Export-Import Bank:

Recent Growth Underscores Need for Continued Improvements in Risk Management

GAO-13-303: Published: Mar 28, 2013. Publicly Released: Mar 28, 2013.

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Mathew J. Scire
(202) 512-8678
sciremj@gao.gov

 

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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.

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 longer-term 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.

For more information, contact Mathew J. Scirè at (202) 512-8678 or sciremj@gao.gov.

Recommendations for Executive Action

  1. Status: Closed - Implemented

    Comments: In response to our recommendation, the Export-Import Bank assessed the availability of data for adjusting loss estimates using longer-term economic forecasts. Ex-Im identified an extended forecast of the global economy (global percent change in real gross domestic product) to adjust loss estimates. As a result, in November 2013, Ex-Im incorporated a 5-year forecast of global economic change into its loss estimation model, compared to the 1-year forecast it had used previously.

    Recommendation: 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.

    Agency Affected: Export-Import Bank of the United States

  2. Status: Closed - Implemented

    Comments: Beginning in fiscal year 2013, the Export-Import Bank began retaining point-in-time historical data on credit performance. The bank plans to use this information to compare the performance of newer and older business as well as to further enhance its loss estimation model.

    Recommendation: 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.

    Agency Affected: Export-Import Bank of the United States

  3. Status: Closed - Implemented

    Comments: The Export-Import Bank's default report to Congress for the quarter ending September 30, 2013 (fourth quarter), describes stress test scenarios the agency ran for that report and provides some information about the results of those scenarios. The scenarios include Monte Carlo simulations of defaults under the existing loss model, downgrading all obliger risk ratings by two notches, and assuming zero recoveries on defaults. The results of the stress tests include a median default rate ranging from 0.59 percent to 1.61 percent (compared to the actual 9/30/13 default rate of 0.24 percent) and median future dollar losses ranging from $0.9 billion and $2.5 billion (compared to the $0.3 billion overdue as of 9/30/13). The bank plans to update the stress test information it provides to Congress in subsequent fourth quarter default reports.

    Recommendation: 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.

    Agency Affected: Export-Import Bank of the United States

  4. Status: Open

    Comments: The Export-Import Bank contracted with a firm to develop workload benchmarks and a workload modeling tool. The first phase of this effort, which was nearing completion as of April 2014, focused on certain activities in three of the bank's divisions. For each of the activities, the firm developed a baseline series of workload metrics, which were benchmarked against peer institutions. The next phase of the effort will focus on applying the workload modeling tool and extending the metrics and analysis to other areas of the bank. We will update the status of this recommendation as additional information becomes available.

    Recommendation: 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.

    Agency Affected: Export-Import Bank of the United States

 

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