With the expiration of its charter looming at the end of September, congressional reauthorization of the Export-Import Bank (Ex-Im) has resurfaced on the legislative agenda. After a deal was struck between Representatives Maxine Waters (D-CA) and Patrick McHenry (R-NC), the Chair and Ranking Member of the House Financial Services Committee, reauthorization of the Ex-Im seemed to be a foregone conclusion. But the bill was pulled last week due to concerns from many House Democrats over provisions that the bill would prohibit the Bank from financing certain Chinese state-owned enterprises. The best option for taxpayers would be to let the charter expire, but if lawmakers do proceed with reauthorization, they should consider strengthening some of the reforms included in the Waters-McHenry bill, as well as provide better accounting of the market risks of the Bank’s loans and subsidies.
On the plus side, the Waters-McHenry deal would address some of the long-standing concerns about the Bank. The bill marginally increased Ex-Im’s required share of loans dedicated to small businesses. Although small, it’s a positive step since the Bank has been consistently criticized for its patronage of subsidized loans to a select number of large corporations.
From July 2015 to May 2019 the Board of the Bank lacked quorum, which prevented it from issuing loans greater than $10 million. During this period, the proportion of loans to small businesses nearly doubled their previous share of the Bank’s lending portfolio. Yet, despite its diminished authority, small businesses still have received less than 40 percent of the Bank’s authorizations since 2015. The contrast was even more stark in the prior years. From 2007-2014, Boeing received more loan guarantees from the Bank than all small business combined, which has led to Ex-Im’s colloquial nickname of “Boeing’s Bank.”
Further raising the loan guarantees set aside for small businesses would go a long way in curbing the Bank’s concentration of lending to large corporations, especially now that the Board is back at full capacity. For example, in 2013, when the Board last had full quorum, just five corporations were the beneficiaries of nearly 57 percent of Ex-Im’s entire subsidies. Further, the Waters-McHenry deal would strengthen reporting requirements for companies to prove they are truly utilizing Ex-Im as the lender of last resort. The proposal would also enhance disclosure requirements for any lender receiving more than 20% of the Bank’s lending authority in a year. These provisions would allow Ex-Im to take affirmative steps away from their stigma of cronyism.
Rounding out the positive aspects of the deal was a provision that made permanent Ex-Im’s risk transfer program authority. Launched in early 2018, this pilot program has allowed the Bank to establish a reinsurance pool with the private sector to reduce lending risks and costs. By making the program permanent, the Bank would be able to continue engaging in a public-private risk-sharing arrangement that limits U.S. taxpayers’ liability for potential future losses.
Unfortunately, the Waters-McHenry deal includes some provisions that lawmakers should reconsider when it is revisited. The proposal extends the Bank’s charter for seven years, which would be the longest reauthorization period since it became an independent agency in 1945. Frequent reauthorizations have allowed Congress to regularly re-examine the Bank’s functions, yet some House Democrats have even floated the idea of eliminating the reauthorization process altogether. Even more alarmingly, the proposed deal would eliminate the necessity for Ex-Im’s Board to hold a quorum in order to approve large transactions - which was the very constraint Congress elected to place on the Bank for the past three years.
One of the best additional reforms that lawmakers should implement if the Bank is extended is to improve the accounting of the costs attributable to its subsidized loan program. The Congressional Budget Office (CBO) calculates that Ex-Im’s guarantees possess a negative subsidy rate, implying its taxpayer-subsidized lending actually turns a profit in the long run. Since the Bank’s mandate is to act as the lender of last resort, it raises the question: Why wouldn’t traditional banks take advantage of these profitable lending opportunities? The simple answer is that these loans are not actually profitable.
Under existing law, the CBO utilizes accounting methods prescribed under the Fair Credit Reform Act of 1990 (FCRA). The FCRA allows the CBO to analyze the Bank’s lending under a discount rate that would never be used by a traditional bank because it severely underestimates the risks associated with these loans. The CBO’s own estimations show as much. Back in 2014, when the Bank was last at full capacity, the CBO calculated a -3.8% subsidy rate under the FCRA but a +0.4 rate when calculated under a more accurate fair-value accounting method that factors in the market risk of default on Ex-Im’s loans. In terms of real dollars, instead of being able to claim that Ex-Im’s lending saves $14.4 billion under the FCRA method, the fair-value method showed that it actually costs taxpayers $1.6 billion over the ten-year period. Nevertheless, the convenient use of FCRA calculations to claim that the Bank’s lending somehow manages to save taxpayer dollars has proven to be a mainstay of Ex-Im proponents.
Implementing this budget scoring reform would be especially important because the Waters-McHenry plan would expand Ex-Im’s lending authority from $135 million to $175 million - a 30% increase. Better accounting would provide a reality check on Ex-Im’s long-term risks to taxpayers.