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Ex-Im's Business Plan concluded that the exposure limits in the Reauthorization Act were appropriate, but GAO’s May 2013 report found weaknesses in the methodology Ex-Im used to justify that conclusion. The Reauthorization Act increased the Ex-Im exposure limit to $120 billion in 2012, with provisions for additional increases to $130 billion in 2013 and $140 billion in 2014. Ex-Im forecast that its year-end exposure would be $120.2 billion in 2013 and $134.9 billion in 2014, below the congressionally determined limits. However, the buffer between the exposure limit and Ex-Im's exposure forecast for 2013 and 2014 is small in comparison with recent historical experience. GAO’s March report found that Ex-Im has been developing a more comprehensive risk-management framework, but could take additional steps to improve this process. For example, Ex-Im has started addressing recommendations by its Inspector General (IG) about portfolio stress testing, thresholds for managing portfolio concentrations, and risk governance. GAO’s review indicated that the IG’s recommendations represent promising techniques that merit continued attention. In addition, GAO concluded that reporting stress testing scenarios and their results would aid congressional oversight and be consistent with internal control standards for effective external communication. However, Ex-Im could further improve its risk management, including its risk modeling. Ex-Im calculates credit subsidy costs and loss reserves and allowances with a loss estimation model that uses historical data and takes credit, political, and other risks into account. 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. Ex-Im also could improve its analysis of the financial performance of its portfolio. As of December 2012, Ex-Im reported an overall default rate of less than 1 percent. Ex-Im’s default rate declined steadily from about 1.6 percent as of September 30, 2006, to just under 0.3 percent as of September 30, 2012, before edging up slightly by the end of the calendar year. However, this downward trend should be viewed with caution because Ex-Im’s portfolio contains a large volume of recent transactions that have not reached their peak default periods. Moreover, 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. Why GAO Did This Study: This testimony discusses GAO's recent work on the U.S. Export-Import Bank (Ex-Im). Ex-Im serves as the official export credit agency of the United States and helps U.S. firms export goods and services by providing a range of financial products, including direct loans, loan guarantees, and insurance. Ex-Im's business volume has grown dramatically in recent years. From 2008 through 2012, Ex-Im's exposure--that is, its total outstanding financial commitments--rose from $58.5 billion to $106.6 billion. Factors associated with this growth include the reduced availability of private-sector financing following the 2007-2009 financial crisis. The rapid increase in business has challenged Ex-Im's ability to plan for and manage its portfolio. This testimony today draws on two reports GAO issued in March and May of this year in response to requirements in the Export-Import Bank Reauthorization Act of 2012 (Reauthorization Act). The act required GAO to assess aspects of Ex-Im's risk management and 2012 Business Plan in the context of the agency's growth. The act also increased the statutory ceiling on the agency's total exposure (exposure limit). This testimony discusses Ex-Im's efforts to (1) forecast exposure levels, (2) manage financial risks and estimate losses, and (3) manage its workload.
The U.S. Export-Import Bank (Ex-Im) has addressed recommendations GAO made in two 2013 reports that related to processes for estimating losses, managing financial risks, and forecasting outstanding financial commitments (exposure). In these reports, GAO found weaknesses in the processes, including limitations in Ex-Im's data and models. Based on accounting standards for federal credit agencies, federal banking regulator guidance, and federal internal control standards, GAO made six recommendations that Ex-Im subsequently implemented. For example, GAO recommended that Ex-Im • assess whether it was using the best available data for adjusting loss estimates for long-term credit transactions to account for global economic risk. In November 2013, Ex-Im replaced a 1-year forecast of global economic conditions it used in its loss estimation model with a 5-year forecast. • retain point-in-time data on credit performance to conduct analyses to compare the performance of newer and more seasoned business at comparable points. Ex-Im began retaining such data in fiscal year 2013. • report to Congress on scenarios used for and results of stress tests on its portfolio. In September 2013, Ex-Im began including this information in quarterly reports to Congress on the bank's default rates. • assess the sensitivity of its exposure forecast model to key assumptions and estimates and identify and report the range of forecasts these analyses produced. In response, Ex-Im created additional statistical models to validate its forecasts and provided a range of estimates. Ex-Im also has begun to address two recommendations in GAO's 2013 reports concerning the bank's workload. In a March report, GAO found Ex-Im faced potential operational risks because administrative budgets and staff levels had not kept pace with growth in its portfolio and Ex-Im had not formally determined the level of business it could properly manage. In a May report, GAO found the Business Plan provided limited analysis of the adequacy of Ex-Im's resources and ability to meet congressional mandates for credit transactions supporting small business and renewable energy. Based in part on federal internal control standards, GAO recommended that Ex-Im develop benchmarks to monitor and manage workload levels and provide Congress with more information on resources associated with meeting the mandates. To help address the recommendations, Ex-Im hired a contractor to develop workload benchmarks and a workload modeling tool. As of June 2014, this effort was ongoing. As a result, the two recommendations remain open. While Ex-Im has been responsive to GAO's recommendations, it is important to note that GAO has ongoing work examining other aspects of Ex-Im operations. Furthermore, managing a large export financing portfolio and its associated risks is challenging. Therefore, it will be important for Ex-Im to sustain the improvements it has made, effectively implement future audit recommendations, and carefully manage emerging risks. 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. As a condition of raising the exposure limit, the act required Ex-Im to prepare a report with a Business Plan and analyses of key operational elements. The act also mandated GAO to evaluate the effectiveness of Ex-Im's risk management and analyze its Business Plan. GAO reported on these issues in March and May 2013, respectively (see GAO-13-303 and GAO-13-620 ). In the reports, GAO made a total of eight recommendations—to which Ex-Im agreed. This testimony is based on GAO's March and May 2013 reports. It discusses actions Ex-Im has taken in response to GAO recommendations on (1) estimating losses, managing financial risks, and forecasting exposure levels; and (2) managing and reporting on its workload. For the 2013 reports, GAO analyzed Ex-Im's financial data, policies and procedures, Business Plan, and processes for calculating program costs and loss reserves. GAO also interviewed Ex-Im officials and other entities involved in export financing.
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 helps U.S. firms export goods and services by providing a range of financial products. Following the 2007-2009 financial crisis, increased demand resulted in rapid increases in Ex-Im's portfolio and exposure. The Export-Import Bank Reauthorization Act of 2012 reauthorized Ex-Im through fiscal year 2014 and, as a condition of raising Ex-Im's exposure limit in 2013, required Ex-Im to prepare a report with a business plan and analyses of key operational elements. The act also directed GAO to analyze the Business Plan. This report discusses the extent to which Ex-Im's Business Plan and analyses (1) justify bank exposure limits; (2) evaluate the risk of loss associated with the increased exposure limit, changing composition of exposure, and compliance with congressional mandates; and (3) analyze the adequacy of Ex-Im resources to manage authorizations and comply with congressional mandates. GAO reviewed Ex-Im's Business Plan, analyses, and other reports, and interviewed Ex-Im officials. What GAO Recommends Ex-Im should (1) adjust its forecasting model based on previous experience, (2) assess and report the sensitivity of the exposure forecast model to key assumptions and estimates, (3) routinely report the financial performance of subportfolios supporting congressional mandates, and (4) provide Congress with additional information on the resources associated with meeting mandated targets. Ex-Im concurred with our recommendations.
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Work is constantly reshaped by technological progress. New ways of production are adopted, markets expand, and societies evolve. But some changes provoke more attention than others, in part due to the vast uncertainty involved in making predictions about the future. The 2019 World Development Report will study how the nature of work is changing as a result of advances in technology today. Technological progress disrupts existing systems. A new social contract is needed to smooth the transition and guard against rising inequality. Significant investments in human capital throughout a person’s lifecycle are vital to this effort. If workers are to stay competitive against machines they need to train or retool existing skills. A social protection system that includes a minimum basic level of protection for workers and citizens can complement new forms of employment. Improved private sector policies to encourage startup activity and competition can help countries compete in the digital age. Governments also need to ensure that firms pay their fair share of taxes, in part to fund this new social contract. The 2019 World Development Report presents an analysis of these issues based upon the available evidence.