Deck 17: Technology and Other Operational Risks

Question 1

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

Answer 1

True

Question 2

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

Answer 2

True

Question 3

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

Answer 3

False

Question 4

As of the 2014,non-interest expense was approximately 10 times larger than interest expense for all FDIC insured banks.

Question 5

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

Question 6

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

Question 7

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

Question 8

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

Question 9

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

Question 10

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

Question 11

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

Question 12

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

Question 13

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

Question 14

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

Question 15

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

Question 16

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

Question 17

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

Question 18

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 19

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

Question 20

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

Question 21

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 22

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

Question 23

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

Question 24

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

Question 25

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

Question 26

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

Question 27

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 28

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

Question 29

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

Question 30

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 31

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 32

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

Question 33

As of December 2014,credit cards used in either a credit or debit function accounted for over 60 percent of the number of payments made in the U.S.

Question 34

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 35

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 36

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 37

As of December 2014,credit cards used in either a credit or debit function accounted for less than 5 percent of the dollar value of payments made in the U.S.

Question 38

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

Question 39

In 2014,the dollar value of all worldwide methods of cashless payments was over $800 trillion.

Question 40

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

Question 41

Currently,banks issue well over half of all new credit cards.

Question 42

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

Question 43

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

Question 44

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

Question 45

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

Question 46

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.

Question 47

Funds transferred on the Fedwire are settled immediately.

Question 48

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

Question 49

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

Question 50

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.

Question 51

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

Question 52

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

Question 53

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

Question 54

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 55

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.

Question 56

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

Question 57

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

Question 58

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.

Question 59

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 60

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 61

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.

Question 62

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.

Question 63

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.

Question 64

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.

Question 65

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 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.

Question 67

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 both Fedwire and CHIPS.
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.

Question 68

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.

Question 69

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.

Question 70

What is float?

A)Overnight payments via CHIPS or Fedwire.
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.

Question 71

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 72

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.

Question 73

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.

Question 74

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 75

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.

Question 76

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.

Question 77

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

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.

Question 78

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)Credit transfers.

Question 79

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.

Question 80

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.