Exam 17: Technology and Other Operational Risks

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. The maximum cost savings that can be generated with this new equipment has been estimated to be $264,237. In order to accept this project, what is the minimum number of years the projected savings must be realized before the project breaks even?

Which of the following is NOT a source of operational risk for an FI?

Allows customers in a network to access FI computers to initiate letters of credit.

Using encryption technology to assist in the electronic transaction of business between customers and businesses.

Which of the following wholesale services offered by FIs to businesses allows the FI to combine the e-mail capabilities of the internet with the FIs ability to process payments electronically through the interbank payment networks?

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 can you conclude about the cost structure of the market consisting of the two FIs?

Cash management services include the collection, disbursement, and transfer of funds.

Which of the following best describes economies of scope?

LVTS guarantees that any wire transfer is final at the time it is made.

Which of the following observations is NOT true?

A centralized collection service where the payments are received on-line for corporate customers.

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. By how much should operating costs of the combined entity (Bank A + Bank B) be reduced in order to stay competitive in the local market, ceteris paribus?

Which is the most important banking area in which technology has had an impact?

As of 2011, credit cards used in either a credit or debit function accounted for over 60 percent of the number of payments made in Canada.

Account reconciliation redirects funds from accounts in a large number of different banks to a few centralized accounts at one bank.

Appropriate technology may allow an FI to achieve lower-cost funding.

Funds transferred on the LVTS are settled immediately.

The "flash crash" on the NYSE in May 2010 was directly attributable to the manipulation of LIBOR by Barclays PLC.

The expenses relating to increased technological improvements made by FIs during the last several years has the most impact on which of the following?

The increased use of technology may have positive and negative effects on the perceived service quality provided to retail customers.