Question 1

Cross-market selling of financial products requires production of the products within the same branch or bank office.

Accepted Answer

A) True 
 B)False  False

Question 2

According to economic theory involving economies of scale, larger and more cost-efficient FIs should prevail over smaller, less cost-efficient FIs.

Accepted Answer

A) True 
 B)False  True

Question 3

The following information is available on the average costs of the three major banks in a given local market. Bank A has assets of $10 million and average costs are 15 percent, Bank B has assets of $20 million and average costs of 13 percent while Bank C has assets of $30 million with average costs of 12 percent. Average costs are measured as a proportion of total assets. Bank B plans to acquire Bank A and in the process cut costs by $100,000. What is the combined bank's average costs?

Accepted Answer

A) 12.00 percent. 
B) 12.67 percent. 
C) 13.00 percent. 
D) 13.33 percent. 
E) 15.00 percent. 
A) 12.00 percent. 
B) 12.67 percent. 
C) 13.00 percent. 
D) 13.33 percent. 
E) 15.00 percent. D

Question 4

Which of the following is consistent with economies of scope? The subscript "b" refers to a banking firm, "s" for a securities firm, "AC" is average costs and "TC" is total costs.

Accepted Answer

A) ACb+s > ACb + ACs. 
B) ACb+s = ACb + ACs. 
C) ACb+s b + ACs. 
D) TCb+s b + TCs. 
E) TCb+s > TCb + TCs. 
A) ACb+s > ACb + ACs. 
B) ACb+s = ACb + ACs. 
C) ACb+s b + ACs. 
D) TCb+s b + TCs. 
E) TCb+s > TCb + TCs.

Question 5

Which of the following wholesale services offered by FIs allows businesses to transfer and transact invoices, purchase orders, and shipping notices automatically?

Accepted Answer

A) Electronic data exchange. 
B) E-commerce facilitation. 
C) Electronic billing. 
D) Electronic funds transfer. 
E) Account reconciliation 
A) Electronic data exchange. 
B) E-commerce facilitation. 
C) Electronic billing. 
D) Electronic funds transfer. 
E) Account reconciliation

Question 6

Technological efficiency focuses exclusively on the cost side of financial intermediation.

Accepted Answer

A) True 
 B)False

Question 7

The tax burden faced by domestic Canadian FIs has been minimized, in part, by the ability to use international wire networks for the transfer of funds.

Accepted Answer

A) True 
 B)False

Question 8

Noninterest expense has increased faster than interest expense for commercial banks in recent years.

Accepted Answer

A) True 
 B)False

Question 9

Funds transferred on CHIPS are settled at the end of the day.

Accepted Answer

A) True 
 B)False

Question 10

Daylight overdraft risk occurs because banks often provide immediate credit to customers for deposits, even though the funds may not arrive until later in the day.

Accepted Answer

A) True 
 B)False

Question 11

Which of the following observations concerning the production approach to measure the cost function of FIs is true?

Accepted Answer

A) It views FIs' outputs of services as having three underlying inputs. 
B) Labor and capital are the only inputs. 
C) It views the output as being produced by labor, capital and the funds used to produce intermediated services. 
D) Deposit costs are viewed as an input in the banking and thrift industries. 
E) None of these. 
A) It views FIs' outputs of services as having three underlying inputs. 
B) Labor and capital are the only inputs. 
C) It views the output as being produced by labor, capital and the funds used to produce intermediated services. 
D) Deposit costs are viewed as an input in the banking and thrift industries. 
E) None of these.

Question 12

Helping small firms set up electronic infrastructure for payment capabilities and interactive website capability.

Accepted Answer

Assisting

Question 13

Why has empirical evidence on economies of scale and scope been so contradictory?

Accepted Answer

A) Data on bank costs are unavailable. 
B) Efficiency may be related to overall market conditions. 
C) Efficiency may be related to non-quantifiable variables such as managerial ability. 
D) Neither the intermediation nor the production approach conform to reality. 
E) The methodology to detect economies of scale and scope are still very rudimentary. 
A) Data on bank costs are unavailable. 
B) Efficiency may be related to overall market conditions. 
C) Efficiency may be related to non-quantifiable variables such as managerial ability. 
D) Neither the intermediation nor the production approach conform to reality. 
E) The methodology to detect economies of scale and scope are still very rudimentary.

Question 14

Suppose that the doubling of a bank's deposit funding allows the bank to triple its loan output. What can you conclude about the bank's production technology?

Accepted Answer

A) It exhibits economies of scale using the production approach. 
B) It exhibits diseconomies of scale using the production approach. 
C) It exhibits diseconomies of scale using the intermediation approach. 
D) It exhibits economies of scale using the intermediation approach. 
E) It exhibits neither economies nor diseconomies of scale. 
A) It exhibits economies of scale using the production approach. 
B) It exhibits diseconomies of scale using the production approach. 
C) It exhibits diseconomies of scale using the intermediation approach. 
D) It exhibits economies of scale using the intermediation approach. 
E) It exhibits neither economies nor diseconomies of scale.

Question 15

An increase in the cost of the joint production of services as compared to the production of those services independently is an example of diseconomies of scale.

Accepted Answer

A) True 
 B)False

Question 16

How can interest expense of an FI be reduced by improved technological efficiency?

Accepted Answer

A) By improving the efficiency of management of information flows. 
B) By obtaining access to low cost sources of funds. 
C) By linking services to the quality of the FI's technology. 
D) By innovating new interest earning products. 
E) By complying with all government regulations. 
A) By improving the efficiency of management of information flows. 
B) By obtaining access to low cost sources of funds. 
C) By linking services to the quality of the FI's technology. 
D) By innovating new interest earning products. 
E) By complying with all government regulations.

Question 17

A new computer system is expected to cost $40 million and generate annual savings of $12 million over the next five years. Should the bank invest in this project if the discount rate is 18 percent?

Accepted Answer

A) Yes, because the net present value of the project is $2,473,948. 
B) No, because the net present value of the project is -$2,473,948. 
C) Yes, because the net present value of the project is $24.8 million. 
D) No, because the net present value of the project is -$24.8 million. 
E) Yes, because the net present value of the project is $1,342,688. 
A) Yes, because the net present value of the project is $2,473,948. 
B) No, because the net present value of the project is -$2,473,948. 
C) Yes, because the net present value of the project is $24.8 million. 
D) No, because the net present value of the project is -$24.8 million. 
E) Yes, because the net present value of the project is $1,342,688.

Question 18

Coordinating the need for funds early in the day with a wire transfer to allow disbursement of the funds later in the day.

Accepted Answer

Controlled

Question 19

Two important input factors in financial intermediation are capital and labour.

Accepted Answer

A) True 
 B)False

Question 20

Which of the following observations concerning e-money is NOT true?

Accepted Answer

A) Check writing lays the foundation of e-money. 
B) E-money removes the middleman from a transaction. 
C) The e-money user transfers the money from his or her bank account to the account of the funds' receiver. 
D) The primary function of e-money is to facilitate transactions on the Internet. 
E) E-money is not a cost efficient way of managing transactions that are small in value. 
A) Check writing lays the foundation of e-money. 
B) E-money removes the middleman from a transaction. 
C) The e-money user transfers the money from his or her bank account to the account of the funds' receiver. 
D) The primary function of e-money is to facilitate transactions on the Internet. 
E) E-money is not a cost efficient way of managing transactions that are small in value.

Exam 17: Technology and Other Operational Risks

Cross-market selling of financial products requires production of the products within the same branch or bank office.

According to economic theory involving economies of scale, larger and more cost-efficient FIs should prevail over smaller, less cost-efficient FIs.

Which of the following is consistent with economies of scope? The subscript "b" refers to a banking firm, "s" for a securities firm, "AC" is average costs and "TC" is total costs.

Which of the following wholesale services offered by FIs allows businesses to transfer and transact invoices, purchase orders, and shipping notices automatically?

Technological efficiency focuses exclusively on the cost side of financial intermediation.

The tax burden faced by domestic Canadian FIs has been minimized, in part, by the ability to use international wire networks for the transfer of funds.

Noninterest expense has increased faster than interest expense for commercial banks in recent years.

Funds transferred on CHIPS are settled at the end of the day.

Daylight overdraft risk occurs because banks often provide immediate credit to customers for deposits, even though the funds may not arrive until later in the day.

Which of the following observations concerning the production approach to measure the cost function of FIs is true?

Helping small firms set up electronic infrastructure for payment capabilities and interactive website capability.

Why has empirical evidence on economies of scale and scope been so contradictory?

Suppose that the doubling of a bank's deposit funding allows the bank to triple its loan output. What can you conclude about the bank's production technology?

An increase in the cost of the joint production of services as compared to the production of those services independently is an example of diseconomies of scale.

How can interest expense of an FI be reduced by improved technological efficiency?

A new computer system is expected to cost $40 million and generate annual savings of $12 million over the next five years. Should the bank invest in this project if the discount rate is 18 percent?

Coordinating the need for funds early in the day with a wire transfer to allow disbursement of the funds later in the day.

Two important input factors in financial intermediation are capital and labour.

Which of the following observations concerning e-money is NOT true?

Why Are Financial Institutions Special

Deposit-Taking Institutions

Finance Companies

Securities, Brokerage, and Investment Banking

Mutual Funds, Hedge Funds, and Pension Funds

Insurance Companies

Risks of Financial Institutions

Interest Rate Risk I

Interest Rate Risk II

Credit Risk: Individual Loans

Credit Risk: Loan Portfolio and Concentration Risk

Liquidity Risk

Foreign Exchange Risk

Sovereign Risk

Market Risk

Off-Balance-Sheet Risk

Liability and Liquidity Management

Deposit Insurance and Other Liability Guarantees

Capital Adequacy

Product and Geographic Expansion

Futures and Forwards

Options, Caps, Floors, and Collars

Swaps

Loan Sales

Securitization Index

Filters