Reasons to Oppose the Ex-Im Bank, Part 8: Back Door Bank Subsidies
The Export-Import Bank’s charter expires on June 30. This series of posts makes the case for closing Ex-Im, one argument at a time. See also parts 1, 2, 3, 4, 5, 6, and 7.
The United States, along with many other countries, is adopting the Basel III capital standards for banks. The Basel standards are complicated, and they require different levels of capital financing (i.e., stock ownership) for different kinds of assets. The general rule is that more risky investments are required to be financed with a higher proportion of capital. Less risky assets have lower capital standards. In other words, the required mix of liabilities—owners’ equity and borrowing—used to finance assets changes with the expected risk of those assets.
Since the Basel standards were written by governments with some help from the world’s major banks, they naturally give favorable treatment to government debt held by banks. In fact, the risk-weighted capital requirement for U.S. Government debt or U.S. Government-backed debt is zero. If a bank holds nothing but U.S. Government debt or U.S. Government-backed debt, it could in theory be financed with no capital under the risk-weighting approach! This is limited in practice, however, by additional leverage-based capital requirements that do not use risk weights. Regardless, the Basel III standards clearly give banks an incentive to invest in more government debt and government-backed securities then they would without this preferential treatment. By investing in government-backed debt, banks can artificially increase their profits per unit of ownership (return on equity).
Enter the Ex-Im. If a bank makes a loan to a foreign firm to buy U.S. products, Ex-Im can step in and guarantee that debt. The full faith and credit of the U.S. government attaches to Ex-Im guarantees, eliminating any commercial or other risk the bank has taken on. Courtesy of Ex-Im, the bank now holds a risk-free asset with a greater return than other risk-free assets. In addition, the Basel rules let the bank be funded with less capital because of the government’s support for the Ex-Im-backed loan. That lets the bank generate higher profits relative to its stock, artificially boosting bank owner profits by putting taxpayers on the hook if the loans go bad.
In this way, the Export-Import bank is a corporate welfare program not just for exporters, but also for banks.