The End of the Export-Import Bank

"Crony Capitalism" or a Useful Financial Tool?

The End of the Export-Import Bank
July 22, 2015

If you are like most Americans, you probably had never heard of the Export-Import bank (Ex-Im) until the recent flap in Congress that led to the expiration of the bank's charter. Since its creation by Franklin D. Roosevelt in 1934, Ex-Im's charter has been reauthorized sixteen times, but this time, the charter was allowed to expire due to ideological concerns about the Ex-Im and its purpose.

The Ex-Im exists to help facilitate exports. Whenever foreign entities are purchasing large capital items from U.S. manufacturers, such as planes or contracts to build structures in foreign countries, the foreign buyers are often unable to secure financing from commercial banks because of the risk.

Ex-Im steps in to provide the financing to the buyers, as well as other assistance designed to support the export process. As an example, for fiscal year 2013, authorizations were split into 55% loan guarantees, 20% as export credit insurance and only 25% in direct loans. Guarantees and loans can cover up to 85% of the principal and interest.

If commercial banks cannot fill the void, what is the problem with Ex-Im? For one thing, since these loans are backed by the full faith and credit of the U.S. government, taxpayers are on the hook for potential defaults. Ex-Im also gives government officials some say in picking winners or losers, instead of allowing the market to determine them, bringing up charges of crony capitalism. Ex-Im does do a majority of its business within the aerospace and air transportation field, which can reinforce the impression of playing favorites. 45% of the bank's exposure in 2013 was related to that sector, occasionally earning it the nickname, "Bank of Boeing."

The aerospace dependence is part of what unraveled support for the Ex-Im bank. Delta Airlines has been engaged in a long battle with Boeing over the Ex-Im bank, saying that Ex-Im's loan guarantees to foreign airlines were giving Delta's competitors an unfair economic advantage — essentially subsidizing their planes. However, what has really spurred the Ex-Im bank issue is the rise of its existence as a sort of litmus test in the Republican Party. The powerful Koch brothers were pushing for the expiration of the bank charter as a move against "corporate welfare," and, at least for the moment, they have succeeded.

The bank's defenders have some powerful ammunition as well. The American Action Forum (AAF), not a liberal group by any means, conducted a policy evaluation in May 2014 and concluded that, while the arguments for expiration have some merit, in practice it works reasonably well. As AAF phrased it, "the case for reauthorization of Ex-Im is based on market realities."

Consider Boeing as an example. Boeing is primarily competing against Airbus from Europe, which has support from three similar export credit agencies (ECAs) within Europe. The reality is that without the Ex-Im bank, foreign competitors to Boeing have a distinct advantage.

That is precisely the issue, say those who argue against the bank. The government is choosing to back Boeing, who benefits from Ex-Im to the detriment of Delta. It is not the government's job to choose between the two. Bank supporters might say removing the bank is also equivalent to the government making a choice, just in the opposite direction.

What about the risk and cost argument? Studies from the Manhattan Institute and several from the Congressional Budget Office (CBO) have given answers ranging from a $200 million annual cost to taxpayers to a $100 million profit. How is that possible? It is due to valuations of "fair market value" in risk assessment and the way the "profits" are accounted for.

Ex-Im sets aside reserves to handle expected losses on loans. If the bank experiences a lower default rate than expected, the extra money is returned to the Treasury. It is not profit; it is fewer losses than expected — but it can represent a real return.

The default rate is quite low — according to the Ex-Im report to Congress, it is a 0.175% rate as of the end of September 2014. It seems that the policies restraining Ex-Im are producing relatively sound loans.

Ex-Im may not be done yet, as there is talk of reauthorization. Whether or not you think the bank should be reauthorized or left to history, expect the fight to continue for a while longer. There seem to be enough merits on either side to make this a prolonged fight.

Photo By U.S. Government [Public domain], via Wikimedia Commons

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