Question 1

Which of the following is NOT a wholesale banking service?

Accepted Answer

A) Controlled disbursement accounts. 
B) Account reconciliation. 
C) Electronic funds transfer. 
D) Electronic initiation of letters of credit. 
E) Automated teller machines. 
A) Controlled disbursement accounts. 
B) Account reconciliation. 
C) Electronic funds transfer. 
D) Electronic initiation of letters of credit. 
E) Automated teller machines.

Question 2

The transmission of payments and payment messages by LVTS, CHIPS, SWIFT, Fedwire, etc.

Accepted Answer

Electronic

Question 3

New retail products and services based heavily on technology often are risky because of the high usage rate necessary to make them positive net present value projects.

Accepted Answer

A) True 
 B)False

Question 4

As of 2011, credit cards used in either a credit or debit function accounted for less than 5 percent of the dollar value of payments made in Canada.

Accepted Answer

A) True 
 B)False

Question 5

Which of the following occur when managers undertake growth-oriented investments to increase an FI's size that may be inconsistent with stockholders' value-maximizing objectives?

Accepted Answer

A) Technology risk 
B) Operational efficiency. 
C) Agency conflicts. 
D) Diseconomies of scale. 
E) Diseconomies of scope. 
A) Technology risk 
B) Operational efficiency. 
C) Agency conflicts. 
D) Diseconomies of scale. 
E) Diseconomies of scope.

Question 6

The operational risk faced by an FI includes sources other than technology.

Accepted Answer

A) True 
 B)False

Question 7

Daylight overdrafts occur when

Accepted Answer

A) FIs in different time zones clear transactions. 
B) FI debits exceed credits during the day. 
C) FI credits exceed debits during the day. 
D) the sum of all debits transmitted over the system exceed the sum of all credits during the day. 
E) the sum of all credits transmitted over the system exceed the sum of all debits during the day. 
A) FIs in different time zones clear transactions. 
B) FI debits exceed credits during the day. 
C) FI credits exceed debits during the day. 
D) the sum of all debits transmitted over the system exceed the sum of all credits during the day. 
E) the sum of all credits transmitted over the system exceed the sum of all debits during the day.

Question 8

The success in technologically related innovation often is dependent on changes in regulations and regulatory procedures.

Accepted Answer

A) True 
 B)False

Question 9

Moving funds from accounts in several FIs into a few centralized accounts at one FI.

Accepted Answer

Funds conc

Question 10

Although secure communications can be carried out between an FI and their customers in dedicated message centers, the centers have yet to replace e-mail communications as the primary means of customer contact.

Accepted Answer

A) True 
 B)False

Question 11

Spruce Bank is planning to automate some of its back office functions and reduce operating costs. The installation of new computers and software will require an initial investment of $1,000,000. The savings generated because of reduced personnel cost is $200,000 per year. The bank uses an 8 percent rate of discount to evaluate cost saving projects which are expected to last 10 years. Should the bank undertake the project given the above information?

Accepted Answer

A) Yes, because the NPV of the project is $500,000. 
B) Yes, because the NPV of the project is $342,016. 
C) No, because the NPV of the project is -$500,000. 
D) No, because the NPV of the project is -$201,458. 
E) No, because the IRR of the project is lower than 12 percent. 
A) Yes, because the NPV of the project is $500,000. 
B) Yes, because the NPV of the project is $342,016. 
C) No, because the NPV of the project is -$500,000. 
D) No, because the NPV of the project is -$201,458. 
E) No, because the IRR of the project is lower than 12 percent.

Question 12

How can noninterest operating income of an FI be increased 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 13

Although cloud computing is a technology that FIs can provide to business clients, the FI itself seldom uses cloud computing in their own operations.

Accepted Answer

A) True 
 B)False

Question 14

Allows efficient management of multiple currency and security portfolios for trading and investment purposes.

Accepted Answer

Treasury m

Question 15

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. The above figures indicate that

Accepted Answer

A) there are significant economies of scale still present in the local markets. 
B) there are significant diseconomies of scale still present in the local markets. 
C) there are significant economies of scope still present in the local markets. 
D) there are significant diseconomies of scope still present in the local markets. 
E) there is not enough information to determine economies of scale or scope. 
A) there are significant economies of scale still present in the local markets. 
B) there are significant diseconomies of scale still present in the local markets. 
C) there are significant economies of scope still present in the local markets. 
D) there are significant diseconomies of scope still present in the local markets. 
E) there is not enough information to determine economies of scale or scope.

Question 16

Consider the following two FIs: Company A has $500 million in total assets and total costs equal to $200 million. Company B has $60 million in total assets and total costs equal to $24 million.
What are average costs for each FI?

Accepted Answer

A)  0.40 for A and 2.50 for B. 
B)  2.50 for both A and B. 
C)  2.50 for A and 0.40 for B. 
D)  0.40 for both A and B. 
E)  Insufficient information. 
A)  0.40 for A and 2.50 for B. 
B)  2.50 for both A and B. 
C)  2.50 for A and 0.40 for B. 
D)  0.40 for both A and B. 
E)  Insufficient information.

Question 17

How can noninterest operating expenses 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 18

Which of the following are the two basic approaches to analyzing the cost functions of FIs?

Accepted Answer

A) Basic indicator approach and standardized approach. 
B) Standardized approach and advanced measurement approach. 
C) Production approach and intermediation approach. 
D) Basic indicator approach and advanced measurement approach. 
E) Intermediation approach and advanced measurement approach. 
A) Basic indicator approach and standardized approach. 
B) Standardized approach and advanced measurement approach. 
C) Production approach and intermediation approach. 
D) Basic indicator approach and advanced measurement approach. 
E) Intermediation approach and advanced measurement approach.

Question 19

Consider the following two FIs: Company A has $500 million in total assets and total costs equal to $200 million. Company B has $60 million in total assets and total costs equal to $24 million.
Assume a third FI (company C) operates in the same market with two FIs, and it has $800 million in assets and total costs of $420 million. What can you conclude about the cost structure of the FIs in this market?

Accepted Answer

A)  There are significant economies of scale because companies A, B, and C coexist in the industry. 
B)  There are no significant economies of scale because both companies A and C are much larger than company B. 
C)  There are no significant economies of scale because the unit costs are constant. 
D)  There are significant economies of scale beyond the $500 million asset size. 
E)  There are no significant economies of scale because the unit costs increase as size increases. 
A)  There are significant economies of scale because companies A, B, and C coexist in the industry. 
B)  There are no significant economies of scale because both companies A and C are much larger than company B. 
C)  There are no significant economies of scale because the unit costs are constant. 
D)  There are significant economies of scale beyond the $500 million asset size. 
E)  There are no significant economies of scale because the unit costs increase as size increases.

Question 20

According to studies, which of the following may better explain cost differences and operating cost efficiencies among FIs?

Accepted Answer

A) Diseconomies of scale. 
B) Economies of scale. 
C) Economies of scope. 
D) X-inefficiencies. 
E) Diseconomies of scope. 
A) Diseconomies of scale. 
B) Economies of scale. 
C) Economies of scope. 
D) X-inefficiencies. 
E) Diseconomies of scope.

Exam 17: Technology and Other Operational Risks

Which of the following is NOT a wholesale banking service?

The transmission of payments and payment messages by LVTS, CHIPS, SWIFT, Fedwire, etc.

New retail products and services based heavily on technology often are risky because of the high usage rate necessary to make them positive net present value projects.

As of 2011, credit cards used in either a credit or debit function accounted for less than 5 percent of the dollar value of payments made in Canada.

Which of the following occur when managers undertake growth-oriented investments to increase an FI's size that may be inconsistent with stockholders' value-maximizing objectives?

The operational risk faced by an FI includes sources other than technology.

Daylight overdrafts occur when

The success in technologically related innovation often is dependent on changes in regulations and regulatory procedures.

Moving funds from accounts in several FIs into a few centralized accounts at one FI.

Although secure communications can be carried out between an FI and their customers in dedicated message centers, the centers have yet to replace e-mail communications as the primary means of customer contact.

How can noninterest operating income of an FI be increased by improved technological efficiency?

Although cloud computing is a technology that FIs can provide to business clients, the FI itself seldom uses cloud computing in their own operations.

Allows efficient management of multiple currency and security portfolios for trading and investment purposes.

Consider the following two FIs: Company A has $500 million in total assets and total costs equal to $200 million. Company B has $60 million in total assets and total costs equal to $24 million. What are average costs for each FI?

How can noninterest operating expenses of an FI be reduced by improved technological efficiency?

Which of the following are the two basic approaches to analyzing the cost functions of FIs?

According to studies, which of the following may better explain cost differences and operating cost efficiencies among FIs?

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