Question 1

External insurance is one way of operational risk loss prevention.

Accepted Answer

A) True 
 B)False

Question 2

Distinguish between diseconomies of scale and diseconomies of scope. How could they occur?

Accepted Answer

Diseconomies of scale occur when the ave

Question 3

Which of the following observations concerning the intermediation approach is true?

Accepted Answer

A)  The intermediation approach views FIs' outputs of services as having two underlying inputs. 
B)  Labour and capital are the only inputs. 
C)  The intermediation approach views the output as being produced by labour, capital and the funds used to produce intermediated services. 
D)  Premiums or reserves are viewed as an input in the banking and thrift industries. 
A)  The intermediation approach views FIs' outputs of services as having two underlying inputs. 
B)  Labour and capital are the only inputs. 
C)  The intermediation approach views the output as being produced by labour, capital and the funds used to produce intermediated services. 
D)  Premiums or reserves are viewed as an input in the banking and thrift industries.

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 
A)  economies of scale 
B)  diseconomies of scale 
C)  economies of scope 
D)  diseconomies of scope

Question 5

Which of the following statements is false?

Accepted Answer

A)  Regulations can affect the profitability of technological innovations. 
B)  Regulations can hinder the rate and types of innovations. 
C)  Typical regulations include caps on loan rates such as usury ceilings. 
D)  Regulations are predominantly implemented to enhance FIs' profitability. 
A)  Regulations can affect the profitability of technological innovations. 
B)  Regulations can hinder the rate and types of innovations. 
C)  Typical regulations include caps on loan rates such as usury ceilings. 
D)  Regulations are predominantly implemented to enhance FIs' profitability.

Question 6

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

Accepted Answer

A) True 
 B)False

Question 7

Operational risk sources can lead to the following costs for the FI:

Accepted Answer

A)  direct costs, indirect costs and opportunity costs. 
B)  direct costs and indirect costs only. 
C)  direct costs and opportunity costs only. 
D)  indirect costs and opportunity costs only. 
A)  direct costs, indirect costs and opportunity costs. 
B)  direct costs and indirect costs only. 
C)  direct costs and opportunity costs only. 
D)  indirect costs and opportunity costs only.

Question 8

Which of the following statements is true?

Accepted Answer

A)  Internet transactions involve 'open' systems and thus are well protected against interception and fraud. 
B)  Internet transactions involve 'closed' systems and thus are well protected against interception and fraud. 
C)  Internet transactions involve 'closed' systems and thus are susceptible to interception and fraud. 
D)  Internet transactions involve 'open' systems and thus are susceptible to interception and fraud. 
A)  Internet transactions involve 'open' systems and thus are well protected against interception and fraud. 
B)  Internet transactions involve 'closed' systems and thus are well protected against interception and fraud. 
C)  Internet transactions involve 'closed' systems and thus are susceptible to interception and fraud. 
D)  Internet transactions involve 'open' systems and thus are susceptible to interception and fraud.

Question 9

Daylight overdrafts occur when:

Accepted Answer

A)  FIs in different time zones clear transactions. 
B)  FI debits exceed credits during the day. 
C)  FI credits exceed debits during the day. 
D)  the sum of all debits transmitted over the system exceeds the sum of all credits during the day. 
A)  FIs in different time zones clear transactions. 
B)  FI debits exceed credits during the day. 
C)  FI credits exceed debits during the day. 
D)  the sum of all debits transmitted over the system exceeds the sum of all credits during the day.

Question 10

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

Accepted Answer

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. 
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.

Question 11

How can 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. 
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.

Question 12

To offset costs arising from operational risks, FI managers spend considerable efforts on the following:

Accepted Answer

A)  Loss prevention, loss control, loss financing and loss insulation. 
B)  Loss prevention, loss control, loss investment and loss insulation. 
C)  Loss provisioning, loss control, loss financing and loss insulation. 
D)  Loss prevention, loss control, loss financing and loss creation. 
A)  Loss prevention, loss control, loss financing and loss insulation. 
B)  Loss prevention, loss control, loss investment and loss insulation. 
C)  Loss provisioning, loss control, loss financing and loss insulation. 
D)  Loss prevention, loss control, loss financing and loss creation.

Question 13

Which of the following expressions describes economies of scope?

Accepted Answer

A)  ACA+B│X1,X2│ A│X1,0│ + ACB│X2,0│ 
B)  ACA+B│X1,X2│ > ACA│X1,0│ + ACB│X2,0│ 
C)  ACA+B│X1,X1│ A│X1,0│ + ACB│X1,0│ 
D)  ACA+B│X1,X2│ = ACA│X1,0│ + ACB│X2,0│ 
A)  ACA+B│X1,X2│ A│X1,0│ + ACB│X2,0│ 
B)  ACA+B│X1,X2│ > ACA│X1,0│ + ACB│X2,0│ 
C)  ACA+B│X1,X1│ A│X1,0│ + ACB│X1,0│ 
D)  ACA+B│X1,X2│ = ACA│X1,0│ + ACB│X2,0│

Question 14

Outline the main sources of operational risk and why operational risk gained prominence during the GFC.

Accepted Answer

There are at least five sources of opera

Question 15

Which of the following statements is false?

Accepted Answer

A)  The long-run implication of economies of scale on the FI sector is that the larger and most cost-efficient FIs will drive out smaller FIs. 
B)  A potential long-run implication of economies of scale on the FI sector is an increase in large-firm dominance. 
C)  A potential long-run implication of economies of scale on the FI sector is a concentration in financial services production. 
D)  A potential long-run implication of economies of scale on the FI sector is a decrease in large-firm dominance. 
A)  The long-run implication of economies of scale on the FI sector is that the larger and most cost-efficient FIs will drive out smaller FIs. 
B)  A potential long-run implication of economies of scale on the FI sector is an increase in large-firm dominance. 
C)  A potential long-run implication of economies of scale on the FI sector is a concentration in financial services production. 
D)  A potential long-run implication of economies of scale on the FI sector is a decrease in large-firm dominance.

Question 16

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

Question 17

Operational risk came into prominence during the global financial crisis (GFC) due to:

Accepted Answer

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. 
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.

Question 18

ES Account stands for:

Accepted Answer

A)  exchange settlement account. 
B)  exchange systems account. 
C)  European settlement account. 
D)  emerging settlement account. 
A)  exchange settlement account. 
B)  exchange systems account. 
C)  European settlement account. 
D)  emerging settlement account.

Question 19

Assume that ABC Bank produces product A for a corporate client, while XYZ Bank produces product B for the client. The total operating cost for producing product A is $200 000 and $300 000 for product B. The resulting business volumes for the FI are $7 500 000 for product A and $10 000 000 for product B. What is the total average cost of producing products A and B separately (round to two decimals)?

Accepted Answer

A)  5.67 per cent 
B)  35 per cent 
C)  70.84 per cent 
D)  2.86 per cent 
A)  5.67 per cent 
B)  35 per cent 
C)  70.84 per cent 
D)  2.86 per cent

Question 20

Losses on technological innovations and new technology could weaken an FI because scarce capital resources were invested in value-decreasing projects.

Accepted Answer

A) True 
 B)False

External insurance is one way of operational risk loss prevention.

Distinguish between diseconomies of scale and diseconomies of scope. How could they occur?

Which of the following observations concerning the intermediation approach is true?

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 statements is false?

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

Operational risk sources can lead to the following costs for the FI:

Which of the following statements is true?

Daylight overdrafts occur when:

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

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

To offset costs arising from operational risks, FI managers spend considerable efforts on the following:

Which of the following expressions describes economies of scope?

Outline the main sources of operational risk and why operational risk gained prominence during the GFC.

Which of the following statements is false?

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.

Operational risk came into prominence during the global financial crisis (GFC) due to:

ES Account stands for:

Losses on technological innovations and new technology could weaken an FI because scarce capital resources were invested in value-decreasing projects.

Why Are Financial Institutions Special

The Financial Services Industry: Depository Institutions

The Financial Services Industry: Other Financial Institutions

Risk of Financial Institutions

Interest Rate Risk Measurement: The Repricing Model

Interest Rate Risk Measurement: the Duration Model

Managing Interest Rate Risk Using Off Balance Sheet Instruments

Credit Risk I: Individual Loan Risk

Market Risk

Credit Risk I: Individual Loan Risk

Credit Risk II: Loan Portfolio and Concentration Risk

Sovereign Risk

Foreign Exchange Risk

Liquidity Risk

Liability and Liquidity Management

Off-Balance-Sheet Activities

Capital Management and Adequacy

Filters

Exam 17: Technology and Other Operational Risk

External insurance is one way of operational risk loss prevention.

Distinguish between diseconomies of scale and diseconomies of scope. How could they occur?

Which of the following observations concerning the intermediation approach is true?

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 statements is false?

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

Operational risk sources can lead to the following costs for the FI:

Which of the following statements is true?

Daylight overdrafts occur when:

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

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

To offset costs arising from operational risks, FI managers spend considerable efforts on the following:

Which of the following expressions describes economies of scope?

Outline the main sources of operational risk and why operational risk gained prominence during the GFC.

Which of the following statements is false?

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.

Operational risk came into prominence during the global financial crisis (GFC) due to:

ES Account stands for:

Losses on technological innovations and new technology could weaken an FI because scarce capital resources were invested in value-decreasing projects.

Why Are Financial Institutions Special

The Financial Services Industry: Depository Institutions

The Financial Services Industry: Other Financial Institutions

Risk of Financial Institutions

Interest Rate Risk Measurement: The Repricing Model

Interest Rate Risk Measurement: the Duration Model

Managing Interest Rate Risk Using Off Balance Sheet Instruments

Credit Risk I: Individual Loan Risk

Market Risk

Credit Risk I: Individual Loan Risk

Credit Risk II: Loan Portfolio and Concentration Risk

Sovereign Risk

Foreign Exchange Risk

Liquidity Risk

Liability and Liquidity Management

Off-Balance-Sheet Activities

Capital Management and Adequacy

Filters