A political fight over an obscure federal agency is threatening to put the kibosh on a big business for banks.
The Export-Import Bank of the United States provides billions of dollars in loans, guarantees and insurance to private banks in the U.S. and abroad. Banks ranging in size from JPMorgan Chase (JPM) and Citigroup (NYSE: C), to the $282 million-asset Midwest Regional Bank in Festus, Mo., use the Ex-Im Bank's programs.
However, a confluence of political events has put that source of financial assistance in jeopardy.
The tide of fiscal conservatism that has swept through Congress is the main force that threatens the Ex-Im Bank's existence. Key leaders like Rep. Jeb Hensarling, R-Texas, already favored letting the bank's charter expire on Sept. 30.
The surprise defeat of House Majority Leader Eric Cantor may fuel that movement. Cantor's successor, Rep. Kevin McCarthy, R-Calif., has said he does not support reauthorizing the Ex-Im Bank's charter. House Speaker John Boehner has declined to say if he supports renewing the bank's charter.
An apparent conflict of interest within the Ex-Im Bank may put further pressure on the agency. The bank suspended or removed four officials recently amid an investigation into allegation of kickbacks and steering federal contracts to companies, according to media reports.
The House Financial Services Committee, which Hensarling chairs, will host a hearing Wednesday about whether to renew the Ex-Im Bank's charter. The committee has given the hearing the ominous title of "Examining Reauthorization of the Export-Import Bank: Corporate Necessity or Corporate Welfare?"
Some bankers have a clear answer to that question: The Ex-Im Bank is a crucial player in trade finance, says Jonathan Byron, senior vice president of export credit and corporate lending at Apple Bank for Savings in New York.
"We make loans around the world that are guaranteed by the Ex-Im Bank," Byron says.
Bank trade groups also support renewing the Ex-Im Bank's charter.
"The purpose of Ex-Im Bank financing is to promote the competitiveness of U.S. companies," says Tod Burwell, president and chief executive of BAFT, a trade organization for international banking.
Critics say the Ex-Im Bank's subsidy programs are ineffective in supporting U.S. exports, and that American taxpayers are on the hook for defaults on loans the bank backstops. The Ex-Im Bank probably can only take credit for helping about 2% of total U.S. export value from 2009 to 2013, says Veronique de Rugy, a research fellow at George Mason University's Mercatus Center. The bank's biggest beneficiaries are the companies whose exports are propped up by the bank, she says.
Others within the banking industry take issue with the claim that some Ex-Im Bank opponents make that the private sector can do the same thing more efficiently.
"In fact, what the Ex-Im Bank does, the private sector can't do," says Francis Creighton, executive vice president for government affairs at the Financial Services Roundtable. "It specializes in the type of hard financing that has to happen in places where private companies find it very difficult to lend."
"It's very difficult for a private institution to provide financing in Central Asia or sub-Saharan Africa or other places with considerable risk that the deal won't follow through," Creighton says.
The $11.6 billion-asset Apple Bank is one of the biggest users of Ex-Im Bank assistance. In 2012, the thrift received a total of $996 million in loan guarantees, largely to support its business of financing aircraft sales.
Aircraft manufacturers, particularly Boeing, have perhaps the most at stake, Byron says. The Ex-Im Bank provides crucial support to Boeing at a time when European countries have no plans to withdraw their own financial support for Boeing's main rival, Airbus.
"If the Export-Import Bank stops [making loan guarantees to Boeing], it will just benefit Airbus," he says. "Airbus will just grab a larger portion of the aircraft market."
Indeed, Boeing was the primary exporter on many of the largest transactions approved by the Ex-Im Bank in 2012. In one of the largest deals, the Ex-Im Bank provided a $572 million loan guarantee to Apple Bank to support Boeing's exports to air-cargo company Atlas Air. JPMorgan received a $395 million loan guarantee for Boeing to export satellites to Mexico, and HSBC obtained a $540 million loan guarantee for a Boeing plane sale to Air China.
If the Ex-Im Bank's charter is not renewed, Apple Bank would not lose any of the guarantees it has already obtained through the agency, Byron says. Those would continue through their original terms.
But Apple Bank would have to go elsewhere for future loan guarantees, Byron says. There are numerous agencies in the U.S. and in other countries that provide a similar service to the Ex-Im Bank, he says. Those include Overseas Private Investment Corp., an independent federal U.S. agency, and Export Development Canada.
De Rugy and other critics will testify at the House Financial Services hearing, as will several supporters of renewing the Ex-Im Bank's charter. Fred Hochberg, the chairman and president of the Ex-Im Bank, is one of the scheduled witnesses. Hochberg could not be reached for additional comment for this story.
Neither the House nor the Senate has officially begun consideration of renewing the bank's charter, but some signs of activity have occurred this week. Rep. Denny Heck, D-Wash., announced plans Tuesday to introduce the Protect American Jobs and Exports Act of 2014, which would reauthorize the bank until 2021 and gradually raise its lending cap to $175 billion from the current $140 billion. Meanwhile, 42 House Republicans in a letter Monday urged Boehner and McCarthy to "move forward with a multiyear reauthorization of Ex-Im that provides certainty and stability for U.S. manufacturers and exporters of all sizes."