Export-Import Bank: Status of Actions to Address GAO Recommendations since the Bank's 2012 Reauthorization
Released: 2015-04-15T00:00:00

Letter

Background

Ex-Im 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, thereby supporting U.S. jobs. 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 other risks that the private sector is unable or unwilling to accept, while still maintaining a reasonable assurance of repayment. When private-sector lenders reduced the availability of their financing after the 2007 to 2009 financial crisis, demand for Ex-Im products correspondingly increased. According to Ex-Im data, the amount of financing Ex-Im authorized increased from $12.2 billion in fiscal year 2006 to $35.8 billion in fiscal year 2012, before declining to $27.3 billion in fiscal year 2013 and $20.5 billion in fiscal year 2014. Though smaller than the fiscal year 2012 peak, Ex-Im’s fiscal year 2014 total authorizations are a 68 percent increase in nominal terms over its total authorizations in fiscal year 2006. Over the same period, Ex-Im’s financial exposure (outstanding financial commitments) increased from $57.8 billion to $112 billion, or by 94 percent in nominal terms. According to U.S. budget documents, Ex-Im’s number of full-time equivalent employees grew from 380 to 397 from fiscal year 2006 through fiscal year 2014, an increase of about 4.5 percent.

Ex-Im offers export financing through direct loans, loan guarantees, and insurance. Ex-Im’s loan guarantees cover the repayment risk on the foreign buyer’s loan obligations incurred to purchase U.S. exports. Loan guarantees are classified as short, medium, or long term. Although the number of Ex-Im’s short-term (working capital) guarantees greatly exceeds the number of its medium- and long-term loan guarantees, long- term loan guarantees account for the greatest dollar value of Ex-Im loan guarantees.

Ex-Im is one of several ECAs worldwide that provide export financing support. Other countries’ ECAs range from government agencies to private companies contracted by governments. Most, including Ex-Im, are expected to supplement, not compete with, the private market. An international agreement, the Organisation for Economic Co-operation and Development (OECD) Arrangement on Officially Supported Export Credits, governs various aspects of U.S. and other member countries’ ECAs, but increasing activity of nonmembers threatens its ability to provide a level playing field for exporters. Several agreements have been made that decrease subsidies and increase transparency among ECAs. However, these agreements apply to participant ECAs, and important emerging countries, including China, are not part of the OECD arrangement.

Ex-Im faces multiple risks when it extends export credit financing, including:

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.

Concentration risk: risk stemming from the composition of a credit portfolio, for example through an uneven distribution of credits within a 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.

During underwriting, Ex-Im reviews a transaction and assigns it a risk rating based on its assessment of the creditworthiness of the obligors and to establish whether there is a reasonable assurance of repayment. Ex-Im also manages risks through (1) monitoring and restructuring—updating risk ratings and restructuring individual transactions with credit weaknesses to help prevent defaults and increase recoveries and (2) recovery of claims—collecting on the assets of the obligors or the collateral for a transaction that defaults.

While demand for its services generally drives Ex-Im’s business, Congress has mandated that Ex-Im support specific objectives and operate within certain parameters. For example, since the 1980s, Congress has required that Ex-Im make available a percentage of its total export financing each year for small business. In 2002, this requirement increased from 10 percent to 20 percent of total authorizations. Congress further instructed that Ex-Im promote the expansion of its financial commitments in sub-Saharan Africa. In annual appropriation acts, Congress has directed that “not less than 10 percent of the aggregate loan, guarantee, and insurance authority available to …should be used for renewable energy technologies or end-use energy efficiency technologies”—which we refer to as the renewable energy mandate. Congress has also imposed a limit, currently $140 billion, on Ex-Im’s total aggregate outstanding amount of financing, referred to as the exposure limit. In addition, Ex-Im must provide financing on a competitive basis with other export credit agencies, minimize competition in government- supported export financing, and submit annual reports to Congress on its actions.

Status of Ex-Im’s Actions to Address GAO Recommendations since Its 2012 Reauthorization

In six reports on Ex-Im issued since March 2013, we presented findings and made 16 recommendations to improve Ex-Im’s operations, summarized in this testimony in three broad areas: (1) portfolio risk management, (2) underwriting and fraud prevention processes, and (3) exposure forecasting and reporting on estimates of its impact on U.S. jobs.

Ex-Im’s Portfolio Risk Management

Our recent work has produced several findings and recommendations about how Ex-Im manages risks related to the overall size and composition of its portfolio. Our March 2013 report on risk management and our May 2013 report on exposure, risk, and resources made a total of six recommendations in this area. Ex-Im agreed with all of these recommendations and has taken action to implement them.

Loss Estimation

Ex-Im calculates credit subsidy costs and loss reserves and allowances with a loss estimation model that uses historical data and takes credit, political, and other risks into account. Consistent with industry practices, Ex-Im added qualitative factors to the model in 2012—including a factor to account for changes in global economic conditions— to adjust for circumstances that may cause estimated credit losses to differ from historical experience. However, in March 2013, we concluded that the short-term forecast Ex-Im used to account for global economic changes might not be appropriate for adjusting estimated defaults for longer-term products and could lead to underestimation of credit subsidy costs and loss reserves and allowances. We recommended that Ex-Im assess whether it was using the best available data for adjusting its loss estimates. In November 2013, Ex-Im incorporated a longer-term forecast of global economic change into its loss estimation model. As a result, we consider this recommendation implemented and closed.

Vintage Analysis

In our March 2013 report, we also found that Ex-Im was not maintaining the data it needed to compare the performance of newer transactions with older transactions at comparable points in time, a type of analysis recommended by federal banking regulators. This analysis, known as vintage analysis, can help evaluate the credit quality of recent transactions by comparing their early performance with the early performance of older transactions. As such, it can provide early warning of potential performance problems in newer business. Ex-Im’s default rate declined steadily from about 1.6 percent as of September 30, 2006, to 0.29 percent as of September 30, 2012, and, more recently, Ex-Im reported a further decline to 0.17 percent as of the end of December However, we concluded that this downward trend should be 2014.viewed with caution because Ex-Im’s portfolio contained a large volume of recent transactions that had not reached their peak default periods. We recommended that Ex-Im retain point-in-time performance data to compare the performance of newer and older business and enhance loss modeling. Ex-Im began retaining such data in 2013. We therefore consider this recommendation implemented and closed.

Stress Testing

GAO-13-303. Ex-Im is not bound by federal banking regulator guidance, but it faces risk- 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). oversight and be consistent with federal internal control standards for effective external communication. We also found that Ex-Im had begun to implement stress testing and recommended that Ex-Im report its stress test scenarios and results to Congress. Ex-Im began reporting its scenarios and results in quarterly reports to Congress on default rates, beginning with the report for the fourth quarter of 2013. In that report, Ex- Im described the stress test scenarios and provided some information about results. Hence, we consider this recommendation implemented and closed.

Subportfolio Reporting

In our May 2013 report, we found that Ex-Im had not routinely reported the performance or risk ratings of its subportfolios for the congressional mandates on small business, sub-Saharan Africa, and renewable energy, though these transactions generally were more risky than Ex-Im’s overall portfolio. We recommended that Ex-Im routinely report to Congress the financial performance of subportfolios supporting congressional mandates. Ex-Im began reporting this information in its default rate report to Congress for the quarter ending June 30, 2013. As a result, we consider this recommendation implemented and closed.

Workload Benchmarks

GAO-13-620. reorganized to improve efficiency. Additionally, Ex-Im has agreed to implement, and in some cases has begun implementing, suggestions by the contractor to mitigate risks of future workload increases. As a result, we consider this recommendation implemented and closed.

Resources for Congressional Mandates

In our May 2013 report, we found that Ex-Im expected that administrative resource constraints might prevent it from meeting its congressionally mandated target for small business export financing. The target is fixed to a percentage of the dollar value of Ex-Im’s total authorizations. Although Ex-Im has dedicated resources to support the mandate, as Ex- Im authorizations have grown, the corresponding growth in the value of the target has outpaced Ex-Im’s increasing support. According to Ex-Im officials, processing small business transactions and bringing in new small business customers is resource-intensive. We concluded that it was important for Ex-Im to communicate to Congress the effect of percentage- based mandates on its operations, as well as the potential impacts such mandates might have on Ex-Im’s resources and operations. We recommended that Ex-Im provide Congress with additional information on the resources associated with meeting its percentage-based mandates. Ex-Im agreed and told us it planned to provide information on resources associated with meeting such mandates in its fiscal year 2016 budget submission. Ex-Im’s fiscal year 2016 Congressional Budget Justification includes both information on the resources associated with these mandates and Ex-Im’s plans to hire additional staff to help meet them. As a result, we consider this recommendation implemented and closed.

Wide-Body Jets

GAO-14-642R. deliveries of 789 Boeing large commercial aircraft, while European ECAs supported deliveries of 821 Airbus large commercial aircraft. Buyers of large commercial aircraft have also used a number of non-ECA financing options for procuring wide-body jets. From 2008 through 2013, Ex-Im and European ECAs supported 26 percent of large commercial aircraft deliveries.

Ex-Im’s Underwriting and Overall Fraud Processes

Our most recent mandated report, in September 2014, found that Ex-Im had implemented many key aspects of its underwriting process but identified weaknesses in certain procedures.recommendations to Ex-Im to enhance its loan guarantee underwriting process and further document aspects of its underwriting and processes to detect, prevent, and investigate fraud. Our August 2014 report on Ex- Im’s monitoring of dual-use exports also found weaknesses in Ex-Im’s procedures.

Underwriting

Our review of a statistical sample of loan guarantees indicated that Ex-Im had implemented many key aspects of the underwriting process as required by its Loan, Guarantee, and Insurance Manual. However, the manual did not (1) include certain procedures or sufficiently detailed instructions to verify compliance with Ex-Im’s requirements and consistency with federal guidance, such as a procedure to verify that applicants did not have delinquent federal debt; (2) include instructions for loan officers to use credit reports and for the inclusion of all required documents and analyses in the loan file prior to approval; and (3) call for assessments of collateral, as required by federal guidance, for certain loan guarantee transactions prior to approval. Furthermore, Ex-Im did not have mechanisms to verify compliance with certain established procedures, including documenting certain loan guarantee eligibility procedures.

We recommended that Ex-Im take the following actions:

Develop and implement procedures, prior to loan guarantee approval, for (1) verifying that transaction applicants are not delinquent on federal debt and (2) performing assessments of collateral for nonaircraft medium- and long-term loan guarantee transactions.

Establish mechanisms to oversee compliance with Ex-Im’s existing procedures, prior to loan guarantee approval, for (1) obtaining credit reports for borrowers or documenting why they were not applicable, (2) documenting certain eligibility procedures, and (3) documenting the analysis of country exposure.

Develop and implement detailed instructions, prior to loan guarantee approval, for (1) preparing and including all required documents or analyses in the loan file and (2) using credit reports in the risk assessment and due diligence process.

Update the Character, Reputational, and Transaction Integrity review process to include the search of databases to help identify transaction applicants with delinquent federal debt that would then not be eligible for loan guarantees.

As of April 2015, Ex-Im has revised its Loan, Guarantee, and Insurance Manual in response to the first three recommendations from our September 2014 report. We consider the second and third of these recommendations to be implemented and are taking actions to close them. With respect to the first of these recommendations, we are continuing to review Ex-Im’s actions. In addition, Ex-Im officials have stated that they have been working with the Department of the Treasury on the fourth recommendation to determine the technical feasibility of an automated method to access a Treasury database to verify that applicants are not delinquent on federal debt. We are currently reviewing Ex-Im’s actions related to this recommendation.

Documentation of Fraud Processes

Our September 2014 report additionally found weaknesses in Ex-Im’s documentation of aspects of its underwriting and overall procedures related to fraud. We found that Ex-Im had not documented its risk-based approach for scheduling examinations to monitor lenders with delegated authority to approve guaranteed loans. In addition, while Ex-Im had processes to prevent, detect, and investigate fraud, it had not documented its overall fraud processes. Such documentation is recommended by several authoritative auditing and antifraud organizations. We therefore recommended that Ex-Im document: its risk-based approach for scheduling delegated authority lender examinations, and its overall fraud-prevention process, including the roles and responsibilities of Ex-Im divisions and officials that are key participants in Ex-Im’s process.

As of April 2015, Ex-Im has revised its Loan, Guarantee, and Insurance Manual to further document its approach and has documented its overall processes related to fraud, including describing the roles and responsibilities of Ex-Im divisions and officials that are key participants in these processes. Therefore we consider these recommendations to be implemented and are taking actions to close them.

Dual-Use Monitoring

Our August 2014 annual report on Ex-Im’s monitoring of dual-use exports also found weaknesses in Ex-Im’s documentation of required procedures. We found that Ex-Im had received some but not all of the information it required in its credit agreements regarding the three dual- use transactions it financed in fiscal year 2012, and that some of the information it had received was late. As a result, we found that Ex-Im did not have complete and timely information about whether the items were actually being used in accordance with the terms of the agreements and Ex-Im policy. We recommended that Ex-Im establish steps that staff should take in cases where borrowers do not submit required end-use documentation within the time frames specified in their financing agreements and ensure that these efforts are well documented. In response to our recommendation, Ex-Im revised its 1997 memorandum on the implementation of its dual-use policy for military applications to provide more specific guidance and disseminated the revised memo to relevant staff. During our current annual review of Ex-Im’s dual-use financing, we are following up with Ex-Im to see how this revised guidance is being implemented.

Ex-Im’s Exposure Forecasting and its Reporting of Jobs Supported

In two May 2013 Ex-Im reports, we reported weaknesses in how Ex-Im estimated its future exposure, and we reported the limitations in its calculations of the number of jobs its financing supports. We made two recommendations related to how Ex-Im prepares forecasts and one recommendation on its reporting jobs impact reporting. Ex-Im agreed with all three recommendations and took actions to address them.

Exposure Forecasting

In our May 2013 report on Ex-Im’s exposure and resources, we found weaknesses in the methodology Ex-Im used to forecast future financial Although Ex-Im’s forecast model is sensitive to key exposure levels.assumptions, Ex-Im had not reassessed these assumptions to reflect changing conditions, nor had it conducted sensitivity analyses to assess and report the range of potential outcomes. We made two recommendations to Ex-Im: (1) that Ex-Im compare previous forecasts and key assumptions to actual results and adjust its forecast models to incorporate previous experience and (2) that Ex-Im assess the sensitivity of the exposure forecast model to key assumptions and estimates and identify and report the range of forecasts based on this analysis. Ex-Im put in place new methodologies for its 2015 budget estimates. Specifically, Ex-Im compared the results of its existing authorization forecast method with actual results and enhanced its calculation of expected repayments and authorizations by incorporating historical experience into the methodology. Additionally, Ex-Im created statistical models to validate its forecasts and provide a range of estimates. Therefore, we consider these two recommendations implemented and closed.

Reporting of Job Support Calculation

GAO-13-446. example, the employment data are a count of jobs that treats full-time, part-time, and seasonal jobs equally. In addition, Ex-Im’s calculations assume that the firm receiving Ex-Im support uses the same number of jobs as the industry-wide average, but Ex-Im’s clients could be different from the typical firm in the same industry. Ex-Im did not report these limitations or fully detail the assumptions related to its data or methodology. We recommended that Ex-Im improve reporting on the assumptions and limitations in the methodology and data used to calculate the number of jobs Ex-Im supports through its financing. Ex-Im’s 2013 and 2014 annual reports included greater detail on these issues; therefore, we consider this recommendation implemented and closed.

In conclusion, our reviews of Ex-Im since the 2012 Reauthorization Act have identified a number of areas in which Ex-Im could improve its operations. Ex-Im has shown a willingness to reexamine its operations, agreeing with all of our recent recommendations and implementing a number of them. However, managing a large export financing portfolio with its wide variety of associated risks is challenging. Therefore, to sustain the improvements it has made and address emerging challenges, it will be important for Ex-Im to effectively implement remaining audit recommendations and carefully manage risks in the evolving global financial marketplace.

Chairmen Jordan and Huizenga, Ranking Members Cartwright and Moore, and Members of the Subcommittees, this concludes my statement. I would be pleased to respond to any questions you may have.

GAO Contacts and Staff Acknowledgements

For further information about this statement, please contact me at 202- 512-8612 or gianopoulosk@gao.gov. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this statement. Individuals making key contributions to this testimony include Celia Thomas, Assistant Director; Kathryn Bolduc; Marcia Carlsen; Michael Simon; and Steve Westley.

Appendix I: Content and Status of Relevant GAO Recommendations

GAO-14-574: EXPORT-IMPORT BANK: Enhancements Needed in Loan Guarantee Underwriting Procedures and for Documenting Fraud Processes (September 2014)

The Chairman of the Export-Import Bank of the United States should direct the appropriate officials to develop and implement procedures, prior to loan guarantee approval, for (1) verifying that transaction applicants are not delinquent on federal debt, including using credit reports to make such a determination, and (2) performing assessments of collateral for nonaircraft medium- and long-term loan guarantee transactions.

The Chairman of the Export-Import Bank of the United States should direct the appropriate officials to establish mechanisms to oversee compliance with Ex-Im’s existing procedures, prior to loan guarantee approval, for (1) obtaining credit reports for transaction borrowers or documenting why they were not applicable; (2) documenting certain eligibility procedures, including the Character, Reputational, and Transaction Integrity reviews for medium- and long- term loan guarantee transactions, export item eligibility, and country eligibility; and (3) documenting the analysis of country exposure.

The Chairman of the Export-Import Bank of the United States should direct the appropriate officials to develop and implement detailed instructions, prior to loan guarantee approval, for (1) preparing and including all required documents or analyses in the loan file and (2) using credit reports in the risk assessment and due diligence process.

The Chairman of the Export-Import Bank of the United States should direct the appropriate officials to Update the Character, Reputational, and Transaction Integrity review process to include the search of databases to help identify transaction applicants with delinquent federal debt that would then not be eligible for loan guarantees.

The Chairman of the Export-Import Bank of the United States should direct the appropriate officials to document Ex-Im’s current risk-based approach for scheduling delegated authority lender examinations.

The Chairman of the Export-Import Bank of the United States should direct the appropriate officials to document Ex-Im’s overall fraud process, including describing the roles and responsibilities of Ex-Im divisions and officials that are key participants in Ex-Im’s fraud processes.

GAO-14-719: EXPORT-IMPORT BANK: Monitoring of Dual-Use Exports Should Be Improved (August 2014)

To ensure adequate and consistent oversight for monitoring the end use of dual-use items, the Chairman of the Export-Import Bank of the United States should strengthen Ex-Im guidance for monitoring end use. Specifically, Ex-Im should establish steps staff should take in cases where borrowers do not submit required end-use documentation within the time frames specified in their financing agreements and ensure that these efforts are well documented.

GAO-13-620: EXPORT-IMPORT BANK: Additional Analysis and Information Could Better Inform Congress on Exposure, Risk, and Resources (May 2013)

To provide Congress with the appropriate information necessary to make decisions on Ex-Im’s exposure limits and targets and to improve the accuracy of its forecasts of exposure and authorizations, the Chairman of the Export-Import Bank of the United States should compare previous forecasts and key assumptions to actual results and adjust its forecast models to incorporate previous experience.

To provide Congress with the appropriate information necessary to make decisions on Ex-Im’s exposure limits and targets and improve the accuracy of its forecasts of exposure and authorizations, the Chairman of the Export-Import Bank of the United States should assess the sensitivity of the exposure forecast model to key assumptions and authorization estimates and identify and report the range of forecasts based on this analysis.

To help Congress and Ex-Im management understand the performance and risk associated with its subportfolios of transactions supporting the small business, sub-Saharan Africa, and renewable energy mandates, Ex-Im should routinely report financial performance information, including the default rate and risk rating, of these transactions at the subportfolio level.

To better inform Congress of the issues associated with meeting each of the bank’s percentage-based mandated targets, Ex-Im should provide Congress with additional information on the resources associated with meeting the mandated targets.

GAO-13-446: EXPORT-IMPORT BANK: More Detailed Information about Its Jobs Calculation Methodology Could Improve Transparency (May 2013)

To ensure better understanding of its jobs calculation methodology, the Chairman of Ex-Im Bank should increase transparency by improving reporting on the assumptions and limitations in the methodology and data used to calculate the number of jobs Ex-Im supports through its financing.

GAO-13-303: EXPORT-IMPORT BANK: Recent Growth Underscores Need for Continued Improvements in Risk Management (March 2013)

To help improve the reliability of its loss estimation model, the Chairman of the Export-Import Bank of the United States 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, the Chairman of the Export-Import Bank of the United States should retain point-in-time, historical data on credit performance.

To help Congress better understand the financial risks associated with Ex-Im’s portfolio, the Chairman of the Export-Import Bank of the United States 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, the Chairman of the Export-Import Bank of the United States 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.

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