject-matter experts. Ex-Im disagreed with the 

fourth recommendation. Ex-Im stated that the agency’s charter does not 

provide this oversight function to the Board of Directors, but rather 

provides the President of Ex-Im broad operational authority for the 

management of Ex-Im, including oversight of all of Ex-Im’s riskmanagement functions.

Ex-Im’s annual authorizations increased from about $12 billion in 2006 to 

nearly $36 billion in 2012, an increase of about 195 percent. Over the 

same period, Ex-Im’s staff level, as measured by full-time equivalents 

(FTE), increased from 380 to 390 FTEs, about 3 percent (see fig. 9).

Other Recommendations 

Ex-Im Has Not Yet 

Determined the Volume It 

Can Prudently Manage
 

Page 48 GAO-13-303 Export-Import Bank

Figure 9: Ex-Im Authorization and FTE Levels, Fiscal Years 2006 - 2012

The rapid increase in business volume, coupled with a modest growth in 

FTEs, creates potential operational risks for Ex-Im. If demand for Ex-Im’s 

services exceeded its capacity, the agency’s ability to properly underwrite 

and monitor transactions might suffer. Agencywide, the average dollar 

amount of annual authorizations per FTE rose from $32 million in 2006 to 

about $92 million in 2012, an increase of more than 150 percent. Over the 

same period, the number of transactions per FTE rose from 7.0 to 9.7, an 

increase of 38 percent. Ex-Im acknowledged that its current resources 

would not be sufficient for the high levels of activity it expected to see in 

the coming years. In addition, Ex-Im division managers with whom we 

spoke noted the strain of the increased and increasing workloads on 

employees and said they could use additional staff. Ex-Im officials stated 

that risks to the agency have been increasing as a result. While the 

officials told us that the increased business volume primarily had affected 

the underwriting function, the impact had been mitigated somewhat by the 

agency’s delegation of some underwriting to private lenders for working 

capital loan guarantees. However, the officials said that Ex-Im’s other 

transaction-related functions, including legal and monitoring activities, 

were expected to have significantly higher workloads as transactions 

complete the underwriting phase and move on to other phases.
 

Page 49 GAO-13-303 Export-Import Bank

Ex-Im has taken some steps to manage its increased workload. Ex-Im 

asked for additional administrative resources in its annual budget 

requests, in part to hire more staff. For example, in its 2013 budget 

request, Ex-Im requested a $7 million increase in administrative 

resources to support underwriting and small business outreach. While 

acknowledging the constrained federal budget environment, Ex-Im 

officials said that future budget requests likely also would request 

resources for additional staff. In the interim, Ex-Im officials said that when 

vacancies occurred, they allocated the positions to areas of highest need 

rather than automatically refilling the vacancies. Ex-Im also hired a 

consultant to identify best practices for improving operational efficiency of 

the monitoring function. In addition, Ex-Im officials said they planned to 

update the agency’s 2009-2012 Human Capital Plan following a 

forthcoming revision to Ex-Im’s strategic plan. Ex-Im’s workforce planning 

process involves assessing its current workforce, anticipating future 

needs, analyzing gaps, and developing strategies to address those gaps.

Although Ex-Im has acknowledged growing risks associated with its 

increasing workload, it has not formally determined the level of business it 

can prudently manage—either agencywide or within specific functional 

areas—with a given level of resources. For example, while Ex-Im has 

reported the average number and dollar amount of authorizations per 

FTE, officials stated that they have not determined the level at which 

operational risks are too high. Additionally, Ex-Im officials within different 

functional areas were unable to provide formal, documented assessments 

of resource needs. As previously noted, our internal control standards 

state that agencies should develop an approach for risk management 

based on how much risk can be prudently accepted. In addition, these 

standards indicate that agencies should decide upon specific control 

activities to manage or mitigate risks entitywide and at each activity level. 

Ex-Im officials said the dramatic increase in business was not anticipated 

and that the agency historically did not need to make major workforce 

adjustments because its business volume was stable. However, without 

benchmarks to determine when workload levels have created too much 

risk, Ex-Im’s ability to monitor and manage operational risks associated 

with its already increased business volume may be limited. Monitoring 

workloads against such benchmarks would help Ex-Im determine when 

additional steps—such as tightening underwriting standards or increasing 

requirements for lender participation—may be needed to mitigate Ex-Im’s 

increased risk. Moreover, legislated increases in Ex-Im’s exposure limits 

provide room for additional increases in Ex-Im’s business volume, and 

thus Ex-Im could continue to experience strains on its workforce.
 

Page 50 GAO-13-303 Export-Import Bank

In recent years, Ex-Im has assumed an increased role in supporting the 

export of U.S. goods and services. In part, this increase resulted from a 

decline in the availability of private-sector credit that accompanied the 

2007-2009 financial crisis. For several years, Ex-Im has been selfsustaining for budgetary purposes, although the long-term cost of Ex-Im’s 

new business is not yet known. In addition, Ex-Im has made recent 

improvements to its risk management, including enhancements to its loss

estimation model and plans for a more systematic approach for stress 

testing its portfolio. However, the growth in Ex-Im’s portfolio and the 

spectrum of risks Ex-Im faces underscore the need for continued 

improvements in risk management. Recommendations made by the ExIm IG in September 2012 and further supported by our work point to 

additional steps that Ex-Im could take to strengthen its risk-management 

framework. These steps include establishing soft portfolio sublimits and 

assessing the benefits of a more centralized CRO function. Following 

through on these recommendations will be critical to help manage the 

risks and challenges associated with the agency’s greater financial 

exposure.

In addition, our work identified other opportunities for Ex-Im to improve 

how it monitors, manages, and reports on the risks it faces. First, while 

Ex-Im added qualitative factors to its loss model in 2012, the factor that 

adjusts loss estimates for potential changes in global economic conditions 

uses a 1-year forecast for speculative-grade corporate bond defaults for 

all its transactions, regardless of their length. Because many of Ex-Im’s 

transactions span multiple years, a 1-year default forecast may not 

represent the best available data for making default adjustments for these 

transactions. The use of default forecasts or other economic data with a 

longer time horizon may produce more reliable loss estimates and would 

be consistent with FASAB guidance on using the best available data for 

developing cash flow projections. Second, Ex-Im has not maintained the 

data necessary to conduct vintage analysis, a technique federal banking 

regulators have cited as useful for monitoring growing portfolios. Once a 

sufficient amount of data has been retained, such an analysis could help 

Ex-Im to assess the early performance of new books of business by 

providing comparisons to seasoned books at a comparable point in time. 

It could also provide Ex-Im an additional early warning indicator to assist 

Ex-Im in taking timely actions to mitigate emerging risks. Such data also 

have the potential to strengthen Ex-Im’s future loss modeling efforts by 

providing additional information about when defaults occur over the life of 

a transaction. Third, Ex-Im has made progress toward implementing a 

systematic approach to stress testing its portfolio, but has not yet made 

plans to report the scenarios and results to Congress. Providing this 

Conclusions 
 

Page 51 GAO-13-303 Export-Import Bank

information to Congress—potentially as part of Ex-Im’s annual report—

would be consistent with federal internal control standards for effective 

external communication and would aid congressional oversight of the 

agency. Finally, although Ex-Im has recognized and taken some steps to 

address workload challenges, it has not developed benchmarks for the 

level of business it can properly support with a given level of resources. 

This is contrary to federal internal control standards, which indicate that

agencies should develop a risk-management approach based on how 

much risk can be prudently accepted. Ex-Im’s workload challenges may 

continue to grow because of increases in Ex-Im’s exposure and exposure 

limit, coupled with resource constraints in the current budgetary 

environment. In the absence of workload benchmarks, Ex-Im lacks a 

sound basis for workforce planning and for determining when additional 

control activities might be needed to manage operational risks.

We recommend that the Chairman of the Export-Import Bank of the 

United States take the following four actions:

• To help improve the reliability of its loss estimation model, Ex-Im 

should assess whether it is using the best available data for adjusting 

loss estimates for longer-term transactions to account for global 

economic risk.

• To conduct future analysis comparing the performance of newer and 

older business and to make future enhancements to its loss 

estimation model, Ex-Im should retain point-in-time, historical data on 

credit performance.

• To help Congress better understand the financial risks associated with 

Ex-Im’s portfolio, Ex-Im should report its stress test scenarios and 

results to Congress when such information becomes available.

• To help manage operational risks stemming from Ex-Im’s increased 

business volume, Ex-Im should develop workload benchmarks at the 

agencywide and functional area levels, monitor workload against 

these benchmarks, and develop control activities for mitigating risks 

when workloads approach or exceed these benchmarks.

We provided a draft of this report to Ex-Im for its review and comment. In 

written comments, which are reproduced in appendix II, Ex-Im agreed 

with our recommendations. Ex-Im also provided technical comments that 

we incorporated into the final report, as appropriate. 

Recommendations for 

Executive Action

Agency Comments 

and Our Evaluation
 

Page 52 GAO-13-303 Export-Import Bank

In its written comments, Ex-Im said it would begin to implement all four of 

our recommendations in fiscal year 2013. Specifically, Ex-Im said it would 

implement our recommendation to assess data for adjusting loss 

estimates for longer-term transactions as part of a spring 2013 

reevaluation of its loss estimation model. Concerning our 

recommendation that Ex-Im retain point-in-time data on credit 

performance, Ex-Im said it had already begun doing so and would use 

these data to compare the performance of newer and older books of 

business and to enhance its loss estimation model. Ex-Im also agreed 

with our recommendation that it provide stress testing scenarios and 

results to Congress and said it would include the results of its stress tests 

in the default reports it submits to Congress. Ex-Im did not indicate 

whether it would also include its stress test scenarios in the default 

reports. Because stress testing results are only meaningful in the context 

of the stress scenarios used, our recommendation emphasizes reporting 

both types of information to Congress. Finally, concerning our 

recommendation that Ex-Im set workload benchmarks to help manage 

operational risk, Ex-Im said it planned to form an Enterprise Risk 

Committee consisting of senior management from the business, financial, 

legal, policy, resource, and risk-management areas. Ex-Im stated that 

operational risk would be one of the first areas the committee examines.

We are sending copies of this report to appropriate congressional 

committees and the Chairman of the U.S. Export-Import Bank. The report 

is also available at no charge on the GAO website at http://www.gao.gov. 

If you or your staff have any questions about this report, please contact 

me at (202) 512-8678 or sciremj@gao.gov. Contact points for our Offices 

of Congressional Relations and Public Affairs may be found on the last 

page of this report. GAO staff who made major contributions to this report 

are listed in appendix III.

Mathew Scirè

Director, Financial Markets and

 Community Investment
Appendix I: Objectives, Scope, and 

Methodology

Page 53 GAO-13-303 Export-Import Bank

Our objectives were to examine: (1) how the U.S. Export-Import Bank’s 

(Ex-Im) business changed in recent years and possible reasons for these 

changes; (2) how Ex-Im determines credit subsidy costs, loss reserves 

and allowances, and product fees, and how these processes account for 

different risks; (3) how Ex-Im’s financial portfolio has performed and the 

budgetary impact of its programs; and (4) the extent to which Ex-Im has a 

comprehensive risk-management framework.

To assess how Ex-Im’s business changed in recent years and possible 

reasons for these changes, we analyzed information on Ex-Im’s financial 

exposure and authorizations, including data from Ex-Im annual reports 

and data compiled by the agency from its Ex-Im Bank Reporting System. 

We examined Ex-Im’s total exposure levels for each year from 1990 

through 2012 to identify growth trends both in nominal and inflationadjusted terms. We also examined Ex-Im’s annual authorizations for each 

year from 2006 through 2012. We chose that period in order to cover ExIm’s pre- and post-financial crisis business activity. We analyzed trends in 

the dollar volume of Ex-Im’s total authorizations each year, the volume of 

total U.S. exports, as well as Ex-Im authorization levels disaggregated by 

product type, region, and industry sector. To identify possible reasons for 

trends in Ex-Im’s business activity, we reviewed a variety of Ex-Im 

documents, including annual reports, competitiveness reports, the 

agency’s strategic plan for 2010-2015, and reports issued by Ex-Im’s 

Office of Inspector General (IG). We also reviewed relevant reports by the 

Basel Committee on Banking Supervision, academics, and foreign export 

credit agencies (ECA). Because Ex-Im can play a countercyclical role in 

export finance (i.e., expanding when private sector credit is retrenching), 

we also analyzed data related to the availability and cost of credit from 

2006 through 2012. In particular, we analyzed (1) calendar 2006-2012 

survey data from the Board of Governors of the Federal Reserve System 

and the European Central Bank on the percentage of commercial lenders 

that were tightening or easing lending standards and (2) calendar 2006-

2012 data on corporate bond risk premiums from Bank of America-Merrill 

Lynch. We also analyzed International Monetary Fund data on the volume 

of U.S. exports over fiscal years 1990 through 2012 in order to compare 

changes in export volume with changes in Ex-Im authorizations. 

Additionally, we interviewed Ex-Im officials and six representatives of 

industry trade associations and research organizations about reasons for 

changes in the agency’s business volume. We selected the trade 

association and research organization representatives to interview on the 

basis of a literature review of relevant published articles, prior GAO work 

on Ex-Im and international trade issues, and recommendations from 

knowledgeable federal agency and industry officials about individuals with 

Appendix I: Objectives, Scope, and 

Methodology 
Appendix I: Objectives, Scope, and 

Methodology

Page 54 GAO-13-303 Export-Import Bank

expertise on Ex-Im’s activities or export financing generally. Our literature 

review focused on publications that cited Ex-Im, export credit agencies, 

trade finance, and export finance. Three of the entities we interviewed 

represented industry trade associations (the Coalition for Employment 

through Exports, the Berne Union, and the Bankers’ Association for 

Finance and Trade and International Financial Services Association) and 

three represented research groups (Peterson Institute for International 

Economics, the Rhodium Group, and the Research Division of the U.S. 

International Trade Commission). Further, to obtain perspectives on ECA 

growth generally, we conducted telephone interviews with officials from 

four foreign ECAs: Export Development Canada (Canada), Compagnie 

Française d’Assurance pour le Commerce Extérieur (France), UK Export 

Finance (United Kingdom), and Japanese Bank for International 

Cooperation (Japan). We selected theses ECAs based on their similarity 

to Ex-Im in terms of: (1) their role in supplementing rather than competing 

with private markets for export credit support, (2) the types of export 

credit products they offer, and (3) the presence of a small business 

directive or mandate.

To examine how Ex-Im determines subsidy costs, loss reserves and 

allowances, and product fees, and how these processes account for 

different risks, we reviewed relevant requirements and guidance. This 

included the Federal Credit Reform Act of 1990; the Office of 

Management and Budget (OMB) Circular No. A-11 (Preparation, 

Submission, and Execution of the Budget); the Statement of Federal 

Financial Accounting Standards No. 2 (Accounting for Direct Loans and 

Loan Guarantees); the Federal Accounting Standards Advisory Board’s 

Federal Financial Accounting and Auditing Technical Release 6 

(Preparing Estimates for Direct Loan and Loan Guarantee Subsidies 

under the Federal Credit Reform Act); and the Organisation for Economic 

Cooperation and Development Arrangement on Officially Supported 

Export Credits (OECD Arrangement). We identified types of risks 

applicable to Ex-Im by reviewing Ex-Im’s documents, including annual 

reports and policy manuals, as well as prior GAO work on credit programs 

and risk management. To examine how Ex-Im accounts for these risks, 

we reviewed information on the tools and processes Ex-Im uses to 

determine subsidy costs and loss reserves and allowances, including ExIm’s loss estimation model. We reviewed documentation on the structure 

of the model, updates made to the model in 2012, and findings and 

recommendations made by the Ex-Im IG and Ex-Im’s independent 

financial statement auditor about the model. We also reviewed relevant 

workpapers from the independent auditor’s audit of Ex-Im’s 2012 financial 

statements. We also reviewed Congressional Budget Office and OMB 
Appendix I: Objectives, Scope, and 

Methodology

Page 55 GAO-13-303 Export-Import Bank

reports on discounting methodologies for federal credit programs. To 

obtain additional information about Ex-Im’s subsidy cost and loss reserve 

and allowance calculations, we interviewed Ex-Im and Ex-Im IG officials, 

representatives from Ex-Im’s independent financial statement auditor, and 

OMB officials responsible for approving Ex-Im’s subsidy cost estimation 

methodology. In addition, we spoke with other federal agencies that 

provide international credit—including the Small Business Administration, 

the Department of Agriculture’s Foreign Agricultural Service and Farm 

Service Agency, and the Overseas Private Investment Cooperation 

(OPIC)—and the four foreign ECAs cited previously about their processes 

for estimating program costs and reserving for future losses. To obtain 

information about how Ex-Im sets product fees and what risks they 

account for, we reviewed fee-setting requirements contained in the OECD 

Arrangement and Ex-Im analyses used as a basis to adjust fees for 

different products. An assessment of the appropriateness of the fee levels 

resulting from the OECD Arrangement was outside the scope of our 

review. We interviewed Ex-Im officials and officials from the U.S. 

Department of the Treasury responsible for negotiating for the United 

States at OECD, including negotiations on minimum premiums. We also 

discussed with the four foreign ECAs how they set product fees.

To assess how Ex-Im’s financial portfolio has performed and the 

budgetary impact of its programs, we reviewed agency data and 

documentation—including Ex-Im performance data, annual reports, 

financial statements, and quarterly default reports—and information 

contained in the President’s budgets and Federal Credit Supplements. 

Specifically, to determine how Ex-Im’s portfolio has performed, we 

analyzed data Ex-Im compiled from the Ex-Im Bank Reporting System on 

active transactions—including authorized and disbursed amounts, 

amounts in arrears, claims paid, and recoveries—to calculate overall 

default rates and default rates by product type. We examined end-offiscal-year data for 2006 through 2012 and data as of December 31, 

2012. We reviewed federal banking regulator guidance on default 

monitoring, including vintage analysis, and determined whether Ex-Im 

conducted or maintained data to perform such an analysis. In addition, we 

reviewed data on the ratio of Ex-Im’s impaired assets to total exposure 

from 2008 through 20012. To determine the budgetary impact of Ex-Im’s 

programs, we reviewed Ex-Im’s analysis of the funds it has been 

appropriated and the funds it has sent to the U.S. Treasury (the net of 

upward and downward credit subsidy reestimates, cancelled authority, 

returned collections, and rescissions) from 1992 through 2012. To do this, 

we compared Ex-Im’s analysis to data contained in appropriation acts, the 

President’s budgets, and Ex-Im’s financial statements for the same years. 
Appendix I: Objectives, Scope, and 

Methodology

Page 56 GAO-13-303 Export-Import Bank

Based on this comparison, we determined that Ex-Im’s analysis was 

reasonable. Additionally, we analyzed Ex-Im’s annual credit subsidy 

reestimates for 1992 through 2012 using information in the President’s 

budgets. We discussed the performance and budget data with 

knowledgeable Ex-Im officials to ensure that we interpreted the data 

correctly.

To assess the extent to which Ex-Im has a comprehensive riskmanagement framework, we reviewed the practices Ex-Im uses to 

manage risks at the transaction, portfolio, and agency level. At the 

transaction level, we reviewed Ex-Im’s policies and procedures related to 

the underwriting, monitoring and restructuring, and claims and recovery 

functions. We also interviewed Ex-Im senior management and division 

managers responsible for various products about these procedures. To 

assess how Ex-Im manages risks at the portfolio level, we reviewed a

September 2012 report by the Ex-Im IG on Ex-Im’s portfolio risk 

management and followed up with Ex-Im officials to determine the actions 

they had taken in response to the report’s recommendations.1 We also 

identified relevant criteria in GAO’s Standards for Internal Control in the 

Federal Government and Internal Control Management and Evaluation 

Tool and documents from financial industry groups describing sound 

practices for managing financial portfolios.2

 

1

OIG-INS-12-02.

Additionally, we discussed 

portfolio and general risk-management practices with officials from the 

federal credit agencies and foreign ECAs cited previously, a 

representative from the International Association of Credit Portfolio 

Management, and Ex-Im officials. Finally, we reviewed information related 

to potential operational risks stemming from Ex-Im’s increasing business 

volume and workload and identified relevant criteria from our internal 

control standards. We limited our work in this area to Ex-Im’s human 

capital management. Specifically, we analyzed Ex-Im data on the number 

of full-time equivalents and the number and dollar volume of transactions 

authorized from 2006 through 2012. We also reviewed Ex-Im’s Human 

Capital Plan for 2009-2012, Reauthorization Act of 2012 Business Plan, 

and congressional budget justifications from 2008 through 2013, and 

internal Ex-Im analyses of agency workloads. Additionally, we interviewed 

Ex-Im officials responsible for resource management.

2

GAO/AIMD-00-21.3.1 and GAO-01-1008G. 
Appendix I: Objectives, Scope, and 

Methodology

Page 57 GAO-13-303 Export-Import Bank

To assess the reliability of the data provided by Ex-Im, including exposure 

and authorization amounts and performance statistics, we (1) reviewed 

information related to data elements, system operations, and controls; (2) 

performed electronic testing for obvious errors in accuracy and

completeness; (3) compared data to published documents; and (4) 

interviewed Ex-Im officials knowledgeable about the data. To assess the 

reliability of data we used to describe capital market conditions and U.S. 

exports, we (1) reviewed related documentation, (2) interviewed 

knowledgeable officials about the data, and (3) performed electronic 

testing and inspected the data for missing observations and outliers. We 

concluded that the data elements we used were sufficiently reliable for 

purposes of describing Ex-Im’s growth and financial performance.

We conducted this performance audit from June 2012 to March 2013 in 

accordance with generally accepted government auditing standards. 

Those standards require that we plan and perform the audit to obtain 

sufficient, appropriate evidence to provide a reasonable basis for our 

findings and conclusions based on our audit objectives. We believe that 

the evidence obtained provides a reasonable basis for our findings and 

conclusions based on our audit objectives.
Appendix II: Comments from the U.S. ExportImport Bank

Page 58 GAO-13-303 Export-Import Bank

Appendix II: Comments from the U.S. ExportImport Bank
Appendix II: Comments from the U.S. ExportImport Bank

Page 59 GAO-13-303 Export-Import Bank
Appendix II: Comments from the U.S. ExportImport Bank

Page 60 GAO-13-303 Export-Import Bank
Appendix III: GAO Contact and Staff 

Acknowledgments

Page 61 GAO-13-303 Export-Import Bank

Mathew J. Scirè, (202) 512-8678, or sciremj@gao.gov

In addition to the individual named above, Steve Westley, Assistant 

Director; Daniel Alspaugh; Kathryn Bolduc; Marcia Carlsen; Pamela 

Davidson; Cole Haase; Michael Hoffman; Christine Houle; Susan Irving; 

Risto Laboski; Felicia Lopez; Colleen Moffatt Kimer; Melissa Kornblau; 

Robert Pollard; Barbara Roesmann; Jessica Sandler; Eva Su; and Celia 

Thomas made key contributions to this report.

Appendix III: GAO Contact and Staff 

Acknowledgments 

GAO Contact

Staff 

Acknowledgments 

(250680)
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