A Turning Point for the EXIM Bank
The U.S. Export-Import Bank (EXIM) is among the most impactful government agencies when it comes to helping U.S. companies compete for business internationally, finance domestic manufacturing, and build resilient supply chains. Up until 2019, EXIM policies and products were little changed despite the U.S. economy evolving dramatically away from traditional manufacturing to a technology and services-dominated economy. As a result, EXIM users are calling for EXIM to be more relevant and adaptable to our 21st-century economy. Lawmakers are hearing these calls and becoming more receptive to EXIM reform.
For example, in 2019, Congress gave EXIM a mandate to bolster U.S. company competitiveness concerning China. EXIM users applauded. More reforms are under consideration in Washington.
Recently, I took part in a panel discussion hosted by the Washington Think Tank, Center for Strategic and International Studies (CSIS), focused on more ways to reform EXIM in response to user demands.
This article summarizes some of the key EXIM reform recommendations gaining traction. For a deeper look at EXIM’s mission and the priority sectors for its financial solutions, check out my earlier article, Accessing Financing Solutions of the U.S. EXIM Bank.
Five Key EXIM Bank Reforms Gaining Traction in Washington
1. Policy Priority One: Revise EXIM’s U.S. Content Policies to Reflect the Modern Global Supply Chain and Export Finance Environment.
Issue: EXIM has an internal policy that mandates it can only finance up to the amount of U.S. content value in an export. In today’s global economy where manufacturing supply chains are global, this policy requirement has been named by EXIM users as the single most limiting feature of EXIM - especially in the technology sector. The reason is that much technological innovation takes place in the U.S. However, the actual component manufacturing is done in many other countries.
Other major countries’ export credit agencies have evolved away from content as a dominant criterion for their financing qualification. Instead, they appropriately focus on the export value and jobs created or supported.
Recommendation: EXIM should replace its content policy with an export value-based and job creation policy - especially for the technology sector.
2. Policy Priority Two: Codify EXIM’s “Make More in America Initiative” (MMIA)
Issue: To help companies make more in America, EXIM created a landmark policy that makes available its existing medium and long-term direct loans, loan guarantees, and insurance for export-oriented domestic manufacturing capacity expansion.
Instead of basing the EXIM financing amount on exports, financing is based on the number of U.S. jobs supported, both during construction and over the life of EXIM’s financing.
Recommendation: Congress should codify this program in EXIM’s charter and provide it with the resources and support needed to maximize its effectiveness.
Interested in uncovering the potential of EXIM's "Make More in America Initiative" for your business? Take a moment to review my earlier article EXIM Bank's New Domestic Finance Initiative: Your Company May Be Eligible, for an in-depth perspective.
3. Policy Priority Three: Raise EXIM’s 2% Statutory Default Limit and Exempt Technology, Nuclear and National Security Related Financings.
Issue: If EXIM incurs a default rate of 2% or more, it must shut down all lending operations until loans roll off its books and the default rate falls below 2%. EXIM’s 2% default rate is conservative especially given EXIM is supposed to take lending risk greater than the private sector. This Sword of Damocles impacts EXIM’s ability to take on credit risk often where needed most.
Recommendation: Congress should:
Raise the statutory default rate to 4%.
Provide that technology sector loans, especially when there is the existence of China competition, nuclear energy loans, and loans that promote national security, should generally be exempt from counting towards the default rate.
If EXIM exceeds the default rate, it should have 12 months to cure any defaulted loan(s) and restore its default rate before limits on its operations are imposed.
4. Policy Priority Four: Modify EXIM’s Underwriting Criterion of “Reasonable Assurance of Repayment.”
Issue: EXIM underwrites all loans to a determination of “Reasonable Assurance of Repayment.” Based on EXIM Bank’s less than 1% historical default rate, this underwriting standard is conservative. As a result, it limits what transactions qualify for EXIM financing despite policy initiatives such as the China Competitiveness program, renewable energy, and Make More in America.
Recommendation: For EXIM to fulfill its policy mandates by taking proper credit risk, EXIM should be allowed to underwrite to a standard of “Reasonable Probability of Repayment.” By providing this criterion and changing the 2% statutory default rate as recommended, EXIM would be in a much stronger position to fulfill its policy mandates.
5. Policy Priority Five: Repeal or Modify EXIM’s Prohibition of Financing Sales of Defense Articles and Services
Issue: In the aftermath of the Vietnam War, Congress amended EXIM’s charter to prohibit its financing of defense articles and services to foreign defense ministries. The definition of “articles” is all-encompassing and would include even buttons for uniforms.
The U.S. aerospace and defense industry supports about 2 million U.S. jobs. The environment for defense sales globally is hyper-competitive. Many nations, such as France, Germany, and China, provide export credit agency financing with their defense sale proposals.
The prohibition on EXIM financing of these sales puts the U.S. at a competitive disadvantage, especially since U.S. products are often the most expensive. As a result, growth and support of U.S. jobs are affected.
Recommendation:
Congress should change the EXIM defense prohibition to exclude sales of non-kinetic articles and services and allow kinetic articles if the President decides it is in the national interest. Defense financing should be limited to no more than $35 billion of EXIM’s $135 billion total lending authority.
These and other notable recommendations are poised to help EXIM be most relevant to our country’s 21st Century economy.
For more information about navigating the financing solutions of the EXIM Bank, please contact Stephen Renna, former EXIM Chief Banking Officer steve.renna@ankura.com or Cameron Dorsey, former EXIM Senior Advisor cameron.dorsey@ankura.com.
© Copyright 2024. The views expressed herein are those of the author(s) and not necessarily the views of Ankura Consulting Group, LLC., its management, its subsidiaries, its affiliates, or its other professionals. Ankura is not a law firm and cannot provide legal advice.
