Question 1

Which of the following is NOT a source of operational risk?

Accepted Answer

A) People 
B) Systems and technology. 
C) Processes and policies 
D) External events 
E) Social media 
A) People 
B) Systems and technology. 
C) Processes and policies 
D) External events 
E) Social media

Question 2

Which of the following best describes economies of scope?

Accepted Answer

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. 
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 3

Large-scale investment projects that lead to excess capacity and integration problems that create cost overruns and control problems are examples of

Accepted Answer

A) diseconomies of scale. 
B) economies of scale. 
C) economies of scope. 
D) diseconomies of scope. 
E) constant returns to scale. 
A) diseconomies of scale. 
B) economies of scale. 
C) economies of scope. 
D) diseconomies of scope. 
E) constant returns to scale.

Question 4

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

Accepted Answer

A) True 
 B)False

Question 5

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

Accepted Answer

A) True 
 B)False

Question 6

Big tech firms are increasingly offering financial services, increasing the competitive pressure on FIs.

Accepted Answer

A) True 
 B)False

Question 7

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

Accepted Answer

A) True 
 B)False

Question 8

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

Accepted Answer

A) True 
 B)False

Question 9

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

Accepted Answer

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. 
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.

Question 10

A new computer system is expected to cost $40 million and generate annual savings of $12 million over the next five years. Should the bank invest in this project if the discount rate is 18 percent?

Accepted Answer

A) Yes, because the net present value of the project is $2,473,948. 
B) No, because the net present value of the project is -$2,473,948. 
C) Yes, because the net present value of the project is $24.8 million. 
D) No, because the net present value of the project is -$24.8 million. 
E) Yes, because the net present value of the project is $1,342,688. 
A) Yes, because the net present value of the project is $2,473,948. 
B) No, because the net present value of the project is -$2,473,948. 
C) Yes, because the net present value of the project is $24.8 million. 
D) No, because the net present value of the project is -$24.8 million. 
E) Yes, because the net present value of the project is $1,342,688.

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

A) True 
 B)False

Question 12

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

Accepted Answer

A) True 
 B)False

Question 13

Cybersecurity risk represents an ongoing and evolving area for firms to focus on.

Accepted Answer

A) True 
 B)False

Question 14

Which of the following statements is NOT true?

Accepted Answer

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) Fedwire has a fee for daylight overdrafts but CHIPS does not. 
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) Fedwire has a fee for daylight overdrafts but CHIPS does not.

Question 15

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

Accepted Answer

A) True 
 B)False

Question 16

Which of the following implies reduced unit costs as the range of products offered increases inputs in producing multiple products?

Accepted Answer

A) Diseconomies of scale. 
B) Economies of scale. 
C) Economies of scope. 
D) Diseconomies of scope. 
E) Constant returns to scale. 
A) Diseconomies of scale. 
B) Economies of scale. 
C) Economies of scope. 
D) Diseconomies of scope. 
E) Constant returns to scale.

Question 17

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

Accepted Answer

A) True 
 B)False

Question 18

Settlement risk is important because

Accepted Answer

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) the Fed's guarantee may prove to be even more costly to the Federal government than the thrift debacle. 
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) the Fed's guarantee may prove to be even more costly to the Federal government than the thrift debacle.

Question 19

Which of the following wholesale services offered by FIs allows businesses to transfer and transact invoices, purchase orders, and shipping notices automatically?

Accepted Answer

A) Electronic data exchange. 
B) E-commerce facilitation. 
C) Electronic billing. 
D) Electronic funds transfer. 
E) Account reconciliation. 
A) Electronic data exchange. 
B) E-commerce facilitation. 
C) Electronic billing. 
D) Electronic funds transfer. 
E) Account reconciliation.

Question 20

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 percent, Bank B has assets of $20 million and average costs of 13 percent while Bank C has assets of $30 million with average costs of 12 percent.Average costs are measured as a proportion of total assets. By how much should operating costs of the combined entity (Bank A + Bank B) be reduced in order to stay competitive in the local market, ceteris paribus?

Accepted Answer

A) $900,000. 
B) $600,000. 
C) $500,000. 
D) $400,000. 
E) $300,000. 
A) $900,000. 
B) $600,000. 
C) $500,000. 
D) $400,000. 
E) $300,000.

Exam 17: Technology and Other Operational Risks

Which of the following is NOT a source of operational risk?

Which of the following best describes economies of scope?

Large-scale investment projects that lead to excess capacity and integration problems that create cost overruns and control problems are examples of

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

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

Big tech firms are increasingly offering financial services, increasing the competitive pressure on FIs.

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

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

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

A new computer system is expected to cost $40 million and generate annual savings of $12 million over the next five years. Should the bank invest in this project if the discount rate is 18 percent?

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.

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

Cybersecurity risk represents an ongoing and evolving area for firms to focus on.

Which of the following statements is NOT true?

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

Which of the following implies reduced unit costs as the range of products offered increases inputs in producing multiple products?

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

Settlement risk is important because

Which of the following wholesale services offered by FIs allows businesses to transfer and transact invoices, purchase orders, and shipping notices automatically?

Why Are Financial Institutions Special

Financial Services: Depository Institutions

Financial Services: Finance Companies

Financial Services: Securities Brokerage and Investment Banking

Financial Services: Mutual Funds and Hedge Funds

Financial Services: Insurance

Risks of Financial Institutions

Interest Rate Risk I

Interest Rate Risk II

Credit Risk: Individual Loan Risk

Credit Risk: Loan Portfolio and Concentration Risk

Liquidity Risk

Foreign Exchange Risk

Sovereign Risk

Market Risk

Off-Balance-Sheet Risk

Fintech Risks

Liability and Liquidity Management

Deposit Insurance and Other Liability Guarantees

Capital Adequacy

Product and Geographic Expansion

Futures and Forwards

Options, Caps, Floors, and Collars

Swaps

Loan Sales

Securitization

Filters