Fair-Value Accounting and the Export-Import Bank
Congress is currently debating whether to reauthorize the charter for the Export-Import Bank of the United States (Ex-Im Bank). Most of the debate has focused on whether the economic and public policy rationale still exists for the federal government to involve itself in helping private firms finance their exports, say Jason Delisle and Christopher Papagianis of Economic Policies for the 21st Century.
A different debate, however, has emerged as to whether or not the Ex-Im Bank places a burden on American taxpayers. Advocates emphasize that far from acting as a burden, the Bank is actually profitable in the loan guarantees that it provides to businesses.
- Under the accounting rules mandated in the Federal Credit Reform Act of 1990 (FCRA), the Bank is allowed to treat its loan guarantees as risk-free in consideration of potential losses.
- Using these rules, the Ex-Im Bank's largest loan program, with $21 billion in estimated new guarantee volume in 2012, posted an effective return of 1.68 percent.
- Thus, its profits for 2012 will likely total around $354 million -- a gain large enough to outweigh losses by many smaller loan programs.
It is through the accounting rules provided by the FCRA that Bank advocates are able to claim the institution's profit-producing potential. However, a more accurate measure of the risks of loan guarantees and the exposure of taxpayers will demonstrate the true cost of the Bank's policies.
Fair-value accounting better incorporates the likelihood of loan default into its discounting considerations. By using this method, Bank administrators could better assess the losses that the Bank incurs at the expense of taxpayers.
- Loan program data available from the Office of Management and Budget, including loan volume, default rate net of recovery, and interest rates, provide enough information to develop a crude cash flow model for the 2012 loan guarantees.
- Next, by adjusting the assumed U.S. Treasury discount rate to incorporate market risk-premiums, the 1.68-percent positive return becomes a 0.69-percent loss.
- This causes the $354 million in profits from the largest loan program to become $200 million in losses, realized alongside rampant losses from smaller programs.
- This thoroughly undermines the argument by advocates of the Bank that it has a net positive return for taxpayers.
Source: Jason Delisle and Christopher Papagianis, "Critics of the Export-Import Bank Have a New Weapon at Their Disposal: Fair-Value Accounting," Economic Policies for the 21st Century, March 29, 2012.