Question 1

Although cloud computing is a technology that FIs can provide to business clients, the FI itself seldom uses cloud computing in their own operations.

Accepted Answer

A) True 
 B)False

Question 2

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. 
E) Interval between the dispatch of a bill and actual payment by the consumer. 
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. 
E) Interval between the dispatch of a bill and actual payment by the consumer.

Question 3

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.

Question 4

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. 
E) 15.00 percent. 
A) 12.00 percent. 
B) 12.67 percent. 
C) 13.00 percent. 
D) 13.33 percent. 
E) 15.00 percent.

Question 5

Which of the following is NOT a source of operational risk for an FI?

Accepted Answer

A) Capital assets. 
B) Customer relationships. 
C) Technology. 
D) Employees. 
E) Positive duration gap. 
A) Capital assets. 
B) Customer relationships. 
C) Technology. 
D) Employees. 
E) Positive duration gap.

Question 6

Which of the following are potential benefits of technology for an FI?

Accepted Answer

A) Improved service quality, especially for customers of large banks. 
B) The rate of innovation of new products can be increased. 
C) FIs can more easily cross-market new and existing products to customers. 
D) Improved flexibility in financial transactions for retail customers. 
E) All of the above. 
A) Improved service quality, especially for customers of large banks. 
B) The rate of innovation of new products can be increased. 
C) FIs can more easily cross-market new and existing products to customers. 
D) Improved flexibility in financial transactions for retail customers. 
E) All of the above.

Question 7

Why has empirical evidence on economies of scale and scope been so contradictory?

Accepted Answer

A) Data on bank costs are unavailable. 
B) Efficiency may be related to overall market conditions. 
C) Efficiency may be related to non-quantifiable variables such as managerial ability. 
D) Neither the intermediation nor the production approach conform to reality. 
E) The methodology to detect economies of scale and scope are still very rudimentary. 
A) Data on bank costs are unavailable. 
B) Efficiency may be related to overall market conditions. 
C) Efficiency may be related to non-quantifiable variables such as managerial ability. 
D) Neither the intermediation nor the production approach conform to reality. 
E) The methodology to detect economies of scale and scope are still very rudimentary.

Question 8

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 9

Which of the following observations is NOT true?

Accepted Answer

A) The use of electronic methods of payment is far higher in major developed countries other than the United States. 
B) E-money payments are virtually nonexistent in the United States. 
C) Money stored in e-money accounts and cards is covered by deposit insurance. 
D) U.S.FIs have been slow in adopting and using online banking and electronic payment methods extensively. 
E) All of the above. 
A) The use of electronic methods of payment is far higher in major developed countries other than the United States. 
B) E-money payments are virtually nonexistent in the United States. 
C) Money stored in e-money accounts and cards is covered by deposit insurance. 
D) U.S.FIs have been slow in adopting and using online banking and electronic payment methods extensively. 
E) All of the above.

Question 10

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) the Fed's guarantee may prove to be even more costly to the Federal government than the thrift debacle. 
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) the Fed's guarantee may prove to be even more costly to the Federal government than the thrift debacle.

Question 11

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 12

Account reconciliation redirects funds from accounts in a large number of different banks to a few centralized accounts at one bank.

Accepted Answer

A) True 
 B)False

Question 13

Which of the following observations concerning e-money is NOT true?

Accepted Answer

A) Check writing lays the foundation of e-money. 
B) E-money removes the middleman from a transaction. 
C) The e-money user transfers the money from his or her bank account to the account of the funds' receiver. 
D) The primary function of e-money is to facilitate transactions on the Internet. 
E) E-money is not a cost efficient way of managing transactions that are small in value. 
A) Check writing lays the foundation of e-money. 
B) E-money removes the middleman from a transaction. 
C) The e-money user transfers the money from his or her bank account to the account of the funds' receiver. 
D) The primary function of e-money is to facilitate transactions on the Internet. 
E) E-money is not a cost efficient way of managing transactions that are small in value.

Question 14

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 the above. 
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 the above.

Question 15

How can noninterest operating expenses 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 16

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 17

Fedwire is a wire transfer network of over 9,300 international FIs with the Federal Reserve System.

Accepted Answer

A) True 
 B)False

Question 18

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

Accepted Answer

A) True 
 B)False

Question 19

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 20

Which of the following wholesale services offered by FIs allows businesses to transfer and transact invoices, purchase orders, and shipping notices automatically?

Accepted Answer

A) Electronic data exchange. 
B) E-commerce facilitation. 
C) Electronic billing. 
D) Electronic funds transfer. 
E) Account reconciliation. 
A) Electronic data exchange. 
B) E-commerce facilitation. 
C) Electronic billing. 
D) Electronic funds transfer. 
E) Account reconciliation.

Exam 17: Technology and Other Operational Risks

Although cloud computing is a technology that FIs can provide to business clients, the FI itself seldom uses cloud computing in their own operations.

What is float?

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.

Which of the following is NOT a source of operational risk for an FI?

Which of the following are potential benefits of technology for an FI?

Why has empirical evidence on economies of scale and scope been so contradictory?

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

Which of the following observations is NOT true?

Settlement risk is important because

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.

Account reconciliation redirects funds from accounts in a large number of different banks to a few centralized accounts at one bank.

Which of the following observations concerning e-money is NOT true?

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

How can noninterest operating expenses of an FI be reduced by improved technological efficiency?

Which of the following is NOT a retail banking service?

Fedwire is a wire transfer network of over 9,300 international FIs with the Federal Reserve System.

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

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

Which of the following wholesale services offered by FIs allows businesses to transfer and transact invoices, purchase orders, and shipping notices automatically?

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

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