House Financial Services Subcommittee on Monetary Policy and Trade Hearing
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Chairman Campbell, Ranking Member Clay, and Members of the Subcommittee:
I am pleased to be here today to discuss our recent work on the
My testimony today draws on two reports we issued in March and May of this year in response to requirements in the Export-Import Bank Reauthorization Act of 2012 (Reauthorization Act). n1 The act required us to assess aspects of Ex-Im's risk management and 2012 Business Plan in the context of the agency's growth. The act also increased the statutory ceiling on the agency's total exposure (exposure limit). I will discuss Ex-Im's efforts to (1) forecast exposure levels, (2) manage financial risks and estimate losses, and (3) manage its workload.
For the March and
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 country risks that the private sector is unable or unwilling to accept, while still maintaining a reasonable assurance of repayment.
Ex-Im faces multiple risks when it extends export credit financing. These risks include (1) credit risk (the risk that an obligor may not have sufficient funds to service its debt or be willing to service its debt), (2) political risk (the risk that expropriation of the obligor's property, war, or inconvertibility of the obligor's currency into U.S. dollars may result in nonrepayment), (3) concentration risk (the risk that events could negatively affect not only one entity or location but also many entities or locations simultaneously), (4) market risk (the risk of loss from declining prices or volatility of prices in the financial markets, which could arise from changing macroeconomic conditions), and (5) operational risk (the risk that loss may result from inadequate or failed internal processes, people, and systems, or from external events).
While Ex-Im's business is generally driven by demand for its services from exporters,
Ex-Im's Process for Forecasting Exposure Has Weaknesses
Ex-Im's Business Plan concluded that the exposure limits in the Reauthorization Act were appropriate, but our
Although Ex-Im's forecast model is sensitive to key assumptions, we 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. For example, certain Ex-Im assumptions about product mix and repayments were not consistent with historical trends. We used historical data in lieu of these assumptions and found that, if these conditions were to occur in the future, Ex-Im's forecast of exposure could be higher than the limit set by
Ex-Im Could Take Additional Steps to Improve Risk Management and Loss Estimates
Our March report found that Ex-Im has been developing a more comprehensive risk-management framework, but could take additional steps to improve this process. For example, Ex-Im has started addressing recommendations by its Inspector General (IG) about portfolio stress testing, thresholds for managing portfolio concentrations, and risk governance. Our review indicated that the IG's recommendations represent promising techniques that merit continued attention. In addition, we concluded that reporting stress testing scenarios and their results would aid congressional oversight and be consistent with internal control standards for effective external communication. Thus, in our
However, Ex-Im could further improve its risk management, including its risk modeling. 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. n2 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. For example, Ex-Im uses a 1-year forecast of certain bond defaults to predict possible changes in loss estimates from changed economic conditions. But a short-term forecast may not be appropriate for adjusting estimated defaults for longer-term products. Guidance from the
Ex-Im also could improve its analysis of the financial performance of its portfolio. As of
Finally, stemming from our analysis of Ex-Im's Business Plan in our
Additional Information and Analysis Could Help Ex-Im Manage Its Workload
In our recent reports, we found that Ex-Im faces potential operational risks because administrative budgets and staff levels have not kept pace with the growth in its portfolio. Ex-Im has reported in its Business Plan that its resource levels cannot sustain the bank's current level of activity or meet expected demand in coming years. From 2008 through 2012, Ex-Im's annual authorizations grew nearly 150 percent. n6 Over the same period, Ex-Im's administrative budget increased 15 percent, from
While Ex-Im has determined that it needs more staff, it has not formally determined the level of business it can properly manage. Federal internal control standards state that agencies should develop a risk-management approach based on how much risk can be prudently accepted. n7 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. Monitoring workloads against such benchmarks would help Ex-Im determine when additional steps--such as tightening underwriting standards or increasing requirements for lender participation--may be needed to mitigate Ex-Im's increased risk.
Ex-Im also expected that administrative resource constraints might prevent it from meeting its congressionally mandated target for small business export financing. The mandated target is fixed to a percentage of the dollar value of Ex-Im's total authorizations. Although Ex-Im has dedicated resources to support congressional mandates, as Ex-Im authorizations have grown, the growth in the value of the mandated target has outpaced Ex-Im's increasing support. Ex-Im projects that the target value will continue to outpace its increasing support for the mandate through 2014. According to Ex-Im officials, processing small business transactions and bringing in new small business customers is resource intensive. Small business authorizations accounted for less than 20 percent of the dollar amount of Ex-Im's total authorizations in 2011 and 2012, but measured in number of transactions, constituted 87 percent of all authorizations. Originating, underwriting, and servicing for small business deals requires more effort than other transactions because small businesses tend to have less exporting experience than larger businesses. OMB guidance directs agency leaders to set ambitious, yet realistic goals that reflect careful analysis of associated challenges and the agency's capacity and priorities. Communicating information about challenges and capacity that may significantly affect achievement of agency goals to external stakeholders, such as
As a result of the challenges Ex-Im faces in managing its workload, in our March and
Chairman Campbell, Ranking Member Clay, and Members of the Subcommittee, this concludes my statement. I would be pleased to respond to any questions you may have.
n1 Pub. L. No. 112-122 [Sec.] 4 and [Sec.] 5 (2012). See GAO,
n2 Ex-Im uses the model to build the agency's credit subsidy estimates in the President's budget as well as for calculating loss reserves and allowances reported in its annual financial statements.
n3 While Ex-Im is not bound by federal banking regulator guidance, it faces similar challenges to regulated private financial institutions in managing risks.
n4 The performance of the subportfolios differs from the overall Ex-Im portfolio. For instance, the higher risk ratings of the subportfolios suggest these transactions generally are more risky than Ex-Im's overall portfolio.
n5 Ex-Im reviews each credit transaction and assigns a numerical risk rating based on assessments of credit, political, and market risks.
n6 An authorization is an export financing transaction for which Ex-Im has granted credit approval.
n7 GAO, Standards for Internal Control in the Federal Government, GAO/AIMD-00-21.3.1 (
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