Question 1

In terms of dollar value,cybercrime has passed trafficking in illegal drugs.

Accepted Answer

A) True 
 B)False  True

Question 2

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

Accepted Answer

A) True 
 B)False  True

Question 3

As banks have increased the use of technology over the past 20 years,

Accepted Answer

A) noninterest income as a percent of total operating income has approximately doubled. 
B) there has been a decrease in the importance of both Fedwire and CHIPS. 
C) there has been an increase in negative net present value because of the speed in which rivals can replicate innovations. 
D) banks no longer need to consolidate because they can access customers worldwide through internet services. 
A) noninterest income as a percent of total operating income has approximately doubled. 
B) there has been a decrease in the importance of both Fedwire and CHIPS. 
C) there has been an increase in negative net present value because of the speed in which rivals can replicate innovations. 
D) banks no longer need to consolidate because they can access customers worldwide through internet services. A

Question 4

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

Accepted Answer

A) True 
 B)False

Question 5

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. 
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.

Question 6

Some analysts and regulators regard this risk as potentially the greatest sources of instability in the financial markets today.

Accepted Answer

A) Daylight overdraft risk 
B) Cybersecurity risk 
C) International technology transfer risk 
D) Competition risk 
A) Daylight overdraft risk 
B) Cybersecurity risk 
C) International technology transfer risk 
D) Competition risk

Question 7

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

Accepted Answer

A) True 
 B)False

Question 8

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. 
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.

Question 9

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

Question 10

What is float?

Accepted Answer

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. 
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.

Question 11

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 12

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.

Bank B plans to acquire Bank A and in the process cut costs by $100,000.What is the combined bank's average costs?

Accepted Answer

A) 12.00 percent. 
B) 12.67 percent. 
C) 13.00 percent. 
D) 13.33 percent. 
A) 12.00 percent. 
B) 12.67 percent. 
C) 13.00 percent. 
D) 13.33 percent.

Question 13

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

Accepted Answer

A) True 
 B)False

Question 14

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

Question 15

Consider the following two FIs: Company A has $500 million in total assets and total costs equal to $200 million.Company B has $60 million in total assets and total costs equal to $24 million.

Assume a third FI (company C)operates in the same market with two FIs,and it has $800 million in assets and total costs of $420 million.What can you conclude about the cost structure of the FIs in this market?

Accepted Answer

A) There are significant economies of scale because companies A,B,and C coexist in the industry. 
B) There are no significant economies of scale because both companies A and C are much larger than company B 
C) There are no significant economies of scale because the unit costs are constant. 
D) There are significant economies of scale beyond the $500 million asset size. 
E) There are no significant economies of scale because the unit costs increase as size increases. 
A) There are significant economies of scale because companies A,B,and C coexist in the industry. 
B) There are no significant economies of scale because both companies A and C are much larger than company B 
C) There are no significant economies of scale because the unit costs are constant. 
D) There are significant economies of scale beyond the $500 million asset size. 
E) There are no significant economies of scale because the unit costs increase as size increases.

Question 16

The expenses relating to increased technological improvements made by FIs during the last several years has the most impact on which of the following?

Accepted Answer

A) Interest expense. 
B) Noninterest expense. 
C) Net income. 
D) Provision for loan losses. 
A) Interest expense. 
B) Noninterest expense. 
C) Net income. 
D) Provision for loan losses.

Question 17

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 18

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 19

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. 
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 20

In 2014,the dollar value of all worldwide methods of cashless payments was over $800 trillion.

Accepted Answer

A) True 
 B)False

Exam 17: Technology and Other Operational Risks

In terms of dollar value,cybercrime has passed trafficking in illegal drugs.

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

As banks have increased the use of technology over the past 20 years,

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

On Fedwire,daylight overdraft

Some analysts and regulators regard this risk as potentially the greatest sources of instability in the financial markets today.

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

Which of the following best describes economies of scale?

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

What is float?

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

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

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?

The expenses relating to increased technological improvements made by FIs during the last several years has the most impact on which of the following?

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.

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

In 2014,the dollar value of all worldwide methods of cashless payments was over $800 trillion.

Why Are Financial Institutions Special

Financial Services: Depository Institutions

Financial Services: Finance Companies

Financial Services: Securities Firms and Investment Banks

Financial Services: Mutual Fund and Hedge Fund Companies

Financial Services: Insurance Companies

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

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