House lawmakers may reach a bipartisan deal this week to reauthorize the Export-Import Bank of the United States. Any reauthorization deal should require that official cost estimates for the bank’s lending activities reflect fair value.
Supporters of the Ex-Im Bank boast that the bank turns a profit for taxpayers when it backs loans for foreign entities that purchase U.S. products. Yet those profits aren’t real; they are an accounting illusion made possible by a flaw in the Federal Credit Reform Act of 1990.
According to the Congressional Budget Office, the law “doesn’t provide a full accounting of what federal credit programs actually cost the government because [it does] not incorporate the full cost of the risk associated with the loans.” Alternatively, fair-value accounting provides a more comprehensive measure of the cost because it “recognizes market risk—the component of financial risk that remains even after investors have diversified their portfolios as much as possible, and that arises from shifts in current and expected macroeconomic conditions—as a cost to the government.”
The apparent profits under Ex-Im Bank’s largest loan guarantee program disappear under fair-value accounting, when market risk is factored in. That is, the loans do in fact provide a subsidy to foreign purchasers, in the form of below-market-rate loans, and those subsidies cost taxpayers. (See this e21 analysis for more details.)
As lawmakers work to reauthorizes the Ex-Im bank in the coming days, they should require that all cost estimates for the bank’s lending programs reflect fair-value accounting, not the flawed rules under the Federal Credit Reform Act. Such a policy would not be without precedent.
Knowing of the bias in the official counting rules, Congress requires that budget agencies report the costs of loans made through the Troubled Asset Relief Program using fair-value accounting. In the same vein, Congress requires that cost estimates for certain funds it commits to the International Monetary Fund be reported under fair-value accouting instead of Federal Credit Reform Act rules.
If fair-value accounting is a better measure of costs imposed on taxpayers through TARP and the IMF, why not the Ex-Im bank, too?