Deck 17: Technology and Other Operational Risks

Question 1

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

Answer 1

False

Question 2

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

Answer 2

True

Question 3

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

Answer 3

True

Question 4

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

Question 5

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

Question 6

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

Question 7

The Bank of Canada has recently proposed that banks carry a capital cushion against losses resulting from operational risk.

Question 8

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

Question 9

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 10

Controlled disbursement accounts are designed to reduce the delay in cheque clearing.

Question 11

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 12

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

Question 13

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

Question 14

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

Question 15

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

Question 16

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

Question 17

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

Question 18

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

Question 19

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

Question 20

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

Question 21

As of 2012, the combined value of payments sent over Fedwire and CHIPS often exceeded $5.0 trillion a day.

Question 22

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

Question 23

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

Question 24

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

Question 25

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.

Question 26

Funds transferred on the LVTS are settled immediately.

Question 27

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

Question 28

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 29

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

Question 30

Fedwire is a wire transfer network operated through the Federal Reserve System to assist banks with U.S. operations to make financial transactions among themselves, on behalf of themselves and customers.

Question 31

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.

Question 32

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 33

Recent evidence strongly suggests that economies of scope exist for both asset and liability products, but not for off-balance-sheet products.

Question 34

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

Question 35

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

Question 36

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 37

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

Question 38

Recent evidence suggests that economies of scale may exist for banks up to the US$10 billion to US$25 billion range.

Question 39

Banks in given size classes tend to have very little difference in cost structures.

Question 40

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

Question 41

As banks have increased the use of technology over the past 20 years,

A)noninterest income as a percent of total operating income has approximately doubled.
B)there has been a decrease in the importance of the LVTS.
C)there has been an increase in negative net present value because of the speed in which rivals can replicate innovations.
D)banks no longer need to consolidate because they can access customers worldwide through internet services.
E)noninterest expense as a percent of total operating income has decreased as supporting branch banking has decreased in importance.

Question 42

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

A)Capital assets.
B)Customer relationships.
C)Technology.
D)Employees.
E)Positive duration gap.

Question 43

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 these.

Question 44

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 45

OSFI requires that operational risk be measured for the purpose of meeting overall capital adequacy.

Question 46

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 47

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 48

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

Question 49

Which of the following is a centralized collection service for corporate payments that helps reduce the float?

A)Funds concentration.
B)Electronic billing.
C)Treasury management.
D)Controlled disbursement accounts.
E)Wholesale lockbox.

Question 50

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

Question 51

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

A)Interest expense.
B)Noninterest expense.
C)Net income.
D)Provision for loan losses.
E)Net securities gains or losses

Question 52

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 53

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 54

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.

Question 55

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 these.

Question 56

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 57

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 58

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 59

How can interest 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 60

What is float?

A)Overnight payments via the LVTS.
B)Encoding, endorsing, microfilming, and handling customers' checks.
C)Time it takes a check to clear at a bank.
D)Management of multiple currency and security portfolios for trading and investment purposes.
E)Interval between the dispatch of a bill and actual payment by the consumer.

Question 61

Settlement risk is important because

A)of the interdependent nature of many international transactions.
B)of the impact on sovereign country risk.
C)problems may induce countries to limit the freedom of international capital flows.
D)the electronic funds transfer network itself may become insolvent.
E)CDIC's guarantee may prove to be even more costly to Canadian taxpayers.

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

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

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

Question 64

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.

A)AC_b+s > AC_b + AC_s.
B)AC_b+s = AC_b + AC_s.
C)AC_b+s < AC_b + AC_s.
D)TC_b+s < TC_b + TC_s.
E)TC_b+s > TC_b + TC_s.

Question 65

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

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 66

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 67

Which of the following is NOT a retail banking service?

A)Cheque deposit services.
B)Point of sale/debit cards.
C)Telephone bill paying services.
D)Pre-authorized debits/credits.
E)Automated teller machines.

Question 68

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

A)Cash-management services.
B)Residential mortgage lending.
C)Issuance of certificates of deposit.
D)Credit approval.
E)None of these.

Question 69

Which of the following observations is NOT true?

A)The use of electronic methods of payment is far higher in major developed countries other than in Canada.
B)E-money payments are virtually nonexistent in Canada.
C)Money stored in e-money accounts and cards is covered by deposit insurance.
D)Canadian FIs have been slow in adopting and using online banking and electronic payment methods extensively.
E)All of these.

Question 70

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

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.

Question 71

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

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 72

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 73

Which of the following is NOT a wholesale banking service?

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

Question 74

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

A)It views FIs' outputs of services as having two 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)Premiums or reserves are viewed as an input in the banking and thrift industries.
E)None of these.

Question 75

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 76

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?

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 77

Daylight overdrafts occur when

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 78

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.

Question 79

Which of the following best describes/defines X-inefficiencies?

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 80

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

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.