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. 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. 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. 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. 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. 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. 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. 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.