OFFICE OF INSPECTOR GENERAL EXPORT‐IMPORT BANK of the UNITED STATES

Follow‐Up 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: Follow‐Up Report on PortfolioRiskandLossReserveAllocationPolicies

Date: July28,2016

Attachedpleasefindthe finalevaluation Follow‐UpReport 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: Follow‐Up Report on PortfolioRisk andLossReserve AllocationPolicies:OIG‐EV‐16‐01,July28,2016

    

 

 

 

 

 

 

 

 

 

 

 

   

EXPORT‐IMPORT BANK – OFFICE OFINSPECTOR GENERAL

EXECUTIVE Follow‐upReportonPortfolioRiskandLossReserveAllocation PoliciesSUMMARY OIG‐EV‐16‐01,July2016

Why We Did This Report

Wecompl eted afollow‐up review inregardtorecommendationsmadetoEx‐ImBank pertainingto OIG’sSeptember2012 report,“ PortfolioRiskandLossReserveAllocationPolicies”(OI G‐INS‐12‐02).T he20 12reportdeterminedthat Ex‐Im Bank shouldimproveits internalrisk management policiesandproceduresandproposedsevenrecommendationstoenhancetheriskmanagement frameworkoftheBankinlinewithbestpractices.ThecurrentreportisintendedtoassessEx‐ImBank’sactionstoaddressthereportedfindingsandtoprovidenewrecommendationsandguidancetofurtheralignitsriskmanagementpoliciesandprocedureswithindustrybestpractices.

What We Recommend:

OIGhasproposedeightnewrecommendationstosupportseveralkeyinitiatives:

Mitigateportfolioconcentrationriskthrough theimplementationofsoftportfoliolimitsa ndrisksharing asprovidedforin the2015Reauthorization Act.

Completeth eindep endentassessmentoftheBank’sfinancialmodelsandfurtherrefine itsriskdashboard,ensuringindependentoversightofthere viewprocess.

Furtherdevelopinternalriskmanagementproceduresandthereportingofriskmanagementdatatobetterinformmanagement andkey stakeholders.

What We Found

SincethepublicationofOIG’sSeptember2012report,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.Third,inresponseto OIG’spriorrecommendationto formulatesoftportfoliosub‐limits,theBankengagedan externalpartytoconstructaportfolioriskdashboardthatallows Bank staffto view currentexposures byregion,industry,creditratingandcounterpartytype.

OIGrecommendsthat Ex‐ImBank take additional stepsto further 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 FOLLOW‐UP REVIEW ................................................................................................ 17

Report On Portfolio Risk and Loss Reserve Allocation Policies (OIG‐INS‐12‐02, September 28, 2012) .............................................................................................................. 17

CONCLUSION................................................................................................................................. 42

APPENDIXES .................................................................................................................................. 43

Appendix A: Management Response and OIG Evaluation................................................................ 43

Appendix B: Summary of OIG’s 2012 Report on Portfolio Risk Policies ............................................ 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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EXPORT‐IMPORT BANK – OFFICE OFINSPECTOR GENERAL

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: Management’s Responses to 2012 Report................................................................... 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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EXPORT‐IMPORT BANK – OFFICE OFINSPECTOR GENERAL

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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EXPORT‐IMPORT BANK – OFFICE OFINSPECTOR GENERAL

INTRODUCTION

Wecompletedafollow‐upreviewregarding therecommendationsmadetotheExport‐ImportBankoftheUnitedStates (“Ex‐ImBank”or“Bank”)intheOfficeofInspectorGeneral’s(“OIG”)evaluationreportontheBank’sportfolioriskandlossreserve policies issuedinSeptember28,2012.1 OIG’s2012reportidentified severalareasneedingimprovementwithrespecttothe Bank’scurrentlossreserve allocationandportfolioriskmanagementpolicies andproposedsevenkey recommendations tostrengthen theBank’sriskmanagement framework.Weinitiatedthereviewaspartofourannualworkplan.

The Export‐Import Bank Reform and Reauthorization Act of 2015 (“theReauthorizationAct”or“Act”) establisheda RiskManagement Committee(“RMC”)ofthe Boardof DirectorsandthemanagementpositionofChief RiskOfficer (“CRO”),andassigned specificdutiestothoseofficesrelatedtotheriskmanagementarchitectureand governanceof theBank.TheActalsorequires OIGtoevaluatetheBank’sportfolioriskmanagement procedures andtheimplementationofthe dutiesassignedtothe CROandtosubmit awritten report withitsfindings toCongressnolaterthanDecember4,2016.2

Thecurrent reportis intended toassessEx‐ImBank’sactionstoaddressthereportedfindings andrecommendationsin theOIG’sSeptember2012report andtoprovidenewrecommendations and guidance fortheBank tofurtheralignits risk managementpoliciesandprocedureswithindustrybest practices. Tocomplywiththe statutoryrequirementoftheReauthorizationAct,OIGwillissueanotherreport in December2016evaluatingtheBank’sprogressinimplementingtheriskmanagementprovisions of the Act.

SCOPE AND METHODOLOGY

Toachieve ourobjective,weundertookaseriesofinternal and externalinterviewstounderstandtheapplicationofthe Bank’scurrentpolicies andtoascertainthebestpracticesobservedbypeer institutionsincludingforeignexportcredit agencies(“ECAs”),otherU.S. government agencies, andmultilateral financialinstitutions.Weinterviewedmanagementandstaff fromseveral Ex‐ImBankdivisionsincludingtheOfficeof ChiefFinancial Officer (“OCFO),theCreditPolicyCommittee(“CPC”)andmembersofthe EnterpriseRiskCommittee(“ERC”)togainanunderstandingoftheBank’seffortstoaddressthe sevenrecommendationscontainedinthe2012 report.Wediscussedthe statusofouropenrecommendations and thefollow‐upreview withtheU.S. GovernmentAccountabilityOffice (“GAO”).

1 SeeEx‐Im BankOIG’s Report on Portfolio Risk and Loss Reserve Allocation Policies (OIG‐INS‐12‐02,dated September28,2012), available at http://www.exim.gov/sites/default/files//oig/reports/EIB Report Final Complete Web‐pdf‐uploaded‐via‐Bulk‐Upload‐at‐ts‐2012‐07‐17‐15‐40‐50.pdf.

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 supportingdocumentationto determinethemeasurestakenbyEx‐ImBankmanagementtoimplementthesevenrecommendations.This includedareviewof theBank’swrittenpoliciesandprocedures,areview ofthesupportingdocumentsandanalysis,etc.Inaddition,wereviewedthe2015 ReauthorizationAct.Weperformed ourreview attheBank’smainlocationinWashington, DC. Weconductedthe follow‐upreviewin accordancewiththe Quality Standards for Inspection and EvaluationissuedbytheCounciloftheInspectorsGeneral onIntegrityandEfficiency.4 Thestandardsrequirethe Ex‐ImBankOIG,asappropriate,tofollow‐upandensure recommendationsmadetotheBankareadequately consideredandagreed‐oncorrectiveactionsarefullyandproperlyimplemented.

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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EXPORT‐IMPORT BANK – OFFICE OFINSPECTOR GENERAL

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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EXPORT‐IMPORT BANK – OFFICE OFINSPECTOR GENERAL

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 wasdriveninlargepartbytheBank’ssignificantasset growthoverthefive‐yearperiod 2006 through2011,Congressionalinterest andquestionsabouttheadequacy ofpoliciesregardingportfolio riskmeasurement and mitigation. Separately, theExport‐Import BankReauthorizationActof2012 requiredGAO toanalyze theBank’sBusiness Plan, growthin businessandtheeffectivenessofitsrisk managementpolicies.11

Ex‐Im Bank OIG Report (OIG‐INS‐12‐02)

OnSeptember28,2012,Ex‐ImBankOIGissueditsreportentitled, Report on Portfolio Risk and Loss Reserve Allocation Policies.12 ThepurposeoftheOIG’s2012evaluationwasto

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).

12 Supra note1.

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determine whethertheBank’slossreserve andportfolio riskmanagementpoliciesweresufficiently robusttosupportits long‐termgrowthobjectives, whileprovidinganadequate cushionforfuturecreditlosses. To thisend, thespecificobjectiveswereto(1)reviewandassesstheEx‐ImBank’slossreserveallocationandportfolioriskmeasurementpoliciesinlightofthe Bank’srapidasset growth,balancesheet‐trends,and thechallengingeconomicenvironment;(2)reviewportfolio riskmanagementbest practices adoptedbyforeign ECAs,U.S.federalagencies,multilateral financialorganizations,andprivate sectorfinancial institutions andbenchmarkthese bestpracticesagainsttheBank’spoliciesprocedures;and(3)highlighttheareaswhere Ex‐ImBankperformancedepartsfromportfolioriskmanagementbestpracticesandto providespecificrecommendationsforfutureaction.

Theevaluationdeterminedthat Ex‐ImBankshouldstrengthenits lossreservemethodologyand forecastingmodelaswellasitriskmanagement governanceframework.Specifically, sevenrecommendationsforcorrective action were madefortheBankto address fivefindings:

Ex‐ImBanklacksasystematicapproachtoidentify,measure,price,andreserve foritsportfolio risk(FindingA);

Ex‐ImBanklacksformalpolicies andproceduresfor itslossreserve forecasting modelwhichclearlydefine roles andresponsibilities and providefor independent validationofthemodel’sintegrity(Finding B);

Ex‐ImBankdoesnotconductportfoliostresstestinginasystematicmannertoassesspotential exposuresunder challengingeconomicconditions(FindingC);

Ex‐ImBankdoesnotself‐impose portfolioconcentrationsub‐limitseitherbyindustry,geography,orassetclass asinternal guidance toinformmanagementonriskanddetermine exposurefeesinnew transactions(FindingD);and

Ex‐ImBank’scurrentriskmanagementframeworkandgovernancestructurearenotcommensuratewith thesize,scope,andstrategicambitions of theinstitution(FindingE).

TheBank’s managementresponses andstatusupdatesto theOIG’s 2012evaluationreport areincludedinAppendixB.Asof thedate ofthisreport, all sevenof theprior recommendations wereaddressed bytheBankandareclosed.

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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EXPORT‐IMPORT BANK – OFFICE OFINSPECTOR GENERAL

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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EXPORT‐IMPORT BANK – OFFICE OFINSPECTOR GENERAL

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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EXPORT‐IMPORT BANK – OFFICE OFINSPECTOR GENERAL

RESULTS OF FOLLOW‐UP REVIEW

Report On Portfolio Risk and Loss Reserve Allocation Policies (OIG‐INS‐12‐02, September 28, 2012)

Thefollowingsectionoutlinesthe reported findingsand recommendationscontainedin OIG’s2012 reportonportfoliorisk andlossreserve allocation policiesaswellas anassessmentofthecorrectiveactionstakenby Ex‐ImBank.Inaddition,theReportprovidesnewrecommendations andguidancefortheBanktofurtheralign itsriskmanagementpoliciesandprocedureswithindustrybestpractices.

2012 Evaluation Report – Recommendation 1

Inthe2012report,OIG concludedthatEx‐ImBankhadnotsystematicallyidentifiedandmeasuredportfolio riskfactors inits lossreservemodels.

Finding A: Ex‐Im Banklacksasystematicapproach toidentify, measure,price, and reserveforitsportfoliorisk.

To addressthisconcern,OIGrecommendedthefollowing:

1. Ex‐Im Bank should develop a systematicapproach toidentifying,measuring,pricing, andreserving forportfoliorisk,includingtheidentificationofappropriatequalitativeriskfactorstoaccountandreserve for suchrisk.Ex‐ImBankshouldincorporatethesefactorsintoitslossallowanceanalysis bothretrospectively andprospectively.TheformerwillensurethatEx‐ImBank has properlyreservedforexisting exposurewhile thelatterwilladdressfutureexposure.

Status – Closed and New Recommendations.

Assessment of Corrective Actions – Recommendation 1

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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EXPORT‐IMPORT BANK – OFFICE OFINSPECTOR GENERAL

Pursuantto OIG’srecommendation,theBank identified variousqualitativeadjustmentsthataddressedmodelrisk,portfolioconcentrationriskand globaleconomicrisk. As partofan OMB‐approvedpilot,thequalitative adjustmentswere then incorporatedintothe2012creditlossre‐estimate processandrequiredan additionalreserve allocationofapproximately$565million.ThisamountwasreceivedfromTreasuryinFY2013,pursuanttothere‐estimateprocess.20 OMBlaterinformedtheBankthattheuseofportfolioconcentration asaqualitative risk factortomodify thelossprovisionwouldbeinconsistent withFCRA.Asaresult,theBankdiscontinuedthe practice ofestablishingqualitative reserves for portfolioconcentrationasan addition tothereservescalculated foreachindividualcredit.21

InFY2013,Bankmanagementidentifiedtherapidgrowthofthe long‐termguaranteeanddirectloanprogramsasapotentialrisk factorthat warranted additionallossreserves.Specifically,duringthe periodfrom2008to 2012,theBank’slong‐term‐guarantee anddirectloanprograms witnessed athree‐fold increase inannual authorizations(seeFigure1below)22 Theunderlyingrationaleforthe additionalreserveswasthatrapidloangrowthmaycontributetogreateroperationalrisk,leadingtohigherloanlossesthanthelevel suggestedbyempirical dataderivedfromanormalgrowthperiod.

OMBopinedthatFCRA allowedtheBanktoreserve fortherisks associated with therapidgrowthoftheBank’sportfolioinprioryears,asthefuturelossmaydiffer fromthehistoricallossonsimilarcredits.Working togetherwithOMB, theBankcreatedaqualitativefactorthat wouldhelpquantify thisrisk.The factordrawsonthehistorical correlation betweenrapidbalance sheetgrowthandanincrease in expectedlossesasobservedinvariousempiricalstudies.23 Inaccordancewiththisanalysis,Bankstaffcreatedan additionalqualitative reserveequalto40percentof theCreditLossFactors

20 OIGunderstandsthatEx‐ImBank receivedapproval fromOMBon September25,2012,to implement the revisedcredit lossfactorsfor useinits modelfor the FY 2015Budget.

21 AlthoughOMBguidancedoesprovideagenciescertainflexibilityto considerhowqualitativeriskfactors mayresult 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, resultinginadisproportionatelyhigher workload for staff and greater operational risk.AlthoughEx‐Im Bank has since added59positionstoits staffing plan,itwas generallyunabletofill newpositionsor increaseitsworkforce throughtheendof FY 2015,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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EXPORT‐IMPORT BANK – OFFICE OFINSPECTOR GENERAL

(“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” available at https://www.federalreserve.gov/boarddocs/srletters/2006/SR0617a1.pdf Thepolicystates“Theremaybetimeswhen aninstitution does not haveits own historicalloss experienceuponwhichto base itsestimate of thecreditlossesinagroup ofloans with similarriskcharacteristics.Thismay occurwhenaninstitutionoffers a new loan productor inthecase of a newly established(i.e.,de novo)institution.Ifaninstitutionhasnoexperienceofitsown for a loan group, referenceto theexperienceofotherenterprises inthe samelendingbusinessmaybeappropriate,provided theinstitution demonstrates that the attributes of the groupof loans initsportfolio are similar to thoseof the loan group inthe portfolio providing thelossexperience.”

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EXPORT‐IMPORT BANK – OFFICE OFINSPECTOR GENERAL

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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20

$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 aerospaceanddefensesector outlook 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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EXPORT‐IMPORT BANK – OFFICE OFINSPECTOR GENERAL

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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EXPORT‐IMPORT BANK – OFFICE OFINSPECTOR GENERAL

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 reservesto besetasideforportfolioconcentrationrisk,thisriskcould bemanagedthroughother mechanisms,suchasco‐financing withotherECAstoreduceconcentrationrisk33 orthe useofrisktransfermechanisms 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,principallyinthe aircraft sector.

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 Obligor  

 1 PEMEX 2 SadaraChemicalCompany

 3 KoreanAirLines  4 Australia‐PacificLNGProcessingLtd.

 5 PapuaNewGuineaLNGGlobalComp.

 6 EmiratesAirlines  7 Refineríade Cartagena  8 Cathay Pacific Airways 9 RyanairLtd.  10 Various GovernmentEntitiesofIndia Total  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)

The OIG closed recommendation 1 from the OIG’s 2012 Report and issued two new recommendations in this report.

NEW RECOMMENDATION

OIGrecommendsthat Ex‐ImBanktakeadditionalstepstomitigateitsportfolioconcentrationrisks 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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EXPORT‐IMPORT BANK – OFFICE OFINSPECTOR GENERAL

2012 Evaluation Report – Recommendation 2

Inthe2012report,Ex‐ImBankOIGconcludedthattheBankwouldbenefit from a morecomprehensivemodel riskmanagementprogramthatincludedasoundmodelvalidationprocessand amoreformalframeworkformodelgovernance.

Finding B: Ex‐Im Bank lacks formal policies andproceduresforitslossreserveforecastingmodelwhichclearlydefinerolesandresponsibilitiesandprovideforindependentvalidationofthemodel’sintegrity.

To addressthis 2. Together withexternalsubjectmatterexperts, OCFOconcern,OIG shoulddesignandimplement aformalgovernancerecommendedthe framework forthe use of financial models.Thisframeworkfollowing: shouldincludepoliciesandproceduresfor model‐

validation includingexternalvalidationof the model’s integrity, modelownership andtesting.

Status – Closed and New Recommendations.

Assessment of Corrective Actions – Recommendation 2

Bankmanagement agreedtothe recommendation andhastakenseveralinitiativestosatisfytheconditionsoftherecommendation inrecent years.Those initiatives includedbothinternalpolicyenhancementsandexternalvalidationofthefinancialmodelsbythirdparty subjectmatterexperts.

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 portfoliorisk management procedures andtheimplementation of the duties assigned to the CRO andto submit a writtenreport withits findings to Congressnolater than December4,2016.

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EXPORT‐IMPORT BANK – OFFICE OFINSPECTOR GENERAL

External Validation of Ex‐Im Bank financial models

InsupportofpriorOIG recommendations,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 objectivescoringcriteriaand modelarchitecture.

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 asanimportant directriskassessmentdriver.S&Precommendsthatanycriterion consideredas partoftheriskassessmentoftheBoard memorandum shouldbecorrespondinglyreflectedasa direct risk factor oftherelevant risk ratingmodel.

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)Conditional use‐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.

The OIG closed recommendation 2 from the OIG’s 2012 Report and issued two new recommendations in this report.

NEW 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 modelsaspartofphase threetestingoftheBCL review,beginningwithprojectfinance, and toaddress the recommendationsput forthin the finalreport. Toensure adequate independenceof thereview process,oversightof theprojectshouldbeplacedwithindividualswhoarenotresponsiblefordevelopmentoruseoftheriskratingmodels.

Management Response:

Pleasesee AppendixA,ManagementResponseand OIGEvaluation.

2012 Evaluation Report – Recommendation 3

Inthe2012report,Ex‐ImBankOIGconcludedthattheBankwouldbenefit from asystematic approachtostress testing.

Finding C: Ex‐Im Bankconductportfoliostresstestingin a systematicmanner toassesspotentialexposuresunderchallengingeconomicconditions.

To addressthis 3. Ex‐Im Bankshoulddevelopa systematic approachto concern,OIG stresstestingandshould conductstresstestingatleastrecommendedthe annuallyaspartofits re‐estimateprocess. following: Status – Closed and New Recommendations.

Assessment of Corrective Actions – Recommendation 3

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 theportfoliowerepresented to 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

The OIG closed and recommendation 3 from the OIG’s 2012 Report and issued one new recommendation in this report.

NEW 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 of Governorsof 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 portfoliomanagement practices of exportcredit agenciesandinternational financial institutions cited scenario analysis and stress testing as a keyobjective for the CPMfunction. Supra note3.

42 Charter, supra note5at 62.

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2012 Evaluation Report – Recommendation 4

Inthe2012report,Ex‐ImBankOIGconcludedthattheBankwouldbenefit from theimplementationofsub‐limitsto addressportfolioconcentrations.

Finding D: Ex‐ImBankdoesnotself‐imposeportfolioconcentrationsub‐limitseither byindustry, geography,or assetclass asinternal guidanceto informmanagementonriskanddetermineexposure feesinnewtransactions.

To addressthis 4. Ex‐Im Bankshouldimplement soft portfolioconcentrationconcerns,OIG sub‐limitsbasedonindustry, geography,orassetclassasrecommendedthe internal guidanceto managerisktolerancelevels andreturnfollowing: parameters.Onceexposurelimitsare inplace,these

guidelinescan inform futurepricing,riskmanagementdecisions,andbusinessdevelopmentnewtransactions.

Status – Closed and New Recommendations.

Assessment of Corrective Actions – Recommendation 4:

Ex‐Im Bankinitiallydisagreedwiththerecommendationtoimplement soft portfolioconcentrationsub‐limits, arguingthatthepracticewould be“inconsistent with the demand‐drivennatureof Ex‐Im’smandate and business…[and that]any limitswouldimpede the Bank’sability to meet demand aswellasadversely impact theEx‐ImBank’scompetitiveness compared to other officiallysupported Export Credit Agencies.”

Inresponse,OIGclarifiedthatthe intent of the recommendation was toset “soft” limits or “informal thresholds” for portfolio concentration levelsdesigned to inform futurepricing and portfolio risk managementdecisionsby advising Ex‐ImBank’s Board ofDirectors of the incremental portfolio exposure consequences of each new transaction. TheBank subsequentlychanged itspositionand agreed toimplementOIG’s recommendation.Inaddition,the ERCrecently approvedtheuse ofsoftportfoliolimits aspartof theBank’soverallportfolioriskmitigationpolicies.Inresponsetothe above actions,OIG changedthe status oftherecommendationfrom“Unresolved”to“Open”.

In2014theBank engaged theEconomist IntelligenceUnit (“EIU”)toanalyzetheBank’sportfolio concentrations,todevelop aportfolioriskdashboard modelandtooutlinevariouspolicy optionsthatwouldenabletheBanktoachieveitsportfolioconcentrationlimits.AccordingtotheStatementofWork(“SOW”)dated July23,2014,EIUwasengagedtodevelopariskdashboardforthreepurposes:(i)to assessthemacro‐economicimpactof outsidefactorsontheBank’scurrentportfolio, includingconcentrationandotherportfoliorisks;(ii)todetermine how newtransactionsimpacttheoverallriskprofileofthe Bank’sportfolio;and(iii)to identifysoft portfoliolimits,andrecommendactionstomitigatetheriskoncethesoftlimits arereached.

EIUdevelopedaportfolioriskdashboardthatallowsBankstaff toviewcurrentexposuresbyregion(NorthAmerica,LatinAmerica/Caribbean,Europe,Africa,Asia,Oceana,and other);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.

Based on our assessment of the corrective actions taken in FY 2015, OIG closed recommendation 4 from the OIG’s 2012 Report and issued two new recommendations in this report.

NEW 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.

2012 Evaluation Report – Recommendations 5 to 7

Inthe2012report,Ex‐ImBankOIGfoundthattheBanklackedwrittenpoliciesforseveralkey riskmanagement areasandthereforetherecommendationstatedthatcertainkey riskpoliciesshouldbeadopted,specificallya portfolioriskmitigation policyanda financialmodelgovernance policy.TheOIGprovidedadditionalclarificationof keyriskmanagementpoliciesthe Bankshoulddevelopandimplementin several e‐mailsdating backtoDecember2014,includinganERMriskassessment,astatementoftheBank’sriskappetiteframework,portfolioriskmitigationpolicies,andafinancial modelgovernance policy.

Finding E: Ex‐Im Bank's current riskmanagement framework andgovernancestructureare notcommensuratewith thesize,scope,andstrategicambitionsofthe institution.

To address this 5. Ex‐ImBankshouldcreatethepositionof CROtooversee concern,OIG thedesign andimplementation of an agency‐widerisk recommendedthe management function.The CROshouldhave sufficientfollowing: independence intheorganizationalstructurefromthe

businessunitswhoseactivities andexposuresitreviews. Workingwith Ex‐Im Banksenior management and theBoardofDirectors,theCROwouldberesponsiblefor drafting,presenting,andthen implementingapprovedkeyrisk policiesincluding a portfolioriskmitigation policy, afinancialmodelgovernancepolicy,aswellasbroaderfinancialgovernance issues.

Status – Closed.

6. Ex‐Im Bank’sBoardof Directorsshouldamenditsby‐lawstoincludethe oversight ofan agency‐wideriskmanagement function coveringthefull rangeofcredit,operational,and otherrisks.

Status ‐Closed.

7. Ex‐Im Bank shouldreviewcurrent riskmetricsandreportingprocedureswitha view to enhancetransparencyandto better inform keystakeholders.

Status – Closed and New Recommendations.

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Assessment of Corrective Actions – Recommendations 5 to 7

Recommendation 5 Assessment: 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 tothePresidentof theBank.” 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, andmanaginginternalcontroland operatingrisksandotheridentifiedrisks;

Toensurethattheprocessfor riskassessmentandunderwriting forindividualtransactionsconsiders howeach suchtransactionconsidersthe effectofthetransactionontheconcentrationofexposureintheoverallportfoliooftheBank,takinginto accountfees,collateralization,andhistoricdefaultrates;and

Toreview theadequacyoftheuse bytheBank ofqualitativemetricstoassess theriskofdefaultundervariousscenarios.

Based on our assessment of the corrective actions taken in FYs 2014 and 2015, OIG closed recommendation 5 from the OIG’s 2012 Report.

Recommendation 6 Assessment: Ex‐ImBankmanagement initiallydisagreedwiththe recommendation,statingthat“the roleoftheBoardofDirectorsofEx‐ImBankisset forthin the Charterand doesnotincludetherecommendedoversightfunction.”TheBank’sresponsealludedtothepossibilityof theAudit Committee“undertak[ing]certainprojectsregardingriskmanagement….”Therecommendation continued toremain“Unresolved”in2015subjecttotheBank’sreauthorization,whichbecameeffectiveonDecember4,2015.

43 2015ReauthorizationAct, supra note2.

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The2015ReauthorizationActmandated thattheBankestablisha RiskManagementCommittee(“RMC”)anddissolvetheformerAuditCommittee.Accordingly,theBankestablished theRMC,comprisedof theBoardofDirectors, with thePresidentand First VicePresidentoftheBankserving asex‐officiomembers.Theduties oftheRMC include:

(i) Oversee, in conjunction withtheOCFOofthe Bank:periodicstresstestingon theentire bankportfolio,reflecting differentmarket,industry,andmacroeconomicscenarios,andconsistent withcommonpracticesofcommercialandmultilateraldevelopmentbanks,andthemonitoringofindustry,geographic,andobligorexposurelevels;and

(ii) Review allrequiredreportsonthe defaultrateofthebank beforesubmission toCongress.

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.

The OIG closed Recommendation 6 from the OIG’s 2012 Report to reflect the above considerations.

Recommendation 7 Assessment: Ex‐ImBankagreed toimplementrecommendation7 andcarried outseveral initiativestoimprovethetransparency of itscurrent riskmetricsand reportingprocedures. Forexample,asrequiredbythe2012Reauthorization Act,theBanksubmitsaquarterly“DefaultRate Report”toCongressonthecurrentdefaultrateofitsactiveportfolioandbyspecificsubcategories—producttype,keymarketand industrysector.44 Thereportalsoincludes thecurrentdefaultrate byregion 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 outthisfollow‐upreview,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,most recentlybeginning 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 the Bank.

47 OCFOmanagement wasadvisedin2011byDeloitte,theindependentpublicaccountingfirmthatconducts the agency’s financialstatementsaudit, that Ex‐ImBank wasnot obligatedto publishtotal impairedcredits initsannual reportunderfederalaccounting standards.

48 OIGnotes that theBank’s definitionof defaults and delinquencyas reportedin the Notessection of the AnnualReporthasnot 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 level detailssupporting 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$420million Boleotransactionresulting 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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EXPORT‐IMPORT BANK – OFFICE OFINSPECTOR GENERAL

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 October 21,2014.

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.

The OIG closed recommendation 7 from the OIG’s 2012 Report and issued a new recommendation in this report.

NEW RECOMMENDATIONS

8. Ex‐ImBankshoulddevelopandimplementformalprocedurestoenhancethetimelinessoftheaggregation and reportingofriskmanagement data,including thedevelopmentofaconsolidateddashboardforseniormanagementthat reportsimportant riskmanagementdata onamonthlybasis.This should includebutnotbe limitedtothefollowing:

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‐OffandDelinquencyRatesonLoansand Leases atCommercialBanks,”Board ofGovernors of the Federal ReserveSystemavailableathttp://www.federalreserve.gov/releases/chargeoff/about.htm.

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EXPORT‐IMPORT BANK – OFFICE OFINSPECTOR GENERAL

Aggregatecreditmetricsoftheportfolioincludingimpairedloansanddefaults; and

Aggregate migrationof risk ratingsinspecific sectorsand obligorstogetherwith anaverageBCLriskratingfor theportfolio.

Management Response:

Pleasesee AppendixA,ManagementResponseand OIGEvaluation.

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EXPORT‐IMPORT BANK – OFFICE OFINSPECTOR GENERAL

CONCLUSION

Incarrying outitsmandate,Ex‐ImBankfacesadiversespectrumofrisksincludingcreditrisk,portfolioconcentration risk,marketrisk,andoperationalrisk.Inaddition, theBankfaces emergingrisktrendsand achallenging economicenvironmentinseveralkeysectors. Therefore, itisofsignificant importance thattheBankhas a robustriskmanagementand governanceframework toachievelong‐termsuccess,operateona self‐sustainingbasis,andprotect U.S.taxpayersfrom significantportfoliolosses.

SincethepublicationofOIG’sSeptember2012report,Ex‐ImBankhasmadeimportantprogressin strengtheningits risk managementpractices.Specifically,OIGfoundthattheBankhadcompletedcorrectiveactionsto addressandcloseall seven priorrecommendations.Nevertheless,inconductingthisreview,OIGfoundthatcertaininternalpoliciesandprocessescouldbeimprovedtostrengthentherisk managementpracticesoftheBank.Tothisend,thisreportformulatesnewrecommendationstoimprovetheassessment ofportfolio risks,the aggregation andreportingof riskmanagementdataandtheoverallriskmanagement architectureof theBank.

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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) “Follow-Up 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 follow up 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 and that all of the recommendations from the initial 2012 report have been implemented, validated, and closed by 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 follow-up 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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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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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

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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

EXPORT‐IMPORT BANK – OFFICE OFINSPECTOR GENERAL

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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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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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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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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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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: Summary of OIG’s 2012 Report on Portfolio Risk Policies

Inour2012evaluation reportonEx‐ImBank’sportfolioriskandloss reserve allocationpolicies,weidentifiedseveralareas needing improvementwith respecttothe Bank’s currentloss reserveallocationand portfolioriskmanagementpoliciesandprocedures.63 Inaddition,wenotedthat Ex‐ImBank’scurrent governancestructurewasnotcommensuratewiththesize,scope,andstrategic ambitionsof theinstitution.SincethepublicationofOIG’sSeptember 2012report,theBank hasmadeimportantprogress in strengtheningitsriskmanagementpractices.Thisreportseeks todocumenttheprogress made,butalsotohighlightareasfor additionalimprovement.

Overall,we believeEx‐ImBankwouldbenefit fromacomprehensive assessmentofboth agency‐widerisk factors andportfolioriskmitigation techniques.Theresultsof thisassessmentwouldinformthedesignofarobustriskmanagement frameworkthatinourestimation iscriticalto theBank’slongtermabilitytomanage itsgrowingportfolio.

Table 10Finding

: Management’s Responses to 2012 Report Recommendation Management

Response Finding A: Ex‐Im Banklacksa systematic approachtoidentify, measure,price,andreserveforitsportfoliorisk.

Ex‐ImBank shoulddevelopasystematic approachtoidentifying,measuring,pricing,andreservingforportfoliorisk,includingtheidentification of appropriate qualitativeriskfactorstoaccountandreserveforsuchrisk.Ex‐ImBank shouldincorporatethesefactors intoitslossallowanceanalysisboth retrospectivelyandprospectively.Theformerwillensurethat Ex‐Im Bankhasproperlyreservedforexistingexposurewhilethelatterwilladdressfutureexposure.

Ex‐ImBank agreedwiththerecommendation.

Finding B: Ex‐Im Banklacksformalpoliciesandproceduresforitslossreserveforecastingmodelwhichclearlydefinerolesandresponsibilitiesandprovideforindependentvalidationofthemodel’sintegrity.

Togetherwithexternal subject matterexperts,OCFOshoulddesignandimplement a formalgovernanceframework forthe use of financialmodels.This frameworkshouldincludepoliciesandproceduresformodel‐validationincludingexternalvalidationofthe model’sintegrity,modelownershipandtesting.

Ex‐ImBank agreedwiththerecommendation.

63 Supra note1.

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Table 10Finding

: Management’s Responses to 2012 Report Recommendation Management

Response Finding C: Ex‐Im Bankdoesnotconduct portfoliostresstestingin asystematicmannertoassesspotentialexposuresunderchallengingeconomicconditions.

Ex‐ImBank shoulddevelopasystematic approachtostresstestingandshouldconductstress testingatleastannuallyaspart ofitsre‐estimate process.

Ex‐ImBank agreedwiththerecommendation.

Finding D: Ex‐Im Bank doesnotself‐imposeportfolioconcentrationsub‐limitseither byindustry,geography,orassetclassasinternalguidance to informmanagement onriskanddetermineexposurefees innewtransactions.

Ex‐ImBank shouldimplement softportfolioconcentrationsub‐limitsbasedon industry,geography,orassetclassasinternalguidance tomanage risktolerance levelsand returnparameters.Onceexposurefees areinplace,theseguidelinescaninformfuturepricing,riskmanagementdecisions,andbusinessdevelopmentnewtransactions.

Ex‐ImBank initiallydisagreedwiththisrecommendation.Uponclarification,theBanksubsequently changeditspositionandagreedto implement OIG’srecommendationtoimplementsoftportfolioconcentrationsub‐limits.

Finding E: Ex‐Im Bank'scurrentriskmanagementframework andgovernancestructurearenotcommensuratewiththesize,scope,andstrategic ambitions ofthe institution.

Ex‐Im BankshouldcreatethepositionofCROtooverseethedesignandimplementationof an agency‐widerisk management function.The CROshouldhavesufficientindependenceintheorganizationalstructurefromthebusinessunitswhoseactivitiesandexposuresitreviews.WorkingwithEx‐ImBank seniormanagementandtheBoardofDirectors,theCROwouldberesponsiblefordrafting,presenting,andthenimplementingapprovedkeyriskpoliciesincludingaportfolioriskmitigationpolicy,afinancialmodelgovernancepolicy,aswellasbroaderfinancialgovernance issues.

Management firstdisagreed but lateragreedto hirea CRO.

Ex‐ImBank’sBoardofDirectorsshouldamend itsby‐laws toincludetheoversightofanagency‐wideriskmanagementfunction coveringthefull rangeofcredit,operational,and otherrisks.

Management disagreed withthisrecommendation.

Ex‐ImBankshouldreviewcurrentriskmetricsandreportingprocedureswithaviewto enhance transparency and to betterinformkeystakeholders.

Ex‐ImBank agreedwiththerecommendation.

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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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EXPORT‐IMPORT BANK – OFFICE OFINSPECTOR GENERAL

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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EXPORT‐IMPORT BANK – OFFICE OFINSPECTOR GENERAL

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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EXPORT‐IMPORT BANK – OFFICE OFINSPECTOR GENERAL

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