Question 1

Which of the following observations concerning the intermediation approach to measure the cost function of FIs is true?

Accepted Answer

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 these. 
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 these.

Question 2

Encoding, endorsing, microfilming, and handling customers' checks.

Accepted Answer

Cheque dep

Question 3

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

Accepted Answer

A) True 
 B)False

Question 4

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?

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 5

As banks and other FIs increase the use of technology, an unintended consequence may be that

Accepted Answer

A) cost savings are seldom realized. 
B) customers are driven away because they still want to interact with a person for certain transactions. 
C) innovation of new products tends to take longer periods of time to attract new customers. 
D) the marginal cost of adding new customers tends to increase at an increasing rate. 
E) None of these. 
A) cost savings are seldom realized. 
B) customers are driven away because they still want to interact with a person for certain transactions. 
C) innovation of new products tends to take longer periods of time to attract new customers. 
D) the marginal cost of adding new customers tends to increase at an increasing rate. 
E) None of these.

Question 6

OSFI requires that operational risk be measured for the purpose of meeting overall capital adequacy.

Accepted Answer

A) True 
 B)False

Question 7

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 12 percent?

Accepted Answer

A) Yes, because the net present value of the project is $3,257,314. 
B) No, because the net present value of the project is -$3,257,314. 
C) Yes, because the net present value of the project is $20 million. 
D) No, because the net present value of the project is -$20 million. 
E) Yes, because the net present value of the project is $4,980,000. 
A) Yes, because the net present value of the project is $3,257,314. 
B) No, because the net present value of the project is -$3,257,314. 
C) Yes, because the net present value of the project is $20 million. 
D) No, because the net present value of the project is -$20 million. 
E) Yes, because the net present value of the project is $4,980,000.

Question 8

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) CDIC's guarantee may prove to be even more costly to Canadian taxpayers. 
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) CDIC's guarantee may prove to be even more costly to Canadian taxpayers.

Question 9

Which of the following best describes/defines X-inefficiencies?

Accepted Answer

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. 
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 10

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 11

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

Accepted Answer

A) True 
 B)False

Question 12

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 13

Which of the following best describes economies of scale?

Accepted Answer

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. 
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 14

Which of the following is a centralized collection service for corporate payments that helps reduce the float?

Accepted Answer

A) Funds concentration. 
B) Electronic billing. 
C) Treasury management. 
D) Controlled disbursement accounts. 
E) Wholesale lockbox. 
A) Funds concentration. 
B) Electronic billing. 
C) Treasury management. 
D) Controlled disbursement accounts. 
E) Wholesale lockbox.

Question 15

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

Accepted Answer

A) True 
 B)False

Question 16

The increased use of wire transfers as a replacement for cheque and cash payments has decreased the risk of fraud.

Accepted Answer

A) True 
 B)False

Question 17

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

Accepted Answer

A) True 
 B)False

Question 18

Automating the information flow associated with the procurement and distribution of goods and services between businesses.

Accepted Answer

Facilitati

Question 19

How can interest 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 20

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.

Exam 17: Technology and Other Operational Risks

Which of the following observations concerning the intermediation approach to measure the cost function of FIs is true?

Encoding, endorsing, microfilming, and handling customers' checks.

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

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?

As banks and other FIs increase the use of technology, an unintended consequence may be that

OSFI requires that operational risk be measured for the purpose of meeting overall capital adequacy.

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 12 percent?

Settlement risk is important because

Which of the following best describes/defines X-inefficiencies?

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

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

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 best describes economies of scale?

Which of the following is a centralized collection service for corporate payments that helps reduce the float?

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

The increased use of wire transfers as a replacement for cheque and cash payments has decreased the risk of fraud.

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

Automating the information flow associated with the procurement and distribution of goods and services between businesses.

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

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?

Why Are Financial Institutions Special

Deposit-Taking Institutions

Finance Companies

Securities, Brokerage, and Investment Banking

Mutual Funds, Hedge Funds, and Pension Funds

Insurance Companies

Risks of Financial Institutions

Interest Rate Risk I

Interest Rate Risk II

Credit Risk: Individual Loans

Credit Risk: Loan Portfolio and Concentration Risk

Liquidity Risk

Foreign Exchange Risk

Sovereign Risk

Market Risk

Off-Balance-Sheet Risk

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 Index

Filters