Question 1

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

Accepted Answer

Technological efficiency focuses on both the cost and the revenue side of financial intermediation. It involves utilizing technology to improve efficiency in areas such as payment processing and customer service, while also finding new ways to generate revenue through technology-based products and services.

Question 2

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

Accepted Answer

The Bank for International Settlements has indeed stated that banks should hold extra capital as a cushion against operational risks. This is in addition to regulatory capital requirements that banks already have to meet.

Question 3

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

Accepted Answer

Capital and labour are key input factors in financial intermediation as financial institutions require capital to invest and manage risk, and also rely on skilled labour to carry out financial transactions and provide advisory services.

Question 4

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

Accepted Answer

With the help of computer technology, financial institutions can analyze customer data and understand which financial products a customer may be interested in, making the initial steps of cross selling easier.

Question 5

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

Accepted Answer

By investing in appropriate technology, an FI can improve its credit rating and risk management capabilities, thereby accessing lower-cost funding markets. This is because investors and lenders are more likely to provide funding to FIs that have robust technology platforms and systems in place to manage risk and ensure compliance with regulations.

Question 6

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

Accepted Answer

Investment in technology by Financial Institutions (FIs) primarily aims to enhance efficiency, reduce costs, and improve customer service, rather than directly lowering the amount of non-interest income as a percent of total operating income. Non-interest income includes fees and other charges that are not related to the interest earned on loans, and technology investments do not inherently reduce this income stream.

Question 7

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

Accepted Answer

The answer of The Bank of Canada has recently proposed...

Question 8

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

Accepted Answer

Regulations and regulatory procedures can play a crucial role in enabling or inhibiting the development and deployment of technological innovations, especially those related to sensitive areas such as health, safety, and the environment. For example, new medical devices or drugs may require extensive testing and approval processes by regulatory agencies before they can be marketed, which can delay or even prevent their commercialization. Similarly, new technologies such as autonomous vehicles, drones, or blockchain-based systems may require changes in legal frameworks, standards, or liability regimes to be widely adopted and embraced by industry and consumers. Therefore, policymakers and regulators need to balance the need for innovation with the need for protection and address potential conflicts between different stakeholders' interests and values.

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.

Accepted Answer

The answer of Although secure communications can be carried out...

Question 10

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

Accepted Answer

Controlled disbursement accounts are designed to provide companies with early notification of the total amount of checks that will clear against their account that day, not 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.

Accepted Answer

New retail products and services based heavily on technology often require a significant investment in technology and infrastructure, and may have high usage rate requirements to justify the investment and generate a positive return on investment. As a result, these projects can be risky and may not result in a positive net present value if they fail to attract enough customers or generate enough revenue.

Question 12

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

Accepted Answer

The flash crash on the NYSE in May 2010 was not directly attributable to the manipulation of LIBOR by Barclays PLC. The cause of the flash crash was a combination of high-frequency trading algorithms and human error.

Question 13

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

Accepted Answer

Cash management services involve managing the flow of cash in an organization, which includes the collection, disbursement, and transfer of funds.

Question 14

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

Accepted Answer

With the rise of digitalization, retail banking services and products have shifted toward electronic payment technology, such as online banking, mobile banking, and contactless payments.

Question 15

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

Accepted Answer

This statement is true. According to data from the Federal Reserve, noninterest expenses for commercial banks in the US have increased at a faster rate than interest expenses over the past decade. This has been driven, in part, by increased regulatory requirements and the need to invest in technology to compete with financial technology (fintech) firms.

Question 16

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

Accepted Answer

Wholesale cash management services are designed to help corporate customers with their cash management needs. This may include monitoring and minimizing cash balances, as well as streamlining cash transactions and keeping track of balances in real-time. By using these services, corporate customers can gain better visibility and control over their cash flow, leading to improved financial management and operational efficiency.

Question 17

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

Accepted Answer

Account reconciliation is a process used by companies to ensure that their financial records (bank statements, for example) are accurate and consistent with their internal records, not for redirecting funds between banks.

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.

Accepted Answer

This statement is no longer completely true. While some FIs were hesitant to adopt cloud computing due to security and regulatory concerns, many FIs have now started using cloud computing for their own operations in some capacity. This includes using public cloud services for non-sensitive data or using private cloud solutions for critical applications. Additionally, many FIs are now offering cloud-based solutions to their own clients.

Question 19

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

Accepted Answer

Appropriate technology can enable an FI to reach new customers and reduce transaction costs, which can ultimately lead to lower-cost funding. For example, mobile banking allows FIs to provide services to customers who previously did not have access to banking services, thus increasing their customer base and potentially lowering funding costs.

Question 20

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

Accepted Answer

Bernie Madoff's Ponzi scheme is an example of internal operational risk because it was a fraudulent activity orchestrated from within his own company, not a risk that originated from outside the organization.

Quiz 17: Technology and Other Operational Risks