Exam 17: Technology and Other Operational Risks

In the U.S., electronic methods of payment account for a larger number of transactions, but a lower aggregate dollar value than non-electronic methods of payment.

Which of the following occur when managers undertake growth-oriented investments to increase an FI's size that may be inconsistent with stockholders' value-maximizing objectives?

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

If AC_{X + Y} < AC_X + AC_Y, where AC is average production cost and X and Y are products, economies of scope are present.

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

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?

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

The success in technologically related innovation often is dependent on changes in regulations and regulatory procedures.

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

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

The U.S. tax burden faced by domestic FIs has been minimized, in part, by the ability to use international wire networks for the transfer of funds.

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 -What are average costs for each FI?

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

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.

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?

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?

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?

As of January 2012, which of the following represented the highest percent of the dollar value of noncash transactions in the United States?

According to studies, which of the following may better explain cost differences and operating cost efficiencies among FIs?

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. -Should the bank undertake the project given the above information?