Deck 17: Technology and Other Operational Risks

Question 1

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

Answer 1

False

Question 2

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

Answer 2

True

Question 3

The Bank for International Settlements has stated that banks should carry extra capital as a cushion against operational risks.

Answer 3

True

Question 4

Bernie Madoff and his infamous Ponzi scheme is an example of external operational risk to the hedge funds he managed.

Question 5

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

Question 6

The U.S.Treasury has recently proposed that banks carry a capital cushion against losses resulting from operational risk.

Question 7

Investment in technology has allowed FIs to lower the amount of non-interest income as a percent of total operating income.

Question 8

The initial steps of cross selling financial products can easily occur with computer technology.

Question 9

Retail banking services and products in recent years have moved strongly toward electronic payment technology.

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.

Question 11

Noninterest expense has increased faster than interest expense for all U.S.insured commercial banks in recent years.

Question 12

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

Question 13

In recent years, U.S.banks have alone spent $20 billion per year in technology related expenditures.

Question 14

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

Question 15

Investing in appropriate technology allows an FI to access lower-cost funding markets.

Question 16

Wholesale cash management services allow corporate customers to minimize cash balances and to monitor quickly cash transactions and balances.

Question 17

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

Question 18

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

Question 19

According to Hitachi Data Systems, recovery time from system failures averages 12 hours.

Question 20

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.

Question 21

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

Question 22

In the U.S., electronic methods of payment account for a larger number of transactions, but a lower aggregate dollar value than non-electronic methods of payment.

Question 23

As of 2015, the combined value of payments sent over Fedwire and the Clearing House Internet Payment System (CHIPS) often exceeded $5.0 trillion a day.

Question 24

The Clearinghouse Internet Payment System (CHIPS) is use in clearing mostly international payments such as foreign exchange and Eurodollar transfers.

Question 25

Companies like Google, Amazon, and Facebook have far more experience in cloud computing, artificial intelligence, and big data analytics that most banks.

Question 26

Fedwire is a wire transfer network of over 9,300 international FIs with the Federal Reserve System.

Question 27

Increases in the rate of innovation of new financial products, whether successful or not, is often credited to advances in technology.

Question 28

Big tech firms are increasingly offering financial services, increasing the competitive pressure on FIs.

Question 29

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.

Question 30

Compared to the United States, the use of electronic methods of payment is lower in other major developed countries.

Question 31

Between 2011 and 2014, the dollar value of all methods cashless payment more than doubled.

Question 32

Large scale investments in technology may lead to diseconomies of scale due to excess capacity, cost overruns, and cost control problems.

Question 33

Funds transferred on the Clearinghouse Internet Payment System (CHIPS) are settled at the end of the day rather than intra-day as with the Fedwire system.

Question 34

Fedwire is a wire transfer network operated through the Federal Reserve System to assist banks in making financial transactions among themselves, on behalf of themselves and customers.

Question 35

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

Question 36

If AC_{X + Y} < AC_X + AC_Y, where AC is average production cost and X and Y are products, economies of scope are present.

Question 37

Between 2012 and 2017 the number of consumer complaints to the CFPB grew at an average annual rate of 28%

Question 38

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

Question 39

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.

Question 40

Funds transferred on the Fedwire are settled immediately.

Question 41

Which of the following statements regarding cybersecurity are not true.

A)Firms security efforts are intended to protect against cyberattacks by unauthorized parties.
B)Cyberattacks include when unauthorized parties obtain access to confidential information, and or destroy data.
C)Cyberattacks can occur due to severe weather or power and telecommunications interruptions.
D)Cyberattacks include when unauthorized parties disrupt or degrade service and or sabotage systems.
E)Third parties with which a firm does business can be the source of a cybersecurity risk.

Question 42

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

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 43

Which of the following statements regarding data management risk are not true.

A)Rapid adoption of new data technologies like artificial intelligence and cloud-based storage has made data management risk a higher concern for firms.
B)Data management risk is the exposure to loss of value or trust caused by issues or limitations to the firm's ability to acquire, store, transform, and move its data assets.
C)Companies like Visa and Master Card follow a "closed loop" system meaning they act as both the issuer and acquirer to keep their data management in-house.
D)Institutions that invest in data infrastructure and data management increase their chance of preventing risk exposures.
E)Data management risk allows a firm to analyze trends and information to help keep relationships with stakeholders strong and secure.

Question 44

The growth areas in technology and revenues are now in data analytics, distributed ledger technology and FinTech challengers.

Question 45

Usury ceilings place caps on interest rates that FIs can charge on certain types of loans and are established by federal regulatory authorities.

Question 46

Regulators have proposed that operational risk should be measured for the purpose of meeting overall capital adequacy.

Question 47

The financial services industry is undergoing a profound change by way of digitization, automation, offshoring, and outsourcing.

Question 48

Delaware and South Dakota have become leading states in the distribution of some financial services because of liberal regulations.

Question 49

Cybersecurity risk represents an ongoing and evolving area for firms to focus on.

Question 50

The increased use of wire transfers as a replacement for check and cash payments has decreased the risk of fraud.

Question 51

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

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 52

Regulation F, a part of the FDIC Improvement Act of 1991, requires financial institutions to develop internal procedures to limit settlement exposures to correspondent banks.

Question 53

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

Question 54

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

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 55

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

Question 56

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

Question 57

The Fed now charges 20 basis points annually for daylight overdrafts.

Question 58

In terms of dollar value, cybercrime has passed trafficking in illegal drugs.

Question 59

Losses attributable to the cybercriminals known as the Carbanak group are estimated to be as high as $1.0 billion.

Question 60

Technological advances in payment systems appear to have decreased the incentive to commit white-collar crime.

Question 61

Which of the following are potential benefits of technology for an FI?

A)Improved service quality, especially for customers of large banks.
B)The rate of innovation of new products can be increased.
C)FIs can more easily cross-market new and existing products to customers.
D)Improved flexibility in financial transactions for retail customers.
E)All of the options.

Question 62

Which of the following best describes economies of scale?

A)The average cost of production decreases as the level of output increases.
B)The effects on costs related to managerial ability and other hard-to-quantify factors.
C)Cost savings are realized from using many of the same inputs to produce multiple products.
D)The average cost of production increases as the level of output increases.
E)Cost increases are realized from using many of the same inputs to produce multiple products.

Question 63

Which of the following best describes economies of scope?

A)They occur when the average cost of production decreases as the level of output increases.
B)They are effects on costs related to managerial ability and other hard-to-quantify factors.
C)They occur when cost savings are realized from using many of the same inputs to produce multiple products.
D)They occur when the average cost of production increases as the level of output increases.
E)They occur when cost increases are realized from using many of the same inputs to produce multiple products.

Question 64

Which of the following statements is NOT true?

A)The Federal Reserve operates the Fedwire electronic payments system while CHIPS is a private network.
B)Fedwire is used to transfer funds from the Fed to the banking system while CHIPS is used to make interbank funds transfers.
C)The Fed guarantees all payments on Fedwire while CHIPS transfers are provisional until settlement.
D)Large daylight overdrafts are incurred on both Fedwire and CHIPS.
E)Fedwire has a fee for daylight overdrafts but CHIPS does not.

Question 65

Which of the following partially explains why cash management services have not attracted customers in Europe to the degree that they have in the US?

A)Prevalence of nationwide branching and banking in Europe.
B)Prevalence of interregional banking restrictions in Europe.
C)Prohibitive charges imposed for the use of domestic telephone lines in Europe.
D)Prohibitive charges imposed on such services in Europe.
E)None of the options.

Question 66

As banks and other FIs increase the use of technology, an unintended consequence may be that

A)cost savings are seldom realized.
B)customers are driven away because they still want to interact with a person for certain transactions.
C)innovation of new products tends to take longer periods of time to attract new customers.
D)the marginal cost of adding new customers tends to increase at an increasing rate.
E)None of the options.

Question 67

Which of the following occurs if the costs of joint production of FI services are higher than they would be if they were produced independently?

A)Economies of scale.
B)Diseconomies of scale.
C)Economies of scope.
D)Diseconomies of scope.
E)Constant returns to scale.

Question 68

Which of the following implies reduced unit costs as the range of products offered increases inputs in producing multiple products?

A)Diseconomies of scale.
B)Economies of scale.
C)Economies of scope.
D)Diseconomies of scope.
E)Constant returns to scale.

Question 69

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

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

Question 70

As of December 2014, which of the following accounts for the highest volume of noncash transactions worldwide?

A)Checks.
B)Card payments.
C)Debit transfers.
D)E-money payments.
E)Credit transfers.

Question 71

Which of the following is NOT a source of operational risk?

A)People
B)Systems and technology.
C)Processes and policies
D)External events
E)Social media

Question 72

Large-scale investment projects that lead to excess capacity and integration problems that create cost overruns and control problems are examples of

A)diseconomies of scale.
B)economies of scale.
C)economies of scope.
D)diseconomies of scope.
E)constant returns to scale.

Question 73

Which of the following is NOT a risk associated with an electronic transfer payment system?

A)Daylight overdraft risk
B)Wholesale and retail risk
C)International technology transfer risk
D)Competition risk
E)Tax avoidance risk

Question 74

As of December 2014, which of the following accounts for the highest volume of noncash transactions in the United States?

A)Checks.
B)Card payments.
C)Debit transfers.
D)E-money payments.
E)Credit transfers.

Question 75

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?

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

Question 76

As of December 2014, which of the following represented the highest percent of the dollar value of noncash transactions worldwide?

A)Checks.
B)Card payments.
C)Debit transfers.
D)E-money payments.
E)Credit transfers.

Question 77

Which of the following implies reduced unit costs as size or volume of assets increases?

A)Diseconomies of scale.
B)Economies of scale.
C)Economies of scope.
D)Diseconomies of scope.
E)Constant returns to scale

Question 78

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?

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

Question 79

As of December 2014, which of the following represented the highest percent of the dollar value of noncash transactions in the United States?

A)Credit transfers.
B)Card payments.
C)Debit transfers.
D)E-money payments.
E)Checks.

Question 80

Which of the following implies that small FIs are more cost efficient than large FIs, and that in a freely competitive environment for financial services, small FIs may outperform their larger counterparts?

A)Economies of scale.
B)Diseconomies of scale.
C)Economies of scope.
D)Diseconomies of scope.
E)Constant returns to scale.