Ex-Im faces multiple risks when it extends export credit financing. Operational risk. Representatives from industry trade associations noted that Ex- Im’s ability to offer direct loans helped Ex-Im to fill the gap in private- sector lending following the financial crisis and implementation of more  stringent banking regulations. Ex-Im Uses Modeling to Estimate Subsidy Costs and Reserves, and Accounts for Multiple Risks in These Processes and in Setting Fees

Ex-Im uses a loss estimation model to estimate credit subsidy costs and  loss reserves and allowances. Consistent with audit recommendations and industry best practices, Ex- Im also incorporated five qualitative factors into the loss model in 2012 to  adjust for circumstances that may cause estimated losses to differ from  historical experience. However, a 1-year forecast may not capture the uncertainty associated  with Ex-Im’s longer-term transactions, and the use of subsequent short- term forecasts does not address this limitation. Ex-Im’s Fees Are Guided by International Agreements and Internal Analyses

Ex-Im’s fees for medium- and long-term products account for the credit  and political risk associated with each transaction and are guided in large  part by the OECD Arrangement, which establishes guidelines for  determining “minimum premiums”—fees to cover the risk of not being  repaid—and minimum interest rates that participant ECAs charge. Ex-Im’s pricing structure for medium- and long-term products (about 85  percent of Ex-Im’s exposure) includes the following:
Exposure fees. Ex-Im Reported a Default Rate under 1 Percent and Generated Receipts, but the Long-Term Budgetary Impact Is Uncertain

Ex-Im calculates and reports default rates for its portfolio, but it has not  maintained data useful for assessing the performance of newer books of  business. Ex-Im has been self-sustaining since 2008. Ex-Im Has Started Developing a More Comprehensive Risk- Management Framework

In September 2012, the Ex-Im IG issued a report on Ex-Im’s management  of risk at the overall portfolio level. Stress testing is consistent with our internal control standards and  industry practices. Ex-Im officials also indicated that they intend to share their stress  testing and loss modeling methodologies with other federal credit  agencies so that others may benefit from Ex-Im’s efforts. Ex-Im has not yet made plans to report its stress scenarios and stress  test results to Congress. In addition to the three recommendations discussed previously, the IG  recommended that Ex-Im: (1) develop a systematic approach for  modeling portfolio risk, including identifying appropriate qualitative risk  factors; (2) with the assistance of external experts, implement a formal  framework for the use of financial models, including procedures for model  validation; (3) review risk metrics and reporting procedures to enhance  transparency and to better inform key stakeholders; and (4) amend its by- laws to provide for oversight of an agencywide risk-management function  by Ex-Im’s Board of Directors. Ex-Im has taken some steps to manage its increased workload. However, without  benchmarks to determine when workload levels have created too much  risk, Ex-Im’s ability to monitor and manage operational risks associated  with its already increased business volume may be limited. For several years, Ex-Im has been self- sustaining for budgetary purposes, although the long-term cost of Ex-Im’s  new business is not yet known. Providing this  information to Congress—potentially as part of Ex-Im’s annual report— would be consistent with federal internal control standards for effective  external communication and would aid congressional oversight of the  agency. This is contrary to federal internal control standards, which indicate that  agencies should develop a risk-management approach based on how  much risk can be prudently accepted. Recommendations for Executive Action

We recommend that the Chairman of the Export-Import Bank of the  United States take the following four actions:
To help improve the reliability of its loss estimation model, Ex-Im  should assess whether it is using the best available data for adjusting  loss estimates for longer-term transactions to account for global  economic risk. Concerning our  recommendation that Ex-Im retain point-in-time data on credit  performance, Ex-Im said it had already begun doing so and would use  these data to compare the performance of newer and older books of  business and to enhance its loss estimation model. Appendix I: Objectives, Scope, and Methodology

Our objectives were to examine: (1) how the U.S. Export-Import Bank’s  (Ex-Im) 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. We also analyzed International Monetary Fund data on the volume  of U.S. exports over fiscal years 1990 through 2012 in order to compare  changes in export volume with changes in Ex-Im authorizations. This  included the Federal Credit Reform Act of 1990; the Office of  Management and Budget (OMB) Circular No.
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 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.

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.