follow‐up report on portfolio risk and loss …...initiated an independent assessment of the...
TRANSCRIPT
Office of Inspector General
811 Vermont Avenue, NW Washington, DC 20571 | Main: 202 565 3908 | Fax: 202 565 3988 exim.gov
Follow up Reporton Portfolio Risk and Loss Reserve Allocation Policies
Report on Portfolio Risk and Loss Reserve Allocation Policies
Digitally signed by JENNIFER FAIN DN: c=US, o=U.S. Government, ou=Export Import Bank, cn=JENNIFER FAIN, 0.9.2342.19200300.100.1.1=83001001859272 Date: 2019.08.29 09:14:54 -04'00'
Office of Inspector General
811 Vermont Avenue, NW Washington, DC 20571 | Main: 202 565 3908 | Fax: 202 565 3988 exim.gov
Report on Performance Metrics for Operational Efficiency Phase One
Report on Portfolio Risk and Loss Reserve Allocation Policies
Review of Portfolio Risk Mitigation Techniques
Follow up Report onPortfolio Risk and Loss Reserve Allocation Policies
Digitally signed by JENNIFER FAIN DN: c=US, o=U.S. Government, ou=Export Import Bank, cn=JENNIFER FAIN, 0.9.2342.19200300.100.1.1=83001001859272 Date: 2019.08.26 15:18:03 -04'00'
OFFICE OF INSPECTOR GENERALEXPORT‐IMPORT BANK of the UNITED STATES
Report on Portfolio Risk and Loss Reserve Allocation
Policies
July 28, 2016 OIG‐EV‐16‐01
EXPORT‐IMPORT BANK – OFFICE OFINSPECTOR GENERAL
The Export‐Import Bank of the United States (“Ex‐Im Bank”) is the official export‐credit agency of the United States. Ex‐Im Bank is an independent, self‐sustaining executive agency and a wholly‐owned U.S. government corporation. Ex‐Im Bank’s mission is to support jobs in the United States by facilitating the export of U.S. goods and services. Ex‐Im Bank provides competitive export financing and ensures a level playing field for U.S. exports in the global marketplace.
The Office of Inspector General, an independent office within Ex‐Im Bank, was statutorily created in 2002 and organized in 2007. The mission of the Ex‐Im Bank Office of Inspector General is to conduct and supervise audits, investigations, inspections, and evaluations related to agency programs and operations; provide leadership and coordination as well as recommend policies that will promote economy, efficiency, and effectiveness in such programs and operations; and prevent and detect fraud, waste, abuse, and mismanagement.
This evaluation was conducted in accordance with the 2012 Quality Standards for Inspection and Evaluation as defined by the Council of Inspectors General on Integrity and Efficiency. This report does not constitute a Government audit and therefore, it was not conducted following the Generally Accepted Government Auditing Standards (“GAGAS”).
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To: DavidSena,SeniorVicePresident &ChiefFinancialOfficerKenTinsley,CRO(Acting)&SVPCredit&RiskManagement
From: MarkThorumAssistantInspectorGeneral,Inspections&Evaluations
Subject: Report on PortfolioRiskandLossReserveAllocationPolicies
Date: July28,2016
Attachedpleasefindthe finalevaluation Report on PortfolioRiskandLossReserveAllocationPolicies. The report outlines eight recommendationsforcorrectiveaction.OnJuly22,2016,Ex‐ImBankprovideditsmanagementresponsetoadraftofthisreport,agreeing withthe recommendations.Theresponse identified theBank’s actions toaddress therecommendations. OIGconsiders theBank’s actionssufficienttoresolvethereported recommendations,whichwillremain openuntil OIGdetermines thattheagreeduponcorrective actionsaresuccessfullyimplemented. Aredactedversionofthis reportwillbepostedontheOIGwebsiteshortly.
Weappreciatethecourtesiesandcooperationextendedto usduringtheevaluation.Ifyouhaveanyquestionsorcommentsregardingthereport,pleasecontactMarkThorumat(202)565‐3939.
cc: CharlesJ.Hall,EVPand ChiefOperatingOfficerMichaelMcCarthy,ActingInspectorGeneralAngelaFreyre,SVP&GeneralCounselInciTonguch‐Murray,DeputyCFOMadolynPhillips,ChiefBankingOfficer(Acting)WalterKeating,VPAssetManagementDivisionMichaelWhalen,VPStructured &ProjectFinanceDivisionJenniferFain,DeputyAIGIEParisaSalehi,Counsel,OIGCristopolisDieguez,BusinessComplianceAnalyst
Attachment: Report on PortfolioRisk andLossReserve AllocationPolicies:OIG‐EV‐16‐01,July28,2016
OFFICE OF INSPECTOR GENERAL • EXPORT-IMPORT BANK ofth, UNITED STATES
EXPORT‐IMPORT BANK – OFFICE OFINSPECTOR GENERAL
EXECUTIVE ReportonPortfolioRiskandLossReserveAllocation PoliciesSUMMARY OIG‐EV‐16‐01,July2016
Why We Did This Report
Wecompl eted a review
Thereportisintendedtoassess
Ex‐ImBank’sactionsto
alignitsriskmanagementpoliciesandprocedureswithindustrybestpractices.
What We Recommend:
OIGhasproposedeight recommendationstosupportseveralkeyinitiatives:
Mitigateportfolioconcentrationriskthrough theimplementationofsoftportfoliolimitsa ndrisksharing asprovidedforin the2015Reauthorization Act.
Completeth eindep endentassessmentoftheBank’sfinancialmodelsandfurtherrefine itsriskdashboard,ensuringindependentoversightofthere viewprocess.
Furtherdevelopinternalriskmanagementproceduresandthereportingofriskmanagementdatatobetterinformmanagement andkey stakeholders.
What We Found
Ex‐Im Bankhasmade importantprogress instrengthening itsrisk management processesandgovernance framework. The Bank’s Enterprise Risk Committee (“ERC”)adoptedseveral newpoliciesincludingaFinancial ModelRiskManagement andGovernancePolicy,aRiskAppetiteStatement,aPortfolioRiskMitigation Policy,andprotocolsforportfoliostresstesting.Thesepolicies providehighlevelguidance toimprove theBank’s riskmanagementarchitecture.Second,theBankinitiatedanindependentassessment ofthe credit lossfactor(“CLF”)modelandtheBudgetCostLevel (“BCL”)riskratingmodels.
theBankengagedan externalpartytoconstructaportfolioriskdashboardthatallows Bank staffto view currentexposures byregion,industry,creditratingandcounterpartytype.
OIGrecommendsthat Ex‐ImBank take additional stepsto align itsriskmanagementpoliciesand procedureswithindustrybest practices.For example, although the Bankhas adoptedthe use ofsoftportfoliolimits,itshoulddevelopmore specificcriteria,metricsandpoliciesformanagingrisksofconcentrationofexposurein industrysectorsorsingleobligors.Additionally,althoughtheportfolioriskdashboardprovidesausefultool to aggregateportfolioexposures,furtherrefinementsarerequiredto enhanceitseffectivenessasarisk management tool.
Concerning theindependentreview of the Bank’s CLF model, OIG found thatthe scope oftheassignmentdidnotallow for afullassessment oftheBank’sapplicationofthemodel,thereasonablenessofthe overalllossreserveprocessandthecalculationof the dollarlossreserve amount.Similarly,the fullassessment of the BCLriskrating modelswascompletedononlytwoofthe11 modelsused bythe Bank. OIGalsofoundthat the aggregation,assessmentandreporting ofrisk management datacan bestreamlined,moretransparentandmoretimely.Finally,althoughtheBankrecentlyannouncedthat itwouldimplementtopdownportfoliostresstestingtwiceayear,additionalsectorbasedstresstestingwouldallowmanagementto proactivelyaddresschanging industryand macroeconomicconditionsand inform theBank’sriskappetite andthe needforriskmitigation.
For additional information, contact the Office of Inspector General at (202) 565-3908 or visit http://www.exim.gov/about/oig.
EXPORT‐IMPORT BANK – OFFICE OFINSPECTOR GENERAL
TABLE OF CONTENTS
EXECUTIVE SUMMARY .................................................................................................................... 4
TABLE OF CONTENTS....................................................................................................................... 5
LIST OF FIGURES AND TABLES......................................................................................................... 6
ABBREVIATION AND GLOSSARY...................................................................................................... 7
INTRODUCTION............................................................................................................................... 9
SCOPE AND METHODOLOGY .......................................................................................................... 9
BACKGROUND............................................................................................................................... 10
Key Risks ............................................................................................................................... ....... 12
Prior Reports on Portfolio Risk and Loss Reserve Policies ............................................................... 13
RESULTS OF REVIEW ................................................................................................ 17
CONCLUSION................................................................................................................................. 42
APPENDIXES .................................................................................................................................. 43
Appendix A: Management Response and OIG Evaluation................................................................ 43
Appendix B: 53
Appendix C: Background on Ex‐Im Bank’s Charter 2015.................................................................. 55
Appendix D: Model Risk Management and Governance.................................................................. 57
Appendix E: Qualitative Risk Factors.............................................................................................. 58
Appendix F: S&P Recommendations .............................................................................................. 59
Appendix G: Impaired Credits – Definitions ................................................................................... 64
Appendix H: BCL Risk Rating Classification and Total Exposure ....................................................... 67
ACKNOWLEDGEMENTS................................................................................................................. 68
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LIST OF FIGURES AND TABLES
Figure 1: Change in Ex‐Im Bank Exposure by Fiscal Year .............................................................. 20
Figure 2: Portfolio Concentration by Industry (FY 2015) .............................................................. 21
Table 1: Key Risks .......................................................................................................................... 12
Table 2: Aggregate CLF Allocation for Qualitative Risks ............................................................... 20
Table 3: Obligor Exposures (FY 2015) ........................................................................................... 24
Table 4: S&P Recommendations – Phase One.............................................................................. 27
Table 5: S&P Recommendations – Phases Two and Three........................................................... 28
Table 6: Impaired Credits – Examples of Definitional Changes .................................................... 37
Table 7: Impaired Credits – Total Amount Reported.................................................................... 38
Table 8: Ex‐Im Bank BCL Risk Rating of Portfolio.......................................................................... 39
Table 9: Summary of Management’s Comments on the Recommendations .............................. 50
Table 10: 53
Table 11: Model Validation........................................................................................................... 57
Table 12: Qualitative Risk Factors Used on Top of the Quantitative Model ................................ 58
Table 13: S&P Recommendations................................................................................................. 59
Table 14: Impaired Credits – Definitions ...................................................................................... 64
Table 15: BCL Risk Rating Classification Categories and Exposure ............................................... 67
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ABBREVIATION AND GLOSSARY Term
ALLL
Description
AllowanceforLoanandLeaseLosses BankorEx‐ImBank Export‐ImportBank oftheUnitedStates
BCBS BaselCommittee onBankingSupervision
BCL Budget Cost Level(“BCL”)isariskratingsystem of Ex‐Im Bank thatratesa transactiononaslidingscaleof one(lowrisk)to11(highrisk).The BCL rating determineslossreservesthatwillbeallocatedbytheBankfor thetransaction.
CLF CreditLossFactors
CPC CreditPolicyCommittee,Ex‐ImBank
CRO ChiefRiskOfficer,Ex‐ImBank
COSO CommitteeofSponsoringOrganizationsoftheTreadwayCommission EconomicCapital
Economiccapital(“EC”)istheamount ofriskcapitalthat a bank estimatesin ordertoremainsolvent atagivenconfidencelevel andtimehorizon.Economiccapitalisafunction ofmarketrisk,creditriskandoperationalrisk.
ECA ExportCreditAgency
ERC EnterpriseRiskCommittee,Ex‐Im Bank
FCRA Federal CreditReform Act of1990
FDIC Federal DepositInsurance Corporation FederalReserve
TheBoardofGovernorsof the Federal ReserveSystem
FYorFYE FiscalYear orFiscalYearEnd
IACPM InternationalAssociation ofCreditPortfolioManagers
ICRAS Interagency CountryRiskAssessmentSystem
LGD LossGivenDefault
LNG LiquefiedNaturalGas
MD&A Management’sDiscussionand AnalysisofResultsandOperations
Notes NotestotheFinancialStatements
OCC OfficeoftheComptrolleroftheCurrency
OCFO Office of the Chief FinancialOfficer,Ex‐ImBank
OECD TheOrganisationforEconomicCo‐operation andDevelopment
OIG OfficeofInspectorGeneral,Ex‐ImBank
OMB U.S.Officeof Management andBudget
PD Probability ofDefault
PI PredictorInterval RiskAppetite Theoverallleveland types of risk anorganizationiswillingtoacceptinorderto
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Term Description
achieveexpectedgoalsand strategic objectives,givenitsrisk capacity,and the expectations ofitsstakeholders.
RiskAppetiteFramework
The riskappetite framework(“RAF”)is theoverarching approach or framework forestablishingandmonitoringallmaterialrisksoftheorganization.Theframeworkmayincluderiskappetitestatements,riskpolicies, risklimits,processes,controlsandsystems.
RiskAppetiteStatement
The risk appetite statement (“RAS”) isa summary of the aggregatelevelsand typesof risks anorganizationis willingtoacceptinorderto achieve itsbusiness objectives.
RiskCapacity The maximumlevelof riskthe firm can assume beforeitreaches regulatory andstakeholderconstraints(e.g.,minimumcapitalthresholds,liquidity).
RiskLimits The allocation ofan organization’srisk appetite statementtospecificrisk categories(e.g.,credit,market, liquidity),lineofbusiness concentrationlimits,
RMC RiskManagement Committee,Ex‐Im Bank
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INTRODUCTION
Wecompleteda reviewregarding theExport‐ImportBankoftheUnitedStates'(“Ex‐ImBank”or“Bank”)
portfolioriskandlossreservepolicies
.Weinitiatedthereviewaspartofourannualworkplan.
TheExport‐ImportBankReformandReauthorizationActof2015(“theReauthorizationAct”or“Act”)establishedaRiskManagementCommittee(“RMC”)oftheBoardofDirectorsandthemanagementpositionofChiefRiskOfficer(“CRO”),andassignedspecificdutiestothoseofficesrelatedtotheriskmanagementarchitectureandgovernanceoftheBank.TheActalsorequiresOIGtoevaluatetheBank’sportfolioriskmanagementproceduresandtheimplementationofthedutiesassignedtotheCROandtosubmitawrittenreportwithitsfindingstoCongressnolaterthanDecember4,2016.2
The reportisintended toprovide
recommendationsandguidancefortheBankto alignitsriskmanagementpoliciesandprocedureswithindustrybestpractices.TocomplywiththestatutoryrequirementoftheReauthorizationAct,OIGwillissueanotherreportinDecember2016evaluatingtheBank’sprogressinimplementingtheriskmanagementprovisionsoftheAct.
SCOPEANDMETHODOLOGY
Toachieveourobjective,weundertookaseriesofinternalandexternalinterviewstounderstandtheapplicationoftheBank’scurrentpoliciesandtoascertainthebestpracticesobservedbypeerinstitutionsincludingforeignexportcreditagencies(“ECAs”),otherU.S.governmentagencies,andmultilateralfinancialinstitutions.WeinterviewedmanagementandstafffromseveralEx‐ImBankdivisionsincludingtheOfficeofChiefFinancialOfficer(“OCFO),theCreditPolicyCommittee(“CPC”)andmembersoftheEnterpriseRiskCommittee(“ERC”)
Wediscussedthestatusofour reviewwiththeU.S.GovernmentAccountabilityOffice
(“GAO”).
2 Seethe Export‐Import Bank Reform and Reauthorization Act of 2015,includedin“DivisionE—Export‐Import BankoftheUnitedStates” of the “FAST Act,” whichbecamepubliclawonDecember4,2015(Pub.L. No.114‐94)at https://www.congress.gov/114/bills/hr22/BILLS‐114hr22enr.pdf.
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EXPORT‐IMPORT BANK – OFFICE OFINSPECTOR GENERAL
OIG’sexternalinterviewscomprisedtwodistinctphases. Phase oneinterviewsincludedexternalconsultantsthathadcompletedindependentreviewsof theBank’sfinancialmodelsandportfolioriskexposures.Indoingso,ourobjective wasto betterunderstandthescopeofworkcompletedbytheseentities aswellastheir findings andrecommendations. Phasetwoconsistedof interviewswith aselectgroupofpeer institutions includingforeignECAs,multilateralfinancial institutionsandprofessional organizations.Ourobjectivewas to researchbestpracticesamongpeerfinancial institutions andtobenchmarkcurrentEx‐ImBankpracticesagainst thosebest practices.In addition,theOIGparticipated inthedraftingandfollowupdiscussionofasurveyonriskmanagementbestpracticesconductedbythe InternationalAssociationofCreditPortfolio Managers(“IACPM”).3
Wealsoreviewedextensive supportingdocumentation .This includeda
reviewof theBank’swrittenpoliciesandprocedures,areview ofthesupportingdocumentsandanalysis,etc.Inaddition,wereviewedthe2015 ReauthorizationAct.Weperformed ourreview attheBank’smainlocationinWashington, DC. Weconductedthe
reviewin accordancewiththe Quality Standards for Inspection and EvaluationissuedbytheCounciloftheInspectorsGeneral onIntegrityandEfficiency.4
BACKGROUND
TheExport‐ImportBankisan independent federalagency andwholly‐owned governmentcorporation whosemissionistoaidexport financing to maintainor create U.S.jobs.TheBank’sCharterauthorizes itto engagein“generalbankingbusiness,” exceptthat ofcurrency circulation.5 Itscorefinancingprograms aredirectloans,exportcredit guarantees,workingcapital guarantees,andexport credit insurance. The Charterrequires“reasonableassuranceofrepayment”forallEx‐ImBank transactions,whichare backedbythefullfaith andcreditoftheU.S.Government. The Bankhasfunctionedona self‐sustainingbasissincefiscalyear2008,coveringits operational costsandprovisioningforexpectedlosses throughloanlossreserves,fundedbythefeesandinterestitchargesitscustomers.
AsaU.S.federalagency,theBankis subjecttoriskmanagementguidelinesderivingfromitsCharter,federallegislation,Congressionalmandates, andtheOfficeof
3 For moreinformation,see http://www.iacpm.org/dotAsset/69825.pdf.
4 For moreinformation on the Quality Standards for Inspection and Evaluation, see https://www.ignet.gov/sites/default/files/files/iestds12.pdf.
5 See The Charter of the Export‐Import Bank of the United States at http://www.exim.gov/ sites/default/files/2015_Charter_‐_Final_As_Codified_‐_02‐29‐2016.pdf.
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ManagementandBudget(“OMB”).Additionalguidanceisprovided inpriorreportsfromtheGAOandthefederalaccountingstandards.Supportfortheportfolioriskmitigation functionderives fromseveralsourcesincluding:
Broadbankingauthority:Section 2(a)(1)oftheExport‐ImportBankActof1945(theAct)confersbroadbanking authoritytoEx‐ImBank.6
Reasonableprovisions forlosses: TheActrequirestheBankto make reasonable provisions forlosses.ThisisalsoaddressedinOMBCircularA‐11.7
TheFederalCreditReformAct(“FCRA”)of1990:8 FCRAdirectspoliciesusedfortheallowanceforloanandlease losses(“ALLL”)–originallyreferredto asthereserveforbaddebts.ALLLisavaluationreserveestablished andmaintainedbychargesagainstoperatingincome.Itisanestimateofuncollectableamountsusedtoreducethebookvalueofloans andleasestotheamountthat a bank expects to collect.
OMBguidance:OMBCircularA‐129 directsagenciestoanalyzeandcontroltheriskandcostsoftheirprogramsand tobenchmarkagainstcurrentmarket practices.9OMBCircularA‐123definesManagement’sResponsibilityforEnterprise Risk Managementand InternalControl.10
Withthepassageof the2015Reauthorization Act,theBank’sCharter wasrenewedforanadditionalfour‐year period.Additionalprovisions included intheActthatrelatetoriskmanagement followbelow.Pleasesee Appendix C for amore indepthdiscussion.
1. Anaggregateexposurecapof$135 billionforeachfiscalyear (“FY”)from2015to 2019,providingtheBank’sdefaultrate remainsbelow2percent.
2. Anew requirementthat theBank “buildtoandholdinreserve” anamountnotlessthan5 percentofthe“aggregateamountofdisbursed andoutstandingloans,guarantees andinsuranceoftheBank.”
3. Establishes anOfficeof Ethicsinthe Bank.
6 ExportImport BankAct of 1945,12U.S.C.§ 635(2006).
7 For moreinformation,see https://www.whitehouse.gov/sites/default/files/omb/assets/ a11 current year/a11 2015.pdf.
8 SeetheFederalCredit Reform Act of1990,includedinTitleXIII,“Sec.13201.Credit accounting”ofthe“OmnibusBudget Reconciliation Act of1990,”whichbecamepubliclawonNov5,1990(Pub.L. No.101‐508)at http://thomas.loc.gov/cgi‐bin/query/F?c101:1:./temp/~c101v6C3ee:e1995277.
9 For moreinformation,see https://www.whitehouse.gov/sites/default/files/omb/assets/a129/rev_2013/ pdf/a‐129.pdf.
10 For moreinformation,see https://www.whitehouse.gov/sites/default/files/omb/memoranda/2016/m‐16‐17.pdf.
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EXPORT‐IMPORT BANK – OFFICE OFINSPECTOR GENERAL
4. Establishes aCROwhoshall“overseeallissues relatingto riskwithin theBank; andreport tothePresidentof the Bank.”
5. Establishes aRiskManagementCommitteeof theBoardofDirectors, toreplacetheBank’s AuditCommittee.
6. Authorizes a pilotprogramtosharerisksundertheBank’sloan,guarantee,andinsuranceprograms.TheaggregateamountofliabilitytheBank maytransferthroughrisk‐sharing maynotexceed$10billionin any fiscalyear.
Key Risks
As an export credit agency, Ex‐Im Bank faces a diverse spectrum of risks
AsexplainedinTable1below,Ex‐ImBankfacesadiversespectrumofrisks includingcredit risk, portfolioconcentration risk,marketrisk,andoperationalrisk.Inaddition,the Bankfaces emergingrisktrendsandachallenging economicenvironmentinseveralkey sectors.The following isasummaryofthekeyrisksand emergingrisktrendstheBank facesin 2016.
Credit Risk:Risk thatan obligor maynot havesufficient fundstorepayits debtormaybeunwillingtopay even if sufficient fundsare available.
Key Risk Ex‐ImBankusesseveralmetricstomeasureCreditRiskincludingtheweightedaverageBudgetCostLevel (“BCL”)riskratingandtheaggregateamountofimpaired,non‐accrualsand defaultedcredits.
Table 1: Key Risks Relevance for Ex‐Im Bank
Country or Political Risk: Riskthatpayment isnot made to Ex‐ImBank,its guaranteedlender,orinsuredparty.May result from the expropriationoftheobligor’sproperty,war,orinconvertibilityoftheobligor’scurrencyintoUS$.
Ex‐ImBank providesfinancing toborrowersinover100countrieswithvaryinglevels of governance,transparency and economic stability.
Portfolio Concentration Risk:Riskofthecreditportfoliocompositionasopposedtorisksrelatedtospecificobligors.
Ex‐ImBank’sexposureis concentrated byregions: Asia(25.7%) and Latin America(18.4%) andbyindustry: airtransportation(48%),manufacturing (16%),andoil andgas (15.6%).Approximately 27% of the portfolioislinkedtoglobalcommoditysectors.Borrowerconcentrationsarealsosignificantlyhighwiththe Bank’s 10largestexposures totaling$30.9billion or 30.3percentoftotalexposureinFY2015.Ofthe top10,exposuretoindividualobligorsranges from 52percentto 168 percent oftotalreservesatFYE2015.
Market Risk: Riskof loss relatedtoadeclineinvaluearisingfromthevolatilityofthefinancialandcommoditymarkets.Marketriskisdeterminedinpart byan entity’s exposure to adversechangesininterestrates,commodityprices,
Ex‐ImBank extendsfinancingtoavarietyof internationalprojectsandforeignborrowersactiveinkeycommoditysectorsincludingminerals,mining, oiland gas and liquefied natural gas(“LNG”).Global marketconditionsinthesecommodity‐basedsectorsdeterioratedin2015and intothefirstquarterof2016,resultinginfurtherdownwardpressureoncreditquality.Foreigncurrencyvolatilitymay
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Operational Risk: Risksrelatedtoinadequateinternal processes,systems,and financialmodels;controldeficienciesandhumanerror.Operationalrisksspantheentireoperationsoftheentity.Examplesincludeimproperpayments,internalfraud,themisapplicationof financialmodels anddata,etc.
Key Risk andforeignexchangeprices.
Ex‐ImBankfacesoperationalrisks inseveral key areas arising from a shortage of humancapital(attrition andhiringfreezeduringthelapse), priorrapidgrowthinthe Bank’sbalancesheet,fragmented databases andthe use ofcertain internal financialmodelsthat arenotbroadlyalignedwithindustrybestpracticemethodologies.
Table 1: Key Risks Relevance for Ex‐Im Bank
leadtoprojectcostoverrunsand/orincreasetheamountoflocalcurrencyrequiredtoservicedollardenominateddebt.
Integrity and Reputational Risks:Risksrelated topossiblefraud,corruptionandlackofadherencetointernationalenvironmentalandsocialstandards.Thoserisksmayresultinsignificantmonetarylossandundermine Ex‐ImBank’sprogramsand reputation.
Ex‐ImBank facespotentiallossesarisingfromfraudulentandcorruptactivities,integrity andreputationalrisksand the potential adverse environmentaleffectsof goods and servicesfinancedby the Bank.In addition,Ex‐Im Bankis subjectto OECD’s “Common Approaches,”whichareintendedtoensureconsiderationoftheenvironmentaleffectsofprojectsonaconsistentbasis amongthe major ECAs.
Enterprise Risk: Enterpriserisk canbe definedastheinteractionofthefullrangeof risksinherentinthecorebusinessactivities,acrosstheentireagency.
Ex‐ImBank mustconsiderhowthekeyriskareas identifiedabovemayinteract,especiallyintimesofU.S.orworldwideeconomicdistress.
Prior Reports on Portfolio Risk and Loss Reserve Policies
OIG’sreviewofEx‐ImBank’srisk managementpolicies wasdrivenin partbythe
Congressionalinterest andquestionsabouttheadequacy ofpoliciesregardingportfolio riskmeasurement and mitigation. Separately, theExport‐Import BankReauthorizationActof2012 requiredGAO toanalyze theBank’sBusiness Plan, growthin businessandtheeffectivenessofitsrisk managementpolicies.11
11 For moreinformation,see Export‐Import Bank Reauthorization Act of 2012 at http://www.gpo.gov/ fdsys/pkg/PLAW‐112publ122/pdf/PLAW‐112publ122.pdf.Pub.L.No.112‐122, 126Stat.357(2012).
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GAO Report (GAO‐13‐303) Export‐Import Bank
OnMarch28,2013,GAOissuedits reportentitled, Export‐Import Bank: Recent Growth Underscores Need for Continued Improvements in Risk Management.13 TheExport‐Import
13 SeeGAO’s Export‐Import Bank: Recent Growth Underscores Need for Continued Improvements in Risk Management (GAO‐13‐303,datedMarch28,2013)report, availableat http://www.gao.gov/assets/660/653373.pdf.
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BankReauthorization Actof2012 requiredGAOtoconductanevaluationofthe Bank’sgrowthinbusinessand theeffectivenessof its riskmanagement.14
GAOmadeatotaloffourrecommendations toEx‐ImBank’sChairmantoimprovetheBank’sinternalriskprocesses:
“WerecommendthattheChairmanoftheExport‐ImportBankofthe UnitedStatestakethefollowingfouractions:
• Tohelpimprovethereliability of itslossestimationmodel,Ex‐Imshouldassesswhetheritisusingthe bestavailabledata foradjustingloss estimates forlonger‐termtransactionstoaccount forglobaleconomicrisk.
• Toconductfutureanalysiscomparing theperformanceofnewerand olderbusinessandtomakefutureenhancements toitsloss estimation model,Ex‐Imshouldretainpoint‐in‐time,historicaldataoncreditperformance.
• TohelpCongressbetter understandthefinancialrisks associatedwithEx‐Im’sportfolio,Ex‐ImshouldreportitsstresstestscenariosandresultstoCongresswhensuchinformationbecomesavailable.
• Tohelpmanageoperationalrisks stemmingfromEx‐Im’s increasedbusinessvolume,Ex‐Imshoulddevelopworkloadbenchmarksattheagency wideandfunctionalarealevels, monitor workloadagainstthesebenchmarks,anddevelopcontrolactivitiesformitigatingriskswhenworkloadsapproach orexceedthese benchmarks.”15
Asofthedateofthis report,allfouroftherecommendations madebyGAOhave beenimplementedbytheBankandareclosed.
GAO Report (GAO‐13‐620) Export‐Import Bank
OnMay30, 2013,GAOissuedan additionalreportentitled, Additional Analysis and Information Could Better Inform Congress on Exposure, Risk, and Resources.16 TheExport‐ImportBankReauthorization Act of 2012 requiredGAOto conduct anevaluation ofthe Bank’sBusinessPlanandanalyses.17 Inwriting thereport, GAO’sobjectives were(1)to examinetheextent to whichtheBusinessPlan andanalysesoftheExport‐ImportBank justifybank exposurelimits;(2)toevaluate theriskofloss associated withtheincreased exposurelimit,changingcompositionof exposure,andcompliancewithcongressional mandates; and(3)toanalyzethe adequacyofEx‐ImBankresourcestomanage
14 Supra note11.
15 Supra note13.
16 SeeGAO’s Additional Analysis and Information Could Better Inform Congress on Exposure, Risk, and Resources (GAO‐13‐620datedMay30, 2013)report,availableat http://www.gao.gov/assets/ 660/654925.pdf
17 Supra note11.
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authorizationsandtocomplywithcongressionalmandates.GAOmadeatotaloffourrecommendations toimprovetheaccuracyofEx‐ImBank’sforecastsofexposureandauthorizations:
“ToprovideCongresswiththeappropriate information necessary tomakedecisionsonEx‐Im’sexposurelimits andtargets, werecommendthattheChairmanoftheExport‐ImportBankoftheUnitedStates takethe followingfour actions:
Toimprovetheaccuracyofitsforecastsofexposureandauthorizations,Ex‐Imshould
• Comparepreviousforecastsandkeyassumptionstoactualresultsandadjustitsforecast modelstoincorporatepreviousexperience;and
• Assessthe sensitivityof theexposureforecast modeltokeyassumptionsandauthorizationestimatesandidentifyand reporttherangeofforecastsbasedon thisanalysis.
TohelpCongressandEx‐Immanagementunderstand the performanceandriskassociated withitssubportfolios oftransactionssupportingthesmallbusiness, sub‐Saharan Africa,and renewableenergymandates,Ex‐Imshouldroutinelyreportfinancialperformance information,includingthedefaultrateandrisk rating,ofthesetransactionsatthesubportfoliolevel.
TobetterinformCongressofthe issuesassociatedwithmeeting eachofthebank’spercentage‐basedmandated targets,Ex‐ImshouldprovideCongress withadditionalinformation ontheresourcesassociatedwith meetingthemandatedtargets.”18
Asofthedateofthis report,allfouroftherecommendations madebyGAOareclosed.
18 Supra note16.
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RESULTS OF REVIEW
Report On Portfolio Risk and Loss Reserve Allocation Policies (OIG‐INS‐12‐02, September 28, 2012)
Thefollowingsection provides
recommendations andguidancefortheBankto align itsriskmanagementpoliciesandprocedureswithindustrybestpractices.
InaccordancewiththeFederalCreditReformAct(“FCRA”)Ex‐Im Bankisrequiredtoestimateexpectedlossesover the lifeof atransaction.As such,theBankallocatesreserves tocoverestimatedlossesatthetimeofauthorization andagainduring theannualre‐estimateprocess.Aspartofthisexercise,theBank developscreditlossfactors foritsprograms andsubmitsthemtotheOfficeofManagementandBudget(“OMB”)forreviewandapproval.19 ThelossfactorsareprimarilybasedontheBank’shistoricallossexperiencebutEx‐ImBankmayselectively incorporatequalitativerisk factorsaspartoftheestimatedcreditlossfactors.
19 Thelossfactorsseek tomeasure the various factors that affect thecollectability of the portfolioor transaction.
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TheBankidentifiedvariousqualitativeadjustmentsthataddressedmodelrisk,portfolioconcentrationriskandglobaleconomicrisk.AspartofanOMB‐approvedpilot,thequalitativeadjustmentswerethenincorporatedintothe2012creditlossre‐estimateprocessandrequiredanadditionalreserveallocationofapproximately$565million.ThisamountwasreceivedfromTreasuryinFY2013,pursuanttothere‐estimateprocess.20OMBlaterinformedtheBankthattheuseof portfolioconcentrationasaqualitativeriskfactortomodifythelossprovisionwouldbeinconsistentwithFCRA.Asaresult,theBankdiscontinuedthepracticeofestablishingqualitativereservesforportfolioconcentrationasanadditiontothereservescalculatedforeachindividualcredit.21
InFY2013,Bankmanagementidentifiedtherapidgrowthofthelong‐termguaranteeanddirectloanprogramsasapotentialriskfactorthatwarrantedadditionallossreserves.Specifically,duringtheperiodfrom2008to2012,theBank’slong‐term‐guaranteeanddirectloanprogramswitnessedathree‐foldincreaseinannualauthorizations(seeFigure1below)22Theunderlyingrationalefortheadditionalreserveswasthatrapidloangrowthmaycontributetogreateroperationalrisk,leadingtohigherloanlossesthanthelevelsuggestedbyempiricaldataderivedfromanormalgrowthperiod.
OMBopinedthatFCRAallowedtheBanktoreservefortherisksassociatedwiththerapidgrowthoftheBank’sportfolioinprioryears,asthefuturelossmaydifferfromthehistoricallossonsimilarcredits.WorkingtogetherwithOMB,theBankcreatedaqualitativefactorthatwouldhelpquantifythisrisk.Thefactordrawsonthehistoricalcorrelationbetweenrapidbalancesheetgrowthandanincreaseinexpectedlossesasobservedinvariousempiricalstudies.23Inaccordancewiththisanalysis,Bankstaffcreatedanadditionalqualitativereserveequalto40percentoftheCreditLossFactors
20 OIGunderstandsthatEx‐ImBank receivedapproval fromOMBon September25,2012,to implement therevisedcredit lossfactorsfor useinits modelfor the FY 2015Budget.
21 AlthoughOMBguidancedoesprovideagenciescertainflexibilityto considerhowqualitativeriskfactorsmayresult in different loss outcomesfromhistoricalbenchmarks,it argues thatthe use of a qualitative reservefactor for portfolio concentrationisinconsistent with FCRAbecause “concentration raises the chancethattheportfoliowillexperienceeitherparticularlyhighor particularlylowlevelsoflosses, without changingthe mean, orexpected, loss.” OMB Letter to Ex‐ImBankdated November7,2013.
22 Incontrast,Ex‐ImBank staffgrewatamodest 11percent, resultinginadisproportionatelyhigherworkload for staff and greater operational risk.AlthoughEx‐Im Bank has since added59positionstoits staffing plan,itwas generallyunabletofill newpositionsor increaseitsworkforce throughtheendof FY2015,duetoemployeeattritionanda hiring freezeprompted by thelapsein theBank’s authorization. Thisoperationalriskof human capital managementcontinuesto be a concern, andtheOIGreported it as a topmanagement challengefacing theBankinFY2016.
23 For example, seeFoos,Danieland Weber, Martinand Norden,Lars,“LoanGrowth andRiskinessofBanks,” Journal of Banking and Finance,34(2009):2929‐2940, http://ssrn.com/abstract=1045001.Theauthors found that prior abnormalloangrowth hasa positive andhighlysignificantinfluenceonsubsequentloanlosseswith a lagof two tofouryears.
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(“CLF”)reservesallocatedtothe long‐termguaranteeanddirectloan programseach year fromFYs2013‐2015.Inaddition,thequalitativereservefor long‐termaircrafttransactionswasincreasedfrom 40to95percent inFY2013,duetotheadditionofseverallargeaircraftfinancingsthatyear.Consequently,the weightedaverage increaseinreserves forlong‐termtransactionsincreasedfrom40 to68 percentinFY2013.InFY2014,the qualitative reserve for long‐term aircraftwas reducedto the40percent levelinlinewiththelong‐termnon aircraftexposure.
Inadditiontotheabovequalitativereserve,theBankimplementedaminimumlossrateof0.5percentasaproxyforcertainprogramssuchaslongtermsovereignguaranteesthathave experienced zerotolowhistoricallossexperience.Theselectionofthe0.5percentloss rate asaproxyis informedbyempiricalcreditdataprovidedbyMoody’s,aratingagency.Importantly,the Bank’suseof aproxylossrate isconsistentwithfederalregulatory guidanceprovidedin theOCC’s“Interagency PolicyStatementontheAllowanceforLoanandLeaseLosses”andthe FederalReserveBank’s “Qualitativefactorsand theAllowanceforLoan andLeaselossesin CommunityBanks.”24 Thelatterrecommendstheuseofsupportableproxies fornewloan products forwhichactualhistoricallossexperienceorriskprofiles are notreadilyavailable.
Finally,toaddressthe riskofrapid changesintheglobaleconomythatmayaffectfutureperformanceoftheportfolio,theBankmayadjusttheprediction intervalor“PI.” ThePIisanadjustmenttotheprobabilityofdefaultbasedonthestandarderroroftheestimateof theprobabilityofdefault.Bankstaffutilized thisapproachintheyearsfollowingthe2008 financialcrisis,butfounditnolonger necessaryduringthepastthree fiscal years.
Table2provides theaggregate CLFallocationforqualitativerisksfor eachfiscal yearalongwiththecorrespondingrisk adjustment.AsindicatedinTable2,theaggregateamountofreservesfor qualitative riskfactors decreasedfrom $1.3billioninFY2013to$817millioninFY2015.Thedeclineresulted fromalowerqualitativerisk adjustmentforaircraft‐relatedexposure inFYs 2014and 2015(40percent inFYs 2014and 2015 versus95percentinFY 2013)and a loweroverallCLFreserve allocationinFY2014andFY2015duetothebetter thanexpectedperformanceofthe long‐termportfolio(seeAppendixEforfurtherdetails).
Inadditiontotheabovequalitativereserveadjustments, theBankrefined itsCLFforecasting methodologybydevelopingindependentcategoricalvariablesthatare
24 Forexample,seetheOCC’s“InteragencyPolicyStatement ontheAllowanceforLoan andLeaseLosses”availableathttps://www.federalreserve.gov/boarddocs/srletters/2006/SR0617a1.pdf.Thepolicystates“Theremaybetimeswhenaninstitutiondoesnothaveitsownhistoricallossexperienceuponwhichtobaseitsestimateofthecreditlossesinagroupofloanswithsimilarriskcharacteristics.Thismayoccurwhenaninstitutionoffersanewloanproductorinthecaseofanewlyestablished(i.e.,denovo)institution.Ifaninstitutionhasnoexperienceofitsownforaloangroup,referencetotheexperienceofotherenterprisesinthesamelendingbusinessmaybeappropriate,providedtheinstitutiondemonstratesthattheattributesofthegroupofloansinitsportfolioaresimilartothoseoftheloangroupintheportfolioprovidingthelossexperience.”
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incorporatedintothequantitative framework. TherefinementsadjustthecalibrationoftheCLFmodelanddo notaddorsubtracttotheimpactonreserves ofqualitativefactors.
Figure 1: Change in Ex‐Im Bank Exposure by Fiscal Year
$0
$20
$40
$60
$80
$100
$120
$140
$160
2008 2009 2010 2011 2012 2013 2014 2015 2016
(In
Billions)
New Authorizations TotalPortfolioExposure AuthoritytoLend
Source: Ex‐Im Bank Annual Reports for FYs 2008 – 2015
Fiscal Year ($ in millions)
Table 2: AggregatNon‐Claim,
Credit Reform Reserve without allocation for
qualitative risks
e CLF Allocation for Qualitative Risks
Aggregate $ CLF reserve
allocation for qualitative risks
Aggregate Non‐Claim, Credit
Reform Reserve
Qualitative On Top Percent
Impact
2012 $2,455 $565 $3,020 23% 2013 $1,955 $1,335 $3,289 68% 2014 $2,706 $1,083 $3,789 40% 2015 $2,044 $817 $2,861 40%
Source:Ex‐Im Bank Data
Risks of Portfolio Concentration
Astheofficialexportcredit agency oftheUnitedStates, the demandforEx‐ImBankfinancingisshapedbytheglobalcredit environment,theavailability offinancing incertainregionsandindustrysectors,andthecharacteristicsofU.S.businessesseekingexportcreditfinancing.Thesefactorshavecontributedto Ex‐ImBank’sportfoliobeingconcentratedincertain industries, markets,and obligors.Asnotedabove,Ex‐ImBank attemptedtoaddressportfolioconcentrationriskbyusing itasaqualitativeriskfactortoincrease reserves as partofthe OMB‐approvedpilot.However, OMBlaterdetermined thatthisapproachwasinconsistent withtherequirementsofFCRA.AlthoughtheBank’sportfoliodecreasedin2015,therisksofportfolioconcentrations
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$0
$20
$40
$60
$80
$100
$120
$140
$160
2008 2009 2010 2011 2012 2013 2014 2015 2016
(InBillions)
NewAuthorizations TotalPortfolioExposure AuthoritytoLend-
EXPORT‐IMPORT BANK – OFFICE OFINSPECTOR GENERAL
areconsistentasevidencedbycontinuedconcentrations byindustry, singleobligor(debtor)andgeographicalregions.
Withrespecttoindustryconcentrations, the Bank’s credit exposure remainshighlyconcentrated,withthreeindustries—airtransportation(48percent),manufacturing(16percent),andoilandgas(15.6 percent)—accounting for80 percentoftotalexposureinFY2015.Figure2belowdepictsEx‐ImBank’scredit exposurebyindustrytype.
Figure 2: Portfolio Concentration by Industry (FY 2015)
48.0%
16.0%
15.6%
20.5% Aircraft
Manufacturing
OilandGas
Other
Source: Ex‐Im Bank Annual Report for FY 2015
Aircraft representsEx‐ImBank’slargest industryexposure,comprising48percentoftheBank’stotalexposure.TheBanksupportsthefullrangeof U.S.manufacturedcommercialaircraft, rangingfrom smallagriculturalaircraft, helicoptersandbusinessaircraft tolargecommercialaircraft.In recentyears,the globalairlineindustryhas experiencedpositive industryconditions,driveninlargepart bydeclining fuelprices,growthinpassengerdemandwithlimitedcapacitygrowth,andprojectedgrowthinoperating marginsof 11‐13.5percentin2016.25 Inaddition,Ex‐ImBank’saircraft portfoliobenefits fromastrong collateralposition.Forexample,thevalueoftheBank’scollateralexceedsthe outstandingportfolio exposureamountby 40percentduetoa rapidamortization of principal on theunderlyingfinancingagreements.26
25 SeeMoody’sreportentitled,“GlobalAirlineIndustry:Margins to Rise onLower FuelPrices,Steady DemandGrowth;Yields toRemain Flat,”datedJanuary14,2016, available through subscription at https://www.moodys.com/ andDeloitte’sreportentitled,“2016Global aerospaceanddefensesectoroutlook poisedfora rebound,”datedJanuary2016at https://www2.deloitte.com/content/dam/ Deloitte/global/Documents/Manufacturing/gx‐manufacturing‐2016‐global‐ad‐sector‐outlook.pdf.
26 SeetheExport‐Import Bank of the United States Annual Report 2014at http://www.exim.gov/sites/default/files/reports/annual/EXIM‐2014‐AR.pdf.
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Notwithstandingcurrentfavorableconditions,theaircraftindustryiscyclicalin natureandtracks macroeconomiccycles.Moreover, thesector isvulnerabletoexogenousrisksincludingglobalpandemics,concernsoverairlinesafety dueto terrorism,upwardpressureon fuelprices, andtechnologicalobsolescence. As aresult,residualvaluesforaircraftcan dropsharplyasaresultoftheseshocks.Forexample,in2009,themarketvalueofbothnarrow‐bodyandwide‐bodyaircraftdeclinedbyalmost20percent,reflecting theglobalrecession.Recognizingthisrisk,rating agencies mayfactor a40‐65 percent reductioninleaserates and resale valuesaspart ofa stresstestingexercise.27
Ex‐ImBankalsoextendsfinancingtoavarietyofinternational projectsandforeignborrowers activeinkeycommoditysectorsincludingmineralssuchasironoreandcopper,oilandgasandliquefied naturalgas(“LNG”).Marketconditionsin thosecommodity‐basedsectorsweakenedin 2015 andcontinuedtodeteriorate into thefirstquarterof2016,resultingin furtherdownwardpressure onpricesandsectormargins.28,29 AsreportedinEx‐ImBank’sindustryriskanalysis,theBank’s exposuretocertaincommoditysectorsincluding minerals,mining,oilandgasandLNGtotaled$26.5billion,or27percentof the Bank’stotal exposureof$98.5billionasofDecember2015.
Thedeclineincommoditypricesworldwidehasalsoadverselyaffectedcertaindevelopingcountriesthataredependenton exportsofcommodities togenerate hard currencyearnings.Ratingagencieshavehighlightedtheincreased riskandsignaledthedownward ratingof numerouscommodity‐exportingcountries.For example,in arecent ratingupdateon 18oil‐exportingcountries,Moody’sdowngradedthecredit ratingsof fourcountriesandplacedanother 12onreview fordowngrade.30 Ofthe 16 countries identifiedfor adowngradein theMoody’sstudy,Ex‐ImBankhassovereignand/orproject‐relatedexposureto 15ofthem.Ex‐ImBankmanagementstatesthatithaspartiallymitigated countryriskinherent initsproject‐related financingsthrough
27 Thereduction invalueisbased on thelevelsfor thelong‐termtrendlinethat isdeterminedbyaircraftdepreciation andtheleaserate factorcurve.Formoreinformation,seeS&P’s“RevisedCashFlowAssumptions and Stresses forGlobalAircraft and Aircraft Engine Lease Securitizations,” datedAugust 26,2010,availablethrough subscriptionat https://www.standardandpoors.com.
28 For example, metal commoditypriceshavedropped forthe third yearinarow,fallingby10to45percent overthepast 12monthsdueinpart to the ongoingexcessindustrysupply,lower‐than‐expecteddemand from China and otherdevelopingmarketsand slowglobal growth. See Moody’s “Sector Comment on Base Metals – Global:Recalibration Amid Fundamental ShiftinMining Sector,” dated January26,2016,availablethrough subscriptionat https://www.moodys.com/.
29 SeeMoody’sreportentitled,“Sector In‐Depth:Banks –Global: Risks from Low OilPricesMoreImminent,”datedFebruary24,2016,availablethroughsubscriptionat https://www.moodys.com/.
30 SeeMoody’sreportentitled,“Sector In‐Depth:Oil‐Exporting Sovereigns—Global:KeyDriversofRating Actions on18 Issuers to AssessImpact of Sharp Fallin OilPrices,”datedMarch4,2016,availablefor subscription at https://www.moodys.com/MdcAccessDeniedCh.aspx?lang=en&cy=global&Source=https%3a%2f%2fwww.moodys.com%2fviewresearchdoc.aspx%3fdocid%3dPBC_1017659%26lang%3den%26cy%3dglobal.
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thestructuringof thetransaction.Possiblemitigants include theselectionof a strong projectsponsor,useof lowcost technologyandtheuseof offshorepaymentaccounts.
Finally,singleborrower concentrationsaresignificantlyhigh whenmeasuredagainsttotalexposureandthe Bank’sreserves.AsTable3belowillustrates, Ex‐ImBank’stenlargest,individualobligorexposurestotaled$30.9billionor 30.3percentoftotalexposureinFY2015.Ofthetopten,exposuretoindividualobligorsranges from 52 percent to 168percentoftotal reservesatFYE2015.Thepractice ofmanagingorlimiting exposuretoasingleobligorisabestpracticeobservedbyalargenumber ofinstitutions includinginternational banks,peerECAs,and multilateral developmentbanks.31 Forexample,IFC,ExportDevelopment CanadaandOPICsetlimitsontotalexposureto asingleborrowerbasedonastipulatedlevel ofeconomiccapitalandtheriskinessof theBorrower.
Otherpeerinstitutions interviewedbyOIGestablishlimitson thevolumeoffinancingprovidedto differentcountries, industries and obligorsbased ondifferentcriteria.Thosecriteriaincludepercentagethresholdsofeconomiccapitalandearnings,creditlossreserves,current industryconditions, nominallimitsontheriskratingoftheborrower,andprogram specificobjectives.In a recentsurveyoffinancialinstitutions conductedbyIACPM, 91percent of respondentsconfirmedtheyuse concentrationlimitstomanagetheirportfolios.Thesurveyconsistedof23participantsincludingECAs(10), multilateral developmentbanks(7)andotherinternationalfinancial institutions (6).32
Applyingthispractice toEx‐Im Bankwouldrequireasystematic approachtomeasuringconcentrations,policiesandattendantcriteriatodetermineprudent softlimits onexposureconcentrationsandprocedurestomanagethoseexposures onceidentified.SinceFCRAasinterpretedbyOMB doesnotpermitsupplementalqualitative reservestobesetasideforportfolioconcentrationrisk,thisriskcould bemanagedthroughothermechanisms,suchasco‐financing withotherECAstoreduceconcentrationrisk33 ortheuseofrisktransfermechanisms inareaswheretheEx‐ImBankportfoliohasconcentratedexposure. Asdiscussedabove,the2015Reauthorization Actauthorizesapilotprogramtosharerisksunder theBank’sloan,guarantee, andinsuranceprograms.
Ex‐ImBankpoliciesandcriteria shouldidentifystepstobetakenwhensoftlimitsareexceeded,includinganalysisofanyadditional riskpresentedwhen exceedingthesoft
31 Althoughnot directly comparabletoEx‐Im Bank as a government banking corporation,U.S.bank regulators and theBaselCommitteeonBanking Supervision(“BCBS”)limitsingleborrowerorgroup credit exposure to 25 percentof a private bank’s capital. For example,OCCregulatoryguidancedefinesconcentration to include direct, indirect, or contingent obligationsthat exceed25percent ofthebank’scapitalstructure.See http://www.occ.gov/publications/publications‐by‐type/comptrollers‐handbook/Concentration‐HB‐Final.pdf.
32 Supra note3.
33 InFY 2014Ex‐ImBank maintained approximately$5billionof co‐financingexposure,principallyintheaircraft sector.
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Obligor
1 PEMEX2 SadaraChemical
Company 3 KoreanAirLines4 Australia‐PacificLNG
ProcessingLtd. 5 PapuaNewGuineaLNG
GlobalComp. 6 EmiratesAirlines7 Refineríade Cartagena 8 Cathay Pacific Airways9 RyanairLtd.10 Various Government
EntitiesofIndiaTotal Top Five Obligors Total Top Ten Obligors
Amount (in millions)$6,754.4
$4,180.0
$3,110.0
$2,865.5
$2,594.9
$2,588.1 $2,506.6 $2,146.1 $2,096.3
$2,085.2
$19,504.8 $30,927.1
Source: Ex‐Im Bank Financial
% Total Credit Reserves 168%
104%
77%
71%
65%
65% 63% 54% 52%
52%
485% 771%
Reports
Loss % Total Exposure
6.6%
4.1%
3.0%
2.8%
2.5%
2.5% 2.5% 2.1% 2.0%2.0%
19.0%30.3%
EXPORT‐IMPORT BANK – OFFICE OFINSPECTOR GENERAL
limitsanddocumentationthatsuchriskwasconsideredbytheappropriatedecisionmakers.
Table 3: Obligor Exposures (FY 2015)
RECOMMENDATION
OIGrecommendsthat Ex‐ImBanktake stepstomitigateitsportfolioconcentrationrisks including:
1. Establishpoliciesand attendantcriteriatodetermineprudent softlimitsonexposureconcentrationsandprocedurestomanagethoseexposures onceidentified, includingoptionsforreducingconcentratedexposures,mitigatingtherisksofconcentrationexposures,orconsiderationofconcentration risksinthetransaction approvalprocess.
2. Aspartoftheimplementationof therisksharingpilotprogram asprovided forinthe2015ReauthorizationAct,assessthepotentialroleofthe risksharingprograminmitigatingportfolio concentrationrisk.
Management Response:
Pleasesee AppendixA,ManagementResponseand OIGEvaluation.
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Enhancement of Internal Process and Governance framework
In2015,theEx‐ImBankEnterpriseRiskCommittee(“ERC”)adoptedseveralinternallyprepareddocumentsdesignedtostrengthen thefinancialgovernanceframeworkoftheBank.34 ThesedocumentsincludedFinancialModelRiskManagementandGovernancePolicy,aRisk Appetite Statement, andaPortfolioRiskMitigation Policy.Thedocuments providehigh levelguidanceto improvetheBank’sriskmanagement architecture.For example,the Financial ModelRiskManagementandGovernancePolicycitebroadprinciplesrelated tomodeldevelopment,modelvalidation,and modeluse.Further,ittasksthe ChiefBanking Officer(“CBO”)andtheChiefFinancial Officer(“CFO”)with oversightof theunderwritingandmonitoringmodelsassociated withtransaction creditratings.Inaddition,it establishesthattheCFO isresponsibleforthe CLFmodelusedtocalculatereserve requirements. AspartoftheforthcomingCRO review,OIGwillconductacomprehensiveassessmentof theBank’sinternalrisk management policies.35
34 TheERC servesas an internalforum for seniormanagementto discussstrategicrisksacrosstheagency.
35 Asmentioned above, theReauthorization Act requires OIGtoevaluate theBank’s portfolioriskmanagement procedures andtheimplementation of the duties assigned to the CRO andto submit a writtenreport withits findings to Congressnolater than December4,2016.
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External Validation of Ex‐Im Bank financial models
Ex‐ImBank’sAuditCommitteeinitiatedanindependentreviewoftheBank’sCLFandinternalriskscoring models.Theover‐archingobjectiveoftheseassignmentswas toconfirmtheconceptualsoundnessofthevariousmodelsandto providerecommendationstoaddressany findingsobservedbythethirdpartyconsultants.Withthedissolution oftheAudit Committeebythe2015Reauthorization Act,theresponsibilityforthevalidation oftheCLFandinternalrisk ratingmodelswasassumedbythe Bank’sChief Operating Officer (“COO”).
IndependentVerificationandValidation(“IVV”)oftheBank’sCLFModel:InFY2015,Ex‐ImBank’sAuditCommitteeengagedSummitConsulting,LLC(“Summit”),toconductanIVVof the Bank’sCLFmodel.Thescopeoftheengagementrequiredananalysisofthereasonabilityofthe CLFmodelandsource dataused forthe data inputs.SummitreferstothisportionoftheCLFmodelprocessasworkstream one(Data)andworkstreamtwo (ModelSpecification). TheIVV exercisedeterminedthat the“documentation,operation,inputsandoutputs,andmethodology oftheCLFmodeltobereasonable,pending minorchanges.”The reportidentifiedseveral recommendationsforimprovementwhichwerepresented toseniormanagement.
AsdisclosedinSummit’sreport, thescopeoftheassignmentdidnot includeanassessmentofthereasonableness oftheBank’sapplicationoftheCLF modelincludingtheuseofthequalitativeandquantitativerisk components,thereasonableness oftheoveralllossreserveprocessandthecalculationofthedollar lossreserveamount.FollowingSummit’sCLFmodel,thesefactorswouldbeevaluated as partofworkstreamthree(ModelCalculations)andworkstreamfour(Dollar LossReserveEstimation).Inseveral meetingswiththeOIG, Bankmanagement confirmed its intentionto completethesecond halfoftheIVVanalysisinFY 2016.
IndependentreviewoftheBank’s BudgetCostLevel(“BCL”)risk ratingsfortransactions:InFY2015Ex‐ImBank’sAudit CommitteeengagedS&PCapitalIQ RiskSolutions(“S&P”)toconductan independent reviewof theBank’sBCLriskratingsfortransactions.Thework wasdividedintoseveralphasesandperformedsequentially:
PhaseOne: Conceptual Soundness ofInternalBCLRiskRatingModels.Thisphasereviewed themethodologyemployedin 11internal financialmodelsandtheextentofalignment withS&P’s riskmethodology.Evaluativecriteriafor alignmentincludedtheextent towhich:(i)similarcredit factorswereexamined, (ii) similar weightings were ascribedto therisk factorsand theirimpactonthefinalrisk score,and (iii)there wassufficientdocumentationtosupporttheratingmodelandmethodology.
Ofthe11financialmodelsreviewed,S&Pdeterminedthatonewas“broadlyaligned,”sevenwere “somewhataligned,”and threewere “notaligned.”PursuanttoS&Pmethodology,“broadlyaligned”denotesthemodelunderreviewexhibitsagood degreeofalignment withbest practice methodologies,withalimitednumberofnon‐substantial methodologicaldifferences,“somewhataligned”denotesthemodelexhibitsriskdimensionssimilartobest practiceswithsomedifferences intheweighting ofthoseriskdimensions; and“not aligned”denotesalargenumber ofmajormethodologicaldifferences.
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Inaddition, thereportprovided eightover‐archingrecommendations toaligntheBank’sinternalrating systemwithindustrystandards,aswell asmodelspecificsuggestions designedto ensurecongruencywithbestpractices. Table4belowprovidesasummaryoftheeight principalrecommendations,while AppendixFprovidestherelatedexcerptsfromS&P’sreportthatsupporttheirrecommendations.
1
2
No. S&PrecommendsthatEx‐ImBankimprovedocumentationformodel developmentandmodelimplementation. S&PrecommendsthatEx‐ImBankimplementbetterdefined objectivescoringcriteriaandmodelarchitecture.
Table 4: S&P Recommendations – Phase One Details
3
4
5
6
7
8
S&PrecommendsthatEx‐Imbankutilizeadditional sectorspecificmodelstobetterassesstheuniquerisksparticulartoanindustry. S&PrecommendsthatEx‐ImBankdevelopadualriskratingstructurewhich wouldclearlydifferentiate between obligorPD riskandtransactionlevelLGD risk.S&PrecommendsthatEx‐ImBankdevelopamodelvalidationfunctionthatisfunctionallyindependent.S&Precommendstoeliminate differencesbetween origination and monitoring models. S&PrecommendsthatNon‐sovereign countryriskshouldbeusedinmodels asanimportantdirectriskassessmentdriver.S&Precommendsthatanycriterion consideredas partoftheriskassessmentoftheBoard memorandum shouldbecorrespondinglyreflectedasa direct risk factor oftherelevant riskratingmodel.
Source: S&P Reports Provided to Bank staff
PhaseTwo: OutcomesBenchmarking.Thisphaseprovidesameasure ofalignmentbetweenthetwoselectedEx‐ImBankrating models(Transportation RiskRatingModelandtheLong‐TermCorporateRisk RatingModel)andS&P ratingmethodologies.AsampleofEx‐ImBanktransactions wasrated usingtheS&PCreditAssessmentScorecards.Theratingoutcomes were thencomparedwiththeBCL ratingusing theBank’sRiskRatingModeloutputs,thusprovidingadirectcomparisonofratingoutcomes.
AsindicatedinTable5,thecombination ofPhasesOneandTwo resultedinthe followingmodelriskassessments: (i)theTransportation model wasassignedaconceptualsoundness ratingof“broadlyaligned”whiletheoutcomesbenchmarkingconferredaratingof“somewhat aligned”basedontheunsecured BCLoutcomeand“notaligned”basedonthesecuredBCLrating;and(ii)theLong‐TermCorporatemodelwasassignedaconceptualsoundnessratingof“somewhataligned andanoutcomesbenchmarkingratingof “broadlyaligned.”
PhaseThree:AssessmentofModel Validation Findings.Thisphasebuildsontheearlierassessmentsofconceptualsoundnessandoutcomesbenchmarkingandprovides anoverallassessmentof modelriskutilizingfourcategories:(i) Fitforuse;(ii)Conditionaluse‐Lowerrisk;(iii)Conditional use‐Higherrisk;and(iv) Not fitforuse.PursuanttoS&Pmethodology,“Conditionaluse‐Lowerrisk indicates thatthe modelisacceptable buthaslimiteddocumentationand/orcontroldesignissuesthat inaggregatedo not
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greatlyimpactthefunctioningof themodel.Conditional use‐Higherriskindicatesthatthemodelisacceptablewithconditionsbuthasoneormoredocumentationand/orcontroldesignissuesthatin aggregatesignificantlyimpact thefunctioningof the model.
Table Risk Rating model
5: S&P Recommendati
Conceptual Soundness
ons – Phases Two and Three Outcomes
Benchmarking Phase Three: Overall
Assessment
Transportation:36‐Unsecured
‐Secured
Broadlyaligned Somewhataligned Conditional use–Lowerrisk
Broadlyaligned Notaligned Conditional use–Lowerrisk
Long‐TermCorporate: Somewhataligned Broadlyaligned Conditional use –Lowerrisk
Source: S&P reports provided to Bank staff
Inadditiontotheoverallmodelriskassessment,S&P recommended:(i)thatEx‐ImBanktakeappropriate modelriskmanagementactionsto prevent creditscoringmodel’sperformancedeteriorationincluding recalibratingordevelopinganewcreditscoringmodel;and(ii)thatEx‐ImBankregularlyconductoutcomestestingofmodelresultsincludingback‐testing(comparingpredictedvaluestoactualoutcomes)andbenchmarkingofmodeloutcomes.
OIGunderstandsthatEx‐ImBank managementhasconvened aninterdivisionaltaskforce,coordinated bytheCPC andcomprisedofrepresentativesof theapplicableoperatingdivisions,todetermine howthegeneralandmodel‐specificrecommendationswillbeimplementedandtodevelopatimeframeforcompletion.
RECOMMENDATIONS
Toensureconceptualsoundnessandconsistencywithbestpractices addressedintheSummitandS&PreviewsofEx‐ImBank’sfinancialmodels,OIGrecommendsthattheBankundertakethefollowing initiatives:
3. Engage an independentexpertto completethesecondhalfofthe CreditLossFactors(“CLF”)validation exerciseinFY2016andto address therecommendationsputforthin the finalreport. Toensure adequate independence ofthereviewprocess,oversightof theprojectshould beplacedwithindividualswho arenotresponsiblefordevelopmentoruseoftheCLFmodel.
36 Based onthe unsecured andsecuredBCL riskrating outcomes.
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4. Engage an independentexpertto evaluate theremaining modelsaspartofphasethreetestingoftheBCL review,beginningwithprojectfinance, and toaddress therecommendationsput forthin the finalreport. Toensure adequate independenceofthereview process,oversightof theprojectshouldbeplacedwithindividualswhoarenotresponsiblefordevelopmentoruseoftheriskratingmodels.
Management Response:
Pleasesee AppendixA,ManagementResponseand OIGEvaluation.
TheOCFOhashistoricallyconductedtopdownportfoliostresstestingonan annual basis.However,theBank advised theOIGthatitplannedtoconductportfoliostress testingon a semi‐annualbasis, whichbeganthesecondquarter of FY2016.37 Aspartofthisexercise,OCFOstaffusesa Monte Carlosimulationapproachtocreatealossestimatebasedon20,000simulations.Inaddition,theBankperiodicallystresstestsitslargestobligorsbymeasuringthe impactofratingsdowngradeonthoseobligorsusingtheBoardofGovernors oftheFederalReserve System’s(“Board”)ComprehensiveCapitalAnalysisandReview(“CCAR”)adverseandseverelyadverse scenarios.38, 39
InrecentyearstherehasbeenanabundanceofguidancefromU.S.bankingauthoritiesregardingstresstesting.Forbankholdingcompanies(“BHC”)with$50billionormore
37 According to Bank staff, the results ofthe first semi‐annual stresstesting of theportfoliowerepresentedto theRMCand were documented intheBank’squarterly Default Rate Report dated March 31,2016.
38 For moreinformation,see http://www.federalreserve.gov/bankinforeg/stress‐tests/CCAR/201503‐comprehensive‐capital‐analysis‐review‐preface.htm.
39 For moreinformation,see http://exim.gov/sites/default/files/oig/audit/Audit‐of‐Export‐Import‐Bank‐of‐the‐United‐States‐Fiscal‐Year‐2014‐Financial‐Statements‐OIG‐AR‐15‐001.pdf
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intotalassets,theBHCsaresubjectedtoannualCCARandDodd‐FrankActsupervisorystress testing(“DFAST”)assessmentsaswellasamid‐cyclestresstest.Althoughfederalregulatory guidance forfinancialinstitutions maynotbe directly applicabletofederalagencies,it doesprovideausefulbenchmarkforbestpractices relatedtostress testing procedures.40
Theimportanceofportfoliostress testingasa keyriskmanagementtoolwasconfirmedinarecent surveyoftherisk andcreditportfoliomanagement practicesofECAsandinternationalfinancialinstitutions with65percentofrespondents citingscenario analysisandstress testing asa keyobjectivefortheCPM function.41 Finally,theBank’sCharterrequirestheRMC,workingwiththeOCFO,tooversee“periodicstress testingontheentire Bankportfolio,reflecting differentmarket,industry,andmacroeconomicscenarios,andconsistentwithcommonpracticesofcommercialand multilateraldevelopmentbanks.”42
RECOMMENDATIONS
5. OIGrecommendsthat Ex‐ImBankfurtherdevelopthescope(e.g., sectorandoneobligor)andfrequencyofstress testingprotocolstoanalyzepotentialvulnerabilitiesduetotheBank’sportfolioconcentrations and incorporate theresultsofthe stresstestingintokey riskmanagementpolicies includingtheBank’sriskappetitestatement,risktolerancelevels,andtheuseof risksharingasprovidedforin the2015ReauthorizationAct.
Management Response:
Pleasesee AppendixA,ManagementResponseand OIGEvaluation.
40 TheU.S.bankingauthoritiesconsist of the FederalDepositInsurance Corporation(“FDIC”),the Board ofGovernorsof theFederal Reserve System (“Board”), and theOffice of theComptrollerof the Currency(“OCC”). For example,see http://www.federalreserve.gov/bankinforeg/srletters/sr1107a1.pdf.
41In2015,sixty‐five(65)percent of respondentsin a surveyof therisk and credit portfoliomanagementpractices of exportcredit agenciesandinternational financial institutions cited scenario analysis andstress testing as a keyobjective for the CPMfunction. Supra note3.
42 Charter, supra note5at 62.
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TheERCrecentlyapprovedtheuseofsoftportfoliolimits
aspartoftheBank’soverallportfolioriskmitigationpolicies.
In2014theBankengagedtheEconomistIntelligenceUnit(“EIU”)toanalyzetheBank’sportfolioconcentrations,todevelopaportfolioriskdashboardmodelandtooutlinevariouspolicyoptionsthatwouldenabletheBanktoachieveitsportfolioconcentrationlimits.AccordingtotheStatementofWork(“SOW”)datedJuly23,2014,EIUwasengagedtodevelopariskdashboardforthreepurposes:(i)toassessthemacro‐economicimpactofoutsidefactorsontheBank’scurrentportfolio,includingconcentrationandotherportfoliorisks;(ii)todeterminehownewtransactionsimpacttheoverallriskprofileoftheBank’sportfolio;and(iii)toidentifysoftportfoliolimits,andrecommendactionstomitigatetheriskoncethesoftlimitsarereached.
EIUdevelopedaportfolioriskdashboardthatallowsBankstafftoviewcurrentexposuresbyregion(NorthAmerica,LatinAmerica/Caribbean,Europe,Africa,Asia,Oceana,andother);industry(aircraft,manufacturingoilandgas,powerandother);
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creditrating(investmentgradeornon‐investmentgrade);andcounterpartytype(sovereignornon‐sovereign).Themodelincludesfourdifferent metricsincludingexposureamount,thepercentage shareofthe totalportfolio,thepredictedprobabilityofpaymenteventandtheestimateddefaultpercentage.
Althoughthemodelprovidesausefultoolto aggregateandreportportfolioexposures,certainrefinementswouldenhanceitseffectivenessasariskmanagementtool.Forexample,aspresentlyconfigured,themodelbasestheproposed exposurelimitsonthecurrentportfolioallocationsand thetwopercentdefaultrate capmandatedbyCongress.Basedonthehistoricallossdata of thevarious products,creditriskratings,andgeographicalregions,themodel determineshowmuchadditional exposuretheBankcanbook ineachcategory(region,industry,creditratingandcounterpartytype),andstillremainunderthedefaultcap.
Inadoptingthisapproach,themodelacceptsthecurrent portfolioallocationandassumesthatthedefaultcapis the appropriatesoftportfolio limitforeachcategory.Otherpeerinstitutionsreviewed byOIGsetportfoliosub‐limitsusingothercriteria,includingpercentagethresholds ofcreditlossreservesandearnings, currentindustryconditions,nominallimitsontheriskratingoftheborrower, andprogramspecificobjectives.Ex‐ImBankshouldfurtherexpandthemodeltousecriteriatodetermineprudentialsoftportfoliolimits thatmaydifferfromthedefaultcapbasedontheBank’sriskappetitestatement.Also,thecurrentmodeldoesnotanalyzeorprovidesoftportfoliolimitsforoneobligor concentrations,aconcentrationriskdiscussedearlierinthisreport.Includinglargeobligorsasoneofthecategories measuredinthemodelandriskdashboardwouldaidconsiderationandmitigationofthatrisk.Anotherimprovementtothecurrentmodel wouldbetoanalyzethepotentialimpactofcovarianceorcorrelationofriskfactors,industriesandregions.ThisisparticularlyimportantforthosesectorswheretheBankcurrentlyhaslarge industryandgeographicalconcentrations.The outcomeofthisanalysiswould enhancethemodel’spredicative capabilityandinformtheprocessofsettingprudentsub‐limits.
RECOMMENDATIONS
OIGrecommendsthatcertainenhancementsbemadetotheEIUriskdashboardtoimproveitseffectivenessasariskmanagementtool.Specifically,
6. Inaddition tothetwopercentdefaultcap,Bankstaffshouldestablishadditionalcriteria for thesetting ofprudent softlimitson exposure concentrations,includingoneobligorrelatedconcentrations.Thismayincludepercentage thresholdsofcreditlossreservesandearnings,current industryconditions,currentexposure,nominallimitsontherisk ratingoftheborrowerand programspecific objectives.
7. Analyzethepotentialimpactof covarianceor correlation ofrisk factors,industriesandregionsontheprobabilitydistributionoflossesofthecreditportfolio.The
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outcomeofthisanalysiswouldenhancethemodel’spredicative capabilityandinformthe processofsettingprudentsoftlimits.
Management Response:
Pleasesee AppendixA,ManagementResponseand OIGEvaluation.
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Ex‐Im Bankcreatedthe position of CRO in FY 2014 andstructuredtheposition withorganizationalindependence.Inaddition,BankmanagementdraftedkeyriskpoliciesincludingaPortfolioRisk MitigationPolicy andaFinancialModelRiskManagement andGovernancePolicy.
Inaddition, the2015ReauthorizationActmandates thattheBankappointa CROwhoshall“overseeallissues relatingto riskwithin theBank; and reports tothePresidentoftheBank.” UnderSec3(l)oftheAct,theBank isexpectedtoappointa CROwithpriorexperienceinpracticalfinancialriskevaluationpractices.43 Theduties oftheCRO shall includethe following:
Toberesponsibleforallmattersrelatedtomanagingand mitigatingallrisktowhichtheBankis exposed,includingtheprogramsandoperationsof theBank;
Toestablishpoliciesandprocessesforriskoversight, the monitoringofmanagementcompliancewithrisk limits,andthemanagementofriskexposuresandriskcontrolsacrosstheBank;
ToberesponsiblefortheplanningandexecutionofallBankriskmanagementactivities,includingpolicies,reporting, andsystemstoachievestrategicriskobjectives;
Todevelop anintegratedriskmanagement programthat includes identifying,prioritizing, measuring, monitoring, andmanaginginternalcontrolandoperatingrisksandotheridentifiedrisks;
Toensurethattheprocessfor riskassessmentandunderwriting forindividualtransactionsconsiders howeach suchtransactionconsidersthe effectofthetransactionontheconcentrationofexposureintheoverallportfoliooftheBank,takinginto accountfees,collateralization,andhistoricdefaultrates;and
Toreview theadequacyoftheuse bytheBank ofqualitativemetricstoassesstheriskofdefaultundervariousscenarios.
43 2015ReauthorizationAct, supra note2.
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The2015ReauthorizationActmandated thattheBankestablisha RiskManagementCommittee(“RMC”)anddissolvetheformerAuditCommittee.Accordingly,theBankestablished theRMC,comprisedof theBoardofDirectors, with thePresidentand FirstVicePresidentoftheBankserving asex‐officiomembers.Theduties oftheRMC include:
(i) Oversee, in conjunction withtheOCFOofthe Bank:periodicstresstestingontheentire bankportfolio,reflecting differentmarket,industry,andmacroeconomicscenarios,andconsistent withcommonpracticesofcommercialandmultilateraldevelopmentbanks,andthemonitoringofindustry,geographic,andobligorexposurelevels;and
(ii) Review allrequiredreportsonthe defaultrateofthebank beforesubmissiontoCongress.
Theregular attendees ofanRMC meetingincludethemembers,ex‐officiomembers,theCFO,COO, OGC,CBO, CROandChiefofStaff. AbsentafullBoard,thecommitteehasmetonaquarterlybasiswithmeetingsheldtoreviewanddiscusstheBank’sriskmanagementactivitiesanddefaultreportforthefirstandsecondquartersof FY2016(February10,2016 and May18,2016,respectively).Thestandingagendacovers fouritems:(1)anoverview ofauthorizations,cancellations, andportfolio exposure;(2)anindustry riskreport;(3)aregionalriskreport; and(4)the defaultreport.
Ex‐ImBank carried outseveral initiativestoimprovethetransparency of itscurrent risk
metricsand reportingprocedures. Forexample,asrequiredbythe2012Reauthorization Act,theBanksubmitsaquarterly“DefaultRate Report”toCongressonthecurrentdefaultrateofitsactiveportfolioandbyspecificsubcategories—producttype,keymarketand industrysector.44 Thereportalsoincludes thecurrentdefaultratebyregion andproductline,an agingsummaryofcreditsinarrears,andthehistorical defaultratesince inceptionof theBankandcreditreformasoftherespective quarter.Lastly,the defaultreportcontainsthemostrecent resultsof theBank’sstresstestingofitsportfolio.
Ex‐ImBankhasfurtherimproved transparency throughitsmonthlyinternalreporton “MajorDelinquentDebt,Impaired Credits&WatchList”(formerlythe“ImpairedCredits &WatchList”)utilized for managementreportinganddecision‐making. ThereportoutlinestransactionswheretheBorrower’sabilitytoservicerepaymentof Ex‐ImBankcredits hasbeen affected(i.e.,“impaired credits”)or couldbeaffected(i.e.,“watchlist”items).Inaddition, thereport alsoprovidesanoverview oftheBank’sportfolioas
44 SeeExport‐Import BankReauthorizationAct of 2012at http://www.gpo.gov/fdsys/pkg/PLAW‐112publ122/pdf/PLAW‐112publ122.pdf.Pub.L.No.112‐122,126Stat.357(2012).
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ofthemostrecentfiscalyearendandalistof majorclaimsandrecoveries(i.e.,“major delinquent debt”).Thelatter is anewadditiontothereport: alist comprisedoflong‐termcreditswhereaclaimhasbeenpaidoradirectloanisin paymentdefaultand/ortheBankis engagedin recoveryefforts.Additionalreports preparedbyEx‐ImBankin FY2015includeindividualtransactionsensitivityanalyses, stresstestingbysector(e.g.,airline),andriskreportsbyindustryand region(e.g.,commodities andLatinAmerica/Caribbean).
However,incarrying outthis review,OIGobserved that Ex‐ImBankpracticescanbefurtherenhancedtoimprovetransparencyandto better informkey stakeholders onriskmanagement issuesand theperformanceof itsportfolio.For example,the Bankwouldbenefit fromchangesinthemonitoring and/orreportingof certaincreditmetrics, suchasimpairedcredits,BCLriskratingandthecurrentdefaultrate.SuchenhancementswouldhelptheBanktoidentifyemergingrisksandtoputinplaceappropriatepreventionormitigation measures, and toinform,inatimely manner, keystakeholders.
Ex‐Im Bank’s credit metrics – transparency and reporting
Impairedcredits:AlthoughEx‐Im Bankhasenhancedits current riskmetricsandreportingprocedures,theOIGfoundthattheBankcan furtherimprovetheclassification andreportingof impairedcredits forthepurposeofpromotingtransparencyandbetterdecision making.InreviewingtheBank’sManagement’sDiscussionandAnalysisofResultsofOperationandFinancialCondition(“MD&A”)andNotestothe Financial Statements (“Notes”)sectionsoftheannualreports45 andmonthlyinternalreportsonimpairedcreditsandwatchlist, OIG found thatthe Bankhaschangedthedefinitionof impairedcredits intheMD&Asection severaltimes,mostrecentlybeginning inFY 2013(seeTable7below).46,47, 48 Theneteffectofthechangesnarrowedthedefinition forclassifying acreditasimpaired.However, neitherthe rationale forthedefinitionalchangesnorthedeviationsfrom thedefinitioninclassifying credits asimpaired weredisclosed bytheBank toenable userstounderstandtheeffectandmanagement’sperspectiveontheperformanceof theportfolio.
Inclassifyingcreditsas impaired, OIGfoundthattheBank did notalwaysfollowthedefinition inplaceatthetime ofreporting.Forexample, inFY2015 Ex‐ImBankdefined
45 Specifically,theMD&Aand Notessectionsof theBank’s annual reports.
46 SeeAppendix Gof thisreport for a scheduleof thevarious definitionsof impaired creditsutilizedby theBank.
47 OCFOmanagement wasadvisedin2011byDeloitte,theindependentpublicaccountingfirmthatconducts the agency’s financialstatementsaudit, that Ex‐ImBank wasnot obligatedto publishtotalimpairedcredits initsannual reportunderfederalaccounting standards.
48 OIGnotes that theBank’s definitionof defaults and delinquencyas reportedin the Notessection of theAnnualReporthasnot changed.
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impairedcredits as“thosetransactionsriskrated from9to11 and ontheverge ofimpairmentduetopolitical,commercial,operational,and/ortechnical eventsorsituations,and/orActsofGodthat haveaffectedtheBorrower’sabilitytoservicerepaymentofEXIMBankcredits.”49 (Emphasisadded)Areviewof the transaction leveldetailssupporting the totalamountfor impairedcredits reported in theMD&Asectionofthe2015 annualreportandSeptember2015impaired credits and watchlistreportincludedcreditswithriskratingsof7,8and12,andaworkingcapitalguarantee.50
FY
Table 6: Impaired Credits – Examples of Definitional Changes
MD&A Section of the Annual Report Amount
(in millions) 2012 Ex‐ImBankgenerallyconsidersa creditimpairedifitmeetsoneormore
ofthe following:(1)delinquent loansandclaims withan amountof $50,000 or morepastdue atleast90 days,(2)rescheduledloansand rescheduledclaimsor(3) non‐delinquentloansand claimsabove acertainriskrating.
$817.0
2013 Impairedcreditsaredefinedas thosetransactions riskratedfrom 9 to 11(refertosectionVII,“Portfolio‐Risk RatingSystem andRiskProfile,” fortheexplanation of risk ratings), or onthevergeofimpairmentduetopolitical,commercial,operationaland/ortechnicaleventsorsituations,and/orforcemajeurethathaveaffectedtheborrower’sability toservicerepaymentofEx‐ImBankcredits.
$434.051
2014 & 2015
ImpairedCreditsaredefinedas thosetransactions riskratedasBudget CostLevel(“BCL”)9‐11 and on the verge ofimpairment dueto political,commercial,operationaland/ortechnicaleventsorsituations, and/orActsofGodthathaveaffectedtheBorrower’s abilitytoservice repaymentofEx‑ImBankcredits.
$294.3 &$468.1
(respectively)
Source:Ex‐ImBank’sAnnual Reports forFYs2012– 2015
AsindicatedinEx‐ImBank’sannualreports, impairedcreditsrepresent a keycredit metricutilizedbyBankmanagement inassessingthehealthofitsportfolio.52 Asakeymetric,Bank managementandstakeholders wouldbenefit fromaconsistent and precisedefinitionandapproachforclassifying credits asimpaired,forbothinternaland
49 SeetheExport‐Import Bank of the United States Annual Report 2015at http://www.exim.gov/sites/default/files/reports/annual/EXIM‐2015‐AR.pdf.
50 Ex‐ImBankportfoliodata as of FYE2015;2015Annual Report, supra note 49;and Ex‐Im Bank’sImpairedCredits andWatchList as ofSeptember2015.
51 Thedeclineintheamount reportedin2013isduetothesuccessfulrestructuringof the$420millionBoleotransactionresulting in improvementtothecredit.
52 IntheMD&Asectionof the2015 Annual Report, Bank management identified“distinct characteristics”or“lenses” for use inunderstanding and addressingvariations and externalrisks to the Bank’sportfolio.Oneof those“lenses”identified is“PortfolioLoss Reserves& MajorImpairedCredits.”2015AnnualReport, supra note49at 38‐43.
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externalreportingpurposes.AccordingtoBankstaff,theERCdiscussedand approvedthechange indefinition ofimpairedcredits at theJune2014meeting. However,theERC’sdiscussionandapprovalof thedefinitionalchangeswasnotaccuratelydocumentedinthemeetingminutes.53
According toOMBCircularA‐136, Bankmanagement isresponsible fortheMD&Aandhas“considerablediscretion withrespecttothe presentation, subjecttotherequiredcomponentsandthepervasiverequirement thattheMD&Anotbemisleading.TheMD&Aprovidesmanagementwith a vehicleforcommunicatinginsightsabouttheentity, increasing theunderstandabilityoffinancialinformation,andprovidinginformation abouttheentity,itsoperations,servicelevels, successes,challenges, andfuture.”54 TheOMBCircularstatesfurther thattheMD&A“shouldberegarded as requiredsupplementary information”andshouldalsoinclude“forward‐lookinginformation,detailsaboutthepossibleeffectsofthemostimportantexistingperformance andfinancialdemands,events,conditions,andtrends…. Managementshouldincludeimportantproblemsthatneedtobeaddressed, and actions that havebeenplannedortaken toaddress thoseproblems.”55
Table7belowdepicts thetotal amountofimpairedcreditsreportedbytheBankintheMD&Asectionoftheannualreport forFYs2010through2015.OIGnotesthat theincrease in impairedcredits inFY 2015waslargelydueto the exposureto(1)Jabiru Satellite($139.1million),(2)
theimpairedcreditslist.
($97.2million) and(3)($54.7million)thatwasoffsetby theremovalof ($100.0million)from
(b) (4), (b) (5) (b) (4), (b) (5)(b) (4), (b) (5)
Table 7: Impaired Credits – Total Amount Reported (in millions) FY 2010
$666.2 FY 2011 $495.0
FY 2012 $817.0
FY 2013 $434.0
FY 2014 $294.3
FY 2015 $468.1Total
% Change ‐ ‐25.7% 65.1% ‐46.9% ‐32.2% 59.1% % of Reserves 13.0% 12.2% 17.8% 9.4% 5.8% 11.7% % of Exposure 0.9% 0.6% 0.8% 0.4% 0.3% 0.5%
Source: Export‐Import Bank’s Annual Reports FYs 2010 – 2015 and Bank Data
BCLriskratingofportfolio:BCLriskratingsareacriticalfactorindeterminingtheappropriatelevelofcreditloss reserveandsubsidythat is allocatedto anindividualtransaction.OIG’sreviewofinternalBankdocumentsand interviewswithBankstaffconfirmedthatthecurrentpracticeistoreviewatransaction’sBCLriskratingonceayear andwithinsixmonthsofthe Borrower’s fiscalyearend,unlessamaterialadverse
53 Ex‐ImBank’s SummaryMinutes of ERC MeetingHeld onJune20,2014(Revised),approved on October21,2014.
54 Formoreinformation,seeOMBCircular A‐136FinancialReporting at https://www.whitehouse.gov/sites/default/files/omb/assets/OMB/circulars/a136/a136_revised_2015.pdf.
55 Ibid.
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creditdevelopmentoccurs.56 Asaresult,atransaction’sBCLriskratingmaylagrecentcredit events(positive ornegative)andprovidealessaccurateassessmentoftheportfolio’soverallriskprofile.
Quarterlyorsemi‐annualBCLratingassessmentswouldprovidea moreaccurate reflectionoftheBank’s overall risk profile,informfuturecreditdecisionsand allowtheBanktoadjustthelossreserve levelasappropriate.ThisisparticularlyimportantinperiodswhensectorsoftheBank’sportfolioareexperiencingdownwardcreditmigration. Forexample,theBank’s riskrating fornewbusiness hasincreasedsinceFY2012,reflecting thewritingof additionalbusinesswithahigherriskratingthan theportfolioweightedaverage inrecentyears.57 Table8belowdepictstheriskratingfortheBank’s portfoliofor FYs2010 through2015.
Total Exposure New Business
Table 8: Ex‐Im Bank BCL Risk Rating of Portfolio FY 2010 FY 2011 FY 2012 FY 2013 FY 2014 4.13 3.87 3.66 3.72 3.753.87 3.81 3.23 3.88 4.09
FY 2015 3.93 4.27
Source: Ex‐Im Bank’s Impaired Credits & Watch List (Internal Reports) and Bank Data
Defaultrate:PursuanttoitsCharter,Ex‐ImBankisrequiredtoreportitsdefaultratetoCongressquarterlyonbothanaggregatebasisandaccordingto specificsubcategories.Thoseincludebytype ofproduct,bykeymarketandbyindustry sector.TheCharterdefinesdefaultrate as “thetotalamountofpayments thatare overduedivided bythetotalamountoffinancinginvolved.”58 Accordingtoitsdefaultreport,Ex‐ImBankimplements thisrequirement asfollows:
Overdue Payments = Defaults paid + Expenses ‐Recoveries
Total Financing = Total Disbursements
Ex‐ImBankcalculatesthestatutorynumeratorof“totalamount ofrequiredpaymentsthatareoverdue”asthe totalamountofclaimspaidonguaranteesandinsurance transactions,aswellas unpaid pastdueinstallmentsonloans intheBank’sactiveportfolio,plusexpensesincurred related totheBank’srecoveryefforts,offset bynetrecoveries todate.As theBankappliesthestatutorydefinition, recoveriestodatereducethe amountoverdueinconnectiontothespecificclaimpaidortheloanin
56 Ex‐ImBank’s AssetMonitoringDivision’s Asset Monitoring System: Report Optimization Project Optimization Manual datedMay 19,2010(revisedSeptember30,2013)
57 For furtherinformation,see Appendix H ofthis report forabreakdownof BCL riskratings and totalexposuresforFY 2012to FY2015.
58 Charter, supra note5at 68.
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arrears.As such,thedefaultratereportedpursuanttothestatutorydefinition is a netlossrateor netcharge‐offrate, ratherthanagrossdefaultrateordelinquencyrate.
Second,the denominatoroftheBank’sdefaultratio isdefined as the“totalamountoffinancinginvolved,”whichtheBankcalculatesastotalamounts disbursedduring thetimeperiod measured. Incontrast, theFDICandFRBrequirememberbankstocalculatedelinquencyandnetchargeoff rates usingaverageloansoutstandingforthemeasuredperiod,ratherthantotaldisbursements.59
AlthoughEx‐ImBankisrequired tocalculateandreportitsdefaultrateasstipulatedbystatute, the statutorydefinitions arenot necessarilyaligned withcomparablereporting requiredby theFDICorFederalReserve forcommercialbanks.In addition,netlossrates,standingalone,donotprovideclarityintohowtherisksofatransactionorportfolioareallocated. AsS&PstatedwhenrecommendingthattheBankdevelopriskmodelsusingseparatecalculationsof“probabilityofdefault” and“lossgivendefault,”theuseofa netlossrate islesspreciseas itincorporatesrecoveriesin thedefaultratewhereas theuseofastandalone orgrossdefaultrateprovides abetterunderstandingofthedriversofthedifferent componentsof atransaction’srisk(seeAppendixF).
Inaddition tothereportingof defaultraterequiredbytheCharter, theBankcouldenhance transparency andbetter informkey internaland externalstakeholders bycalculating andreportingadditionalriskmetricsforcreditprogramsandanetchargeoffratiousingaverage outstandingsforthemeasuredperiodin linewithcommonpractices. Theuseofadditional metricscouldbetterinformmanagersastothelevelandtypesofrisks and allowfora meaningfulcomparisonwithbothratingagencydataandtheperformanceofitspeers.
RECOMMENDATIONS
8. Ex‐ImBankshoulddevelopandimplementformalprocedurestoenhancethetimelinessoftheaggregation and reportingofriskmanagement data,including thedevelopmentofaconsolidateddashboardforseniormanagementthat reportsimportant riskmanagementdata onamonthlybasis.This should includebutnotbelimitedtothefollowing:
Aggregateportfolioconcentrations onasector, countryandone obligorbasis,delineating variancewithestablishedportfolio limits;
59 Common practice as observedby U.S.financial regulatory agenciesis toutilizetheratioofnet chargeoffs to average outstandings. For moreinformationsee“Charge‐OffandDelinquencyRatesonLoansandLeases atCommercialBanks,”Board ofGovernors of the Federal ReserveSystemavailableathttp://www.federalreserve.gov/releases/chargeoff/about.htm.
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Aggregatecreditmetricsoftheportfolioincludingimpairedloansanddefaults;and
Aggregate migrationof risk ratingsinspecific sectorsand obligorstogetherwithanaverageBCLriskratingfor theportfolio.
Management Response:
Pleasesee AppendixA,ManagementResponseand OIGEvaluation.
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CONCLUSION
Incarryingoutitsmandate,Ex‐ImBankfacesadiversespectrumofrisksincludingcreditrisk,portfolioconcentrationrisk,marketrisk,andoperationalrisk.Inaddition,theBankfacesemergingrisktrendsandachallengingeconomicenvironmentinseveralkeysectors.Therefore,itisofsignificantimportancethattheBankhasarobustriskmanagementandgovernanceframeworktoachievelong‐termsuccess,operateonaself‐sustainingbasis,andprotectU.S.taxpayersfromsignificantportfoliolosses.
Ex‐ImBankhasmadeimportantprogressinstrengtheningitsriskmanagementpractices.
Inconductingthisreview,OIGfoundthatcertaininternalpoliciesandprocessescouldbeimprovedtostrengthentheriskmanagementpracticesoftheBank.Tothisend,thisreportformulates recommendationstoimprovetheassessmentofportfoliorisks,theaggregationandreportingofriskmanagementdataandtheoverallriskmanagementarchitectureoftheBank.
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July 22,2016
Michael McCarthy Deputy Inspector General Office of the Inspector General Export-Import Bank of the United States 811 Vermont Avenue NW Washington, DC 20571
Dear Deputy Inspector General McCarthy,
Thank you for providing the Export-Import Bank of the United States (“EXIM Bank” or “the Bank”) Management with the Office of the Inspector General’s (OIG) “ Report on Portfolio Risk and Loss Reserve Allocation Policies” (July 2016) (“Risk Management”). Management continues to support the OIG’s work which complements the Bank’s efforts to continually improve its processes. The Bank appreciates that the OIG report notes the
important progress made by the Bank in strengthening its risk management processes and governance framework. As of March 31, 2016 the Bank’s default rate was 0.261%.
EXIM Bank is proud of the strong and cooperative relationship it has with the OIG
The Bank strives to continuously improve its processes and is pleased that the OIG inspection cited the Bank’s implementation of several new policies including a Financial Model Risk Management and Governance Policy, a Risk Appetite Statement, Portfolio Risk Mitigation Policy, soft portfolio limits, and protocols for portfolio stress testing overall and by industry and
region.
The Bank is committed to full cooperation with the OIG and agrees to all eight recommendations in the report and will work with staff on implementing all recommendations.
Recommendation 1: Establish policies and attendant criteria to determine prudent soft limits on exposure concentrations and procedures to manage those exposures once identified, including options for reducing concentrated exposures, mitigating the risk of concentration exposures, or consideration of concentration risks in the transaction approval process.
1
811 Vermont Avenue, N.W. W ashington, D.C. 20571
EXPORT‐IMPORT BANK – OFFICE OFINSPECTOR GENERAL
APPENDIXES
Appendix A: Management Response and OIG Evaluation
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Michael McCarthy
Deputy Inspector General
EXPORT-IMPORT BANK OF THE UNITED STATES
Office of the Inspector General
Export-Import Bank of the United States
811 Vennont A venue NW
Washington, DC 20571
Dear Deputy Inspector General McCarthy,
July 22, 2016
Thank you for providing the Export-Import Bank of the United States ("EXlM Bank" or "the
Bank") Management with the Office of the Inspector General's (OIG) " Report on
Portfolio Risk and Loss Reserve Allocation Policies" (July 2016) ("Risk Management").
Management continues to support the OIG's work which complements the Bank' s efforts to
continually improve its processes. The Bank appreciates that the OJG report notes the
important progress made by the Bank in stTengthening its risk management processes and
governance framework. As of March 31, 2016 the Bank's default rate was 0.261 %.
EXIM Bank is proud of the strong and cooperative relationship it has with the 010
. The Bank strives to continuously improve its processes and is pleased that the OIG
inspection cited the Bank' s implementation of several new policies including a Financial Model
Risk Management and Governance Policy, a Risk Appetite Statement, Portfolio Risk Mitigation
Policy, soft portfolio limits, and protocols for portfolio stress testing overall and by industry and
region.
Toe Bartk is committed to full cooperation with the OIG and agrees to all eight recommendations
in the report and will work with staff on implementing all recommendations.
Recommendation I: Establish policies and attendant criteria to determine prudent soft limits on
exposure concentrations and procedures to manage those exposures once identified, including
options for reducing concentrated exposures, mitigating the risk of concentration exposures, or
consideration of concentration risks in the transaction approval process.
1
811 VER.\IONT AVENUF~ N.W WASHINGTO. , 0 .C. 20571
Management Response: The Bank agrees with this recommendation.In February 2016, the Enterprise Risk Committee (ERC) approved the use of soft limits including the consideration of these limits during the due diligence process of new transactions. As directed by the ERC in
February 2016, the Bank has directed staff to continue to improve the soft portfolio limit model recognized by OIG as a useful tool. The Bank will work with staff to establish policies and attendant criteria to determine prudent soft limits on exposure concentrations. Staff will be directed to establish these policies with a focus on developing procedures to manage those
exposures once identified, including options for reducing concentrated exposures, mitigating the risk of concentration exposures, or consideration of concentration risks in the transaction approval process. As a part of this process, Management has already approved the inclusion in
transaction Board memoranda of the portfolio effects of transactions under consideration by the Board of Directors.
Recommendation 2: As part of the implementation of the risk sharing pilot program as provided for in the 2015 Reauthorization Act, assess the potential role of the risk sharing program in mitigating portfolio concentration risk.
Management Response: The Bank agrees with this recommendation, and has already begun to assess the potential role of the risk sharing program in mitigating portfolio concentration risk as part of the implementation of the risk sharing pilot program as provided for in the 2015 Reauthorization Act, including the posting of a Sources Sought Notification to FedBizOpps.Gov on July 6th 2016.
Recommendation 3: Engage an independent expert to complete the second half of the Credit Loss Factors (“CLF”) validation exercise in FY 2016 and to address the recommendations put forth in the final report. To ensure adequate independence of the review process, oversight of the project should be placed with individuals who are not responsible for development or use of the CLF model.
Management Response: The Bank agrees with this recommendation, has posted a request for proposal and is currently reviewing proposals for an independent expert to complete the second half of the Credit Loss Factors validation exercise in FY 2016. Additionally, staff will be directed to address the recommendations put forth in the final report. Further, the Bank will place oversight of the project with individuals who are not responsible for development or use of the CLF model, such as those within the Office of the Chief Financial Officer group in charge of internal controls and A 123 implementation.
Recommendation 4: Engage an independent expert to evaluate the remaining models as part of phase three testing of the BCL review, beginning with project finance, and to address the recommendations put forth in the final report. To ensure adequate independence of the review
EXPORT‐IMPORT BANK – OFFICE OFINSPECTOR GENERAL
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Management Response: The Bank agrees with this recommendation.In February 2016, the Enterprise Risk Committee (ERC) approved the use of soft limits including the consideration of
these limits during the due diligence process of new transactions. As directed by the ERC in February 2016, the Bank has directed staff to continue to improve the soft portfolio limit model recognized by OIG as a useful tool. The Bank will work with staff to establish policies and attendant criteria to determine prudent soft limits on exposure concentrations. Staff will be
directed to establish these policies with a focus on developing procedures to manage those
exposures once identified, including options for reducing concentrated exposures, mitigating the
risk of concentration exposures, or consideration of concentration risks in the transaction approval process. As a part of this process, Management has already approved the inclusion in
transaction Board memoranda of the portfolio effects of transactions under consideration by the Board of Directors.
Recommendation 2: As part of the implementation of the risk sharing pilot program as provided for in the 2015 Reauthorization Act, assess the potential role of the risk sharing program in mitigating portfolio concentration risk.
Management Response: The Bank agrees with this recommendation, and has already begun to assess the potential role of the risk sharing program in mitigating portfolio concentration risk as part of the implementation of the risk sharing pilot program as provided for in the 2015
Reauthorization Act, including the posting of a Sources Sought Notification to FedBizOpps.Gov on July 61h 2016.
Recommendation 3: Engage an independent expert to complete the second half of the Credit Loss Factors ("CLF") validation exercise in FY 2016 and to address the recommendations put forth in the final report. To ensure adequate independence of the review process, oversight of the
project should be placed with individuals who are not responsible for development or use of the CLFmodel.
Management Response: The Bank agrees with this recommendation, has posted a request for proposal and is currently reviewing proposals for an independent expert to complete the second half of the Credit Loss Factors validation exercise in FY 2016. Additionally, staff will be directed to address the recommendations put forth in the final report. Further, the Bank will place oversight of the project with individuals who are not responsible for development or use of the CLF model, such as those within the Office of the Chief Financial Offic.er group in charge of internal controls and Al23 implementation.
Recommendation 4: Engage an independent expert to evaluate the remaining models as part of
phase three testing of the BCL review, begim1ing with project finance, and to address the recommendations put forth in the final report. To ensure adequate independence of the review
2
process, oversight of the project should be placed with individuals who are not responsible for development or use of the risk rating models.
Management Response: The Bank agrees with this recommendation, and will engage an independent expert to evaluate the remaining models as part of phase three testing of the BCL
review and direct staff to address the recommendations put forth in the final report. Further, oversight of the project will be placed with individuals who are not responsible for development or use of the risk rating models, such as those within the OCFO group in charge of internal
controls and A123 implementation.
Recommendation 5: 01G recommends that Ex-Im Bank further develop the scope (e.g., sector and one obligor) and frequency of stress testing protocols to analyze potential vulnerabilities due to the Bank’s portfolio concentrations and incorporate the results of the stress testing into key risk management policies including the Bank’s risk appetite statement, risk tolerance levels and the use of risk sharing as provided for in the 2015 Reauthorization Act.
Management Response: The Bank agrees with this recommendation, and has already developed and circulated a credit level stress testing policy and a portfolio level stress testing policy. The Bank has already changed its stress testing protocol from annual to every six months. The Bank
will direct staff to further develop the scope of stress testing protocols and incorporate the results of the stress testing into key risk management policies including the Bank's risk appetite statement, risk tolerance levels and the use of risk sharing as provided for in the 2015 Reauthorization Act.
Recommendation 6: In addition to the two percent default cap, Bank staff should establish additional criteria for the setting of prudent soft limits on exposure concentrations, including one obligor related concentration. This may include percentage thresholds of credit loss reserves and earnings, current industry conditions, current exposure, nominal limits on the risk rating of the
borrower and program specific objectives.
Management Response: The Bank agrees with this recommendation, and will direct staff to establish additional criteria for the setting of prudent soft limits on exposure concentrations, including one obligor related concentration while recognizing that the Bank’s long time policy has been to meet demand as long as it meets the requirement of reasonable assurance of repayment as established in the Bank’s Charter.
Recommendation 7: Analyze the potential impact of covariance or correlation of risk factors, industries and regions on the probability distribution of losses of the credit portfolio. The outcome of this analysis would enhance the model’s predicative capability and inform the process of setting prudent soft limits.
3
EXPORT‐IMPORT BANK – OFFICE OFINSPECTOR GENERAL
REPORTOIG‐EV‐16‐01
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process, oversight of the project should be placed with individuals who are not responsible for
development or use of the risk rating models.
Management Response: The Bank agrees with this recommendation, and will engage an independent expert to evaluate the remaining models as part of phase three testing of the BCL
review and direct staff to address the recommendations put forth in the final report. Further,
oversight of the project will be placed with individuals who are not responsible for development
or use of the risk rating models, such as those within the OCFO group in charge of internal controls and A123 implementation.
Recommendation 5: OIG recommends that Ex-Im Bank further develop the scope (e.g., sector
and one obliger) and frequency of stress testing protocols to analyze potential vulnerabilities due to the Bank's portfolio concentrations and incorporate the results of the stress testing into key risk management policies including the Bank's risk appetite statement, risk to lerance levels and the use of risk sharing as provided for in the 2015 Reauthorization Act.
Management Response: The Bank agrees with this recommendation, and has already developed and circulated a credit level stress testing policy and a portfolio level stress testing policy. The
Bank bas already changed its stress testing protocol from annual to every six months. The Bank will direct staff to further develop the scope of stress testing protocols and incorporate the results of the stress testing into key risk management policies including the Bank's risk appetite statement, risk tolerance levels and the use ofrisk sharing as provided for in the 2015
Reauthorization Act.
Recommendation 6: In addition to the two percent default cap, Bank staff should establish
additional criteria for the setting of prudent soft limits on exposure concentrations, including one obliger related concentration. This may include percentage thresholds of credit loss reserves and earnings, current industry conditions, current exposure, nominal limits on the risk rating of the borrower and program specific objectives.
Management Response: The Bank agrees with this recommendation, and will direct staff to
establish additional criteria for the setting of prudent soft limits on exposure concentrations, including one obliger related concentration while recognizing that the Bank' s long time policy has been to meet demand as long as it meets the requirement of reasonable assurance of repayment as established in the Bank's Charter.
Recommendation 7: Analyze the potential impact of covariance or correlation of risk factors, industries and regions on the probability distribution of losses of the credit portfolio. The outcome of this analysis would enhance the model' s predicative capability and inform the
process of setting prudent soft limits.
3
Management Response: The Bank agrees with this recommendation, and will direct staff to analyze the potential impact of covariance or correlation of risk factors, industries and regions on the expected loss of the credit portfolio.
Recommendation 8: Ex-Im Bank should develop and implement formal procedures to enhance the timeliness of the aggregation and reporting of risk management data, including the development of a consolidated dashboard for senior management that reports important risk management data on a monthly basis. This should include but not be limited to the following:
• Aggregate portfolio concentrations on a sector, country and one obligor basis, delineating variance with established portfolio limits;
• Aggregate credit metrics of the portfolio including impaired loans and defaults; and
• Aggregate migration of risk ratings in specific sectors and obligors together with an average BCL risk rating for the portfolio.
Management Response: The Bank agrees with this recommendation, and is currently providing risk management data to senior management on a monthly basis. The Bank appreciates that the OIG has recognized the improvements made to regular risk management reports such as the Major Delinquent Debt, Impaired Credits & Watch List report, which aids the Bank in risk assessment of individual credits on a monthly basis, and the Default Rate Report, which as of
March 31,2016 reported the Bank’s default rate at 0.261%. The Bank will direct staff to implement formal procedures to further enhance the timeliness of the aggregation and reporting of risk management data, including the development of a consolidated dashboard for senior management that reports important risk management data on a monthly basis.
We thank the OIG for your efforts to ensure the Bank’s policies and procedures continue to improve, as well as the work you do with us to protect Ex-Im funds from fraud, waste, and abuse. We look forward to strengthening our working relationship and continuing to work
closely with the Office of the Inspector General.
Sincerely,
Charles J. HallExecutive Vice President and Chief Operating Officer Export-Import Bank of the United States
4
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Management Response: The Bank agrees with thjs recommendation, and will direct staff to
analyze the potential impact of covariance or correlation of risk factors, industries and regions on
the expected loss of the creilit portfolio.
Recommendation 8: Ex-Im Bank should develop and implement formal procedures to enhance
the timeliness of the aggregation and reporting of risk management data, including the
development of a consolidated dashboard for senior management that reports important risk
management data on a monthly basis. This should include but not be limited to the following:
• Aggregate portfolio concentrations on a sector, country and one obliger basis, delineating
variance with established portfolio limits;
• Aggregate credit metrics of the portfolio including impaired loans and defaults; and
• Aggregate migration of risk ratings in specific sectors and obligors together with an
average BCL risk rating for the portfolio.
Management Response: The Bank agrees with this recommendation, and is currently providing
risk management data to senior management on a monthly basis. The Bank appreciates that the
OIG has recognized the improvements made to regular risk management reports such as the
Major Delinquent Debt, Impaired Credits & Watch List report, which aids the Bank in risk
assessment of individual credits on a monthly basis, and the Default Rate Report, which as of
March 3 I, 2016 reported the Bank's default rate at 0.261 %. The Bank will direct staff to
implement formal procedures to further enhance the timeliness of the aggregation and reporting
of risk management data, including the development of a consolidated dashboard for senior
management that reports important risk management data on a monthly basis.
We thank the OIG for your efforts to ensure the Bank's policies and procedures continue to
improve, as well as the work you do with us to protect Ex-Im funds from fraud, waste, and
abuse. We look forward to strengthening our working relationship and continuing to work
closely with the Office of the Inspector General.
Sincerely,
Charles J. Hall
Executive Vice President and Chief Operating Officer
Export-Import Bank of the United States
4
EXPORT‐IMPORT BANK – OFFICE OFINSPECTOR GENERAL
OIG Evaluation
OnJuly22,2016,Ex‐ImBankprovided itsmanagement response toadraftofthisreport,agreeingwiththeeight recommendations. Theresponse identifiedtheBank’sactionstakenorplanned toaddress therecommendations. OIGconsiderstheBank’s actionssufficienttoresolvethe reported recommendations,whichwillremain openuntil OIGdetermines thattheagreed uponcorrective actionsarecompleted andresponsive tothereportedrecommendations. TheBank’smanagementresponseto theeight reportedrecommendations and OIG’sassessmentoftheresponse areas follows:
RECOMMENDATION 1
Recommendation 1:Establishpoliciesandattendantcriteriatodetermineprudentsoftlimitsonexposureconcentrations andprocedurestomanagethose exposuresonceidentified, includingoptionsforreducingconcentratedexposures,mitigatingthe risksofconcentrationexposures,orconsiderationof concentrationrisksinthetransactionapprovalprocess.
Management Response: TheBank agreeswiththisrecommendation. InFebruary 2016,theEnterprise RiskCommittee(ERC)approvedtheuseofsoftlimits includingtheconsiderationofthese limitsduring theduediligenceprocess ofnewtransactions.Asdirectedby theERCin February 2016,theBankhasdirectedstaff tocontinueto improvethesoftportfoliolimit modelrecognizedbyOIGasausefultool.TheBankwillworkwithstafftoestablishpoliciesand attendantcriteriatodetermine prudentsoftlimitsonexposureconcentrations.Staffwillbedirectedtoestablishthesepolicieswitha focusondevelopingprocedures tomanage thoseexposuresonceidentified,includingoptionsforreducingconcentrated exposures, mitigatingtheriskofconcentrationexposures,orconsiderationofconcentration risksinthe transactionapprovalprocess.Asapartofthisprocess,Managementhasalready approvedtheinclusionintransaction Boardmemorandaoftheportfolioeffectsoftransactionsunderconsiderationby theBoardofDirectors.
Evaluation of Management’s Response:Management’s actionsareresponsive;therefore,therecommendation isresolvedand willbecloseduponcompletionandverificationthat theactionshave been implemented.
RECOMMENDATION 2
Recommendation2:Aspartoftheimplementation oftherisksharingpilotprogramas provided forinthe 2015Reauthorization Act, assessthepotentialrole oftherisk sharingprogramin mitigating portfolioconcentration risk.
Management Response: TheBank agreeswiththisrecommendation, andhasalreadybeguntoassessthepotential roleoftherisksharing programin mitigating portfolioconcentrationriskaspartof theimplementationof therisksharingpilotprogramas provided forinthe 2015Reauthorization Act,includingthepostingofaSourcesSoughtNotification toFedBizOpps.GovonJuly6th 2016.
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EXPORT‐IMPORT BANK – OFFICE OFINSPECTOR GENERAL
Evaluation of Management’s Response:Management’s actionsareresponsive;therefore,therecommendation isresolvedand willbecloseduponcompletionandverificationthat theactionshave been implemented.
RECOMMENDATION 3
Recommendation 3:EngageanindependentexperttocompletethesecondhalfoftheCreditLoss Factors(“CLF”)validationexerciseinFY2016 and toaddresstherecommendationsput forthin the finalreport. Toensure adequate independenceofthereviewprocess,oversightofthe projectshouldbeplacedwith individualswhoarenotresponsiblefordevelopmentoruseoftheCLFmodel.
Management Response: TheBank agreeswiththisrecommendation, hasposted arequestforproposalandiscurrentlyreviewingproposalsforanindependentexperttocompletethesecondhalfoftheCreditLossFactorsvalidation exercise inFY2016.Additionally,staffwillbedirectedtoaddressthe recommendationsputforthinthefinalreport.Further,theBankwillplaceoversightofthe projectwithindividualswhoarenotresponsible fordevelopmentoruseof theCLFmodel,suchasthosewithintheOffice oftheChief FinancialOfficergroupincharge ofinternalcontrolsand A123 implementation.
Evaluation of Management’s Response:Management’s actionsareresponsive;therefore,therecommendation isresolvedand willbecloseduponcompletionandverificationthat theactionshave been implemented.
RECOMMENDATION 4
Recommendation 4:Engageanindependentexperttoevaluatetheremainingmodels aspartofphasethreetestingoftheBCLreview,beginningwithprojectfinance,andtoaddress therecommendationsput forthin the finalreport. Toensure adequateindependenceofthereviewprocess,oversightoftheprojectshouldbeplacedwithindividuals whoarenotresponsiblefordevelopmentoruseoftheriskratingmodels.
Management Response: TheBank agreeswiththisrecommendation, andwillengageanindependentexpertto evaluate theremaining modelsaspartof phasethreetestingoftheBCLreview anddirectstafftoaddresstherecommendationsput forth inthe finalreport.Further,oversightoftheprojectwillbeplacedwithindividualswhoarenotresponsiblefordevelopmentoruseof therisk ratingmodels,suchasthosewithintheOCFOgroupinchargeofinternalcontrolsandA123 implementation.
Evaluation of Management’s Response:Management’s actionsareresponsive;therefore,therecommendation isresolvedand willbecloseduponcompletionandverificationthat theactionshave been implemented.
RECOMMENDATION 5
Recommendation 5:OIGrecommendsthatEx‐ImBankfurtherdevelopthescope(e.g.,sectorandoneobligor)andfrequencyofstresstestingprotocolstoanalyzepotentialvulnerabilitiesduetotheBank’sportfolioconcentrations and incorporate theresultsofthestress testingintokey riskmanagementpoliciesincluding the Bank’sriskappetite
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EXPORT‐IMPORT BANK – OFFICE OFINSPECTOR GENERAL
statement, risktolerancelevels,andtheuseof risksharing asprovidedforin the 2015Reauthorization Act.
Management Response: TheBank agreeswiththisrecommendation, andhasalreadydeveloped andcirculatedacreditlevelstresstestingpolicyandaportfoliolevelstresstestingpolicy.TheBank hasalreadychanged itsstresstesting protocolfromannualto everysixmonths.The Bankwilldirectstaff to furtherdevelop thescopeofstress testingprotocolsandincorporatetheresultsofthestresstestingintokey risk managementpoliciesincludingtheBank’sriskappetitestatement,risktolerance levelsandtheuseof risksharing asprovidedforin the 2015Reauthorization Act.
Evaluation of Management’s Response:Management’s actionsareresponsive;therefore,therecommendation isresolvedand willbecloseduponcompletionandverificationthat theactionshave been implemented.
RECOMMENDATION 6
Recommendation 6:Inadditiontothetwopercent defaultcap,Bankstaffshould establishadditionalcriteriaforthesettingof prudentsoftlimitsonexposure concentrations,includingoneobligorrelatedconcentrations. Thismayinclude percentage thresholdsof creditlossreservesand earnings,current industryconditions, currentexposure,nominallimitsontherisk ratingoftheborrowerand programspecific objectives.
Management Response: TheBank agreeswiththisrecommendation, andwilldirectstaff toestablishadditionalcriteriaforthe settingofprudentsoft limitsonexposureconcentrations,includingoneobligorrelated concentrationwhilerecognizingthattheBank’slongtimepolicyhasbeento meetdemandaslongasitmeetstherequirementofreasonableassuranceof repayment asestablishedintheBank’s Charter.
Evaluation of Management’s Response:Management’s actionsareresponsive;therefore,therecommendation isresolvedand willbecloseduponcompletionandverificationthat theactionshave been implemented.
RECOMMENDATION 7
Recommendation 7:Analyzethepotentialimpactofcovarianceorcorrelationof risk factors, industriesand regionsontheprobabilitydistribution oflossesofthecreditportfolio.Theoutcomeofthisanalysiswouldenhance themodel’spredicativecapabilityandinform theprocess ofsettingprudentsoft limits.
Management Response: TheBank agreeswiththisrecommendation, andwilldirectstaff toanalyzethe potentialimpactof covarianceor correlation ofrisk factors,industriesand regionsontheexpectedloss ofthecreditportfolio.
Evaluation of Management’s Response:Management’s actionsareresponsive;therefore,therecommendation isresolvedand willbecloseduponcompletionandverificationthat theactionshave been implemented.
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EXPORT‐IMPORT BANK – OFFICE OFINSPECTOR GENERAL
RECOMMENDATION 8
Recommendation 8:Ex‐ImBankshoulddevelopand implementformal procedurestoenhance thetimeliness oftheaggregationand reportingof risk managementdata, includingthedevelopmentof a consolidateddashboardforseniormanagementthatreportsimportantrisk managementdataonamonthlybasis.This shouldincludebutnotbe limitedtothefollowing:
Aggregateportfolioconcentrations onasector, countryandone obligorbasis,delineating variancewithestablishedportfolio limits;
Aggregatecreditmetricsoftheportfolioincludingimpairedloansanddefaults; and
Aggregate migrationof risk ratingsinspecific sectorsand obligorstogetherwith anaverageBCLriskratingfortheportfolio.
Management Response: TheBank agreeswiththisrecommendation, andiscurrentlyprovidingriskmanagementdata toseniormanagementon amonthlybasis.The BankappreciatesthattheOIGhasrecognized theimprovementsmadeto regularriskmanagementreportssuchastheMajorDelinquentDebt,Impaired Credits&WatchListreport,whichaidsthe Bankin riskassessmentof individualcreditsonamonthlybasis,andtheDefault RateReport,whichasofMarch31, 2016reportedtheBank’sdefaultrateat0.261%. TheBankwilldirectstaff toimplementformalprocedurestofurtherenhancethetimelinessoftheaggregation and reportingofriskmanagement data,including thedevelopmentofaconsolidateddashboardforseniormanagementthatreportsimportantriskmanagementdata onamonthlybasis.
Evaluation of Management’s Response:Management’s actionsareresponsive;therefore,therecommendation isresolvedand willbecloseduponcompletionandverificationthat theactionshave been implemented.
Rec. No.
Table 9: Summary of Management’s Corrective Action: Taken or Planned
Comments on tExpected
Completion Date60
he Recommendations Resolved: Yes
or No61
Open or Closed62
1. TheBankwilltoestablishpoliciesandattendantcriteriafordeterminingprudentsoftlimits
Notargetcompletiondate
Yes Open
60 Ex‐ImBankOIGhasrequestedtarget completiondatesforeach of the outstanding recommendations.
61 “Resolved” means that (1)Managementconcurswiththerecommendation, and theplanned, ongoing and completed correctiveaction isconsistent withthe recommendation; or(2) Managementdoesnot concur withtherecommendation, butalternate actionmeetstheintent ofthe recommendation.
62 Upon determination byEx‐Im BankOIGthatthe agreed upon correctiveactionhasbeencompletedandis responsivetotherecommendation, therecommendationcanbeclosed.
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EXPORT‐IMPORT BANK – OFFICE OFINSPECTOR GENERAL
Rec. No.
Table 9: Summary of Management’s Corrective Action: Taken or Planned
Comments on tExpected
Completion Date60
he Recommendations Resolved: Yes
or No61
Open or Closed62
onexposureconcentrationswithafocustomanagethoseexposures orconsiderconcentrationrisks inthetransaction approvalprocess.
provided
2. TheBankhasbegunto assessthepotentialroleoftherisk sharingprogramin mitigating portfolioconcentrationrisk.Thisincludestheposting ofasolicitationofinterestthroughFedBizOpps.Gov.
Notargetcompletiondate
provided
Yes Open
3. TheBankis currentlyreviewingresponses toarequest forproposalforanindependentexperttocompletethesecondhalfoftheCLFvalidationexercise. TheBankwilladdressrecommendations in thefinalreportand placeoversightoftheprojectwith individualswhoare notresponsibleforthedevelopmentoruseof theCLFmodel.
Notargetcompletiondate
provided
Yes Open
4. TheBankwillengage anindependentexpertto evaluatetheremainingBCLrisk ratingmodels.TheBankwilladdressrecommendations in thefinalreportand placeoversightoftheprojectwith individualswhoare notresponsibleforthedevelopmentoruseof theriskratingmodels.
Notargetcompletiondate
provided
Yes Open
5. TheBankhasdevelopedcreditandportfoliolevelstresstestingpoliciesandchangeditsstresstestingprotocolfromannualtoeverysixmonths.The Bankwillfurtherdevelopthescopeofitsstress testingprotocolsandincorporatetheresults intothe
Notargetcompletiondate
provided
Yes Open
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EXPORT‐IMPORT BANK – OFFICE OFINSPECTOR GENERAL
Rec. No.
Table 9: Summary of Management’s Corrective Action: Taken or Planned
Comments on tExpected
Completion Date60
he Recommendations Resolved: Yes
or No61
Open or Closed62
Bank’skey riskmanagementpolicies.
6. TheBankwillestablishadditionalcriteria for settingprudentsoftlimitsonexposureconcentrations,includingoneobligorconcentrations.
Notargetcompletiondate
provided
Yes Open
7. TheBankwillanalyze thepotentialimpactofcovarianceandcorrelationof risk factors,industriesandregions ontheexpectedlossofthecreditportfolio.
Notargetcompletiondate
provided
Yes Open
8. TheBankis currentlyprovidingriskmanagementdata toseniormanagementonamonthlybasisandwillimplementformalprocedures tofurther enhancethetimelinessand aggregationofthereportingofthedata.Thiswillincludethedevelopmentofaconsolidateddashboardthatreportsriskmanagementdataonamonthlybasis.
Notargetcompletiondate
provided
Yes Open
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Appendix B:
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Appendix C: Background on Ex‐Im Bank’s Charter 2015
WiththepassageoftheExport‐ImportBankReformandReauthorization Actof 2015(the“Act”),theBank’sCharter wasrenewed foranadditionalfive‐yearperiod.64,65 TheActincludedadditional provisions relatedtoriskmanagementassummarizedbelow:
1. Enactan exposurecap“freeze”iftheBank’sdefaultraterises to2percentormore:UnderSec.6(a),theaggregateoutstandingexposuresare cappedat$135billionforeachfiscalyearfrom 2015to2019. Inaddition, theexposure capissubjecttoa“freeze”iftheBank’sdefaultrate66 risesto2percentormore.Under thefreeze,theexposurewouldbe cappedattheamountoutstandingasof thelastdayofthequarterandwouldremaininplaceuntilthedefault ratefallsunder2percent.
2. Buildandholdareserve of5percentormorefortheaggregate amountofdisbursedandoutstandingcommitments:UnderSec.6(b),thebankisrequiredto“buildtoandholdinreserve”anamountnotlessthan5percentofthe aggregateamountofdisbursedandoutstandingloans, guarantees, andinsuranceoftheBanktoprotectagainstfuturelosses.
3. Establishan“OfficeofEthics” intheBank:UnderSec.3(k),theOfficeofEthicsprovidesoversight for allethics issueswithintheBank.Thedutiesinclude administrativeactions toestablishorenforcestandardsof officialconduct,referralofallegedethicsviolations totheOIG,reportingof violationstoappropriateFederalor State authoritiesandissuanceofgeneralethicalguidanceonBankmatters.
4. Appointa ChiefRisk Officer whoshall“overseeallissues relatingtoriskwithintheBank;andreporttothePresidentof theBank”:UnderSec.3(l),theBankisexpectedto appointa ChiefRisk Officer withpriorexperience inpracticalfinancialriskevaluationpractices.ThedutiesoftheChiefRiskOfficer shallincludethefollowing:
Toberesponsibleforallmattersrelatedtomanagingand mitigatingallrisktowhichtheBankisexposed,includingtheprograms andoperationsoftheBank;
Toestablishpoliciesandprocessesforriskoversight, the monitoringofmanagementcompliancewithrisk limits,andthemanagementofriskexposuresandriskcontrolsacrosstheBank;
64 2015ReauthorizationAct, supra note2.
65 Charter, supra note5.
66 Default Rate, as definedby Ex‐ImBank,is the total amountof requiredpaymentsthatareoverdue dividedby a totalamount of financing involved.
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ToberesponsiblefortheplanningandexecutionofallBankriskmanagementactivities, including policies,reporting, and systemsto achievestrategicrisk objectives;
Todevelop anintegratedriskmanagement programthat includes identifying, prioritizing, measuring, monitoring,andmanaging internal controland operatingrisksandotheridentifiedrisks;
Toensurethattheprocessfor riskassessmentandunderwriting forindividualtransactions considershoweachsuchtransactionconsiderstheeffectofthetransactiononthe concentrationofexposureintheoverallportfoliooftheBank,takingintoaccountfees,collateralization, andhistoricdefaultrates;and
Toreview theadequacyoftheuse bytheBank ofqualitativemetricsto assessthe riskofdefaultundervariousscenarios.
5. Terminate theBank’sAuditCommitteeand establisha“RiskManagementCommittee”:UnderSec.3(m),the membersoftheBoard, alongwiththePresidentandFirstVicePresidentofthe Bank,formthe RiskManagement Committee.InconjunctionwithEx‐ImBankOCFO, theRiskManagementCommittee shallprovideoversighttoperiodicstress testingof theentire Bank portfolioandthemonitoring ofindustry, geographic, andobligor exposurelevels.Theoversightwillensurethat portfoliostresstestingcoversdifferentmarket,industry, andmacroeconomicscenariosfollowing thecommonpracticesofcommercialand multilateral banks.Inaddition,the RiskManagement Committee isresponsibletoreviewallrequiredreportsonthe defaultrateoftheBank beforesubmissionto CongressunderSec.8(g).
6. Establishapilotprogramtosharerisksunderitsloan,guarantee, and insuranceprograms: UnderSec. 51008, the Bankmayenter intocontractstoengageinrisktransferactivities. The aggregateamountofliabilitythe Bank maytransferthroughrisk‐sharing maynotexceed$10billionin any fiscal year. TheBankisrequiredto reportannuallyonthe useofthepilotprogram.
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Appendix D: Model Risk Management and Governance
U.S.financialregulatorshavecited severalcomponentsof asoundmodelriskmanagement program,including:
Sound model validation process,includingtheconfirmation ofconceptualsoundness, ongoingmonitoring,processverificationand benchmarking; and ongoingreviewofassumptionsandanoutcomesanalysis,includingback‐testing.
External validation of the model’s integrity,whichisdesignedtoconfirm amodel’sintegrityandperformance.Validationrequiresadegreeof independencefrom modeldevelopmentanduse.Ideally,validationshouldbe undertakenexternallyby competent, impartialsourcesnot responsiblefordevelopingthe model.
A formal system of governance,whichestablishesan effectiveframeworkwithdefined rolesand responsibilitiesforclearcommunicationofmodellimitations andassumptions,aswellastheauthoritytorestrict modelusage.
Modelvalidationtypicallyconsists ofthreeseparatecomponents:areviewof thedevelopmentalevidence,process verificationandoutcomeanalysis.AdescriptionofeachisprovidedbelowinTable11.
DevelopmentalEvidence
Component Developmentalevidence focuses onthereasonableness of the conceptual approachand quantificationtechniques of the model. This analysistypically considersthefollowing: Documentationandsupportfor theappropriatenessofthelogic andspecificriskquantificationtechniques usedinthemodel.
Confirmationofmodelsensitivitytokeyassumptionsanddatainputs used. Supportfor thereasonableness andvalidityofmodelresults.
Table 11: Model Validation Description
ProcessVerification
Processverificationconsidersdatainputs,formulae,andmodel outputreporting.Ittypicallyevaluatesthefollowing: Internalcontrols. Thereconciliationofsourcedatasystemswithmodelinputs. Theusefulnessandaccuracyof modeloutputsandreporting. Thebenchmarkingofmodelprocessesagainstindustrypractices forsimilarmodels.
OutcomeAnalysis
sources.
Outcomeanalysisfocusesonmodeloutputandreportingtoassessthemodel’spredictiveability.This mayincludethe followingqualitative andquantitative techniques: Checkingqualitativereasonablenesstoassesswhether the model isgenerallyproducingexpectedresults.
Back‐testingwhichcomparesthe model’spredictedresultstoobservedactualresults.
Benchmarkingofmodel outputto comparepredictedresultsgeneratedbythemodelbeingvalidated withpredictedresults from other modelsor
Source: FDIC Supervisory Insights – Model Governance
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Appendix E: Qualitative Risk Factors
Table 12: Qualitative Risk Factors Used on Top of the Quantitative Model # Factor Aggregate $ CLF
Allocation for Qualitative Risks
(in millions) FY 20121 Minimum LossRate 0.5%
$565
2 PredictionInterval(“PI”)Level NoPI 3 PortfolioGrowthPercent Increaseto LossRate
Region 7% Industry 13%Aircraft 1%
Qualitative on Top Percent Impact 23% FY 20131 Minimum LossRate 0.5%
$1,335
2 PredictionIntervalLevel NoPI 3 PortfolioGrowthPercentIncreasetoLoss Rate
LongTermNon‐Aircraft 40%Aircraft 95%OtherPrograms/Products 0%
Qualitative on Top Percent Impact 68% FY 20141 Minimum LossRate 0.5%
$1,083
2 PredictionIntervalLevel NoPI 3 PortfolioGrowthPercent Increaseto LossRate
ShortTerm 0% Medium Term 0%Long Term 40%
Qualitative on Top Percent Impact 40% FY 20151 Minimum LossRate 0.5%
$817
2 PredictionIntervalLevel NoPI 3 PortfolioGrowthPercent Increaseto LossRate
ShortTerm 0% Medium Term 0%Long Term 40%
Qualitative on Top Percent Impact 40% Source: Ex‐Im Bank’s Loss Rate Reports for 2012 ‐ 2015 (Internal Reports)
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Appendix F: S&P Recommendations
1.S&Precommendsthat Ex‐Im Bankimprovedocumentationformodeldevelopmentandmodelimplementation.
“Modeldevelopmentdocumentationshouldprovidedetailedinformationabout thedevelopment processusedforthemodelanddetailedinformationaboutthetesting by modeldevelopers. Thorough development documentation isthekeyforensuringcontinuityofknowledgeaboutthemodelandminimizingkey‐person dependencyrisks.Thisdocumentation isalso a key document for managing modelrisk,andisreviewed by the modelvalidationgroupandinternalorexternalauditdepartments.
Modelimplementationdocumentation isanothercriticalpartofmodeldocumentationthatprovidesinformationabout themodeltechnicalspecifications(modelstructureandprocessflow) andUser’sGuidelinesonproceduresforoperatingthemodelandprovidinginputsforthemodel.Theabovedescribeddocumentationtypesareoftensupplementedby a separatedocument(orsection)dedicatedtoon‐goingmodelgovernancedescribingtheprocesses andplansformaintainingandupdatingkeymodelparametersandassumptions,securityandchangecontrolprocedures.”
S&P Recommendations Federalguidanceprovidesthatmodeldocumentation“shouldprovideathorough understandingofhow themodelworks (modeltheory)and allowsanewusertoassumeresponsibilityfor themodel's use(operationalprocedures).”
However,S&P stated,“Export‐Import modelsdo not have the appropriatelevel ortype ofdocumentationto accomplishthesetwo objectives,andthelevelofdocumentationisbelowcommonpracticesandexpectationsforthemodel'sintended use...EnhanceddocumentationforallExport‐ImportBankmodels isneededto allowfor institutionalknowledgetobecarriedforwardandalloweffective improvement of models/methodologies goingforward…mostof theBCLriskrating modelsdid nothavesufficienttechnicaldocumentationto explain howthe modelwasdeveloped,noradequateinstructionastohow theyshouldbe utilized.”
“
Table 13: S&P Recommendations S&P Findings
2.S&Precommendsthat Ex‐Im Bankimplement betterdefined objectivescoringcriteriaand modelarchitecture:“Allmodelsshoulduseweightsorsimilartransparentandconsistentalgorithmsforderivingrisk scoresand ensureawell‐controlledandreplicableratingprocess.
Inorder to ensurethatriskratings arebothconsistentandaccurate,thecriteriausedtodeterminethe appropriateratingshouldbeprecise.For all quantitative and
S&Pfound that while the ratings assigned to a creditare generally well supported and documented in thesample of reviewed Export‐Import creditfiles (board memos), the modelsdo not adequately codify the ratinganalysislevel ofdetail and thought process. Wefind that the design of expert judgment scorecardsneeds to be consistent with the rating analyst’sthought process, allowing the thought process to becodifiedin a transparent, replicable andauditable manner.”
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qualitativefactorsincludedineachmodels,thefollowing shouldbeoutlinedanddocumentedinpoliciesfor thereferenceofallpersonnel involved:
‐weightsorotherscoringmechanisms/protocols
‐criteriaforassigningeachrisklevel thatdetermineriskratings –e.g.ratiobenchmark/ranges,qualitativeobjectifiedcriteria.”
S&P Recommendations Table 13: S&P Recommendations
S&P Findings
3.S&Precommendsthat Ex‐Im Bankutilizeadditionalsectorspecificmodelstobetterassesstheuniquerisksparticularto anindustry sector.
“The exactnumber of modelsultimatelyemployedto some extent dependson the assessmentofthecost/benefitofdeveloping moreversuslesssector‐specificmodels.Sincethereisa widerangeof practicesinfinancialinstitutionswithrespecttothenumberofmodelsusedforlargecorporate andprojectportfolios‐itisdifficulttoprovideastandardbenchmarksincethedefinitionof a ‘model’ differs by institution,nevertheless,arough estimate isbetween 6‐20 sectorspecificmodels,dependent onportfoliocomposition.
Ata minimum,wewouldrecommendseparatemodelsbeusedforBanksversusNon‐Bank Financial Institutions (includingfinancial leasing) andManufacturingvs.Oil&Gas(adetailedportfolioreviewwouldbeneeded formorespecificrecommendations).”
S&Pfoundthatgiventhe Bank’sportfoliosectorconcentrations(i.e.Transportation, Manufacturing,Oil&Gas),“thenumberofsector‐specificmodelsappliedissomewhat belowindustrystandards and may be insufficientfortherangeofexposures withinportfolio. Thisindicates that model riskfactors,benchmarks/metrics,andfactorweightsmaynotbesufficientlydifferentiated bysector.”
4.S&Precommendsthat Ex‐Im Bankdevelopadualriskratingstructuresimilartobestpracticeandpeerinstitutionapproaches...SuchaframeworkwouldclearlydifferentiatebetweenobligorPD riskandtransaction levelLGDrisk.”
S&Pfoundthat“theBank’sriskratingarchitectureuses a ‘hybrid’ approachwherethecustomer‐leveldefaultriskratingisfirst determined…then adjustedaccordingto thenature of each ofthe customer’screditfacilities.Theystatethatalthoughthispracticeisstillinuse,“most ofcomparable (peer) institutionsandanincreasingnumberofbanksworldwideareusingorplanning to usea dualriskratingframework withseparate defaultandrecoveryrating systems(whichis alsoa Basel IIrequirement)toimprovedifferentiation
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S&P Recommendations andbetterunderstandingofthedriversofthedifferentcomponentsofatransaction’srisk.”Sincethe Export‐Import Bank system does not have aseparate FacilityRiskRating(FRR)system forthe explicitratingof Loss GivenDefault(LGD)andExposure atDefault(EAD), thisresultsintherecovery potentialbeingembeddedinthe BCL rating asan adjustment. Thiscouldpotentiallycomplicateand impacttheaccuracyofthePDestimates”
Table 13: S&P Recommendations S&P Findings
5.S&Precommendsthat Ex‐Im Bankdevelopamodelvalidationfunction thatisfunctionallyindependent:“TheExport‐ImportBank “shouldestablishasystemofindependent,ongoingassessmentofthebank’screditriskmanagementprocesses.Institutingamodelvalidationfunctionthat isstructurallyindependentfrom the modeldevelopersandusers isrecommended….Themodelvalidationrolewhichis functionallyindependentfromtheindividualsresponsiblefordeveloping andmonitoringtheriskmodelsused inthe Export‐Importriskratingframework,shouldalsocontrolandmonitor themodeloverrideprocess,develop guidelines forselectingwhichmodelstouseandplaya criticalroleinallmodelriskmanagementprocesses.Allmodelcomponents,includinginput,processing,andreporting,shouldbesubjecttoon‐goingvalidation(thisappliesequallyto modelsdevelopedin‐house andto thosepurchasedfrom ordevelopedbyvendors).
Export‐ImportBank shouldformalizeallmodelrisk management activities withpoliciesandprocedurestoimplementthem.Modelriskmanagementpoliciesshouldbeconsistentwith regulatorystandards (OCC Bulletin 2011‐12 /FederalReserveBulletin SR11‐7)andalsobecommensuratewiththe Bank'srelative complexity,businessactivities,corporateculture,andoverallorganizationalstructure.”
“Afew modelgovernance‐relatedissueshave beenidentifiedduringourreview,for example,Export‐Importdoesnothaveanindependentvalidation grouptomonitor andmanage theongoingperformanceoftheratingsystemsandprocesses.The absenceoftestingandvalidationofimplementedriskratingtechniquesisanotherimportantissue,sinceitdoes notallowforacontinuouslearningandimprovementprocessaroundthe models,whereissues are diagnosed,andcorrectiveactionstakeninacontinuousandtimelyfashion.
Whileitisgenerallygoodpracticefor banksto ensurethat allmodelsundergothefullvalidationprocess,theriskratingprocessshould atthevery leastundergoa high‐levelindependent review on aregularbasis‐at leastannuallybut more frequentlyif warranted‐ todeterminewhetherit is workingasintended.Suchareviewcouldsimplyaffirmpreviousvalidationwork,suggestupdatestopreviousvalidationactivities,orcallforadditionalvalidationactivitieswhereneeded.Additionaltests(e.g.back‐testingorindependentbenchmarking)coulddetermine whether theassumptions arevalidand themodels performas intendedin moredetail.”
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6.S&Precommendsto eliminatedifferencesbetweenorigination andmonitoring models.“To ensureauniformcreditcultureandmethodologyacrossindividualtransactionsisusedacrossdifferentdivisionswerecommendthatdifferencesbetweenmonitoringandoriginationmodelsbeeliminated.
Potentialfuturechangesineconomicconditionsshouldbetakenintoconsiderationinaformalizedwaywhenassessingindividualcreditsunderstressfulconditions.Generally,stresstestingshould involveidentifyingpossibleeventsorfuture changesineconomicconditionsthat couldhaveunfavorable effects on a bank’screditexposures.Typicalareasthatshouldbeexaminedinclude:(a) economic orindustrydownturns;(b) market‐riskevents,and(c)liquiditystresses.Thestresstestingincommonpracticescanrange from relativelysimplealterationsinassumptionsaboutoneormorefinancial,economicor structuralvariabletothehighlysophisticatedstress‐testingprojectionmodels.Irrespectiveofthemethod ofstresstestingused,theoutputofthesetests shouldbe reviewedperiodicallybyseniormanagement andappropriateactiontakenwhereneeded(e.g.the resultsexceedagreedtolerances).Inbestpracticeinstitutionssuchoutputs arealsoincorporatedintotheprocessforassigningandupdatingpoliciesandlimits.
S&P Recommendations S&Pfound a lackofconsistencybetween themodels usedfororigination andmonitoring:“While Export‐Import has in place a system for monitoring the overall composition and quality of the creditportfolio, the system lacks consistency withorigination models. This could lead to increased model risks since model users may need to adjust modelresults for definitions, factors and methodologies that differ from model to model making comparisonsdifficult. Standard practices in Financial Institutions indicate a level of consistency between frontand back end models is recommended. This is particularlythe case for Ex‐Im’s TPMD and Project FinanceMonitoring models where we observe the largest level of differences from the front end….To ensurecontinued effectiveness of risk ratings as a key toolto manage credit risk and prevent loan losses, the risk rating system should be designed to be dynamicenough to capture information about downsidescenarios. The bank’s internal risk rating systemshould have a structured process for ensuringresponsiveness to indicators of potential or actualdeterioration in credit risk.”
Table 13: S&P Recommendations S&P Findings
7.S&Precommendsthat Non‐sovereign country riskshould be used inmodels as animportantdirectriskassessmentdriver.“S&P’sbelievethe analysisofnon‐sovereigncountryriskisimportantforaddressingthemajor factorsthat affecttheoperatingconditionsinaspecificcountrywherean entityconductsbusiness.UndertheS&P criteria,thecombinedassessments for countryrisk,
S&Pfoundthat“theNon‐SovereignCountryRiskscoresusedin the Export‐Importrisk ratingsystemconsistsofsimilarcomponentsasthoseoutlinedabove,butthe component isnot usedas adirectscoringfactor (apart from the Project Finance framework)withintherisk scoringmodels.Basedonthelatestdocumentedinternalrecommendationfortheuse of non‐sovereign ratingswithinEx‐Im’scorporateandfinancialinstitutionlong‐termscoringmodels,toeliminate redundancy,the non‐sovereign
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Table 13: S&P Recommendations S&P Recommendations S&P Findings
industryrisk,andcompetitivepositiondeterminethebasisofacompany'sbusinessriskprofileassessment“
BCLisused only asa limiting factor (‘cap’)tothe overallBCLrating–the finalBCL cannotbe morethan onenotchbetterthanthe non‐sovereignBCLwithoutadditionaldocumentedjustification.”
8.S&Precommendsthat any criterionconsideredaspartoftheriskassessmentofthe Boardmemorandumshouldbecorrespondinglyreflectedasa direct risk factoroftherelevant risk rating model.
S&Pfoundthat“Whiletheratingsassignedtoacreditaregenerallywellsupported…thisanalysistakes placeoutsideof the modelsthemselves. The modelstructureand documentation generallydoesnotadequatelycodifythe rating analysis levelofdetail andthoughtprocessembeddedintheloanapprovaldocuments.”certaintransactionrisksidentifiedintheBoardmemorandums
Source: S&P Reports Provided to Bank Staff
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Appendix G: Impaired Credits – Definitions
Table 14: Impaired Credits – Definitions
FY Annual Report Section and Definition ’
Total (in MD&A67
millions) Notes68
2008 Management sDiscussion andAnalysisofResultsofOperation andFinancialCondition(“MD&A”):TheMD&Adidnotcontain adefinition ofimpairedcredits.However,the sectiondid reportanamountforcredits classifiedas“impaired.”
$767.4 $3,428.7
NotestotheFinancialStatements(“Notes”):Ex‐ImBankgenerallyconsidersacreditimpaired ifit meetsone or more ofthefollowing:(1)delinquentloansandclaimswithan amountof$50,000 or more past dueat least90days,(2)rescheduledloansandrescheduledclaims,or(3)non‐delinquentloansandclaimsaboveacertainriskrating.
Ex‐ImBankgenerallyconsidersa creditimpairedifitmeetsoneormoreofthefollowing:(1) delinquent loans,guaranteed loans andclaimswith an amount of $50,000 ormore past dueatleast90days,(2) rescheduledloans,guaranteedloansandrescheduledclaims,or(3)non‐delinquentloans,guaranteedloansandclaimsaboveacertainriskrating.
2009 MD&A: The MD&Adidnotcontainadefinition ofimpairedcredits.However,thesectiondid reportanamount forcreditsclassifiedas“impaired.”
$825.0 $4,100.7
Notes:Ex‐Im Bank generallyconsidersacreditimpairedifit meets oneor moreof the following:(1)delinquentloansand claimswithanamount of$50,000 or morepastdueatleast90days,(2)rescheduledloansandrescheduledclaims,or(3)non‐delinquentloansand claimsaboveacertainriskrating.
Ex‐ImBankgenerallyconsidersa creditimpairedifitmeetsoneormoreofthefollowing:(1) delinquent loans,guaranteed loans andclaimswith an amount of $50,000 ormore past dueatleast90days,(2) rescheduledloans,guaranteedloansandrescheduledclaims,or(3)non‐delinquentloans,guaranteedloansandclaimsaboveacertainriskrating.
2010 MD&A: The MD&Adidnotcontainadefinition ofimpairedcredits.However,thesectiondid reportanamount forcreditsclassifiedas“impaired.”
Notes:Ex‐Im Bank generallyconsidersacreditimpairedifit meets oneor moreof the following:(1)delinquentloansand
$666.2 $4,351.9
67 As ofFYE, the amountreported isforthosecredits classified as “impaired” per theBank’s Annual Report.
68 ForFYs2010– 2015,Ex‐ImBankprovided thetotal amount ofimpairedassets.
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Table 14: Impaired Credits – Definitions
FY Annual Report Section and Definition Total (in
MD&A67 millions) Notes68
claimswithanamount of$50,000 or morepastdueatleast90days,(2)rescheduledloansandrescheduledclaims,or(3)non‐delinquentloansand claimsaboveacertainriskrating.
2011 MD&A: The MD&Adidnotcontainadefinition ofimpairedcredits.However,thesectiondid reportanamount forcreditsclassifiedas“impaired.”
$495.0 $2,718.0
Notes:Ex‐Im Bank generallyconsidersacreditimpairedifit meets oneor moreof the following:(1)delinquentloansand claimswithanamount of$50,000 or morepastdueatleast90days,(2)rescheduledloansandrescheduledclaims,or(3)non‐delinquentloansand claimsaboveacertainriskrating.
2012 MD&A andNotes: Ex‐Im Bank generallyconsidersacreditimpairedifit meetsone ormore ofthe following: (1)delinquent loansandclaimswithanamount of$50,000ormorepastdue atleast90days,(2)rescheduledloans andrescheduledclaimsor(3) non‐delinquentloansand claimsabove acertainriskrating.
$817.0 $2,634.6
2013 MD&A:Impairedcreditsaredefinedasthosetransactionsriskratedfrom9to11(refertosection VII, “Portfolio‐RiskRating System and RiskProfile,”forthe explanation of riskratings), oronthevergeofimpairmentduetopolitical,commercial,operationaland/ortechnicaleventsorsituations,and/orforcemajeurethat have affected theborrower’sabilitytoservicerepaymentofEx‐ImBankcredits.
$434.0 $2,267.9
Notes:Impairedcreditsaredefinedas thosetransactionsriskratedfrom 9 to11 or on thevergeofimpairmentduetopolitical,commercial,operationaland/ortechnicaleventsorsituationsand/or“ActsofGod”that haveaffectedtheborrower’sabilitytoservicerepaymentof Ex‐Im Bankcredits.
2014 MD&A: ImpairedCreditsaredefined as thosetransactionsrisk ratedas Budget CostLevel(“BCL”) 9‐11 and ontheverge ofimpairmentduetopolitical,commercial,operationaland/ortechnicaleventsorsituations, and/orActsofGodthathaveaffectedtheBorrower’sabilitytoservicerepaymentof Ex‑ImBankcredits.
Notes:Impairedcreditsaredefinedas thosetransactionsriskratedfrom 9 to11,oronthevergeof impairmentduetopolitical,commercial,operationaland/ortechnicaleventsorsituations,and/orActsof Godthathaveaffectedthe Borrower’sabilitytoservicerepaymentof Ex‑ImBankcredits.
$294.3 $2,027.1
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Table 14: Impaired Credits – Definitions
FY Annual Report Section and Definition Total (in millions)
MD&A67 Notes68
201569 MD&A: ImpairedCreditsaredefined asthosetransactionsrisk ratedas Budget CostLevel(“BCL”) 9‐11 and ontheverge ofimpairmentduetopolitical,commercial,operationaland/ortechnicaleventsorsituations, and/orActsofGodthathaveaffectedtheBorrower’sabilitytoservicerepaymentof EXIMBankcredits.
Notes:Impairedcreditsaredefinedas thosetransactionsriskrated from 9 to 11, and on the verge ofimpairmentdue topolitical,commercial,operationaland/ortechnicaleventsorsituations,and/orActsof GodthathaveaffectedtheBorrower’sabilitytoservicerepaymentofEXIMBankcredits.
$468.1 $2,375.5
Source: Ex‐Im Bank’s Annual Reports for FYs 2008 – 2015 and Impaired Credits & Watch Lists (Internal Reports)
69 OIGnotesanearlierposting of theFY2015MD&AandNotessectionsof theannualreportdiffered(i.e., “and”versus “or”,respectively).However, theBankinthefinalpostingof the fullannualreport to the webcorrectedthedifference afternotificationbyOIG.
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Appendix H: BCL Risk Rating Classification and Total Exposure
Table 15: BCL Risk Rating Classification Categories and Exposure
Risk Classification
Total Exposure Amount, % of Portfolio and % Change
% Growth FY 2012 to FY 2015 FY 2012 FY 2013 FY 2014 FY 2015
1 $2,814.9 $2,382.7 $2,266.4 $2,046.4
‐10.1%2.6% 2.1% 2.0% 2.0% ‐ ‐15.4% ‐4.9% ‐9.7%
2 $24,143.6 $23,584.6 $23,231.2 $20,554.5
‐5.3%22.6% 20.7% 20.7% 20.1% ‐ ‐2.3% ‐1.4% ‐12.1%
3 $23,172.9 $22,754.0 $23,163.7 $18,705.5
‐6.9%21.7% 20.0% 20.7% 18.3% ‐ ‐1.8% 1.8% ‐19.2%
4 $18,341.0 $23,866.0 $22,148.3 $20,073.7
3.1%17.2% 21.0% 19.8% 19.6% ‐ 30.1% ‐7.2% ‐9.4%
5 $12,759.5 $16,630.9 $16,998.0 $13,335.6
1.5%12.0% 14.6% 15.2% 13.0% ‐ 30.3% 2.2% ‐21.5%
6 $7,521.1 $7,196.8 $8,331.1 $8,992.9
6.1%7.1% 6.3% 7.4% 8.8% ‐ ‐4.3% 15.8% 7.9%
7 $1,924.1 $2,290.8 $2,297.4 $2,877.5
14.4% 1.8% 2.0% 2.1% 2.8% ‐ 19.1% 0.3% 25.3%
8 $1,267.0 $1,267.6 $1,268.2 $2,642.7
27.8% 1.2% 1.1% 1.1% 2.6% ‐ 0.05% 0.05% 108.4%
9 $942.5 $452.2 $596.4 $853.3
‐3.3%0.9% 0.4% 0.5% 0.8% ‐ ‐52.0% 31.9% 43.1%
10 $32.0 $21.6 $20.9 $16.5
‐19.8%0.03% 0.02% 0.02% 0.02% ‐ ‐32.5% ‐3.2% ‐21.1%
11 $486.2 $501.4 $416.5 $598.8
7.2%0.5% 0.4% 0.4% 0.6% ‐ 3.1% ‐16.9% 43.8%
12 $643.4 $544.7 $547.7 $605.5
‐2.0%0.6% 0.5% 0.5% 0.6% ‐ ‐15.3% 0.6% 10.6%
Source: Ex‐Im Bank’s Accounting Manual 2012 and Bank Data for FYs 2012 ‐ 2015
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AcknowledgementsThisreportwaspreparedbythe Officeof Inspections and Evaluations,OfficeofInspectorGeneralfor theExport‐ImportBankoftheUnitedStates.Severalindividualscontributedto thereport includingMarkThorum,Jennifer FainandDanielWong.
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Office of Inspector General Export‐Import Bank of the United States 811 Vermont Avenue, NW Washington, DC 20571 202‐565‐3908 www.exim.gov/about/oig