TESTIMONY OF CFTC ACTING CHAIRMAN WETJEN REGARDING BUDGET AND OVERSIGHT

FROM:  COMMODITY FUTURES TRADING COMMISSION 
Testimony of Acting Chairman Mark P. Wetjen Before the U.S. House Appropriations Subcommittee on Agriculture, Rural Development, Food And Drug Administration, and Related Agencies

March 6, 2014

Good morning, Chairman Aderholt, Ranking Member Farr and members of the Subcommittee. Thank you for inviting me to today’s hearing on the FY 2015 President’s Budget request for the Commodity Futures Trading Commission (“Commission” or “CFTC”).

Under the Commodity Exchange Act, the Commission has oversight responsibilities for the derivatives markets. These markets, which have been in existence for centuries, have taken on particular importance to the U.S. economy in recent decades and as a consequence have become enormously vast, measuring hundreds of trillions of dollars in notional value. They are critical to the effective functioning of the U.S. and global economies.

At their core, the derivatives markets exist to help farmers, producers, small businesses, manufacturers and lenders focus on what they do best: providing goods and services and allocating capital to reduce risk and meet main street demand. Well-regulated derivatives markets facilitate job creation and the growth of the economy by providing a means for managing and assuming prices risks and broadly disseminating, and discovering, pricing information.

Stated more simply, through the derivatives marketplace, a farmer can lock in a price for his crop; a small business can lock in an interest rate that would otherwise fluctuate, perhaps raising its costs; a global manufacturer can lock in a currency value, allowing it to better plan and grow its global business; and a lender can manage its assets and balance sheet to ensure it can continue lending, fueling the economy in the process.

Essentially, these complex markets facilitate the assumption and distribution of risk throughout the financial system, and for that reason alone, it is critical that these markets are subject to appropriate governmental oversight.

Mr. Chairman, Ranking Member, and Committee members, I do not intend the testimony that follows to sound alarmist, or to overstate the case for additional resources, but I do want to be sure that Congress, and this committee in particular, have a clear picture of the potential risks posed by the continued state of funding for the agency. When not overseen properly, irregularities in these markets, or failures of firms intermediating in them, can severely and negatively impact the economy as a whole and cause dramatic losses for individual participants. The stakes, therefore, are high.

The CFTC’s Responsibilities have Grown Substantially in Recent Years

The unfortunate reality is that, at current funding levels, the Commission is unable to adequately fulfill the mission given to it by Congress: to prevent disruptions to market integrity, protect customer assets, monitor and reduce the build-up of systemic risk, and ensure to the greatest extent possible that the derivatives markets are free of fraud and manipulation.

Recent increases in the agency’s funding have been essential and appreciated. They have not, however, kept pace with the growth of the Commission’s responsibilities, including those given to it under the Dodd-Frank Wall Street Reform and Consumer Protection Act (“Dodd-Frank”).

Various statistics have been used to measure this increase in responsibilities. One often-cited measure is the increase in the gross notional size of the marketplace now under the Commission’s oversight. Other measures, though, are equally and perhaps more illustrative.

For instance, the trading volume of CFTC-regulated futures and options contracts was 3,060 million contracts in 2010 and rose to 3,477 million in 2013. Similarly, the volume of interest rate swap trading activity by the 15 largest dealers averaged 249,564 swap events each in 2010, and by 2012, averaged 332,484 each (according to International Swaps and Derivatives Association (“ISDA”) data). Those transactions, moreover, can be executed in significantly more trading venues, and types of trading venues, both here and abroad. In addition, the complexity of the markets, its products and sophistication of the market tools, such as high frequency trading techniques, has increased greatly over the years.

The notional value of derivatives centrally cleared by clearinghouses was $124 trillion in 2010 (according to ISDA data), and is now approximately $223 trillion (according to CFTC data from swap data repositories (“SDRs”)). That is nearly a 100 percent increase. The expanded use of clearinghouses is significant in this context because, among other things, it means that the Commission must ensure through appropriate oversight that these entities continue to properly manage the various types of risks that are incident to a market structure dependent on central clearing. A clearinghouse’s failure to follow international guidelines and the Commission’s regulations, now more than ever, could have significant economic consequences.

The amount of customer funds held by clearinghouses and futures commission merchants (“FCMs”) was $177 billion in 2010 and is now over $225 billion, another substantial increase. These are customer funds in the form of cash and securities deposited at firms to be used for margin payments made by the end-users of the markets, like farmers, to support their trading activities. Again, Commission rules are designed to ensure customer funds are safely kept by these market intermediaries, and a failure to provide the proper level of oversight increases the risk of certain practices by firms, including perhaps operational risks or fraud. In fact, recent events in the FCM community have led to the temporary or permanent loss of more than a billion dollars of customer funds.

The total number of registrants and registered entities overseen directly by the Commission, depending on the measure, has increased by at least 40 percent in the last four years. This includes 99 swap dealers, two major swap participants (“MSPs”), FCMs, clearinghouses, trading venues and SDRs.

In addition, the CFTC oversees more than 4,000 advisers and operators of managed funds, some of which have significant outward exposures in and across financial markets. It is conceivable that the failure of some of these funds could have spill-over effects on the financial system. In all cases, investors in these funds are entitled to know their money is being appropriately held and invested.

The Commission also directly or indirectly supervises another approximately 64,000 registrants, mostly associated persons that solicit or accept customer orders or participate in certain managed funds, or that invest customer funds through discretionary accounts. Although it leverages the resources of the self-regulatory organizations (“SROs”), the Commission itself must oversee these registrants in certain areas and provide guidance and interpretations to the SROs with a total staff of only 644 employees currently onboard, less than 10 percent of the number of registrants under its purview.

By almost any measure, in fact, the portfolio of entities that the Commission is charged with overseeing has expanded in size and risk dramatically over the last half decade. The intermediaries in the derivatives markets are by and large well-run firms that perform important services in the markets and for their customers. But as a collective whole, these firms can potentially pose risks, even significant risks, to the financial system and the individuals operating within it. Those relying upon these firms deserve assurances that such firms are supervised by an agency capable of meaningful oversight.

The FY15 Request Prioritizes Examinations, Technology and Market Integrity, and Enforcement

The FY 2014 appropriation of $215 million was a modest budgetary increase for the Commission, lifting the agency’s appropriations above the sequestration level of $195 million that has posed significant challenges for the agency’s orderly operation. As directed by Congress, the agency has submitted to Congress a FY 2014 Spend Plan outlining the agency’s allocation of current resources, which reflects an increased emphasis on examinations and technology-related staff.

The President’s FY 2015 budget request also reflects these priorities and highlights both the importance of the Commission’s mission and the potential effects of continuing to operate under difficult budgetary constraints.

The request is a significant step towards the longer-term funding level that is necessary to fully and responsibly fulfill the agency’s core mission: protecting the safety and integrity of the derivatives markets. It recognizes the immediate need for an appropriation of $280 million and approximately 920 staff years (“FTEs”) for the agency, an increase of $65 million and 253 FTEs over the FY 2014 levels, heavily weighted towards examinations, surveillance, and technology functions.

In this regard, the request balances the need for more technological tools to monitor the markets, detect fraud and manipulation, and identify risk and compliance issues, with the need for staff with the requisite expertise to analyze the data collected through technology and determine how to use the results of that analysis to fulfill the Commission’s mission as the regulator of the derivatives markets. Both are essential to carrying out the agency’s mandate. Technology, after all, is an important means for the agency to effectively carry out critical oversight work; it is not an end in itself.

In light of technological developments in the markets today, the agency has committed to an increased focus on technology and is requesting a 17 percent increase in technology funding, or approximately $7 million, over FY 2014 solely for IT investments. The Commission’s FY 2014 Congressional Spending Plan already reflects that priority. The agency, in fact, reprogrammed $7.9 million from salaries and expenses to enhance technology investments.

In my remaining testimony, I will review three of the primary mission priorities for FY 2015.

Examinations

The President’s request would provide $38 million and 158 FTEs for examinations, which also covers the compliance activities of the Commission. As compared to FY 2014, this request is an increase of $15 million and 63 FTEs.

I noted earlier that the Commission has seen substantial growth in, among other things, trading volumes, customer monies held by intermediaries in the derivatives markets, and margin and risk held by clearinghouses. Examinations and legal compliance oversight are perhaps the best deterrents to fraud and improper or insufficient risk management and, as such, remain essential to compliance with the Commission’s customer protection and risk management rules.

The Commission has a direct examinations program for clearinghouses and designated contract markets, and it will soon directly examine swap execution facilities (“SEFs”) and SDRs. However, the agency does not at this time have the resources to place full-time staff on site at these registered entities, even systemically-important clearing organizations, unlike a number of other financial regulators that have on-the-ground staff at the significant firms they oversee. The Divisions of Market Oversight and Clearing and Risk collectively have 47 total examinations positions in FY 2014 to monitor, review, and report on some of the most complex financial markets and operations in the world.

The Commission today also performs only high-level, limited-scope reviews of the nearly 100 FCMs and 99 swap dealers holding over $225 billion in customer funds. In fact, the Commission has a staff of only 35 examiners to review these firms and analyze, among other things, over 1,200 financial filings each year. This staff level is less than the number the Commission had in 2010, yet the number of firms requiring its attention has almost doubled. Additionally, although it has begun legal compliance oversight of swap dealers and MSPs, the Commission has been able to allocate only 14 FTEs for this purpose. This number is insufficient to perform the necessary level of oversight of the newly registered swap dealer entities.

In FY2014, the Commission overall will have a mere 103 staff positions dedicated to examinations of the thousands of different registrants that should be subject to thorough oversight and examinations. The reality is that the agency has fallen far short of performance goals for its examinations activities, and it will continue to do so in the absence of additional funding from Congress. For example, as detailed in the Annual Performance Review for FY 2013, the Commission failed to meet performance targets for system safeguard examinations and for conducting direct examinations of FCM and non-FCM intermediaries. The President’s budget request appropriately calls on Congress to bolster the examinations function at the agency, and it would protect the public, and money deposited by customers, by enhancing the examinations program staff by more than 66 percent in FY 2015.

Moreover, if Congress fully funds the President’s request, the Commission can move toward annual reviews of all significant clearinghouses and trading platforms and perform more effective monitoring of market participants and intermediaries. Partially funding the request will mean accepting a certain amount of operational risk in the derivatives markets as the Commission is forced to forego more in-depth financial, operational and risk reviews of the firms within its jurisdiction and as such be reactive and not proactive to firm or industry risk issues.

Technology and Market Integrity

The FY 2015 request also supports a substantial increase in technology investments relative to FY 2014, roughly a 17 percent increase to supplement the more than 62 percent overall increase in data acquisition, analytics, and surveillance staff to make use of these investments. The $50 million investment in technology will provide millions of dollars of new and sophisticated analytical systems that will assist the Commission in its efforts to ensure market integrity.

The President’s FY 2015 budget request supports, in addition, 103 data-analytics and surveillance-related positions in the Division of Market Oversight alone, an increase of more than 98 percent over the FY 2014 staffing levels. Market surveillance is a core Commission mission, and it is an area that depends heavily on technology. As trading across the world has moved almost entirely to electronic systems, the Commission must make the technology investments required to collect and make sense of market data and handle the unprecedented volumes of transaction-level data provided by financial markets.

Effective market surveillance, though, equally depends on the Commission’s ability to hire and retain experienced market professionals who can analyze extremely complex and voluminous data from multiple trading markets and develop sophisticated analytics and models to respond to and identify trading activity that warrants investigation. The FY 2015 investment in high-performance hardware and software therefore must be paired with investments in personnel that can employ technology investments effectively.

In addition to the agency’s direct oversight responsibilities, the CFTC continues to prioritize the data and technology infrastructure needs across the Commission. The President’s FY 2015 Budget requests significant increases in both dollars and staff dedicated to these needs. Data, and the ability to analyze and report data, are more important than ever in the derivatives markets, and in the CFTC’s ability to oversee these markets. The CFTC must aggregate various types of data from multiple industry sources and across the futures and swaps markets. The increasing complexity and volume of this incoming data, moreover, requires significantly more powerful hardware, such as massively parallel processing systems to support analytics. Moving forward, the Commission will continue to improve information technology and management capabilities in the areas of data management to support analytics, statistical processing, and market research.

Enforcement

The President’s FY 2015 request would provide $62 million and 200 FTEs for enforcement, an increase of $16 million and 51 FTEs over FY 2014.

In its role as a law enforcement agency, the Commission’s enforcement arm protects market participants and other members of the public from fraud, manipulation and other abusive practices in the futures, options, cash and swaps markets, and prosecutes those who engage in such conduct. In FY 2013, the Commission filed 82 enforcement actions, bringing the total over the past three fiscal years to 283, and obtained orders in FY 2013 imposing more than $1.7 billion in sanctions.

The cases the agency pursues range from sophisticated manipulative and disruptive trading schemes in markets the Commission regulates, including financial instruments, oil, gas, precious metals and agricultural products, to quick strike actions against Ponzi schemes that victimize investors. The agency also is engaged in complex litigations related to issues of financial market integrity and customer protection. By way of example, in FY 2013, the CFTC filed and settled charges against three financial institutions for engaging in manipulation, attempted manipulation and false reporting of LIBOR and other benchmark interest rates.

Such investigations continue to be a significant and important part of the Division of Enforcement’s docket. Preventing manipulation is critical to the Commission’s mission to help protect taxpayers and the markets, but manipulation investigations, in particular, strain resources and time. And once a case is filed, the priority must shift to the litigation. In addition to drawing time and resources at the Commission, litigation requires additional resources, such as the retention of costly expert witnesses.

In 2002, when the Commission was responsible for the futures and options markets alone, the Division of Enforcement had approximately 154 people. Today, the CFTC also has anti-fraud and anti-manipulation authority over the vast swaps market, and it oversees a host of new market participants. In addition, the agency is also now responsible for pursuing cases under our enhanced Dodd-Frank authority that prohibits the reckless use of manipulative or deceptive schemes. Notwithstanding these additional responsibilities, there are currently only 149 members of the enforcement staff. The President’s budget request brings this number to 200, and more cops on the beat means the public is better assured that the rules of the road are being followed.

In addition to the need for additional enforcement staff and resources, the CFTC also believes technology investments will make our enforcement staff more efficient. For instance, the FY 2015 request would support developing and enhancing forensic analysis capabilities to assist in the development of analytical evidence for enforcement cases.

A full increase for enforcement means that the agency can pursue more investigations and better protect the public and the markets. A less than full increase means that the CFTC will continue to face difficult choices. It is not clear that we could maintain the current volume and types of cases, as well as ensure timely responses to market events.

Other FY 2015 Priorities: International Policy Coordination & Economic and Legal Analysis

The President’s FY 2015 request would provide $4.2 million and 15 FTEs that would be dedicated to international policy, a decrease of $41,000 and no increase in FTE over FY 2014. This allocation should not be misconstrued to mean that international coordination is not a priority for the Commission.

The global nature of the swaps and futures markets makes it imperative that the United States consult and coordinate with international authorities. For example, the Commission recently announced significant progress towards harmonizing a regulatory framework for CFTC-regulated SEFs and EU-regulated multilateral trading facilities (“MTFs”). The Commission is working internationally to promote robust and consistent standards, to avoid or minimize potentially conflicting or duplicative requirements, and to engage in cooperative supervision, wherever possible.

Over the past two years, the CFTC, Securities and Exchange Commission, European Commission, European Securities and Markets Authority, and market regulators from around the globe have been meeting regularly to discuss and resolve issues with the goal of harmonizing financial reform. The Commission also participates in numerous international working groups regarding derivatives. The Commission’s international efforts directly support global consistency in the oversight of the derivatives markets. In addition, the Commission anticipates a significant need for ongoing international policy coordination related to both market participants and infrastructure in the swaps markets. The Commission also anticipates a need for ongoing international work and coordination in the development of data and reporting standards under Dodd-Frank rules. Dodd-Frank further provided a framework for foreign trading platforms to seek registration as a foreign board of trade, and 24 applications have been submitted.

A full increase for international policy means the Commission will be able to increase our coordination efforts with financial regulators and market participants from around the globe. A less than full increase means we will be less able to engage in cooperative work with our international counterparts, respond to requests, and provide staffing for various standard-setting projects.

In addition, for FY 2015, the President’s budget would support $24 million and 92 FTEs to invest in robust economic analysis teams and Commission-wide legal analysis. Compared to the FY 2014 Spending Plan, this request is an increase of $4 million and 18 FTEs. Both of these teams support all of the Commission’s divisions.

The CFTC’s economists analyze innovations in trading technology, developments in trading instruments and market structure, and interactions among various market participants in the futures and swaps markets. Economics staff with particular expertise and experience provides leverage to dedicated staff in other divisions to anticipate and address significant regulatory, surveillance, clearing, and enforcement challenges. Economic analysis plays an integral role in the development, implementation, and review of financial regulations to ensure that the regulations are economically sound and subjected to a careful consideration of potential costs and benefits. Economic analysis also is critical to the public transparency initiatives of the Commission, such as the Weekly Swaps Report. Moving into FY 2015, the CFTC’s economists will be working to integrate large quantities of swaps market data with data from designated contract markets and SEFs and large swaps and futures position data held by the Commission to provide a more comprehensive view of the derivatives markets.

The legal analysis team provides interpretations of Commission statutory and regulatory authority and, where appropriate, provides exemptive, interpretive, and no-action letters to CFTC registrants and market participants. In FY 2013, the Commission experienced a significant increase in the number and complexity of requests from market participants for written interpretations and no-action letters, and this trend is expected to increase into FY 2015.

A full increase for the economics and legal analysis mission means the Commission will be able to support each of the CFTC’s divisions with economic and legal analysis. Funding short of this full increase or flat funding means an increasingly strained ability to integrate and analyze vast amounts of data the Commission is receiving on the derivatives markets, thus impacting our ability to detect problems that could be detrimental to the economy. Flat funding also means the Commission’s legal analysis team will continue to be constrained in supporting front-line examinations, adding to the delays in responding to market participants and processing applications, and hampering the team’s ability to support enforcement efforts.

Conclusion

Effective oversight of the futures and swaps markets requires additional resources for the Commission. This means investing in both personnel and information technology. We need staff to analyze the vast amounts of data we are receiving on the swaps and futures markets. We need staff to regularly examine firms, clearinghouses and trading platforms. We need staff to bring enforcement actions against perpetrators of fraud and manipulation. The agency’s ability to appropriately oversee the marketplace hinges on securing additional resources.

Thank you again for inviting me today, and I look forward to your questions.

EXPORT-IMOIRT BANK CHAIRMAN'S STATEMENT TO SENATE BANKING COMMITTEE

FROM:  EXPORT-IMPORT BANK 
Chairman Hochberg's Statement to Senate Banking Committee on Ex-Im Bank’s Oversight and Reauthorization

Washington, D.C. – Today Export-Import Bank of the United States (Ex-Im Bank) Chairman and President Fred P. Hochberg delivered the following remarks to the Senate Committee on Banking, Housing, and Urban Affairs at the beginning of a hearing titled “Oversight and Reauthorization of the Export-Import Bank of the United States” in the Dirksen Senate Office Building.

Chairman Hochberg offered testimony today highlighting many of the Export-Import Bank’s achievements in recent years and its numbers from 2013. Highlights of the testimony include:

•           Ex-Im supported an estimated 205,000 U.S. jobs in FY 2013

•           Ex-Im generated more than $1 billion for the U.S. taxpayers in FY 2013

•           Exports from the United States were up in 2013, but authorizations from Ex-Im Bank were off from the prior year, indicating that as the global economy continues to strengthen, exports are being financed not only by commercial banks but also by capital markets

•           In FY 2013, the Bank financed a record 3,413 small businesses - nearly 90 percent of Ex-Im’s transactions.

•           Ex-Im financed more small businesses in the last five years than the prior eight years combined.

•           The Bank also financed more minority and woman-owned businesses in the last five years than the prior sixteen years combined.

His full written testimony is attached and pasted below.

*As prepared for delivery

Chairman Johnson, Ranking Member Crapo and distinguished members of the Banking Committee, thank you for inviting me to testify before you as the Committee considers the progress of the Export-Import Bank of the United States (“Ex-Im Bank” or “the Bank”) has made in supporting U.S. jobs through exports since our last reauthorization.

Today, American exports are at an all-time high. The United States exported a record $194.9 billion in November, 2013. Never before has the U.S. exported more goods and services in a single month. Our trade gap is the lowest it has been since 2009, when U.S. exports totaled $1.9 trillion. In 2012, U.S. exports totaled a record $2.2 trillion. The “Made in America” brand has never been stronger.

I am proud of the job our 400+ employees do each and every day. Ex-Im Bank has supported nearly 1.2 million private sector U.S. jobs since 2009, including 205,000 jobs in FY 2013 alone. The Bank operates at no cost to the taxpayers, and in FY 2013, the Bank generated more than $1 billion for the U.S. taxpayers above and beyond the cost of all operations and loan loss reserves. This $1 billion goes toward deficit reduction. We do this while maintaining a default rate of 0.267.

Ex-Im Bank has at its core ensuring that small businesses – the foundation of our economy – are at the forefront of U.S. exports. We cannot grow our economy – or our exports for that matter – without fully supporting the small businesses of America. In 2013, the Bank financed a record 3,413 small businesses - nearly 90 percent of Ex-Im’s transactions. In addition, Ex-Im financed more small businesses in the last five years than the prior eight years combined. The Bank also financed more minority and woman-owned businesses in the last five years than the prior sixteen years combined.

As the global economy continues to strengthen, exports are being financed not only by commercial banks but also by capital markets. This is an encouraging trend. In 2013, the total dollar amount of transactions financed by Ex-Im was significantly lower than in 2012, yet exports as a whole from the U.S. were up during that timeframe.

Ex-Im Bank is the official export credit agency of the United States. The mission of the Bank is to enable U.S. companies – large and small – to turn export opportunities into sales that help maintain and create U.S. jobs which contribute to a stronger national economy. The Bank achieves its mission, when needed, by providing export financing through its loan, guarantee, and insurance programs in cases where the private sector is unable or unwilling to do so.
For example, we provide trade credit insurance to Miss Jenny’s Pickles in North Carolina so they don’t need to worry about foreign buyers not paying. We provide a working capital guarantee to Auburn Leather in Kentucky so they can build the inventory necessary to meet large foreign purchase orders. And, we provide direct loans to foreign buyers of GE locomotives so the sales and jobs will benefit workers in Pennsylvania rather than a foreign competitor.
Ex-Im Bank also provides support if necessary to level the playing field when financing is provided by foreign governments to their companies who compete against U.S. exporters. We assume commercial, country, and liquidity risks that are reasonable and responsible, but currently beyond the still-recovering appetite of private lenders. Ex-Im Bank does not compete with private sector lenders, but rather provides financing for transactions that would otherwise not take place because commercial lenders are either unable or unwilling to accept the political or commercial risk inherent in the deal.

Ex-Im Bank offers a variety of products to help U.S. businesses export around the world. Our working capital financing supports small business exporters to obtain loans which facilitate the exports of goods or services made by commercial lenders and backed by our guarantee. These loans provide small businesses the liquidity and confidence to accept new international contracts, grow export sales, and compete more effectively in the international marketplace. Export credit insurance allows U.S. businesses to increase their export sales by limiting their international risk, offering credit to international buyers, and enabling American businesses to access working capital funds.

Ex-Im Bank continues its prudent oversight and due diligence standards to protect taxpayers through its comprehensive risk management framework. It begins with effective project underwriting, including detailed documentation and financial structuring to ensure the Bank’s rights are protected. It continues long after a transaction is approved and disbursed with pro-active monitoring efforts to ensure timely payment.

During all of FY 2013, the Ex-Im Bank paid, from the fees we collect, new gross claims of just $48.8 million on a total portfolio greater than $110 billion. The Bank recovered more money - $62.6 million - than it had in new claims for the fiscal year. The Bank is also appropriately reserved to cover expected loan losses. The Bank’s reserve methodology has been reviewed, by GAO, our internal auditors, KPMG, and our external auditors Deloitte & Touche. As a result of provisions included in the Bank’s charter during last year’s re-authorization, Ex-Im Bank submits a quarterly default rate report to Congress. As of December 31, 2013, the Bank's default rate was 0.267 percent. At the same time, over the past five years Ex-Im Bank has generated more than $2 billion for U.S. taxpayers, above and beyond all administrative operating costs, claims and loan loss reserves we set aside. We operate at no cost to the taxpayers.

Moreover, we are committed to providing “Government at the Speed of Business,” which means top-notch service and a relentless focus on our customers and a drive to innovate. In FY 2013, 89 percent of all transactions were completed within 30 days and 98 percent within 100 days. The time required to process long-term transactions dropped to an average of 88 days in FY 2013, down from an average of 163 days in FY 2009.

In 2013, the Bank named Mr. Charles J. Hall as our new Executive Vice President and Chief Risk Officer. Prudent risk-management is one of our foremost priorities. As chief risk officer, Mr. Hall reports directly to me and is responsible for ensuring that the Bank continues to be properly protected as it fulfills its mission of supporting jobs through exports.

Comprehensive risk management and continuous improvement is what we strive towards, and our default rate reflects that. The Bank has made many improvements over the past few years including:

Modernizing credit monitoring;
Creating a Special Assets unit to address emerging credit issues;
Expanding our pro-active monitoring efforts;
Improving our underwriting; and
Enhancing credit loss modeling with qualitative factors

We also have plans to implement additional risk management improvements identified over the past two years from our internal analysis of best practices, outside expert advice, audit recommendations, and from our Inspector General.

Ex-Im Bank has met all of the reporting requirements set forth in our reauthorization bill. We produced several reports to this committee including:

Our Business Plan;
Our Small Business Report;
Our Content Review;
Our Report on Financing of Textiles; and
Our Quarterly Default Rate Reports

We have added a textile industry representative to our Advisory Committee from Frontier Spinning in Greensboro, NC, which I visited earlier this month. We have fully implemented all Iran sanctions provisions, as required under the most recent reauthorization. In certain instances we have gone beyond the requirements of our reauthorization. For example, Congress required us to simply post our economic impact policies. The Bank went beyond the requirement by re-evaluating our economic impact procedure process and making changes to that process, which included the review of airline services.

As part of the reauthorization we are working in a transparent and cooperative way with GAO. I personally met with the Comptroller General to express my strong desire to work collaboratively and make the Bank more efficient and effective. I received very positive feedback from the Comptroller General about the cooperation between the GAO and Ex-Im.

Four reviews were required under our last reauthorization. To date, three reviews have been completed: risk management; business plan; and jobs supported calculation. In each of these reviews, the Bank agreed with the GAO’s recommendations and we have implemented or are in the process of implementing each of them. We continue to work closely with the GAO as they seek to complete the final audit, due diligence process, which is due in May 2014.

Small businesses are critical to our economy and comprise a significant number of net new jobs. Congress has mandated we make available 20 percent of our financing to meet their needs. In FY 2013 we financed a total of $6 billion in small business exports, of which $5.2 billion was for the direct support of American small-business exporters. Total small business exports include those directly exported by small business to a foreign buyer, plus small business inputs into the supply chain of larger U.S. companies’ products which are ultimately exported. At Ex-Im Bank, small business accounted for a record-high 3,413 authorizations – nearly 90 percent of the total number of Ex-Im transactions.

To put this in perspective, we have financed more small business in the past five years than in the previous eight years combined.

Another area that we are particularly proud of is our financing to woman and minority-owned businesses. In FY 2013, authorizations for woman-owned and minority-owned small businesses reached a historic high of 761 transactions, totaling $815.5 million. One in five of total authorizations supported woman-owned and minority-owned businesses. In fact, over the past five years we have financed more woman and minority owned businesses than the Bank did in the previous sixteen years combined.

To address the needs of our small business customers, Ex-Im Bank has implemented a number of new financial products. Our most popular product, Express Insurance, received an innovation in government award from Harvard’s Kennedy School and has helped more than 800 small businesses get a prompt response to their application.

The key to expanding exports is marketing and communicating to small businesses. Three years ago, Ex-Im in partnership with Tom Donohue at the U.S. Chamber of Commerce, Jay Timmons at the National Association of Manufacturers (NAM) and commercial banks, launched Global Access for Small Business. To date, we have held over 60 Global Access forums across America. From Billings to Boise and from Shreveport to Charlotte, more than five thousand businesses have learned how to access foreign markets and use Ex-Im Bank to give them a competitive edge when exporting. For example, in November 2013, Ex-Im and FedEx announced an innovative new alliance that will help U.S. small and medium-sized businesses (SMEs) reach the 95% of the world’s customers who live overseas. As part of this agreement, FedEx international customer representatives will make their clients aware of the Bank’s abilities to protect against the risk of nonpayment and to extend credit to buyers, eliminating the need for expensive letters of credit or cash-in-advance payments. Customers who are interested in this service will then be connected to Ex-Im Bank’s managers for trade finance counseling. This alliance with FedEx will help businesses increase sales, create jobs, and succeed in international markets.

At Ex-Im Bank we have worked to ensure significant progress in supporting our other congressional mandates to finance more renewable energy exports and exports to sub-Saharan Africa. Our support for renewable energy has increased nearly than tenfold from $30.4 million in FY 2008 to $257 million in FY 2013.

I am proud of our work in sub-Saharan Africa which is home to seven of the ten fastest growing economies in the world. In the past four years, Ex-Im Bank has authorized more than $4 billion in financing for U.S. exports to sub-Saharan Africa, including $604 million in authorizations in FY 2013.

The Bank approved a record 188 authorizations to sub-Saharan Africa in FY 2013. This financing supported U.S. exports to 35 of 49 sub-Saharan African countries, including Cameroon, Ethiopia, Ghana, Kenya, Mozambique, Nigeria, South Africa and Tanzania.
Ex-Im Bank is a key player in the Power Africa initiative, involving other U.S. government agencies including the U.S. Agency for International Development (USAID), U.S. Trade and Development Agency (USTDA), the Overseas Private Investment Corporation (OPIC) and the Departments of State and Energy. Ex-Im Bank pledged support of up to $5 billion over the next five years in support of the President’s goal of doubling sub-Saharan Africa’s access to electricity.

As a destination market, Sub-Saharan Africa receives about one percent of U.S. exports, but the region receives a higher percentage of Ex-Im’s financing. As of FY 2013, almost five percent of Ex-Im’s total exposure consisted of exposure to sub-Saharan Africa.

I want to thank this committee for their work on our reauthorization in 2012 and stress the importance of a timely reauthorization in 2014. There are some 60 Export Credit Agencies (ECAs) around the globe. Make no mistake, these foreign governments want the 205,000 American jobs Ex-Im financing helped support last year for themselves. As I travel the world on behalf of American companies, I know that my counterparts in China, Brazil, Russia and South Korea, are right behind me. These nations, and many others, are serious competitors in the global marketplace. For example, the South Korean government, with an economy less than one tenth of our size finances more than 3 times the exports for South Korean companies than the United States finances for U.S. companies.. There is a strong drive to increase exports from many countries around the globe. We need to send the same signal to competitor nations that we stand behind American workers and ensure they are operating on a level playing field. In order for U.S. businesses to be able to compete based on the price and quality of their exports, Ex-Im needs to be there to level the playing field when it comes to meeting foreign ECA competition. The thousands of businesses that benefit from Ex-Im Bank financing – almost 90 percent of which are small businesses - appreciate the fact that Congress was able to reach an agreement to reauthorize the Bank in 2012 and they need to know that we will be around in the years ahead to help them meet foreign competition and grow their exports and create more jobs here at home.

I thank you for this opportunity to provide you with an update on the excellent work Ex-Im Bank is doing to support U.S. jobs. I want to commend the outstanding, professional work of our 400+ employees who are committed to supporting American jobs and increasing U.S. exports. I look forward to working with you to reauthorize the Bank and continue to grow U.S. exports.

SENATE ARMED SERVICES COMMITTEE FINDS OVERSEAS CONSTRUCTION PROJECTS LACKING OVERSIGHT

FROM: SENATE ARMED SERVICES COMMITTEE CHAIRMAN CARL LEVIN'S WEBSITE

Senate Armed Services Committee report finds lack of oversight, rising U.S. costs at overseas bases

Wednesday, April 17, 2013

WASHINGTON – A Senate Armed Services Committee review of the Defense Department’s annual $10 billion overseas spending [PDF] has found construction projects lacking congressional or Pentagon oversight, and allied contributions failing to keep up with rapidly rising U.S. costs.

The year-long review of spending in Japan, South Korea and Germany, where nearly 70 percent of spending to support our permanent overseas facilities takes place, suggests that changes to the management of such spending are necessary and that closer scrutiny is warranted to avoid future commitments that may be inefficient or unaffordable.

"Japan, South Korea and Germany are critical allies. In order to better sustain our presence in these important locations, we need to understand and control our costs. Federal dollars should always be spent with utmost care, but at a time when the Pentagon and the entire federal government face enormous fiscal challenges, the questionable projects and lack of oversight identified in this review are simply unacceptable," said Sen. Carl Levin, D-Mich., the committee chairman. "Every dollar spent on unnecessary or unsustainable projects is a dollar unavailable to care for our troops and their families, to maintain and modernize equipment, and to pay for necessary investments in base infrastructure."

"This report reaffirms the committee's commitment to ensure that the resources we provide to the armed forces, as well as contributions provided by our allies, are directed towards the most critical core defense requirements of our U.S. Military stationed overseas," said Sen. James Inhofe, R-Okla., the committee’s ranking member. "In an unprecedented era of rapidly decreasing defense funds, we will continue to extend oversight to each and every taxpayer dollar spent for our national defense."

Among the review’s findings:
In Germany, force reductions will result in the return of a large number of U.S. facilities to the German government. These returns will generate payments from Germany for the "residual value" of U.S. investments in those facilities. The committee’s review of recent residual value settlements found that in-kind payments have replaced cash in such settlements despite Congress’s intent that in-kind settlements be a last resort. In-kind refers to non-cash payments, such as the provision of services or facilities that have cash value. The committee found that the Army’s Installation Management Command-Europe directed in-kind contributions to questionable projects such as planning for a $6 million furniture warehouse and $200,000 for sun-room additions to senior officer housing. The committee also found that the Department has failed to notify Congress about negotiations for in-kind payments as required by law.
U.S. Forces Korea’s (USFK) use of hundreds of millions of dollars of in-kind contributions from South Korea is subject to little oversight by the Department of the Army, U.S. Pacific Command or the Defense Department. Congress is not even notified about projects built by USFK with in-kind contributions. The committee’s review identified plans to use in-kind contributions for a $10 million museum and a fiscally ill-conceived dining hall project rather than mission-critical facilities.
A U.S. Army proposal for a public-private partnership to build military family housing in South Korea would increase the rental portion of the overseas housing allowance paid to military families housed in the development from the current standard $1,600 per month to $3,900 per month. The Army’s justification for the proposed increase relies on an unprecedented interpretation of overseas housing allowance regulations. The committee’s analysis indicates that, if approved, the proposal would cost U.S. taxpayers hundreds of millions of dollars more than the standard overseas housing allowance for military families.
The committee’s findings raise issues associated with cost of the planned realignment of U.S. forces in the Asia Pacific. The committee has declined to authorize spending for some of these realignment initiatives until detailed plans and cost estimates are produced.
U.S. contributions to the cost of maintaining forces in South Korea grew by more than $500 million between 2008 and 2012. By comparison, South Korea’s contributions under the U.S. – Korea Special Measures Agreement grew by about $42 million during that same period.
In Japan, host-nation burden-sharing payments have failed to keep pace with U.S. costs. For example, Japan’s contributions to a voluntary cost-sharing program have fallen more than 80 percent since 1992 from more than $1 billion to about $200 million.
In response to the findings, Levin has asked Armed Services Committee staff to look into what changes in law may be required to reform how foreign government payments are negotiated and spent. Levin has previously communicated to the department his opposition to the large proposed increase in rental rates to support the construction of family housing in South Korea. Already, Congress has precluded the Department from spending funds to support Marine realignment in the Pacific until the Pentagon produces detailed plans and cost estimates and meets other requirements.