Export-Import Bank: OMB's Method for Estimating Bank's Loss Rates Involves Challenges and Lacks Transparency
GAO-04-531
Published: Sep 30, 2004. Publicly Released: Sep 30, 2004.
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Highlights
The Export-Import Bank (Ex-Im Bank) facilitates U.S. exports by extending credit to foreign governments and corporations, mostly in developing countries. The Federal Credit Reform Act requires Ex-Im Bank to estimate its net future losses, called "subsidy costs," for budget purposes. Beginning with fiscal year 2003, the Office of Management and Budget (OMB) significantly changed its methodology for estimating a key subsidy cost component: the expected loss rates across a range of risk ratings of U.S.-provided international credits. In response to a congressional mandate, GAO agreed to (1) describe OMB's current and former methodologies and the rationale for the recent revisions, (2) determine the current methodology's impact on Ex-Im Bank, and (3) assess the methodology and how it was developed.
Recommendations
Recommendations for Executive Action
| Agency Affected | Recommendation | Status |
|---|---|---|
| Office of Management and Budget | To improve the transparency of the subsidy cost estimation process and help ensure the validity of estimates over time, the Director of the Office of Management and Budget should provide Interagency Country Risk Assessment System agencies and Congress a technical description of OMB's expected loss methodology, including the default model, the key assumptions OMB made, and the data it used. |
Closed – Implemented
OMB officials confirmed that OMB completed technical documentation of the loss estimation model in August 2006. They stated that the documentation was sent to the relevant agencies and includes the default model and key assumptions made. According to OMB, it will provide this information to Congress upon request, but Congress has not yet requested such information.
|
| Office of Management and Budget | To improve the transparency of the subsidy cost estimation process and help ensure the validity of estimates over time, the Director of the Office of Management and Budget should provide similar information in the event of significant changes in its method of calculating expected loss rates. |
Closed – Implemented
OMB officials confirmed that no significant changes to OMB's loss estimation model have occurred since 2004; therefore, additional technical descriptions have not been needed. [Note, that in response to GAO recommendation 1 in the same report, OMB indicated that it had provided affected U.S. government agencies with a technical description of the expected loss model.] Thus, this recommendation can be closed as implemented.
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| Office of Management and Budget | To improve the transparency of the subsidy cost estimation process and help ensure the validity of estimates over time, the Director of the Office of Management and Budget should ensure that data from nonagency sources--for example, rating agencies' corporate default data, which are used to estimate expected loss rates--be updated as appropriate. |
Closed – Implemented
OMB officials have confirmed that OMB updated the corporate default data used in the loss estimation model. At the time of our report, the model used published corporate default data from 1920-1989. OMB stated that it updated the model to use default data covering the period 1920-2006. In addition, GAO subsequently analyzed Moody's corporate default data through 2007, and determined that the default rates through 2007 were not significantly different from those through 2006. Therefore, the single update OMB made appears to be reasonable over this time period.
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| Office of Management and Budget | To improve the transparency of the subsidy cost estimation process and help ensure the validity of estimates over time, the Director of the Office of Management and Budget should request from Ex-Im Bank and other U.S. international lending agencies the most complete and reliable data on their default and repayment histories and periodically obtain updated information, so that the validity of the data on which the current methodology is based can be assessed as sufficient agency data are available. |
Closed – Implemented
OMB has ongoing access to Ex-Im data, according to OMB and Ex-Im officials. OMB has reviewed that data in order to approve Ex-Im's shift, effective for the 2008 budget year, to using its own historical default and recovery data--and not OMB loss rates to estimate budgetary costs under credit reform. According to OMB, it also continues to work with other U.S. international lending agencies on improving their data collection. OMB stated, however, that since the other agencies' historical data is not currently as broad, useful, or complete as Ex-Im data, OMB does not expect its work with the other agencies on their historical data to yield similar improvements. Thus, the extent to which OMB can use default data from other agencies to revise its loss rate methodologies is limited at this time.
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| Office of Management and Budget | To improve the transparency of the subsidy cost estimation process and help ensure the validity of estimates over time, the Director of the Office of Management and Budget should arrange for independent methodological review of OMB's expected loss rate model and assumptions and document that review. |
Closed – Not Implemented
As of July 14, 2008, OMB indicated that "OMB continues to plan on seeking comments from a range of academics and finance professionals outside of government on the method as appropriate." Thus, because OMB has not yet demonstrated specific steps taken toward this end, this recommendation should at this time be closed as not implemented.
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Topics
Bank loansCost analysisExportingFeesForeign loansFuture budget projectionsLoan defaultsLossesRisk managementStatistical methodsSubsidiesTransparency