Question 1

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

Accepted Answer

A) True 
 B)False

Question 2

How can interest expense of an FI be reduced by improved technological efficiency?

Accepted Answer

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. 
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 3

On Fedwire, daylight overdraft

Accepted Answer

A) is a bank's positive intraday balance in its reserve account at the Fed. 
B) does not occur under the current payments system. 
C) invites a fee is 50 basis points, quoted as an annual rate on the basis of a 24-hour day. 
D) has a seasonal component. 
E) is not a potential source of instability in the financial markets. 
A) is a bank's positive intraday balance in its reserve account at the Fed. 
B) does not occur under the current payments system. 
C) invites a fee is 50 basis points, quoted as an annual rate on the basis of a 24-hour day. 
D) has a seasonal component. 
E) is not a potential source of instability in the financial markets.

Question 4

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

Accepted Answer

A) True 
 B)False

Question 5

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

Accepted Answer

A) True 
 B)False

Question 6

A new computer system is expected to cost $40 million and generate annual savings of $12 million over the next five years. What is the IRR for this investment?

Accepted Answer

A) 11.18 percent. 
B) 12.98 percent. 
C) 15.24 percent. 
D) 12.00 percent. 
E) 18.00 percent. 
A) 11.18 percent. 
B) 12.98 percent. 
C) 15.24 percent. 
D) 12.00 percent. 
E) 18.00 percent.

Question 7

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. The above figures indicate that

Accepted Answer

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. 
E) there is not enough information to determine economies of scale or scope. 
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. 
E) there is not enough information to determine economies of scale or scope.

Question 8

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

Accepted Answer

A) True 
 B)False

Question 9

How can noninterest operating income of an FI be increased by improved technological efficiency?

Accepted Answer

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. 
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 10

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?

Accepted Answer

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

Question 11

Spruce Bank is planning to automate some of its back office functions and reduce operating costs.The installation of new computers and software will require an initial investment of $1,000,000.The savings generated because of reduced personnel cost is $200,000 per year.The bank uses an 8 percent rate of discount to evaluate cost saving projects which are expected to last 10 years. What must be the minimum annual cost savings in order to accept this project? Assume a five-year horizon and 8 percent discount rate.

Accepted Answer

A) $200,000. 
B) $222,256. 
C) $250,456. 
D) $279,724. 
E) $500,913. 
A) $200,000. 
B) $222,256. 
C) $250,456. 
D) $279,724. 
E) $500,913.

Question 12

Which of the following is NOT a retail banking service?

Accepted Answer

A) Check deposit services. 
B) Point of sale/debit cards. 
C) Telephone bill paying services. 
D) Pre-authorized debits/credits. 
E) Automated teller machines. 
A) Check deposit services. 
B) Point of sale/debit cards. 
C) Telephone bill paying services. 
D) Pre-authorized debits/credits. 
E) Automated teller machines.

Question 13

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.

Accepted Answer

A) True 
 B)False

Question 14

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.

Accepted Answer

A) True 
 B)False

Question 15

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

Accepted Answer

A) True 
 B)False

Question 16

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

Accepted Answer

A) True 
 B)False

Question 17

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

Accepted Answer

A) True 
 B)False

Question 18

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?

Accepted Answer

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 options. 
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 options.

Question 19

Which of the following is NOT a risk associated with an electronic transfer payment system?

Accepted Answer

A) Daylight overdraft risk 
B) Wholesale and retail risk 
C) International technology transfer risk 
D) Competition risk 
E) Tax avoidance risk 
A) Daylight overdraft risk 
B) Wholesale and retail risk 
C) International technology transfer risk 
D) Competition risk 
E) Tax avoidance risk

Question 20

Which of the following is consistent with economies of scope? The subscript "b" refers to a banking firm, "s" for a securities firm, "AC" is average costs and "TC" is total costs.

Accepted Answer

A) ACb + s > ACb + ACs. 
B) ACb + s = ACb + ACs. 
C) ACb + s b + ACs. 
D) TCb + s b + TCs. 
E) TCb + s > TCb + TCs. 
A) ACb + s > ACb + ACs. 
B) ACb + s = ACb + ACs. 
C) ACb + s b + ACs. 
D) TCb + s b + TCs. 
E) TCb + s > TCb + TCs.

Exam 17: Technology and Other Operational Risks

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

How can interest expense of an FI be reduced by improved technological efficiency?

On Fedwire, daylight overdraft

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

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

A new computer system is expected to cost $40 million and generate annual savings of $12 million over the next five years. What is the IRR for this investment?

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

How can noninterest operating income of an FI be increased by improved technological efficiency?

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?

Which of the following is NOT a retail banking service?

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.

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.

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

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

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

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?

Which of the following is NOT a risk associated with an electronic transfer payment system?

Which of the following is consistent with economies of scope? The subscript "b" refers to a banking firm, "s" for a securities firm, "AC" is average costs and "TC" is total costs.

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