Export-Import Bank:

Additional Analysis and Information Could Better Inform Congress on Exposure, Risk, and Resources

GAO-13-620: Published: May 30, 2013. Publicly Released: May 30, 2013.

Additional Materials:

Contact:

Lawrance L. Evans, Jr
(202) 512-4802
evansl@gao.gov

 

Office of Public Affairs
(202) 512-4800
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What GAO Found

While the Export-Import Bank (Ex-Im) Business Plan reported that Ex-Im's exposure limits were appropriate, the forecasting process used to reach this conclusion has weaknesses. Congress increased the Ex-Im exposure limit--the limit on Ex-Im's total aggregate outstanding amount of financing--to $120 billion in 2012, with provisions for additional increases to $130 billion in 2013 and $140 billion in 2014. Although Ex-Im's forecast model is sensitive to key assumptions, GAO found that Ex-Im did not reassess these assumptions to reflect changing conditions or conduct sensitivity analyses to assess and report the range of potential outcomes. GAO used historical data in lieu of these assumptions and found that Ex-Im's forecast of exposure could be higher than the limit set by Congress for 2014. GAO's cost guidance calls for agencies' assumptions and forecasts to be supported by historical data and experience, and a sensitivity analysis, which can assess the effect of changes in assumptions. Because Ex-Im has not taken these steps, the reliability of its forecasts is diminished. This is of particular concern because Ex-Im projects that its outstanding financing in the future will be closer to its exposure limit than it has been historically. Consequently, any forecast errors could result in the bank having to take actions, such as delaying financing for creditworthy projects, to avoid exceeding its limit.

The Business Plan provided limited analysis of Ex-Im's risk of loss. First, Ex-Im did not provide some forecast data because of pending Office of Management and Budget (OMB) approval of key analyses. For example, Ex-Im did not include conclusions on Ex-Im's overall risk of loss and risk by industry. Second, Ex-Im included only limited analysis to support its conclusions that changes in its portfolio--including subportfolios of transactions supporting congressional mandates for small business, sub-Saharan Africa, and renewable energy--would not affect its risk of loss. In addition, Ex-Im has not routinely analyzed or reported the risk rating and default rate of subportfolios that respond to these mandates, although their performance may differ from the overall portfolio. OMB and banking regulator guidance call for entities, including federal agencies, to be able to provide comprehensive information by subportfolio, product, and other financial performance metrics. By not routinely analyzing and reporting financial performance for mandated transactions, Ex-Im decreases its ability to evaluate such performance at the subportfolio level and inform Congress of related risks.

The Business Plan provided limited analysis of the adequacy of Ex-Im's resources and ability to meet congressional mandates. From 2008 through 2012, Ex-Im's administrative resources remained relatively flat as its portfolio grew. Ex-Im does not expect to meet its small business or renewable energy mandate targets in 2013 or 2014. These mandate targets are fixed to a percentage of the dollar value of Ex-Im's total authorizations. Although Ex-Im has dedicated resources to support these mandates, as Ex-Im authorizations have grown, the growth in mandate targets has outpaced Ex-Im's increasing support. Ex-Im projects that the targets will continue to outpace its growth in support through 2014. Mandate transactions also are resource-intensive and Ex-Im's ability to expand its renewable energy portfolio may be constrained by the size of the overall market. Communicating the effect of percentage-based targets on Ex-Im's resources and ability to achieve its goals to external stakeholders, such as Congress, is consistent with federal internal control standards.

Why GAO Did This Study

Ex-Im helps U.S. firms export goods and services by providing a range of financial products. Following the 2007-2009 financial crisis, increased demand resulted in rapid increases in Ex-Im's portfolio and exposure. The Export-Import Bank Reauthorization Act of 2012 reauthorized Ex-Im through fiscal year 2014 and, as a condition of raising Ex-Im's exposure limit in 2013, required Ex-Im to prepare a report with a business plan and analyses of key operational elements. The act also directed GAO to analyze the Business Plan. This report discusses the extent to which Ex-Im's Business Plan and analyses (1) justify bank exposure limits; (2) evaluate the risk of loss associated with the increased exposure limit, changing composition of exposure, and compliance with congressional mandates; and (3) analyze the adequacy of Ex-Im resources to manage authorizations and comply with congressional mandates. GAO reviewed Ex-Im's Business Plan, analyses, and other reports, and interviewed Ex-Im officials.

What GAO Recommends

Ex-Im should (1) adjust its forecasting model based on previous experience, (2) assess and report the sensitivity of the exposure forecast model to key assumptions and estimates, (3) routinely report the financial performance of subportfolios supporting congressional mandates, and (4) provide Congress with additional information on the resources associated with meeting mandated targets. Ex-Im concurred with our recommendations.

For more information, contact Lawrance L. Evans, Jr. at (202) 512-4802 or EvansL@gao.gov.

Recommendations for Executive Action

  1. Status: Closed - Implemented

    Comments: Ex-Im concurred with the recommendation. In response, Ex-Im has taken steps to improve and validate its forecasting methodology for both authorizations (new loans, guarantees, and insurance) and exposure (outstanding authorizations less repayments and cancellations). In its January 2014 Report to the Senate Committee on Banking, Housing, and Urban Affairs and the House Committee on Financial Services, Ex-Im compared the results of its pipeline authorization forecast method to actual results and introduced additional forecast methods to supplement the pipeline method. Ex-Im also documented its revised authorization and exposure forecast methodologies in its fiscal year 2015 Congressional Budget Justification (CBJ). In the pipeline method, as Ex-Im used for its fiscal year 2013 authorization forecast, Ex-Im projects future authorizations based on (1) individual transaction information for long-term transactions, and (2) historical information, feedback from market participants, and current trends for the medium-term and short-term transactions. Using the pipeline method, Ex-Im's Business Plan predicted $38.4 billion in authorizations for fiscal year 2013. Actual authorizations, however, were approximately $27 billion. In response to our recommendation, the January 2014 report examined the reasons for the difference between forecast and actual results. The January 2014 report identified three main factors leading to the difference between the fiscal year 2013 forecast and actual results: (1) increased liquidity for private lenders, which reduced the demand for Ex-Im financing, (2) a global reduction in commodity demand, and (3) delays in individual authorizations, which pushed these authorizations to fiscal year 2014. Also in response to our recommendation, the report presented the results of three separate new regression analyses. These three analyses would have predicted fiscal year 2013 authorizations of $24.2 billion, $24.6 billion, and $27.0 billion--each closer to the actual result than that predicted by Ex-Im's Business Plan. Ex-Im has now incorporated these model outputs into its forecasting to validate the pipeline methodology for its fiscal year 2014 and 2015 forecasts. Authorizations are one of two main components of Ex-Im's total exposure--new authorizations increase Ex-Im's exposure but repayments and cancellations decrease its exposure. Therefore, improvements to authorization forecasting also improve exposure forecasting. In addition, Ex-Im also improved its calculation of expected repayments by incorporating actual Ex-Im data from previous years. For repayments Ex-Im took current transactions and used their actual repayment terms in developing its forecast for the 2015 CBJ. For future transactions, Ex-Im took typical repayment terms and applied them to forecasted amounts.

    Recommendation: 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.

    Agency Affected: Export-Import Bank of the United States

  2. Status: Closed - Implemented

    Comments: Ex-Im concurred with this recommendation and stated that it would incorporate the additional information into its next quarterly default report, to be issued June 30, 2013. In its June 2013 Default Rate Report to the Congress, Ex-Im provided default rate and risk rating reports for its subportfolio of transactions supporting these mandates, which were approximately 12 percent of its total financing at that time.

    Recommendation: 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.

    Agency Affected: Export-Import Bank of the United States

  3. Status: Open

    Comments: Ex-Im concurred with this recommendation at its issuance and stated that it would review its operational risk, including resources required to meet mandate targets, during FY 2013. Subject to Administration approval, information from this review was to be included in Ex-Im's next Congressional Budget Justification in April 2014. In its January 2014 report to the Senate Committee on Banking, Housing, and Urban Affairs and the House Committee on Financial Services regarding our report, Ex-Im reiterated that it expected to incorporate a response to this recommendation into future Congressional Budget Justifications, subject to the Administration's approval. However, as of May 2014, Ex-Im had not developed such information for its CBJ but had continued its larger effort examining operational risk. In May 2014, Ex-Im said that in 2013, it created the Enterprise Risk Committee and started a review of operational risk (the basis for the Bank's response to the recommendation). Ex-Im contracted with a consultant to develop workload benchmarks. The first phase, completed in early 2014, focused on medium and long-term transactional and direct supporting offices (i.e. Structured Finance, Trade Finance, Transportation, and the supporting functions of Legal, Engineering). For each of the transactions functions a baseline series of workload metrics was developed which are being benchmarked against peer institutions. According to Ex-Im, it is also developing a workload modeling tool. The second phase of the consultant project, expected to be completed in 2014, will complete the workload modeling tool and extend the metrics and analysis to other areas of the Bank. Ex-Im now expects that the FY 2016 CBJ (again subject to the Administration's approval) will include the analysis of resources necessary to meet the mandated targets. GAO will review the CBJ information in early 2015 before deciding whether to close this recommendation.

    Recommendation: 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.

    Agency Affected: Export-Import Bank of the United States

  4. Status: Closed - Implemented

    Comments: Ex-Im concurred with this recommendation. In response, Ex-Im has begun to assess the sensitivity of its forecasts to uncertainty and to report the range of forecast results. In its fiscal year 2015 Congressional Budget Justification (CBJ) Ex-Im used three different forecast models to identify a range of potential authorization amounts in fiscal year 2015. Ex-Im also reported in its CBJ that its forecast authorization projection was most sensitive to a potential one-time $5 billion transaction. Authorizations are one of two main components of Ex-Im's total exposure--new authorizations increase Ex-Im's exposure but repayments and cancellations decrease its exposure. Therefore, Ex-Im similarly noted the sensitivity of its exposure forecast to the one-time $5 billion transaction. Ex-Im also reported low, middle, and high range values for its fiscal year 2014 and fiscal year 2015 exposure forecasts in the fiscal year 2015 CBJ.

    Recommendation: 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.

    Agency Affected: Export-Import Bank of the United States

 

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