Question 1

Potential reasons that technologically based product innovations result in a negative net present value are:
A)competitors' ability to mimic these products after long periods of time.
B)uncertainties over revenues and costs of these projects.
C)uncertainties over revenues and costs of these projects and competitors' ability to mimic these products after long periods of time.
D)certainty of cash flows and competitors' ability to mimic these products quickly.

Accepted Answer

B

Question 2

ES Account stands for:
A)exchange settlement account.
B)exchange systems account.
C)European settlement account.
D)emerging settlement account.

Accepted Answer

ES Account stands for Exchange Settlement Account. It is a type of account used by banks to settle interbank transactions in real-time gross settlement systems (RTGS).

Question 3

Diseconomies of scale refers to the:
A)fall in an FI's average costs of production as its output decreases.
B)fall in an FI's average costs of production as its output increases.
C)fall in an FI's average costs of production as its output remains stable.
D)increase in an FI's average costs of production as its output increases.

Accepted Answer

Diseconomies of scale refer to an increase in the average cost of production as output increases. This could be due to factors such as a lack of coordination among employees, an increase in bureaucracy or administrative costs, or the difficulty of managing larger operations.

Question 4

Economies of scale refers to the:
A)fall in an FI's average costs of production as its output decreases.
B)fall in an FI's average costs of production as its output increases.
C)fall in an FI's average costs of production as its output remains stable.
D)increase in an FI's average costs of production as its output increases.

Accepted Answer

Economies of scale occur when the average cost of production decreases as the output increases. This can happen due to factors such as specialization, greater use of technology, and increased purchasing power.

Question 5

Some of the most important retail payment product innovations are:
A)ATMs, EFTPOS and online banking.
B)home banking, telephone banking and business-to-business ecommerce.
C)online banking, smart cards and account reconciliation.
D)All of the listed options are correct.

Accepted Answer

The answer of Some of the most important retail payment...

Question 6

Which of the following wholesale services offered by FIs to businesses allows the FI to combine the email capabilities of the internet with the FIs ability to process payments electronically through the interbank payment networks?
A)electronic data exchange
B)ecommerce facilitation
C)electronic billing
D)electronic funds transfer

Accepted Answer

Electronic billing allows FIs to combine email capabilities with the ability to process payments electronically through interbank payment networks. Electronic data exchange, ecommerce facilitation, and electronic funds transfer do not specifically involve email capabilities.

Question 7

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

Accepted Answer

Diseconomies of scale refer to the situation where an increase in the size or scale of a business leads to higher costs per unit of output. This implies that small FIs may be more cost efficient than larger FIs, and in a freely competitive environment, small FIs may outperform their larger counterparts.

Question 8

Which of the following scenarios is most desirable for the FI?
A)The initial set-up and development costs are lower than the sum of the discounted present values of cash flows from selling the product.
B)The initial set-up and development costs exceed the sum of the discounted present values of cash flows from selling the product.
C)The initial set-up and development costs equal the sum of the discounted present values of cash flows from selling the product.
D)The most desirable scenario depends on the FI's individual situation.

Accepted Answer

A lower initial set-up and development cost than the sum of discounted present values of cash flows from selling the product would mean that the product is profitable and would generate positive cash flows. This is the most desirable scenario for any FI.

Question 9

The most important banking area in which technology has impacted wholesale or corporate customer services is a financial institution's ability to provide:
A)cash-management services.
B)residential mortgage lending.
C)issuance of certificates of deposit.
D)credit approval.

Accepted Answer

Technology has greatly improved a financial institution's ability to provide cash-management services to its wholesale or corporate customers. Automated systems allow for faster and more accurate processing of transactions, real-time reporting and monitoring of account activity, and enhanced security measures. This has led to improved efficiency and increased customer satisfaction in the area of cash-management services. While technology has also impacted other areas of banking such as residential mortgage lending and credit approval, the impact has not been as significant in these areas as in cash-management services. Issuance of certificates of deposit is also an important service but is more relevant to retail customers rather than wholesale or corporate customers.

Question 10

Economies of scope refers to the:
A)fall in an FI's average costs of production as its output increases.
B)increase in an FI's average costs of production as its output increases.
C)situation in which the costs of joint production of FI services are higher than they would be if they were produced independently.
D)ability of an FI to generate synergistic cost savings through joint use of inputs in producing multiple outputs.

Accepted Answer

Economies of scope refer to the cost savings an FI can achieve by jointly producing multiple products or services using the same inputs. This allows for more efficient use of resources and can lead to lower average costs of production.

Question 11

Which of the following statements is true?
A)The profitability of any product innovation is negatively related to the size of the stream of expected net cash flows from selling the services.
B)The profitability of any product innovation is positively related to the size of the stream of expected net cash flows from selling the services.
C)The profitability of any product innovation is unrelated to the size of the stream of expected net cash flows from selling the services.
D)The relationship depends on the FI's individual situation.

Accepted Answer

The profitability of any product innovation is positively related to the size of the stream of expected net cash flows from selling the services. This is because a larger stream of expected net cash flows means higher revenue and therefore higher profitability for the product innovation.

Question 12

An FI's operating cost and the efficient use of technology:
A)have no impact on the FI's profits before taxes.
B)can have a significant impact on the FI's profits before taxes.
C)will merely improve the FI's reputation.
D)are not important as FIs have the back-up of the government in times of financial distress.

Accepted Answer

An FI's operating cost and the efficient use of technology can significantly impact the FI's profits before taxes. By reducing operating costs and using technology to improve efficiency, an FI can increase profitability. This can also improve the FI's competitiveness in the market.

Question 13

A major advantage of EFTPOS is that:
A)the transaction value will be debited from the customer's account at a later point in time.
B)customers can use cheques to pay for their purchases.
C)customers do not have to carry cash to make purchases.
D)All of the listed options are correct.

Accepted Answer

EFTPOS allows customers to make purchases without carrying cash, which can be convenient and safe. Option A is not entirely accurate as the transaction value is typically debited immediately or within a few days. Option B is not correct as EFTPOS does not allow for cheque payments. Option D is not a valid answer as option A and B are incorrect.

Question 14

Which of the following statements is true?
A)The profitability of any product innovation is negatively related to the size of the initial set-up and development costs and the FIs cost of capital.
B)The profitability of any product innovation is positively related to the size of the initial set-up and development costs and the FIs cost of capital.
C)The profitability of any product innovation is unrelated to the size of the initial set-up and development costs and the FIs cost of capital.
D)The relationship depends on the FI's individual situation.

Accepted Answer

The profitability of a product innovation tends to decrease as the initial setup and development costs increase, and as the financial institution's (FI) cost of capital increases. Higher costs and higher capital costs reduce the net return on investment, making the innovation less profitable.

Question 15

How can 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.

Accepted Answer

Improved technological efficiency can help an FI to manage information flows more efficiently, reducing the cost of operations such as data entry and analysis. This can help reduce the need for additional staff and increase overall efficiency, leading to potential cost savings. Obtaining low cost sources of funds, linking services to technology, and innovating new products can also be beneficial for an FI, but they may not necessarily reduce operating expenses.

Question 16

Operational risk came into prominence during the global financial crisis (GFC) due to:
A)Lehman Brothers using 'recycled collateral' to expand their funding beyond on-balance-sheet assets.
B)The classification of 'sophisticated investors' led to investment banks not providing material information about the riskiness of derivative transactions.
C)the credit default swap market was likely to cause systemic market risk due to difficulties in settling out trades with distressed or failed counterparties.
D)All of the listed options are correct.

Accepted Answer

All of the listed options are correct. Lehman Brothers used 'recycled collateral', which was a form of operational risk, to expand their funding beyond on-balance-sheet assets. Investment banks not providing material information about the riskiness of derivative transactions due to the classification of 'sophisticated investors' added to the operational risk. Furthermore, the credit default swap market was likely to cause systemic market risk due to difficulties in settling out trades with distressed or failed counterparties, which also added to operational risk.

Question 17

Smart cards allow customers to:
A)spend money for various transactions, whereby the transaction value will be directly debited from the customer's account.
B)store and spend money for various transactions using a card that has a chip-storage device.
C)spend money for various transactions without having to pay the balance until a pre-set due date.
D)access their funds overseas.

Accepted Answer

Smart cards have a chip-storage device that allows customers to store and spend money for various transactions without needing to carry cash. The transaction value is directly debited from the customer's account upon usage of the card. Smart cards do not necessarily have features for paying balances at a later date or accessing funds overseas.

Question 18

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 per cent, Bank B has assets of $20 million and average costs of 13 per cent while Bank C has assets of $30 million with average costs of 12 per cent.Average costs are measured as a proportion of total assets. The above figures indicate that:
A)there are significant economies of scale still present in the local markets.
B)there are significant diseconomies of scale still present in the local markets.
C)there are significant economies of scope still present in the local markets.
D)there are significant diseconomies of scope still present in the local markets.

Accepted Answer

The increasing size of the banks (measured by their assets) is leading to a decrease in average costs, indicating that there are still significant economies of scale present in the local market.

Question 19

The term daylight overdraft refers to a situation in which an FI's:
A)reserve account at the central bank is negative at the end of a banking day.
B)reserve account at the central bank is negative at the beginning of a banking day.
C)reserve account at the central bank becomes negative within the banking day.
D)account with another FI becomes negative within the banking day.

Accepted Answer

Daylight overdraft occurs when an FI's reserve account at the central bank becomes negative within the banking day. This means that the FI has made payments or withdrawals that require more funds than they have in their account, resulting in an overdraft during the day. It is called "daylight" because the overdraft only occurs during the business day and is cleared by the end of the day.

Question 20

Diseconomies of scope refers to the:
A)fall in an FI's average costs of production as its output increases.
B)increase in an FI's average costs of production as its output increases.
C)situation in which the costs of joint production of FI services are higher than they would be if they were produced independently.
D)ability of an FI to generate synergistic cost savings through joint use of inputs in producing multiple outputs.

Accepted Answer

Diseconomies of scope occur when the costs of producing services or products together are higher than producing them separately.

Quiz 17: Technology and Other Operational Risk

Potential reasons that technologically based product innovations result in a negative net present value are:

ES Account stands for:

Diseconomies of scale refers to the:

Economies of scale refers to the:

Some of the most important retail payment product innovations are:

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

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?

Which of the following scenarios is most desirable for the FI?

The most important banking area in which technology has impacted wholesale or corporate customer services is a financial institution's ability to provide:

Economies of scope refers to the:

Which of the following statements is true?

An FI's operating cost and the efficient use of technology:

A major advantage of EFTPOS is that:

Which of the following statements is true?

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

Smart cards allow customers to:

The term daylight overdraft refers to a situation in which an FI's:

Diseconomies of scope refers to the: