Export-Import Bank: Additional Analysis and Information Could Better Inform Congress on Exposure, Risk, and Resources

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.

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.

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.

The Export-Import Bank (Ex-Im) serves as the official export credit  agency of the United States, providing a range of financial products for  U.S. exporters and their customers to support the export of U.S. goods  and services, thereby supporting U.S. jobs. Following the financial crisis  of 2007-2009, increased demand for Ex-Im authorizations (caused by a  retreat of private-sector lenders from the market) led to rapid increases in  the size of Ex-Im’s portfolio and changes in its portfolio composition.  While Ex-Im has been “self-sustaining” for appropriations purposes since  fiscal year 2008—financing its operations from receipts collected from its  customers—it must operate within the parameters and limits authorized  by Congress, including congressional mandates that it support small  business and promote sub-Saharan African and environmentally  beneficial exports.

The Export-Import Bank Reauthorization Act of 2012 (the Reauthorization  Act) reauthorized the bank through 2014 and increased the limit on its  total aggregate outstanding loans, guarantees, and insurance—the Ex-Im  exposure limit—to $120 billion in 2012, and to $130 billion in 2013 and  $140 billion in 2014, if certain conditions are met. As one condition to  increasing the exposure limit for 2013, the reauthorization required that  Ex-Im submit a report by September 30, 2012, that included a business  plan and analyses: estimating and justifying the appropriate exposure limit; estimating future growth by industry sector, product type, and key analyzing the risk of loss from the estimated exposure limit by industry  sector, product type, and key market; analyzing its ability to meet congressional mandates under the  proposed exposure limit and the risk of loss associated with meeting  those mandates; and analyzing the adequacy of its resources under the proposed exposure  limit, including resources for required economic impact analyses.

In response to the congressional requirement, Ex-Im completed and  submitted a report that, according to Ex-Im officials, generally relied on  data from existing Ex-Im analyses. The reauthorization further directed  GAO to analyze Ex-Im’s report.

This report discusses the extent to which Ex-Im’s Business Plan and  analyses (1) justify bank exposure limits; (2) evaluate Ex-Im’s risk of loss  associated with the increased exposure limit, the 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 under the proposed exposure limits.

To assess the extent to which Ex-Im’s Business Plan and analyses justify  exposure limits, we reviewed Ex-Im’s Business Plan and methodology,  the model Ex-Im used to forecast exposure, source data on  authorizations, and met with Ex-Im officials. To assess the exposure  model, we compared its projections of exposure and authorizations with  actual results. To assess Ex-Im’s forecast of repayments, we compared  Ex-Im’s assumptions with previous data on the share of short-term  transactions in the Ex-Im portfolio and calculated Ex-Im’s exposure using  alternative assumptions about short-term percentage and repayment  terms. We assessed the procedures and assumptions Ex-Im used in its  Business Plan forecast of exposure against GAO standards for  developing estimates.

To assess the extent to which Ex-Im’s Business Plan and analyses  evaluate the risk of loss associated with Ex-Im’s increased exposure limit,  the changing composition of exposure, and compliance with  congressional mandates, we reviewed Ex-Im’s data and documentation— including financial performance data, annual reports, and quarterly default  rate reports—and previous GAO and Ex-Im Inspector General reports. To  further examine Ex-Im’s risk of loss evaluation in the plan, we examined  weighted-average risk ratings and default rate data for fiscal years 2008  and 2012 that Ex-Im compiled for us at the subportfolio level, including by  industry, product, key market, and congressional mandates. To assess  the reliability of these data, we reviewed and checked them against  previous Ex-Im reporting and consulted the data reviews conducted for  another recent GAO report. We found the data to be sufficiently reliable  for the purpose of providing context for the financial performance of the  overall portfolio and subportfolios in each year. To evaluate Ex-Im’s risk  management, we compared its risk management and analysis practices  against federal banking regulator guidance on financial performance  reporting, Office of Management and Budget (OMB) guidance on federal  credit programs, and GAO’s standards for internal control.

To assess the extent to which Ex-Im’s Business Plan and analyses  analyze the adequacy of Ex-Im resources to manage authorizations and  comply with congressional mandates under the proposed exposure limits,  we reviewed previous GAO and Ex-Im Inspector General reports. We  also reviewed relevant Ex-Im documents, including Congressional Budget  Justifications, annual reports, the Ex-Im charter, and other plans,  performance reports, policies, and procedures. We found the data in  these reports to be sufficiently reliable for the purposes of describing the  growth of Ex-Im’s business, size of its workforce, and amount of  administrative funds requested and appropriated. To assess the reliability  of these data, we reviewed and checked them against previous Ex-Im  reporting and consulted the data reviews conducted for another recent  GAO report. We also reviewed relevant GAO and Ex-Im Inspector  General reports and met with officials from Ex-Im and Ex-Im’s Office of  Inspector General. We compared Ex-Im’s planning documents against  criteria established by GAO, the Office of Personnel Management, and  OMB.

We conducted this performance audit from November 2012 to May 2013  in accordance with generally accepted government auditing standards.  Those standards require that we plan and perform the audit to obtain  sufficient, appropriate evidence to provide a reasonable basis for our  findings and conclusions based on our audit objectives. We believe that  the evidence obtained provides a reasonable basis for our findings and  conclusions based on our audit objectives.

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. As a result, when private-sector lenders reduced the  availability of their financing after the 2007-2009 financial crisis, demand  for Ex-Im products correspondingly increased.

Ex-Im operates in several functional areas under the leadership of a  chairman and president. Functional areas include the Small Business  Group, Office of the Chief Financial Officer, Office of Resource  Management, and Export Finance Group. The Export Finance Group is,  in turn, subdivided into business units for certain types of transactions,  such as Trade Finance, Transportation, Structured and Project Finance,  and Renewable Energy.

Ex-Im offers a number of export financing products, including direct loans,  loan guarantees, and export credit insurance. Ex-Im makes fixed-rate  loans directly to international buyers of goods and services. These loans  can be medium-term (more than 1 year up to 7 years and less than $10  short-term (up to 1 year),  million), or  long-term (including transactions of more than 7 years or $10 million  and higher and longer than 1 year).

Ex-Im also guarantees loans made by private lenders to international  buyers of goods or services, committing to pay the lenders if the buyers  default. Like direct loans, loan guarantees may be short-, medium-, or  long-term. Additionally, Ex-Im provides export credit insurance products  that protect the exporter from the risk of nonpayment by foreign buyers for  commercial and political reasons. This allows U.S. exporters the ability to  offer foreign purchasers the opportunity to make purchases on credit.  Credit insurance policies can cover a single buyer or multiple buyers and  be short- or medium-term. Ex-Im’s short-term insurance covers a wide  range of goods, raw materials, spare parts, components, and most  services on terms, in most cases, of up to 180 days. Medium-term  insurance policies protect longer-term financing to international buyers of  capital equipment or services, covering one or a series of shipments.

Ex-Im’s long-term products are often used to finance transportation  projects, in project finance transactions, and for what Ex-Im calls  “structured finance.” In dollar terms, transportation projects primarily  support the purchase of aircraft. In project finance, Ex-Im lends to newly  created project companies in foreign countries and looks to the project’s  future cash flows as the source of repayment. Project finance  transactions have repayment terms up to 14 years, and renewable energy  transactions have repayment terms up to 18 years. In structured finance  transactions, Ex-Im provides direct loans or loan guarantees to existing  companies located overseas. Structured finance transactions generally  have repayment terms of 10 years, but some transactions may have  terms of 12 years.

Ex-Im’s Exposure and Portfolio Since 2008

Congress has limited the extent of potential losses to the government  from Ex-Im transactions by placing a cap on Ex-Im’s total amount of  outstanding loans, guarantees, and insurance—the exposure limit. In the  May 30, 2012 reauthorization, Congress increased Ex-Im’s exposure limit  to $120 billion, with provisions for additional increases to $130 billion in  2013, and $140 billion in 2014. When Ex-Im authorizes additional loans,  guarantees, and insurance, its exposure grows. When authorizations are  repaid or cancelled, Ex-Im’s exposure is reduced (see fig. 1). To forecast  its exposure for the September 2012 Business Plan, Ex-Im’s Office of the  Chief Financial Officer used a model that took the bank’s July 2012 actual  exposure, added the amount of authorizations forecast by Ex-Im’s  business units, and subtracted the estimated amount of repayments and  cancellations based on the forecast authorizations and assumptions  about the portfolio composition. Ex-Im’s actual exposure at the end of  2012 was $106.6 billion, and Ex-Im’s Business Plan forecasts exposure  to increase to $120.2 billion at the end of 2013 and $134.9 billion at the  end of 2014.

Ex-Im’s annual authorizations have increased. Overall, in nominal dollars,  annual Ex-Im authorizations rose from $14.4 billion in 2008 to $35.8  billion in 2012 (see fig. 2). Annual authorizations for new project and  structured finance transactions increased from $1.9 billion in 2008 to  $12.6 billion in 2012—accounting for almost half of Ex-Im’s 2012 long- term authorizations. Aircraft-related authorizations grew from $5.7 billion  in 2008 to $11.9 billion in 2012—an increase of about 110 percent—and  accounted for about one-third of Ex-Im’s authorizations in 2012. While  long-term authorizations make up the largest part of Ex-Im’s portfolio in  dollar terms, more than 80 percent of Ex-Im transactions are short-term.

While Ex-Im’s business is generally driven by demand for its services  from exporters, Congress has also mandated that Ex-Im support specific  objectives. The Reauthorization Act requires Ex-Im to analyze its ability to  meet, and its risk of loss from complying with, three congressional  mandates. Since the 1980s, Congress has required that Ex-Im make  available a certain percentage of its total export financing each year for  small business. In 2002, Congress increased the small business financing  requirement from 10 to 20 percent. Congress further mandates that Ex-Im  promote the expansion of its financial commitments in sub-Saharan Africa  under Ex-Im’s loan, guarantee, and insurance programs. Finally, in its  2012 appropriations, Congress directed that “not less than 10 percent of  the aggregate loan, guarantee, and insurance authority available to [Ex- Im]… should be used for renewable energy technologies or end-use  energy efficiency technologies,” to which we refer as the renewable  energy mandate.

Ex-Im faces multiple risks when it extends export credit financing,  including credit, political, market, concentration, foreign-currency, and  operational risks. Ex-Im uses its resources to manage risks through (1)  underwriting, (2) monitoring and restructuring, and (3) recovery of claims.

Underwriting: During underwriting, Ex-Im first uses its Country Limitation  Schedule to determine whether it can provide financing for transactions in  the country. If the transaction meets the requirements of the Country  Limitation Schedule, Ex-Im reviews the transaction and assigns it a risk  rating based on its assessment of the creditworthiness of the obligors and  to establish whether there is a reasonable assurance of repayment. Ex- Im’s risk ratings range from 1 (least risky) to 11 (most risky). Ex-Im  generally does not authorize transactions with risk ratings over 8.

Monitoring and Restructuring: Ex-Im updates the risk ratings of medium-  and long-term transactions above $1 million at least annually to reflect  any changes in credit risk. Ex-Im also may restructure individual  transactions with credit weaknesses to help prevent defaults and increase  recoveries on transactions that default.

Recovery of Claims: Ex-Im pays a claim when a loan that it has  guaranteed or an insurance policy that it has issued defaults. Ex-Im tries  to minimize losses on claims paid by pursuing recovery of the amount of  claims it paid. For example, it can collect on the assets of the obligors or  the collateral for a transaction.

Ex-Im uses a loss estimation model to estimate credit subsidy costs and  loss reserves and allowances for these risks. Ex-Im annually updates its  loss model, and the model is subsequently reviewed by OMB. The  expected loss model calculates loss rates based on historical data (the  default and loss history of prior loan guarantee and insurance  transactions as well as variables that can be used to predict defaults and  losses, such as transaction amount and length, obligor type, product type,  and risk rating) and qualitative factors (minimum loss rate, global  economic risk, and region, industry, and aircraft portfolio obligor  concentration risk) to account for risks associated with the agency’s  current portfolio. The model calculates a loss rate (the percentage loss  that Ex-Im can expect for each dollar of export financing) for each Ex-Im  risk rating and product type. The loss rates produced by the model are  then used to estimate future cash flows (repayments, fees, recoveries,  and claims) for the business Ex-Im expects in the upcoming year. As of  December 31, 2012, Ex-Im reported a default rate for its active portfolio of  0.34 percent.

Ex-Im uses OMB’s credit subsidy calculator to determine the credit  subsidy costs for existing transactions in its portfolio and projected future  transactions based on its estimated future cash flows. These credit  subsidy estimates are reported in the President’s budget. Ex-Im also uses  the estimated future cash flows to calculate the loss reserves or  allowances—financial reporting accounts for estimated losses—it needs  for each new authorized transaction. Each year, Ex-Im adjusts this loss  reserve or allowance amount for each transaction using updated  estimates of future cash flows.

In addition to these existing procedures, in January 2013, Ex-Im  completed a comprehensive revision of its policies and procedures  manual that covers each stage of risk management. According to Ex-Im  officials, Ex-Im also has been reviewing and responding to several  recommendations on risk management from internal and external  auditors, OMB, Ex-Im’s Inspector General, and GAO. Inspector General  and GAO recommendations include performing and reporting of stress  testing, retaining point-in-time historical data on credit performance,  setting soft portfolio sublimits (informal thresholds for the portion of total  exposure within different segments of the portfolio), and establishing a  chief risk officer position.

Forecasting Processes Ex-Im Used for Its Business Plan and Other Estimates Have Weaknesses

The Ex-Im Business Plan concluded that the exposure limits Congress  placed on the bank in the Reauthorization Act were appropriate, but the  exposure forecast model Ex-Im used to justify its conclusion relied on  authorization forecasts and assumptions about repayments that have a  degree of uncertainty that was not accounted for in Ex-Im’s forecast.  Based on its estimates of authorizations and repayments, Ex-Im projects  its exposure to rise to within $5.1 billion of its $140 billion limit by the end  of 2014. Although this exposure is closer to its exposure limit than it has  been at year-end in recent years, it supports Ex-Im’s conclusion that the  congressional limits are appropriate. However, in developing its estimated  authorizations for the Business Plan, Ex-Im used the same forecasting  process it used for its recent budget estimates, which were between 11  and 42 percent below actual authorizations. Ex-Im used the same  assumptions about repayments as it used in previous years, but did not  check these key assumptions against previous experience or report the  sensitivity of the model to its assumptions. Alternative forecasts using  authorizations and repayments estimated based on previous Ex-Im  results produce exposure estimates that would be higher than Ex-Im’s  limit for 2014, raising concerns about Ex-Im’s conclusion that its limits are  appropriate.

Ex-Im Projects 2014 Exposure to be Approximately $5 Billion below Limit

Ex-Im’s Business Plan stated that the exposure limits for 2012, 2013, and  2014 were appropriate and sufficient for the bank to satisfy anticipated  demand for Ex-Im financing under current market conditions. Ex-Im  forecast that its exposure in 2013 and 2014 would be below its limits by  $9.8 and $5.1 billion, respectively, preserving a small buffer for Ex-Im to  respond to market changes and unforeseen increases in demand, allow  for variance in its estimates, and signal to U.S. exporters and foreign  buyers that Ex-Im support would be available for credit-worthy projects.  Ex-Im forecast that its year-end exposure would be $105.8 billion in 2012,  $120.2 billion in 2013, and $134.9 billion in 2014, below the  congressionally determined exposure limits of $120 billion, $130 billion,  and $140 billion, respectively (see fig. 3).

The buffer between actual exposure and the exposure limit that Ex-Im’s  Business Plan forecast for 2012, 2013, and 2014 is small in comparison  with recent historical experience. Between 2003 and 2008, Ex-Im’s  exposure hovered around $60 billion, well below its exposure limit. During  the fiscal crisis in 2009, Ex-Im’s exposure began an upward trend,  reducing the buffer between actual exposure and the exposure limit. By  the end of 2011, Ex-Im’s exposure rose to 89 percent of its limit. At the  end of 2012 Ex-Im’s exposure limit had increased to $120 billion, but Ex- Im’s exposure also increased and remained at 89 percent of the limit. Ex- Im’s Business Plan forecasts that further increases will bring exposure to  92 percent of its limit at the end of 2013 and 96 percent at the end of  2014. In dollars, Ex-Im forecasts that it will be $5.1 billion below its $140  billion exposure limit at the end of 2014. According to Ex-Im, at the time of  the exposure limit increase from $100 billion to $120 billion (on May 30,  2012), Ex-Im was approaching its maximum permitted exposure and was  monitoring its authorizations and repayments but not delaying any  authorizations. Although Ex-Im did not have to take such measures at  that time, if Ex-Im were to approach its exposure limit in the future, it  might need to take actions such as delaying authorizations to prevent  exceeding its exposure limit.

A Number of Factors Affect the Accuracy of Ex- Im’s Exposure and Authorization Forecasts

The accuracy of Ex-Im’s 2013 and 2014 exposure forecasts is uncertain,  but the plan’s forecast underestimated Ex-Im’s 2012 exposure by about  $900 million for the 2 months of 2012 remaining at the time it prepared  the plan. Ex-Im prepared the plan’s 2012 year-end exposure estimate in  August 2012. At that time, Ex-Im took its known exposure at the end of  July 2012, $99 billion, and estimated the authorizations, repayments, and  cancellations that would occur in August and September to determine the  year-end 2012 exposure. Ex-Im forecast that $10 billion in additional  authorizations in those months would be offset by $3.3 billion in  repayments and cancellations—to result in an additional $6.7 billion in  exposure in the next 2 months. However, by the end of September, Ex- Im’s actual exposure had increased by $7.6 billion, 13 percent higher.

Ex-Im’s authorization forecast for August and September was within 0.3  percent of the actual authorizations in those 2 months, suggesting that  the forecast error resulted from an overestimate of the repayments and  cancellations that reduce exposure.

Ex-Im’s Business Plan forecast $38.4 billion in authorizations in 2013 and  $42.7 billion in 2014, with 77 percent of the value of forecast  authorizations consisting of long-term transactions including  transportation and project and structured finance. According to Ex-Im’s  Office of the Chief Financial Officer, Ex-Im used the same process to  estimate authorizations for the Business Plan that it had used in previous  years to estimate authorizations for its annual budget estimates. Ex-Im  estimated long-term authorizations in the plan based on an analysis of its  pipeline of in-house applications and expected applications, in which  customers are in consultation with Ex-Im. For example, Ex-Im reviews  aircraft production and delivery schedules to determine when financing for  new aircraft is expected to be needed. Long-term transactions have a  consultation and application period of between 6 months and 3 years.  According to Ex-Im officials, the lead time for the largest project and  structured finance transactions is generally at the upper end of this range,  giving Ex-Im a more specific basis for its estimates within that time  horizon. Ex-Im forecast the average size for individual long-term  structured finance transactions in 2013 at $389 million, and $478 million  in 2014. Individual transportation authorizations for aircraft included in the  2013 and 2014 forecasts average approximately $266 and $203 million,  respectively. The remaining 23 percent of Ex-Im’s forecast authorizations  are short- and medium-term. Ex-Im estimated these based on information  gathered from Ex-Im partner banks—as well as Ex-Im officials’ own sense  of overall market trends. Ex-Im short- and medium-term transactions  averaged approximately $2.2 million in 2012.

Ex-Im’s Business Plan asserts that the pipeline approach has been  demonstrated to be the most effective forecasting methodology, but also  notes that large swings in the amount of transportation and project and  structured finance authorizations may occur due to fluctuations in overall  market conditions or situations unique to the transaction. According to Ex- Im, it is less likely that authorizations for aircraft or larger project and  structured finance authorizations would appear unexpectedly or not  occur, but these transactions may be delayed and their amount may  fluctuate. Smaller project and structured finance transactions and  nonaircraft transportation authorizations may have shorter lead times of  several months. Thus, they can be presented to Ex-Im and authorized  within 2013 or 2014 without Ex-Im having been aware of them in August  2012, when it prepared the Business Plan. Ex-Im’s short- and medium- term transactions generally have shorter lead times than long-term  transactions, increasing the uncertainty of Ex-Im’s forecast for these  transactions in future years. However, because of their generally smaller  size, it would take far more change in the number or size of these  transactions to affect Ex-Im’s overall authorization or exposure estimates.

Since the submittal of the plan in September 2012, the size of some Ex- Im forecast authorizations has fluctuated, as the plan noted could occur.  Approximately 6 months after preparing the plan, in February 2013, Ex-Im  management reviewed its 2013 authorization forecasts as part of its  internal planning. As of March 28, 2013, Ex-Im reduced its 2013 estimate  by $2.6 billion (6.9 percent) to $35.8 billion.

Ex-Im reduced its 2013 transportation and structured finance  authorizations but did not change other 2013 forecasts. Changes in Ex- Im’s forecast resulted from  transactions no longer expected to be completed in 2013 (decrease of  $5.7 billion),  changes in the size of specific authorizations still forecast to occur  (increase of $845 million), and new transactions not anticipated at the time of the August 2012  Business Plan forecast (increase of $2.2 billion).

The forecast change in the total amount of authorizations in turn would  affect Ex-Im’s forecast calculation of exposure. Using Ex-Im’s revised  authorization estimate, the same model Ex-Im used to support its  Business Plan forecast would now predict a reduction of $2.6 billion in  exposure in 2013 and $1.6 billion in 2014.

Ex-Im’s data on previous authorizations show that Ex-Im’s recent budget  forecasts underestimated Ex-Im’s authorizations. Ex-Im’s 2012 budget  estimate, submitted to Congress approximately 16 months before the end  of that year, was 11 percent below the actual authorization figure. The  2012 estimate was closer to the actual authorization figures than Ex-Im’s  forecasts in 2009, 2010, and 2011, which were between 33 and 42  percent below actual authorizations (see fig. 4).

Ex-Im’s Business Plan notes that few could have predicted the financial  crisis of 2007-2009, which led to a significant contraction in commercial  lending and a sharp increase in demand for Ex-Im financing. Likewise,  the European sovereign debt crisis led in 2011 to a continued need for  Ex-Im financing at levels higher than originally estimated. Ex-Im officials  asserted that their improved 2012 forecast shows they have begun to  better account for the changed economic environment. However, any  difference in the amount of authorizations also would affect the forecast  amount of Ex-Im’s exposure. For example, Ex-Im’s 2013 and 2014  forecasts of exposure would increase if forecast authorizations were  underestimated by the same 11 percentage points as for 2012. The same  forecasting model Ex-Im used to support its Business Plan forecast would  now predict Ex-Im’s exposure to be $2.2 billion higher at the end of 2013,  and $5.9 billion higher at the end of 2014. The estimated total exposure at  the end of 2014 would be $140.8 billion, greater than Ex-Im’s $140 billion  exposure limit for 2014.

Ex-Im Did Not Update or Assess the Assumptions of Its Repayment Forecast Model

Ex-Im prepared the Business Plan exposure forecast in August 2012  using the same model and assumptions about repayments that it had  used in previous years. However, the model is sensitive to repayment  assumptions and Ex-Im’s data no longer support the model’s assumption  about the percentage of the portfolio that is short-term. To estimate the  amount of repayments and cancellations that reduce Ex-Im exposure, Ex- Im made two key assumptions.

Ex-Im assumed that 30 percent of authorizations each year were for  short-term products that would be repaid within the year.

Ex-Im assumed that the remaining nonshort-term authorizations  would be repaid 10 percent at a time over 10 years.

According to the Ex-Im staff who prepared the analysis, the 30 percent  and 10-year assumptions were used in previous years and not revised for  the Business Plan forecast. However, from 2002 through 2012, the actual  percentage of Ex-Im authorizations that were short-term ranged from 24  to 37 percent, averaging 32 percent. These data were available to Ex-Im,  but Ex-Im did not use them in its calculations. Furthermore, the  percentage of Ex-Im’s portfolio that was short-term rapidly decreased in  recent years—from 37 percent in 2010 to 31 percent in 2011 and to 25  percent in 2012. The data included in Ex-Im’s authorization forecast  spreadsheet indicate that Ex-Im would calculate short-term percentages  of 22 percent in 2013 and 23 percent in 2014. Using Ex-Im’s actual and  forecast percentages of short-term authorizations in Ex-Im’s model results  in a forecast of $123 billion in exposure for 2013 and $142 billion—in  excess of the $140 billion exposure limit—for 2014.

While Ex-Im assumes that nonshort-term exposures would be repaid over  10 years, the repayment terms for Ex-Im’s long-term products range from  7 to 18 years. Assuming a 9-year average repayment term decreases Ex- Im’s exposure by approximately $1 billion at the end of 2014. Assuming  an 11-year average repayment term increases the estimate by  approximately $1 billion. In combination, varying the model’s assumptions  about the percentage of short-term authorizations in Ex-Im’s portfolio  (using a 30 percent assumption or actual historical data) and average  repayment terms (9 or 11 years) results in a range of 2014 exposure  estimates between $132 billion and $144 billion (see fig. 5).

Although the authorization forecast is uncertain and key assumptions  about repayments affect the results, Ex-Im did not conduct sensitivity  analyses to assess and report the range of various outcomes. In addition,  Ex-Im did not update its model or reassess its process for estimating  authorizations in light of previous underestimates. GAO guidance for  estimating costs states that assumptions should be realistic, valid, and  backed up by historical data to minimize uncertainty and risk. Further,  forecast models should be assessed against historical experience to  check their validity. In addition, a sensitivity assessment should be  conducted for all estimates to examine the effect of changing  assumptions, and this assessment should be documented and presented  to management. As a result of not addressing the uncertainty of  authorization estimates and assumptions in its forecast model, the range  of uncertainty of its exposure forecast shows that Ex-Im could have to  take actions such as postponing planned authorizations to avoid  exceeding its exposure limit.

Business Plan’s Limited Risk Evaluation Suggests Opportunities for Additional Analyses

Ex-Im’s support for its evaluation of risk of loss was limited in the  Business Plan, with some forecast data not provided in the plan pending  approval of key analyses by OMB. While Ex-Im concluded there would be  no change to its risk of loss for its subportfolios by product type or relating  to the small business, sub-Saharan Africa, and renewable energy  mandates, it did not provide conclusions on the overall risk of loss or the  risk of loss by industry or key market. Ex-Im also did not present data on  historical performance in the Business Plan, although it reported  performance data such as default rates in other reports. Additionally, Ex- Im does not routinely report the performance of its subportfolios relating  to the small business, sub-Saharan Africa, and renewable energy  mandates, although these mandates encourage Ex-Im to undertake  transactions in these subportfolios and their performance differs from the  overall Ex-Im portfolio.

Mandated Reporting Deadline Affected Comprehensiveness of the Business Plan

According to Ex-Im, the deadline for the Business Plan limited its ability to  provide more detailed information on its projected risk of loss. The loss  rates Ex-Im annually updates are key to its estimation of its risk of loss.  OMB did not approve Ex-Im’s model that calculates these loss rates until  September 24, 2012, 6 days before the plan’s mandated completion date  of September 30, 2012. Instead of providing detailed information on its  projected risk of loss, Ex-Im’s Business Plan described the components  of its risk-management program (underwriting, monitoring, claims,  recovery, and loss reserves) and discussed the two elements it used to  assess risks (risk ratings and portfolio concentration). Ex-Im’s Business  Plan stated that the risk rating element includes (1) the distribution of  risks among transactions such as how many are low-, medium-, or high- risk; and (2) the individual transactions’ risk rating, which is the most  relevant factor in predicting losses, according to the plan. Ex-Im’s  Business Plan included four portfolio concentration measures—(1) the  portfolio share of its top 10 countries, (2) the portfolio share of its top 10  obligors, (3) the distribution of its portfolio by geographic region, and (4)  the distribution of its portfolio by industry.

Ex-Im’s risk analysis in its Business Plan was limited because it did not  provide a conclusion on the overall risk of loss, or risk of loss by industry  or key market under the new exposure limit. While the plan provided  historical data on overall risk rating and portfolio concentration in 2008  and 2012, such data did not reflect the projected changes of composition  or the risks of Ex-Im’s subportfolios. Specifically,

Ex-Im did not project the overall risk of loss under the new exposure  limit in future years, but instead referred to historical data showing that  the overall portfolio risk rating improved between 2008 and 2012. For  example, the overall risk rating improved from 4.23 in 2008 to 3.85 in  the third quarter of 2012 (on Ex-Im’s scale of 1-11, 1 is the least  risky).

Ex-Im did not project changes in industry concentration or provide a  conclusion on how such changes would affect its risk of loss. Instead,  Ex-Im presented a comparison of the industry distribution of Ex-Im’s  portfolio in 2008 and 2012 and stated that the concentration in some  industries increased from 2008 to 2012 while others decreased. For  example, the aircraft industry marginally increased its share of the  portfolio. Ex-Im also asserted that its loss estimation model accounted  for such changes to determine the appropriate amount of loss  reserves.

Ex-Im did not provide information in the plan on projected changes in  exposure composition by key market or a conclusion on how such  changes would impact risk of loss. Instead, the plan discussed  changes in portfolio concentration by regions, top 10 countries, and  top 10 obligors between 2008 and 2012. The plan also compared Ex- Im’s portfolio distribution by region in 2008 and 2012, rather than by  countries Ex-Im identified as key markets.

Ex-Im did conclude in the Business Plan that it expected a favorable  impact on risk of loss from changes in product mix as it expected its  portfolio to shift towards long-term products, which have the lowest  loss rates, according to the plan. However, Ex-Im did not provide  information on the composition of exposure by product after this shift.

Ex-Im concluded that its risk of loss associated with complying with the  small business, sub-Saharan Africa, and renewable energy mandates  under the new exposure limits would not increase. Specifically,

Ex-Im concluded that there would be no increase to its risk of loss  associated with complying with the small business mandate under the  new exposure limit because a large share of Ex-Im’s small business  transactions are short-term and highly diversified across industry  sectors and geographic areas. In addition, Ex-Im shares the risks of  some of these transactions with the originating banks and obtains  collateral to secure the transactions.

Ex-Im concluded that there would be no increase to its risk of loss  associated with complying with the sub-Saharan Africa mandate  under the new exposure limit. Ex-Im’s rationale was that it primarily  engages with profitable companies in growing sectors and well- managed African governments.

Ex-Im concluded that there would be no change to its risk of loss  associated with complying with the renewable energy mandate. Ex- Im’s rationale was that its renewable energy transactions have default  rates comparable to its long-term transactions, which have the lowest  default rates, according to the plan.

While Ex-Im’s strategic plan states that the bank uses default rates to  measure risk of loss, the Business Plan did not present any historical  default rate data on Ex-Im’s subportfolios. Again limited by its lack of final  projected loss rates at the time of the Business Plan, Ex-Im did not  present any projected loss data in the Business Plan—for example, the  estimated credit subsidy costs of its portfolio in the future years—to  support its conclusions. However, Ex-Im does report some financial data  on historical performance in some of its existing reports, which provide  some insight into potential losses. These data include default rates by  subportfolio of product, key market, and industry; loss reserves and  allowances; and overall weighted-average risk ratings. Examples of such  reports include Ex-Im’s annual reports, audited financial statements,  default rate reports, and internal portfolio status reports.

To provide context for the Business Plan’s conclusions on risk of loss, we  reviewed fiscal year-end financial data from Ex-Im’s active portfolio for  2008 and 2012. Using Ex-Im’s default rate methodology, we calculated  the average default rates for 2008 and 2012 based on subportfolio-level  data Ex-Im compiled at our request. Table 1 shows that the default rates  of the subportfolios were generally lower than the overall default rate as  of September 30, 2012, with the exception of the subportfolios of  medium-term products and transactions with only small business  participants.

While Ex-Im’s average default rates overall and by subportfolio generally  declined from 2008 to 2012, the declining trend may not be conclusive  because Ex-Im’s portfolio at the end of 2012 contained a large volume of  recent transactions that have not reached their peak default periods, as  we recently reported. Recent transactions have had limited time to  default and may not default until they are more seasoned. Further, Ex-Im  does not retain point-in-time historical data on credit performance to allow  it to compare defaults of recent and seasoned transactions at comparable  points in time. We recently made a recommendation to address this  weakness so that Ex-Im can conduct future analyses comparing the  performance of its portfolio between years. Ex-Im concurred with this  recommendation.

Ex-Im Has Not Routinely Reported Risk of Loss Related to Three Congressional Mandates

Business Plan Did Not Provide Risk Rating Data to Support Its Risk Conclusions on Congressional Mandates

While Ex-Im included an assessment of the risk of loss associated with  implementing the three congressional mandates in its Business Plan as  required by the Reauthorization Act, Ex-Im missed the opportunity to  present any risk rating data to support its risk evaluations, though this  was not required. Again limited by its lack of final projected loss rates— which are calculated using risk ratings of transactions as a key variable— at the time of the Business Plan, Ex-Im did not present any projected risk  rating data in the plan.

While the Business Plan did not include any risk rating data related to the  three congressional mandates, to further examine Ex-Im’s conclusions on  risk of loss associated with complying with the three mandates, we  analyzed the weighted-average risk ratings for 2008 and 2012 related to  these mandates as compiled by Ex-Im (see table 2). Our analysis shows  that Ex-Im’s overall weighted-average risk rating declined between 2008  and 2012. However, transactions related to these three mandates  generally had higher weighted-average risk ratings than the overall  weighted-average risk ratings for both years, except for transactions that  partially support small businesses.

Ex-Im did not include risk ratings of transactions supporting the small  business, sub-Saharan Africa, and renewable energy mandates in the  Business Plan, and has not routinely reported the mandates’ performance  (for example, default rates) at the subportfolio level. Ex-Im’s most recent  strategic plan indicates that Ex-Im uses default rates as one of the  metrics to measure risk performance. In addition, Ex-Im monitors default  rates both internally and in quarterly default rate reports to Congress;  however, Ex-Im does not include the default rates for transactions  supporting these three congressional mandates in its reports. Ex-Im’s  annual report documents the weighted-average risk rating of its overall  portfolio, but does not provide further breakdown of the risk rating at the  subportfolio level. Congress requires Ex-Im’s default rate reports to  include default rates of its overall portfolio and by subportfolios of product  type, industry sector, and key market. However, Ex-Im can analyze  additional information about its subportfolios related to the three  mandates. For example, according to Ex-Im, although it does not  separately track the performance of the small business subportfolio, it  tracks the performance of the working capital guarantee and short-term  multibuyer insurance subportfolios, which are largely small business  products and therefore serve as its proxy of the small business  subportfolio. Similarly, Ex-Im does not track the performance of  renewable energy transactions but has included them in the overall  product category. Additionally, Ex-Im’s default rate report includes default  rates broken out for countries in Africa, which can be used as a proxy for  sub-Saharan Africa transactions.

Our analysis indicates that the performance of the subportfolios related to  the three congressional mandates can vary from that of the overall  portfolio. For instance, the higher risk ratings of the subportfolios suggest  these transactions generally are more risky than Ex-Im’s overall portfolio.  Although it is not required by Congress, Ex-Im is able to report financial  performance information on subportfolios supporting the three mandates,  such as default rates and risk ratings. Because Ex-Im does not currently  report financial performance data related to these mandates, Ex-Im  officials explained that the agency specifically developed new analyses to  address our data requests for default rates and weighted-average risk  ratings at the subportfolio level.

Congress directs that Ex-Im engage in transactions that support business  activities fulfilling these three mandates while maintaining reasonable  assurance of repayment. In addition, OMB guidance indicates that  agencies should use comprehensive reports on the status of the credit  financing portfolios to evaluate effectiveness and collect data for program  performance measures such as default rates. Furthermore, federal  banking regulator guidance suggests that banks should provide financial  performance information by portfolio and specific product type to allow  management to properly evaluate lending activities. For example,  guidance from the Office of the Comptroller of the Currency and  interagency guidance from federal banking regulators suggest that banks  and other financial institutions should report performance information,  such as default rates, loss severity, and delinquencies, and compare their  performance with expected performance on an overall and subportfolio  level. Financial performance information on Ex-Im’s subportfolio can  help inform Ex-Im’s risk evaluation and risk-management activities.  Moreover, reporting financial performance information would be  consistent with federal internal control standards, which indicate that  communications with external parties, including Congress, should provide  information that helps them better understand the risks facing the  agency. By not routinely analyzing and reporting performance  information on these congressionally mandated transactions, Ex-Im limits  its ability to internally evaluate the performance and default rates of  transactions it is specifically mandated to maintain, which in turn hinders  reporting of such performance to Congress.

Ex-Im’s Business Plan’s Resource Analysis Was Limited and Growing Congressional Mandated Targets Challenge Bank Resources

In the Business Plan, Ex-Im’s response to the reauthorization requirement  to assess its resources was limited and further details were not included  pending OMB review of Ex-Im’s 2014 budget request. From 2008 through  2012, Ex-Im experienced rapid growth in authorizations while its staff and  administrative budget level remained relatively flat. The Business Plan  reports that Ex-Im’s resources are strained and cannot sustain the bank’s  current level of activity or meet expected demand in coming years.  Although the Business Plan does not give specific details about the  resources needed to manage Ex-Im’s growing authorizations, other bank  documents outline estimated resource requirements in more detail. While  Ex-Im’s support for small business has grown and Ex-Im forecasts  continuing increases, Ex-Im’s mandated target will require it to increase  small business authorizations by $2.4 billion (39 percent) between 2012  and 2014. The Business Plan reports that Ex-Im expects administrative  resource constraints may prevent the bank from meeting its  congressionally mandated target for small business export financing and  lack of demand may prevent meeting the target for renewable energy  export financing.

Business Plan Reports That More Resources are Needed

The Business Plan states that recent growth has strained Ex-Im’s  resources, particularly its underwriting and monitoring staff. Although the  bank has been able to manage the growth through increased operating  efficiencies, its current resources cannot sustain the level of activity  expected in coming years. According to Ex-Im officials, although  additional information was available, Ex-Im’s response regarding its  resource needs was limited in the Business Plan because Ex-Im’s 2014  budget request had not yet been cleared by OMB at the time the plan was  due to Congress.

Ex-Im data presented in other documents demonstrate that while  authorizations and exposure grew, its administrative budget and staff  level remained relatively flat. From 2008 through 2012, Ex-Im’s annual  authorizations grew nearly 150 percent. Its administrative budget  increased 15 percent, from $78 million in 2008 to $90 million in 2012 (see  fig. 6). Over the same period, Ex-Im’s staff level, as measured by full-time  equivalents (FTE), increased less than 11 percent, from 352 in 2008 to  390 in 2012. In 2008, the ratio of authorizations to Ex-Im staff was $40.1  million per employee. In 2012, the ratio was $90.9 million per employee.  Ex-Im has requested additional administrative funds in recent years, but  has not received the full amount of its requests.

According to Ex-Im officials, initially the increased business primarily  affected Ex-Im’s underwriting function. However, as transactions  complete the underwriting phase officials expect workloads to increase  significantly in other areas, such as legal and monitoring. In March 2013,  we reported that Ex-Im had taken steps to address workload challenges,  but had not developed benchmarks for the level of business it can  properly support with a given level of resources. We recommended that  Ex-Im develop workload benchmarks, monitor workloads against these  benchmarks, and develop controls to mitigate risk when workloads  approach or exceed these benchmarks. Ex-Im concurred with our  recommendation.

Ex-Im does not track the time employees spend on particular tasks. Some  Ex-Im divisions are primarily focused on specific transactions—such as  small business or transportation—enabling Ex-Im to use the staff and  administrative funds allotted to these divisions as a proxy indicator of the  resources invested in these transactions. However, other Ex-Im divisions  also devote resources to these transactions. For example, Ex-Im staff  may spend time underwriting or monitoring various types of transactions  in different portfolios. According to Ex-Im officials, systems that track  costs more precisely are expensive to develop and require time-intensive  data capture. Ex-Im was able to provide the number of direct FTEs that  support some of its mandated activities, but did not quantify the FTEs  supporting bankwide activities that also support the individual mandates.

The Business Plan did not discuss the bank’s ability to conduct economic  impact assessments, as specifically mentioned in the reauthorization  requirement. According to Ex-Im officials, details of the resources  required for economic impact assessments were not included in the plan  because Ex-Im was reviewing its economic impact methodology and  drafting new guidelines and procedures at the time the plan was issued.  However, Ex-Im officials stated that they considered the resources  needed to conduct these assessments in the Business Plan’s  assessment of resource needs, particularly for underwriting. Congress  requires Ex-Im to consider the economic impact of its work and not to  fund activities that will adversely affect U.S. industry. Ex-Im tests for  adverse affects by performing an economic impact analysis. As we  previously reported, Ex-Im uses a screening process to identify projects  with the most potential to have an adverse economic impact, and then  subjects the identified projects to a detailed analysis. According to Ex-Im  officials, the bank currently has three staff members conducting economic  impact analyses and plans to hire an additional employee to assist with  these analyses because Ex-Im expects to conduct more large  transactions that will likely require more economic impact assessments.

The Business Plan describes Ex-Im’s information technology (IT) systems  as antiquated and inflexible, noting that some systems are more than 30  years old. The plan also states that Ex-Im has begun a Total Enterprise  Modernization project to address its IT issues, but notes that continued  progress is contingent upon adequate funding. In January 2012, Ex-Im’s  Inspector General found that Ex-Im’s IT infrastructure made it difficult for  the bank to provide timely service, effectively manage and track its  programs, measure progress, and increase productivity. The Inspector  General also found that Ex-Im did not have practices to effectively  manage its strategic planning, coordinate initiatives, and determine the  best use of funds for improving IT support of its mission.

Ex-Im has been addressing the IT issues identified by the Inspector  General. According to initial responses to the Inspector General, dated  January 10, 2012, a series of processing system projects were underway.  In addition, Ex-Im hired a contractor to evaluate its IT systems and  provide recommendations. The contractor’s major recommendation was  to replace Ex-Im’s financial management system. Ex-Im officials expect  the new financial system be ready in October 2014.

Ex-Im also has been consolidating different forms into a simplified online  form that will guide applicants through the application process and allow  them to sign forms, submit documents, and pay fees online. According to  Ex-Im, a pilot form was demonstrated at Ex-Im’s annual conference in  April 2013 but this project requires OMB approval, which Ex-Im expects  by September 2013.

Finally, Ex-Im has been updating its systems to assign each customer a  unique identifier recognized across all systems. In its September 2012  update to the Inspector General on the status of IT improvements, Ex-Im  projected full implementation by January 2013. However, in March 2013  Ex-Im told us that this upgrade was being tested and was expected to go  into operation by September 2013.

Increased Demand for Export Financing Has Driven Mandated Targets Higher

Congress has given Ex-Im explicit policy goals—which include specific  targets for small business and environmentally beneficial exports—in  addition to its general mandate to support domestic exports.

Since the 1980s, Congress has required that Ex-Im make available a  certain percentage of its export financing for small business. In 2002,  Congress established several new requirements for Ex-Im relating to  small business, including increasing the small business financing  requirement from 10 to 20 percent of the total dollar value of Ex-Im’s  annual authorizations. Related congressional directives have included  requirements to create a small business division and define standards to  measure the bank’s success in financing small businesses.

Ex-Im’s support for small businesses has increased 92 percent over the  past 5 years, from $3.2 billion in 2008 to $6.1 billion in 2012. However,  these recent increases have not kept pace with the rising amount— caused by the increase in Ex-Im’s overall authorizations—needed to meet  the 20 percent mandate. Ex-Im projects in its Business Plan that it will be  challenged to meet the 20 percent mandate in 2013 or 2014 because the  dollar amount of its overall growth will continue outpacing its small  business activity. The 20 percent target equaled $4.9 billion in small  business authorizations in 2010, the last year in which Ex-Im met the  requirement. Based on Ex-Im’s projected authorizations, the 20 percent  target will equal $8.5 billion in 2014. Therefore, to meet this mandate, Ex- Im will need to increase small business authorizations even further, by  $3.6 billion (73 percent) in 4 years. This is also an increase of $2.4 billion  (39 percent) from its 2012 small business authorizations (see fig. 7).  Small business authorizations accounted for less than 20 percent of the  dollar amount of Ex-Im’s total authorizations in 2011 and 2012. However,  measured in number of transactions, 87 percent of all authorizations  approved by Ex-Im since 2008 directly supported small business exports.

Ex-Im expects to increase its small business authorizations by $1.4 billion  (22 percent) to approximately $7.7 billion between 2013 and 2014. Ex-Im  achieved a similar increase in 2011, but saw a more modest increase of  1.4 percent in 2012 and projects a 2.5 percent increase in 2013.  According to the Business Plan’s forecast, Ex-Im expects its total  authorizations to exceed $42 billion in 2014, which would raise its small  business mandate to $8.5 billion. Even if Ex-Im’s small business  authorizations increase as expected in 2014, the bank still would fall short  of its mandated target by more than $800 million.

In addition to the rising target amount, Ex-Im officials noted that limited  resources will affect its ability to meet the small business mandate. Ex- Im’s 2013 Congressional Budget Justification stated that achieving its  forecast increase in small business transactions was contingent on an  additional $14 million for administrative expenses. Ex-Im planned to use  $7 million of the additional administrative funds it requested to support  small business outreach and underwriting abilities. However, Ex-Im did  not receive this increase.

According to Ex-Im officials, processing small business transactions and  bringing in new small business customers is resource intensive.  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. Ex-Im’s Business  Plan notes that small business transactions were approximately $1.8  million on average but required more of Ex-Im’s resources than other  transactions. For each $1 billion of nonsmall-business authorizations—an  amount sometimes achieved with a single Project Finance transaction— Ex-Im must generate $200 million in small business authorizations (about  122 transactions) to meet its small business mandate.

According to Ex-Im officials, 65 of its 390 FTEs are in the Small Business  Group and directly support the bank’s efforts to meet its small business  mandate target. Six additional FTEs from other divisions devote 50  percent of their time to small business transactions. Ex-Im also recently  launched several new small business products and opened four new  regional offices to support small business exporters. The Business Plan  states that Ex-Im has about 25 field staff in 13 offices to support small  businesses. Ex-Im also started a series of small business forums and  webinars to assist exporters in understanding how the bank’s various  products could help increase sales. Small business transactions are also  supported by dedicated IT resources. For example, Ex-Im has added a  small-business portal to its website, which includes step-by-step  assistance to exporters, videos, stories about the success of other  exporters, and contact information for nearby Ex-Im Export finance  managers.

Since 1992, Congress has directed Ex-Im to report on its financing of  environmentally beneficial exports. In recent years, Congress has  provided a 10 percent financing target for environmentally beneficial  exports, and in 2009 it directed that the target be specifically for two  subcategories of environmentally beneficial exports—renewable energy  or energy efficient end-use technologies.

Despite a recent increase in its renewable energy authorizations, Ex-Im’s  Business Plan indicates that it does not anticipate sufficient market  demand to allow the bank to provide enough renewable energy  authorizations to meet the target of 10 percent of its overall authorizations  and still meet its requirement for reasonable assurance of repayment. Ex- Im’s support for renewable energy exports grew from $30 million in 2008  to $721 million in 2011 and is forecast to reach $1.1 billion in 2014.  Although Ex-Im’s renewable energy authorizations generally increased  since 2008, they have remained less than 3 percent of Ex-Im’s overall  authorizations. Based on Ex-Im’s projected total authorizations for 2013  and 2014, Ex-Im would have to authorize $3.8 billion in renewable energy  financing in 2013 and $4.3 billion in 2014 to meet the 10 percent target  (see fig. 8).

Ex-Im officials stated that additional administrative resources would not  enable it to meet its renewable energy target, as its inability to meet the  target results from a lack of demand for renewable energy export  financing. Seven bank employees are directly involved in meeting Ex-Im’s  renewable energy target, six in the Office of Renewable Energy and one  in the Structured Finance Group. However, Ex-Im officials noted that a  2010 Department of Commerce report estimated the value of all U.S.  renewable energy exports at $2 billion in 2009. Thus, if the bank had  financed every U.S. renewable energy export that year, it still could not  have met its renewable energy target.

For both small business and renewable energy transactions, the  mandated authorization target is tied to total authorizations, which  increase or decrease based on factors unrelated to Ex-Im’s performance  in support of small business or renewable energy. 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 this information to external stakeholders, such  as Congress, that may have a significant impact on the agency achieving  its goals is also consistent with federal internal control standards.

In addition to resources supporting renewable energy transactions, Ex-Im  devotes resources to implementing its carbon policy, which was put in  place in 2010, and developed in response to a lawsuit challenging Ex- Im’s compliance with provisions of the National Environmental Policy  Act. The carbon policy (1) promotes renewable energy exports where  carbon dioxide emission levels are very low to zero, (2) establishes a  $250 million facility to promote renewable energy, and (3) calls for  increased transparency in the tracking and reporting of carbon dioxide  emissions. Although Ex-Im’s carbon policy was not mandated by  Congress, the Business Plan notes that 2012 appropriations language  requires Ex-Im to notify Congress of projects that will generate more  greenhouse gases than bank-supported projects generated on average  during the preceding 3 years. The Business Plan also states that Ex-Im  may exceed this threshold as its level of activity increases. Ex-Im has  three environmental engineers who directly support compliance with the  carbon policy. Additionally, the vice president of Ex-Im’s Environmental  and Engineering Division and another employee responsible for legal  policy spend 20 and 50 percent of their time, respectively, on carbon  policy-related activities.

The sub-Saharan Africa mandate does not have quantifiable targets. This  mandate requires Ex-Im, in consultation with the Secretary of Commerce  and the Trade Promotion Coordinating Committee, to promote the  expansion of its financial commitments in sub-Saharan Africa, establish  an advisory committee to assist with the implementation of policies and  programs to support this expansion, and report to Congress on efforts to  improve relations with relevant regional institutions and coordinate with  U.S. agencies pursuant to the African Growth and Opportunity Act. Two  employees from Ex-Im’s Office of African Development are directly  involved in meeting the requirements of the sub-Saharan Africa mandate  and half of the duties of an Ex-Im vice chairman are also related to this  mandate.

Ex-Im reports that it has met the requirements of this mandate and  expects to continue to meet this mandate. Ex-Im’s efforts to meet this  mandate include: establishing an advisory committee to assist the Board  of Directors in meeting Ex-Im’s sub-Saharan Africa mandate; and creating  a $100 million Africa Initiative to make insurance available for exports to  sub-Saharan African countries that otherwise would not be eligible for Ex- Im support. From 2008 to 2012, Ex-Im’s authorizations supporting the  sub-Saharan Africa mandate increased from $575.5 million to $1.5 billion,  and are projected to decline to about $1 billion in 2013 before increasing  again to approximately $1.8 billion in 2014.

Ex-Im has experienced enormous growth in its authorizations and  exposure in recent years, challenging its ability to plan for and manage its  portfolio. While Ex-Im may not have been able to anticipate the effect of  events like the 2007-2009 financial crisis on its portfolio, the bank also  has not reacted to the changed environment and taken steps to account  for the uncertainty of its authorization forecasts and reassess its exposure  forecast model and assumptions. These assumptions and forecasts  should be supported by historical data and experience. In addition, a  sensitivity assessment of the effect of these assumptions should be  presented to management.

Furthermore, Ex-Im is a demand-driven institution, but Congress has  placed specific requirements on the bank’s portfolio to support small  business, sub-Saharan Africa, and renewable energy. The risk profile of  transactions supporting the three mandates differs from the bank’s overall  risk profile, but Ex-Im has not routinely documented the risk effect of  these mandates for its own management or for Congress. Reporting such  information would be consistent with OMB and federal banking regulator  guidance as well as federal internal control standards.

In addition, the Reauthorization Act and appropriations language reflect  important national priorities and congressional interest in supporting small  businesses and promoting renewable energy. However, because these  requirements are linked directly to the bank’s total authorizations, the  targets are volatile—subject to fluctuation caused by changes in overall  demand for export financing. Recently, the bank’s growth has created  growing targets that could lead the bank to devote an increasing portion  of its limited staff and resources to activities that are particularly time- and  resource-intensive, such as small business authorizations, or set goals  that may not be achievable in the current market, such as providing a set  amount of renewable energy financing that is higher than the demand.  OMB criteria indicate that agency targets should be ambitious, yet  realistic, and reflect careful analysis, factors affecting outcomes, and  agency capacity and priorities. It is important to communicate the effect of  these mandated targets on Ex-Im operations to external stakeholders,  such as Congress, and the potential impacts percentage-based targets  may have on the agency’s resources and ability to achieve its goals.

To provide Congress with the appropriate information necessary to make  decisions on Ex-Im’s exposure limits and targets, we recommend that the  Chairman of the Export-Import Bank of the United States take the  following four actions:  To improve the accuracy of its forecasts of exposure and authorizations,  Ex-Im should  compare previous forecasts and key assumptions to actual results  and adjust its forecast models to incorporate previous experience; and 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.

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.

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.

We provided a draft of this report to Ex-Im for comment. Ex-Im concurred  with all of our recommendations, and stated that it would incorporate our  recommendations into preparation of subsequent reports for Congress.  Ex-Im further clarified that it would never exceed the exposure limit set by  Congress. Ex-Im stated that it monitors exposure on a monthly basis and  if necessary on a daily basis and would put in place the necessary  processes and procedures to prevent exceeding the limit. We did not  intend to imply that Ex-Im would exceed its limit, but rather that not  accounting for forecast uncertainty could lead to Ex-Im having to take  such steps to avoid exceeding the limit. We slightly modified the language  in the summary of our key findings to clarify this point.

We are sending copies of this report to appropriate congressional  committees and the Chairman of the U.S. Export-Import Bank. The report  is also available at no charge on the GAO website at http://www.gao.gov.

If you or your staff have any questions about this report, please contact  me at (202) 512-4802 or evansl@gao.gov. Contact points for our Offices  of Congressional Relations and Public Affairs may be found on the last  page of this report. GAO staff who made major contributions to this report  are listed in appendix III.

Appendix I: Objectives, Scope, and Methodology

Our objectives were to examine the extent to which the Business Plan  and analyses of the Export-Import Bank (Ex-Im): (1) justify bank exposure  limits; (2) evaluate Ex-Im’s risk of loss associated with the increased  exposure limit, the 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 under the proposed exposure limits. For all objectives, we  reviewed and analyzed Ex-Im’s response in the Business Plan.

To assess the extent to which Ex-Im’s Business Plan and analyses justify  exposure limits, we reviewed the spreadsheet model Ex-Im used to  forecast exposure, and the source data on authorizations and repayments  Ex-Im entered into the model. We met initially with Ex-Im staff who  prepared the spreadsheet model to review the Ex-Im spreadsheet to  understand its structure and formulas. We then received a copy of the  model and reviewed it independently. Following our independent review,  we met a second time to discuss more detailed questions about the  structure, data, and assumptions contained in the model. To assess the  reliability of the exposure model, we compared its August 2012  projections of what exposure would be at the end of September 2012 with  the actual results in Ex-Im’s annual report. To understand the  development of the source data on authorizations used in the model, we  met individually with Ex-Im officials from its various business units who  prepared the estimates. To assess Ex-Im’s methods and data in follow-up  to these meetings, we requested and reviewed additional written detail on  the methodology used for the authorization estimates and source data for  individual estimates of long-term authorizations. We reviewed these  source data to determine the forecast timing and average size of the  estimates, and checked the forecast authorization size against the actual  authorization size for authorizations that occurred through March 2013.  To assess the performance of Ex-Im’s authorization forecast procedures,  we compared previous years’ projections with actual results. We  additionally reviewed Ex-Im’s revised authorization estimates, compared  the original and revised estimates, and assessed the effect of the revised  estimates on Ex-Im’s exposure projection by inputting the revised  authorization estimates into Ex-Im’s spreadsheet model. To assess Ex- Im’s forecast of repayments, we compared the assumption Ex-Im used in  the spreadsheet to previous data on the short-term percentage of the Ex- Im portfolio. We then calculated Ex-Im’s exposure under alternative  scenarios based on these previous actual percentages and alternative  assumptions about repayment terms. Finally, we assessed the  procedures and assumptions Ex-Im used in its Business Plan forecast of  exposure against GAO criteria for developing estimates.

To assess the extent to which Ex-Im’s Business Plan and analyses  evaluate the risk of loss associated with Ex-Im’s increased exposure limit,  the changing composition of exposure, and compliance with  congressional mandates, we reviewed agency data and documentation— including Ex-Im’s financial performance data, annual reports, and  quarterly default rate reports. We also reviewed relevant GAO and Ex-Im  Inspector General reports and interviewed Ex-Im officials responsible for  risk evaluation. To further examine Ex-Im’s risk of loss evaluation in the  Business Plan, we examined weighted-average risk ratings from fiscal  years 2008 to 2012 that Ex-Im compiled at our request for subportfolios  supporting congressional small business, sub-Saharan Africa, and  renewable energy mandates. We compared these subportfolio risk ratings  to Ex-Im’s overall portfolio risk ratings for 2008 and 2012. In addition, we  examined default rate data compiled at our request by Ex-Im for these  subportfolios and calculated fiscal year-end default rates for Ex-Im’s  subportfolios for 2008 and 2012. We compared these default rate data to  Ex-Im’s overall portfolio default rate for 2008 and 2012. To assess the  reliability of these data, we reviewed and checked them against previous  Ex-Im reporting. Additionally, we consulted the data review prepared for  another recent GAO report on Ex-Im. We found the data to be sufficiently  reliable for the purposes of providing context for the financial performance  of overall portfolio and subportfolios in each fiscal year. To evaluate Ex- Im’s risk management, we compared its risk management and analysis  practices against federal banking regulator guidance on financial  performance reporting, Office of Management and Budget guidance on  federal credit programs, and our standards for internal control.

To assess the extent to which Ex-Im’s Business Plan and analyses  analyze the adequacy of Ex-Im resources to manage authorizations and  comply with congressional mandates under the proposed exposure limits,  we reviewed Ex-Im responses to previous GAO and Inspector General  audit reports. We also reviewed relevant Ex-Im documents, including the  Ex-Im Charter, 2010-2015 Strategic Plan, Small Business Reports,  Government Performance and Results Act Performance Reports, Ex-Im’s  carbon policy and environmental procedures, Ex-Im’s economic impact  procedures and methodological guidelines, Congressional Budget  Justifications, annual reports, 2009-2012 Human Capital Plan, draft 2013- 2015 Human Capital Plan, and Ex-Im’s workforce and full-time equivalent  data. To assess the reliability of these data, we reviewed and checked  them against previous Ex-Im reporting. Additionally, we consulted the  data review prepared for another recent GAO report on Ex-Im. We found  these data to be sufficiently reliable for the purposes of describing the  growth of Ex-Im’s business, size of its workforce, and amount of  administrative funds requested and received from Congress. We also  reviewed relevant GAO, Congressional Research Service, and Ex-Im  Inspector General reports and met with officials from Ex-Im and Ex-Im’s  Office of Inspector General. We compared Ex-Im’s planning documents  against criteria established by GAO, the Office of Personnel  Management, and the Office of Management and Budget.

We conducted this performance audit from November 2012 to May 2013  in accordance with generally accepted government auditing standards.  Those standards require that we plan and perform the audit to obtain  sufficient, appropriate evidence to provide a reasonable basis for our  findings and conclusions based on our audit objectives. We believe that  the evidence obtained provides a reasonable basis for our findings and  conclusions based on our audit objectives.

Appendix II: Comments from the U.S. Export- Import Bank

Appendix III: GAO Contact and Staff Acknowledgments

In addition to the contact named above, Juan Gobel, Assistant Director;  Joshua Akery; Anna Chung; Martin De Alteriis; Risto Laboski; Grace Lui;  Yesook Merrill; Barbara Roesmann; and Michael Simon made key  contributions to this report. Jena Sinkfield provided technical assistance.

Question: How has Ex-Im's exposure limit changed?

Answer: 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.

Question: To what extent has Ex-Im reassessed its forecast model to reflect changing conditions?

Answer: 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.

Question: How does the model compare to historical data?

Answer: 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.

Question: How does this compare to GAO's cost guidance?

Answer: 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.

Question: Why might this be a cause for concern?

Answer: 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.

Ex-Im’s Exposure and Portfolio Since 2008

Forecasting Processes Ex-Im Used for Its Business Plan and Other Estimates Have Weaknesses

Ex-Im Did Not Update or Assess the Assumptions of Its Repayment Forecast Model

Appendix I: Objectives, Scope, and Methodology

Question: In what way did the Business Plan examine Ex-Im's risk of loss?

Answer: The Business Plan provided limited analysis of Ex-Im's risk of loss.

Question: Why did Ex-Im not provide full forecast data?

Answer: 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.

Question: To what extent did Ex-Im provide analysis for its conclusions?

Answer: 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.

Question: To what extent does Ex-Im regularly assess the risks of these subportfolios?

Answer: 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.

Question: How does this compare to OMB and banking regulator guidance?

Answer: 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.

Question: How does the lack of regular analysis affect Ex-Im?

Answer: 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.

Business Plan’s Limited Risk Evaluation Suggests Opportunities for Additional Analyses

Mandated Reporting Deadline Affected Comprehensiveness of the Business Plan

Ex-Im Has Not Routinely Reported Risk of Loss Related to Three Congressional Mandates

Business Plan Did Not Provide Risk Rating Data to Support Its Risk Conclusions on Congressional Mandates

Question: To what extent did the Business Plan analyze Ex-Im's resources and ability to meet congressional mandates?

Answer: The Business Plan provided limited analysis of the adequacy of Ex-Im's resources and ability to meet congressional mandates.

Question: How does the growth of Ex-Im's administrative resources compare to its portfolio?

Answer: From 2008 through 2012, Ex-Im's administrative resources remained relatively flat as its portfolio grew.

Question: To what extent is Ex-Im expected to meet renewable energy mandate targets for 2013-14?

Answer: Ex-Im does not expect to meet its small business or renewable energy mandate targets in 2013 or 2014.

Question: How are these mandate targets set?

Answer: These mandate targets are fixed to a percentage of the dollar value of Ex-Im's total authorizations.

Question: Why is Ex-Im unlikely to meet these mandate targets?

Answer: 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.

Question: What other factors might constrain Ex-Im's ability to meet its target?

Answer: 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.

Question: Why must Ex-Im communicate its targets and goals?

Answer: 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.

Ex-Im’s Business Plan’s Resource Analysis Was Limited and Growing Congressional Mandated Targets Challenge Bank Resources

Business Plan Reports That More Resources are Needed

Increased Demand for Export Financing Has Driven Mandated Targets Higher

Question: How does Ex-Im aid U.S. firms?

Answer: Ex-Im helps U.S. firms export goods and services by providing a range of financial products.

Question: How did the Export-Import Bank Reauthorization Act of 2012 affect Ex-Im?

Answer: 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.

Question: What does this report examine?

Answer: 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.

Question: How did GAO source data for this review?

Answer: GAO reviewed Ex-Im's Business Plan, analyses, and other reports, and interviewed Ex-Im officials.

Background
Ex-Im’s Functional Areas and Products