Deck 16: Technology and Other Operational Risks

Question 1

16-12 Appropriate technology may allow an FI to achieve lower-cost funding.

Answer 1

True

Question 2

16-7 Bernie Madoff and his infamous Ponzi scheme is an example of external operational risk to the hedge funds he managed.

Answer 2

False

Question 3

16-16 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.

Answer 3

True

Question 4

16-1 Two important input factors in financial intermediation are capital and labor.

Question 5

16-18 Cross-market selling of financial products requires production of the products within the same branch or bank office.

Question 6

16-3 According to Hitachi Data Systems,recovery time from system failures averages 12 hours.

Question 7

16-2 Technological efficiency focuses exclusively on the cost side of financial intermediation.

Question 8

16-5 Noninterest expense has increased faster than interest expense for all U.S.insured commercial banks in recent years.

Question 9

16-9 The initial steps of cross selling financial products can easily occur with computer technology.

Question 10

16-14 Account reconciliation redirects funds from accounts in a large number of different banks to a few centralized accounts at one bank.

Question 11

16-13 Cash management services include the collection,disbursement,and transfer of funds.

Question 12

16-19 Increases in the rate of innovation of new financial products,whether successful or not,is often credited to advances in technology.

Question 13

16-15 Retail banking services and products in recent years have moved strongly toward electronic payment technology.

Question 14

16-10 Wholesale cash management services allow corporate customers to minimize cash balances and to monitor quickly cash transactions and balances.

Question 15

16-11 Controlled disbursement accounts are designed to reduce the delay in check clearing.

Question 16

16-17 The success in technologically related innovation often is dependent on changes in regulations and regulatory procedures.

Question 17

16-4 As of the first quarter 2009,non-interest expense was 250 percent larger than interest expense for all FDIC insured banks.

Question 18

16-6 The U.S.Treasury has recently proposed that banks carry a capital cushion against losses resulting from operational risk.

Question 19

16-20 The increased use of technology may have positive and negative effects on the perceived service quality provided to retail customers.

Question 20

16-8 In recent years,U.S.banks have alone spent $20 billion per year in technology related expenditures.

Question 21

16-33 Daily Fedwire and CHIPS transaction volume never exceeds the amount of bank reserves.

Question 22

16-23 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 23

16-30 As of August 2009,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 24

16-40 Regulation F requires financial institutions to develop internal procedures to limit settlement exposures to correspondent banks.

Question 25

16-28 Compared to the United States,the use of electronic methods of payment is lower in other major developed countries.

Question 26

16-22 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 27

16-34 As of 2009,the combined value of payments sent over Fedwire and CHIPS often exceeded $4.5 trillion a day.

Question 28

16-39 The Fed has begun to charge either a fee or an interest rate for daylight overdrafts.

Question 29

16-26 Banks in given size classes tend to have very little difference in cost structures.

Question 30

16-38 CHIPS guarantees that any wire transfer is final at the time it is made.

Question 31

16-29 As of August 2009,credit cards used in either a credit or debit function accounted for over 50 percent of the number of payments made in the U.S.

Question 32

16-36 Funds transferred on the Fedwire are settled immediately.

Question 33

16-27 In the U.S.,electronic methods of payment account for a larger number of transactions,but a lower aggregate dollar value than nonelectronic methods of payment.

Question 34

16-21 According to economic theory involving economies of scale,larger and more cost-efficient Is should prevail over smaller,less cost-efficient FIs.

Question 35

16-24 Recent evidence suggests that economies of scale may exist for banks up to the $10 billion to $25 billion range.

Question 36

16-32 Fedwire is a wire transfer network of over 6,300 international FIs with the Federal Reserve System.

Question 37

16-35 Funds transferred on CHIPS are settled at the end of the day.

Question 38

16-37 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 or the next day.

Question 39

16-31 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 40

16-25 Recent evidence strongly suggests that economies of scope exist for both asset and liability products,but not for off-balance-sheet products.

Question 41

16-52 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 42

16-48 How can 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

16-51 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 44

16-44 Usury ceilings placing ceilings on interest rates that FIs can charge on certain types of loans are always established by federal regulatory authorities.

Question 45

16-49 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.
E)By complying with all government regulations.

Question 46

16-45 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 47

16-46 The operational risk faced by an FI includes sources other than technology.

Question 48

16-60 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 above.

Question 49

16-55 The dollar amount of which of the following items has been increasing in the U.S.banking industry in recent years?

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

Question 50

16-58 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 51

16-42 The increased use of wire transfers as a replacement for check and cash payments has increased the risk of fraud.

Question 52

16-50 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.
E)By complying with all government regulations.

Question 53

16-41 The use of ATMs in European countries has grown at a slower rate than in the U.S.

Question 54

16-54 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 55

16-43 Delaware and South Dakota have become leading states in the distribution of some financial services because of liberal regulations.

Question 56

16-57 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 57

16-56 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.
E)Interval between the dispatch of a bill and actual payment by the consumer.

Question 58

16-59 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 59

16-47 Regulators have proposed that operational risk should be measured for the purpose of meeting overall capital adequacy.

Question 60

16-53 Which of the following are potential benefits of technology for an FI?

A)Service quality,especially for customers of large banks.
B)The rate of innovation of new products has increased.
C)FIs can more easily cross-market new and existing products to customers.
D)Only two of the above are benefits.
E)All of the above.

Question 61

16-69 Which of the following best describes 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 62

16-70 Which of the following best describe 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

16-65 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 64

16-78 As of August 2009,which of the following accounts for the highest volume of noncash transactions worldwide?

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

Question 65

16-80 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 the United States.
B)E-money payments are virtually nonexistent in the United States.
C)Money stored in e-money accounts and cards is covered by deposit insurance.
D)U.S.FIs have been slow in adopting and using online banking and electronic payment methods extensively.
E)All of the above.

Question 66

16-61 Which of the following explains why ATM networks have grown relatively slowly in countries such as Sweden and Singapore?

A)Absence of interregional banking restrictions in these countries.
B)Prevalence of nationwide branching and banking in these countries.
C)Prohibitive charges imposed for the use and leasing of domestic telephone lines.
D)Crime and fraud risk.
E)None of the above.

Question 67

16-72 Which of the following observations concerning the production approach 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 the above.

Question 68

16-67 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 69

16-74 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)Neither Fedwire nor CHIPS charges interest or fees for daylight overdrafts.

Question 70

16-75 As of August 2009,which of the following represented the highest percent of the dollar value of noncash transactions in the United States?

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

Question 71

16-76 As of August 2009,which of the following accounts for the highest volume of noncash transactions in the United States?

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

Question 72

16-68 Which of the following best describes economies of scope?

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

Question 73

16-64 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 74

16-73 Which of the following observations concerning the intermediation approach 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 the above.

Question 75

16-77 As of August 2009,which of the following represented the highest percent of the dollar value of noncash transactions worldwide?

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

Question 76

16-79 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 77

16-63 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 78

16-71 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 79

16-66 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 80

16-62 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