Congressional Testimony: House Financial Services...
HOUSE FINANCIAL SERVICES COMMITTEE
Fred P. Hochberg
Jun 03, 2015 – Washington, DC
WRITTEN TESTIMONY OF
FRED P. HOCHBERG - PRESIDENT AND CHAIRMAN
EXPORT-IMPORT BANK OF THE UNITED STATES
BEFORE THE HOUSE FINANCIAL SERVICES COMMITTEE
“Examining the Export-Import Bank’s Reauthorization Request and the Government’s Role in Export Financing”
June 3, 2015
Chairman Hensarling, Ranking Member Waters, and distinguished members of the Committee, thank you for inviting me to testify before you today.
ABOUT EXIM BANK
The Export-Import Bank (EXIM Bank) was created to support American job growth by facilitating the export of American goods and services. Each year, EXIM Bank empowers thousands of U.S. businesses—the vast majority of which are small—to contend for sales in an increasingly competitive global marketplace. With 95% of the world’s consumers living beyond America’s borders, U.S. companies are increasingly looking abroad so that they can grow sales and add jobs here at home. Because of global trends in financing, however, U.S. companies are no longer simply competing for sales against foreign businesses—they’re also competing against countries offering generous financing terms to their domestic exporters. American exporters face additional competitive headwinds due to broader trends in global trade; for three decades prior to the financial crisis, global trade grew at twice the rate of the global economy, but today, that rate has been cut in half. In an ideal world, competitive financing terms would not be an additional challenge faced by our businesses; however, countries such as China, Russia, and others increasingly see expanding their respective nations’ exports as critical to growing their economies. It is incumbent upon America to continue to lead, and to strive to level the playing field in the global export arena—restoring free market factors to their rightful place at center stage of competition. That is where the EXIM Bank comes in.
EXIM Bank is a small and effective government agency whose approximately 450 employees are passionate about empowering businesses to create more American private sector
jobs, while serving as responsible stewards of taxpayer dollars. EXIM fulfills its mission to support U.S. jobs in two ways. First, EXIM fills the gaps when the private sector is unable or unwilling to provide financing for U.S. exports—a particularly important role for American small businesses, which often find it difficult to obtain export financing from their local bank, and for exports to the developing world, which accounted for 68 percent of EXIM’s authorizations in 2014. Second, the Bank seeks to ensure a level playing field for U.S. exports by making available financing that encourages buyers to make decisions based on free market factors such as price and quality, rather than on foreign competitors’ state-sponsored or cut-rate financing.
EXIM Bank does not pick winners and losers; rather, it serves any eligible American business seeking competitive financing to export goods and services. EXIM’s customers pay fees and interest for the financial services offered by the Bank, and as a result, EXIM Bank is a self-sustaining agency. Over the past two decades, EXIM Bank has sent nearly $7 billion to the U.S. Treasury. Consequently, if EXIM Bank were not reauthorized, the agency would no longer be able to serve as a budgetary offset.
EXPORT-IMPORT BANK REAUTHORIZATION ACT OF 2012 (P.L. 112-122)
In May 2012, the Export-Import Bank Reauthorization Act of 2012 (P.L. 112-122) was passed by Congress with overwhelming bipartisan support in both chambers – 330 Republicans and Democrats in the House and 78 in the Senate. The vote carried on a long tradition of bipartisan support that has existed for 81 years. To be clear, every action and study required in the Bank’s 2012 bipartisan reauthorization has been completed and implemented, or is being complied with on an ongoing basis (Attachment 1). Of the 16 recommendations made by the Government Accountability Office (GAO) since the 2012 reauthorization, EXIM has addressed 15, and is working to address the final recommendation (Attachment 2). Further to the work we do with the GAO, the Bank regularly consults with the Office of the Inspector General (OIG). Since early 2012, the Office of Inspector General has issued 26 reports and follow-up evaluations containing a total of 145 recommendations. Of those 145 recommendations, EXIM Bank has fully concurred with 143 and has fully implemented 92 to date. We are diligently working to fully implement the remaining 51. On the remaining two unresolved recommendations we continue to work with the OIG on the best path forward (Attachment 3). We have closed four additional recommendations since the April 15th hearing.
I fully respect and would like to thank the Committees, Congress, the Office of the Inspector General, and the GAO, as well as the EXIM Bank employees, all of whom have played an integral role in ensuring effective oversight of the Bank. This attention and oversight has helped the Bank to become a better institution, and has allowed us to better achieve our shared goals of growing U.S. exports while protecting American taxpayers. Over the past several years, the Bank has become more transparent, heightened its focus on risk, expanded its attention on small business and textiles, and is increasingly mindful of global competition—all of which has made the Bank a more effective, more resilient institution supporting U.S. job growth.
ENHANCING PRIVATE SECTOR COMPETITIVENESS
The top priority at EXIM Bank has and will continue to be to support American jobs by facilitating U.S. exports. In FY 2014, EXIM Bank supported 164,000 U.S. jobs through financing approximately $27.5 billion worth of exports. In accordance with its Charter, the Bank must first and foremost consider a reasonable assurance of repayment standard for the Bank’s approval of financing transactions. Except in certain cases that are clearly and carefully defined in EXIM Bank’s Charter, EXIM Bank support is only available to finance exports to buyers that lack sufficient private sector liquidity or capital to finance most transactions.
Transparent & Consistent Lending Standards
EXIM Bank’s practices adhere to competitiveness and transparency standards established by the Organisation for Economic Cooperation and Development (OECD) Arrangement on Guidelines for Officially Supported Export Credits. In an effort to promote a level global playing field for exports based on free market competition, the OECD Arrangement put into place responsible market based lending and transparency rules, which for several decades governed the totality (100 percent) of official export credit support worldwide. Today, only 16 years removed from that 100 percent figure, the share of official export support that still falls under these guidelines has now dropped to 35 percent (this includes tied and untied financing), as countries such as China and Russia, which operate outside of the OECD Arrangement, have begun to aggressively back their domestic exporters with unregulated, opaque financing. Even among countries that adhere to the OECD guidelines, competition is increasing. For example, Korea's medium- and long-term official export support was more than double that of the United States in 2014, despite the fact that the U.S. economy is eleven times larger than the Korean economy.
Equipping American Businesses to Compete and Promoting a Free and Open Market
More often than not, American businesses and workers aren’t simply competing against their Chinese, Russian, and French counterparts; more and more, they’re being asked to compete against ‘China, Inc.’ Though the United States remains well-stocked with innovative businesses of all sizes—many of which are perfectly capable of winning sales opportunities on their merits throughout the world—American companies aren’t always able to bring competitive financing packages with them to close a sale, which is increasingly required today. Even those that can secure financing from private lenders face a serious disadvantage when going up against foreign rivals offering generous state financing support of their national champions. This trend has the potential to threaten America’s global economic leadership.
I just returned from a meeting with the Berne Union, a group made up of my counterparts from many of the 79 and counting export credit agencies around the globe. At that meeting, I wanted to know whether they anticipate doing more or less to support their domestic exporters over the next five years than they currently do. Japan, Korea, Russia, Germany, France, United Kingdom, Brazil, and others all indicated that they expect to accelerate their official export credit backing for their exporters. Generally, China is hesitant to share such forecasts with the world - but no serious observer could possibly anticipate anything other than rapid, aggressive acceleration of official export financing support from China in the years to come. Only Austria and Norway indicated they did not expect significant growth in the coming years.
Our European rivals in particular are keenly focused on job growth. Following our lead, they are putting increased emphasis on supporting their small business exporters. As a result, there’s going to be more competition than ever for U.S. small businesses looking to win sales in global markets. And that’s to say nothing of larger foreign exporters who will have access to more financial backing than ever before as they compete for business against some of America’s largest manufacturing employers. It is also important to remember that those large manufacturers support extensive small business supply chains in cities and towns across America.
Additionally, as my foreign counterparts acknowledged their export credit agencies have become increasingly critical resources in the face of financial crises—both global and regional. When private financiers withdraw from regions or sectors that are experiencing downturns, export credit agencies are equipped to step in so that their domestic exporters don’t experience a drop in sales—thereby maintaining domestic jobs. Export credit agencies are like firetrucks in that sense—not always necessary, but, when disaster strikes, absolutely essential. Like firetrucks, export credit agencies have a security function, safeguarding U.S. exporters’ sales from the fires of global and regional financial meltdowns. You don’t sell off the firetruck just because there doesn’t happen to be a fire at this time. No one can predict when or where the next crisis will hit.
Other countries are aggressively supporting their commercial sectors as a means to enhance their sphere of influence. For example, in February, 12 former national security officials sent a letter to Congress stating: “By way of example, the government of China has announced a new initiative to devote an additional $10 billion in export credit to Africa – bringing China’s total to $30 billion, roughly the equivalent of the EXIM Bank’s global volume for the year. This will enable Chinese firms to expand their reach in the continent – particularly in the infrastructure sector, where projects can have a lifespan of twenty to thirty years. In an environment such as this, we should be exploring how to strengthen the EXIM Bank through sound reform and expand its efforts to counter the aggressive moves of our economic competitors” (Attachment 4).
EXIM Bank is a demand-driven agency; EXIM does not pick winners and losers. Therefore, EXIM Bank does not set pre-determined exposure limits for industries, companies, and countries. Within those limitations, the Bank’s rigorous underwriting and due diligence processes ensure that the standard of reasonable assurance of repayment embedded in our charter is achieved for all approved transactions. The Bank has a comprehensive risk management framework as noted by a recent GAO Audit (GAO Report 13-303). EXIM Bank continually improves the accuracy and reliability of its monitoring and loss reserve systems based on recommendations from internal and external auditors, OMB, OIG, GAO, as well as private sector best practices. The Bank’s Country Limitation Schedule, which is derived from the Interagency Country Risk Assessment System (ICRAS, chaired by OMB) country rating process, provides policy limitations on the Bank’s business based on country credit considerations. The Bank’s low default rate1 is evidence that this system of portfolio management is effective. Safeguarding American Taxpayers from Excessive Exposure Essential to protecting taxpayer dollars is a solid risk management framework which starts with effective underwriting for potential transactions. After a new transaction is authorized, the Bank focuses on proactive monitoring of the credit, through both rigorous due diligence and documentation. This proactive management framework prevents potential defaults and allows the Bank to recover the rare actual defaults, as noted in a recent GAO audit (GAO‐ 13‐446).
The result of our strong focus on comprehensive risk management: our low default rate of 0.167% as of March 31, 2015.1 As called for in the 2012 reauthorization, we now report our default rate to Congress every quarter, using a methodology that is completely transparent. As illustrated in the chart below, EXIM’s default rate remained low during the global financial crisis - the most realistic ‘stress test’ imaginable - and has declined since that time. In addition, in FY 2014, almost 80 percent of the Bank’s exposure was backed by collateral or a sovereign guarantee. EXIM Bank’s risk management framework has ensured a low number of defaults, coupled with high recovery rates on those rare credits that have entered into default. Since the Federal Credit Reform Act went into effect in 1992, the Bank has succeeded in recovering approximately 50 cents for every dollar defaulted in the portfolio. Claims are paid from fees collected from the Bank’s customers - not from taxpayers.
In addition to closely monitoring its exposure, EXIM Bank performs regular stress testing of its portfolio to identify how the current portfolio may perform in the future under stressedscenarios. Those stress tests results are included in our quarterly default rate reports that we send to Congress. Stress testing provides a forward-looking assessment of the potential impact of various adverse scenarios that could impact a banking institution’s financial condition and capital adequacy. EXIM Bank’s stress testing builds capacity to understand the Bank’s risks and the potential impact of stressful events and circumstances on the Bank’s financial condition. EXIM Bank’s Inspector General recommended—and EXIM accepted—that “Ex-Im Bank should develop a systematic approach to stress testing and should conduct stress testing at least annually as part of its re-estimate process.” The Bank accepted the OIG’s recommendations and took proactive measures to go one step further by including an additional stress scenario, which assumes zero recoveries for the Bank—a highly unlikely, but informative stress test. The Bank will continue to monitor and report the results of these future stress test scenarios to the U.S. Congress.
EXIM Bank has a culture of continuous improvement, and has implemented numerous risk management improvements to further ensure that we remain effective stewards of the taxpayers we serve. Equally important is the Bank’s commitment to improving how it measures, controls, and mitigates risks. The Bank has made numerous advancements in recent years, including:
- Hiring a Chief Risk Officer;
- Creating the Enterprise Risk Committee to examine and monitor all bank wide risk;
- Creating a Special Assets unit to enhance recoveries;
- Expanding proactive monitoring efforts;
- Increasing staffing in our asset monitoring divisions by 33 percent;
- Going beyond federal requirements to implement mandatory ethics training for ALL Bank employees;
- Updating, streamlining, and simplifying domestic content requirements;
- Streamlining our application process to provide better customer service and reduce decision time;
- Enhancing the customer contact center, now operating from 8am to 8pm Monday through Friday with a team of trained operators; and
- Implementing mandatory training on preventing and detecting fraud for all loan officers/underwriters.
Small Business, Customer Experience, and Data Quality
EXIM Bank is constantly seeking out new ways to serve its customers more efficiently without compromising our underwriting standards. Expanding on the 2012 reauthorization efforts to improve our IT infrastructure, we have taken additional steps to meet industry standards and focus on data quality. With a new Chief Information Officer, the Bank isproactively working to improve these ractices. Alongside this effort to improve technology, EXIM has streamlined its application processing, which has seen the number of days needed to reach an authorization decision cut in half since 2009.
Additionally, as part of our ongoing efforts to enhance the customer experience for current and prospective exporters, EXIM Bank initiated a new and improved customer contactcenter that includes an improved 1-800 number experience, along with a new email response system. The contact center also has online chat capabilities that allows small businesses to get questions answered quickly. The new contact center is the latest EXIM Bank initiative aimed at bringing our customers “government at the speed of business.” EXIM Bank is one of only four government agencies to have established a dedicated customer experience function. In addition, to improve the quality, reliability, and accuracy of the data we collect, we updated our application processes to require that certain data be included prior to accepting an application, such as number of employees, annual sales volumes, and NAICS codes. By requiring this information, we are working to improve our data quality as well as enhance the support we provide to our customers, your constituents.
HISTORY OF ONGOING ACTIONS TO PREVENT CORRUPTION & FRAUD
As a U.S. Government agency, EXIM Bank takes rigorous proactive measures to protect taxpayer dollars. Corruption and fraud mitigation efforts begin with EXIM Bank participants meeting our “Know Your Customer” requirements and “Transaction Due Diligence” standards. Risk-based due diligence is performed by staff to underwrite transactions. Subsequent due diligence is performed post-authorization using a risk-based sampling of authorized transactions to identify possible corruption and fraud. Any evidence of corruption and/or fraud uncovered as a result of these activities is referred to the Office of Inspector General (OIG), which began operating in 2007 and has a team of 23 employees. The successful record of the OIG in prosecuting parties involved in attempting to defraud the Bank is an important deterrent as well. EXIM Bank has zero tolerance for fraud, waste, or abuse and takes thorough and immediate action when any hint of misconduct or fraud is detected by the safeguards we have in place, including working closely with OIG. EXIM Bank conducts mandatory ethics training for all employees on an annual basis, including specific segments on rules relating to gifts from participants in EXIM Bank programs. Additionally, there is mandatory fraud-awareness training for all loan officers/underwriters on an annual basis. This training is designed to maintain a vigilant awareness of the risk of fraud in EXIM Bank transactions. EXIM’s culture of high ethical standards is evident in the Bank’s collaborative work with the OIG and support of OIG investigations and Department of Justice prosecutions of fraud matters. Of course, any organization can experience a bad apple. However, in the last six years, there has been only one indictment involving an EXIM Bank employee. In fact, the situation was uncovered thanks to a tip received by the OIG from a fellow EXIM employee. That employee recently pled guilty and is facing sentencing. Fortunately, this was an isolated incident. Unfortunately, like many other government agencies, there are also those outside the agency who try to take advantage. As Michael McCarthy, Acting Inspector General, stated in his testimony before the joint subcommittees of the House Financial Services Committee and House Oversight and Government Reform Committee on April 15, 2015: “So what I can assure you is at this time in those other cases that we are investigating [sic] do not have evidence that we have developed of EXIM Bank employee internal complicity or participation…In those other cases, [Interruption] at this point, [interruption] within the 31 cases, I would not at this point expect indictments of EXIM employees.”
EXIM Bank is committed to operating under the highest ethical standards. The agency’s ethics program is not only fully compliant with all laws, but goes beyond government regulations, and policies that govern this aspect of our work. We conduct comprehensive ethics training for all employees and foster an environment where employees are encouraged to ask questions and report suspected unethical behavior. Among other duties, our ethics staff:
- Reviews 227 Confidential Financial Disclosure forms and 55 Public Financial Disclosure forms and conducts conflicts reviews;
- Reviews outside activity requests from Bank employees;
- Provides advice to employees on ethics questions;
- Provides advice on post-employment restrictions for current and former employees;
- Provides travel guideline advice; and
- Monitors the Bank’s “Ethics Advice” email account, which was created to provide employees quick and discreet ethics advice on basic ethics questions.
Furthermore, all new employees receive introductory ethics training upon arrival and mandatory training annually thereafter. The Bank brings in the Office of Special Counsel (OSC) to conduct Hatch Act training as well. Our ethics staff ensures 100% participation of all employees (above and beyond the minimum requirements of GS-11) by tracking who attends the training and following up with employee supervisors to ensure attendance. Employees who are unable to attend live sessions take an electronic course through the AGLearn online learning program.
Also, the Bank introduced the “Ethics Guide for Federal Government Employees” a pocket sized guide to provide a quick reference for employees to refer to ethics rules. We incorporated the use of the guides into the 2013 training module, and we distribute the guides to all new employees. The guides have been well-received by the staff and resulted in increased employee engagement in ethics rules.
We appreciate the widespread bipartisan support of EXIM, and are eager to continue to support American jobs, as the Bank has done effectively and efficiently for more than eight decades. Providing long-term certainty to U.S. businesses seeking to compete in overseas markets is imperative as they make long-term plans to grow their global sales, to hire more workers, and to invest in innovation. Deciding to export is not a last-minute decision, but one that requires extensive planning. For companies like Bassett Ice Cream in Philadelphia, L&H Industrial in Gillette, Wyoming, or Murray Equipment in Fort Wayne, Indiana, EXIM Bank plays a critical role - and one that by definition would not be filled by the private sector.Selling goods across borders is not the same as selling goods domestically. Access to credit is frequently what is needed to make global projects happen. When U.S. companies compete for international, large-scale infrastructure projects, the financial options are more limited. The larger the project, the greater the impact on a company’s day-to-day cash flow.
Zeeco, a combustion technology company in Broken Arrow, Oklahoma knows this fact very well. Zeeco started as a small business, but due to export sales has been able to triple its size and grow into a medium-sized business. This was primarily due to the superior products they provide, but also a result of the guarantee they were able to obtain from EXIM Bank. That guarantee allowed them to effectively compete with foreign rivals who were offering financing packages as a part of their sales pitch. When I visited Zeeco in March, they told me thatcommercial banks get nervous about making loans on international transactions, and that unless you are investment-grade, the commercial sector would not extend credit without a guarantee. Zeeco is a great example of where EXIM Bank has been able to simultaneously fill the gap and level the playing field.
Companies face a variety of challenges in competing for sales. The U.S. government should be there to break down barriers wherever we can, not to put up more road blocks. We know that export-backed jobs pay up to 18 percent more on average than other jobs and we also know that exports have accounted for nearly one-third of our total economic growth over the past five years. Right now, U.S. exports are at record levels, representing over 13% of our GDP. But I think we can do better, which is why the President is trying to open more markets for American goods with bipartisan free trade agreements, and why EXIM continues to work with the private sector to fill in commercial financing gaps in order to encourage more U.S. exports. Rising competition and an ever-globalizing world have made EXIM Bank more vital than ever for reducing the risks faced by American exporters so that they can unleash opportunity in the form of new jobs. I look forward to continuing to work with you on empowering your constituents to export, grow, and hire more American workers.
1 This default rate is different than the default rates published in the annual Budget Appendix due to differing definitions. The reported rate in the Budget Appendix reflects projected defaults over the life of the loan while the default rate in this report reflects actual defaults at a particular point in time.