Question 1

Economies of scope refers to the:
A)fall in an FI's average costs of production as its output increases
B)increase in an FI's average costs of production as its output increases
C)situation in which the costs of joint production of FI services are higher than they would be if they were produced independently
D)ability of an FI to generate synergistic cost savings through joint use of inputs in producing multiple outputs

Accepted Answer

Economies of scope refer to the ability of an FI to generate synergistic cost savings through joint use of inputs in producing multiple outputs. This means that by producing multiple products or services using the same inputs, an FI can reduce its average costs of production.

Question 2

Which of the following statements is true?
A)The profitability of any product innovation is negatively related to the size of the initial set-up and development costs and the FI's cost of capital.
B)The profitability of any product innovation is positively related to the size of the initial set-up and development costs and the FI's cost of capital.
C)The profitability of any product innovation is unrelated to the size of the initial set-up and development costs and the FI's cost of capital.
D)The relationship depends on the FI's individual situation.

Accepted Answer

The profitability of a product innovation tends to decrease as the initial setup and development costs increase, and as the financial institution's (FI) cost of capital increases. Higher costs and higher capital costs reduce the net return on investment, making the innovation less profitable.

Question 3

Which of the following wholesale services offered by FI's to businesses allows the FI to combine the email capabilities of the internet with the FI's ability to process payments electronically through the interbank payment networks?
A)electronic data exchange
B)ecommerce facilitation
C)electronic billing
D)electronic funds transfer

Accepted Answer

Electronic billing allows the FI to combine email capabilities with electronic payment processing through interbank payment networks. Electronic data exchange involves the transmission of structured data between organizations, ecommerce facilitation is a broad term that refers to various services aimed at facilitating online transactions, and electronic funds transfer focuses solely on the transfer of funds between accounts.

Question 4

The most important banking area in which technology has impacted wholesale or corporate customer services is a financial institution's ability to provide:
A)cash-management services
B)residential mortgage lending
C)issuance of certificates of deposit
D)credit approval

Accepted Answer

Technology has greatly impacted cash-management services provided to wholesale or corporate customers. With the use of online banking, mobile banking, and other technological advancements, financial institutions are now able to offer real-time monitoring of account balances, cash flow forecasting, and automated payment processing, among other services. This has greatly increased the efficiency and effectiveness of cash-management services, which are essential for any business. While technology has also impacted other areas such as credit approval, residential mortgage lending, and issuance of certificates of deposit, these are not typically considered core services for wholesale or corporate customers.

Question 5

Some of the most important retail payment product innovations are:
A)ATMs, EFTPOS and online banking
B)home banking, telephone banking and business-to-business ecommerce
C)online banking, smart cards and account reconciliation
D)All of the listed options are correct.

Accepted Answer

The answer of Some of the most important retail payment...

Question 6

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

Accepted Answer

An FI's operating cost and efficient use of technology can have a significant impact on its profits before taxes. By reducing operating costs through the use of technology, FIs can increase profits and remain competitive in the market. FIs that fail to efficiently use technology may struggle to keep up with their competitors and could experience decreased profits.

Question 7

Diseconomies of scope refers to the:
A)fall in an FI's average costs of production as its output increases
B)increase in an FI's average costs of production as its output increases
C)situation in which the costs of joint production of FI services are higher than they would be if they were produced independently
D)ability of an FI to generate synergistic cost savings through joint use of inputs in producing multiple outputs

Accepted Answer

Diseconomies of scope occur when the costs of producing services or products together are higher than producing them separately.

Question 8

Which of the following sources of operational risk are internally controllable by FI management?
A)technology
B)employees
C)customer relationships
D)All of the listed options are correct.

Accepted Answer

All of the listed options (technology, employees, customer relationships) are internally controllable by financial institution (FI) management through policies, training, and systems management.

Question 9

ES account stands for:
A)exchange settlement account
B)exchange systems account
C)European settlement account
D)emerging settlement account

Accepted Answer

ES account commonly stands for exchange settlement account, which is a bank account used by traders and investors to settle their transactions on stock exchanges. This type of account is used to facilitate the transfer and settlement of funds between the parties involved in a trade or investment.

Question 10

Economies of scale refers to the:
A)fall in an FI's average costs of production as its output decreases
B)fall in an FI's average costs of production as its output increases
C)fall in an FI's average costs of production as its output remains stable
D)increase in an FI's average costs of production as its output increases

Accepted Answer

Economies of scale refer to the reduction in average costs of production as output increases. As the volume of production increases, fixed costs can be spread over more units, leading to lower average costs. This allows larger FIs to achieve cost savings and increase profitability.

Question 11

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

Accepted Answer

Improved technological efficiency can help reduce the operating expenses of an FI by improving the efficiency of management of information flows. This can include automating processes, eliminating manual errors, and reducing the need for physical paperwork. This can lead to reduced labor costs, higher productivity, and generally lower operating expenses. Options B, C, and D are not directly related to technological efficiency and may not necessarily lead to a reduction in operating expenses.

Question 12

A major advantage of EFTPOS is that:
A)the transaction value will be debited from the customer's account at a later point in time
B)customers can use cheques to pay for their purchases
C)customers do not have to carry cash to make purchases
D)All of the listed options are correct.

Accepted Answer

EFTPOS allows customers to make purchases without carrying cash, making it more convenient and safer for customers. The other options are incorrect, as transactions made with EFTPOS are usually debited immediately and do not involve cheques.

Question 13

The term daylight overdraft refers to a situation in which an FI's:
A)reserve account at the central bank is negative at the end of a banking day
B)reserve account at the central bank is negative at the beginning of a banking day
C)reserve account at the central bank becomes negative within the banking day
D)account with another FI becomes negative within the banking day

Accepted Answer

A daylight overdraft occurs when an FI's reserve account at the central bank becomes negative within the banking day, usually as a result of outgoing payments exceeding incoming payments. Option A is incorrect because the reserve account may have been positive at the beginning of the day. Option B is incorrect because a negative balance at the start of the day would be an overnight overdraft. Option D is incorrect because it refers to an account with another FI, which is not relevant to the definition of a daylight overdraft.

Question 14

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

Accepted Answer

All of the options listed are correct and contributed to the prominence of operational risk during the global financial crisis. Lehman Brothers' use of "recycled collateral" and investment banks' failure to provide material information to "sophisticated investors" both highlighted issues with transparency and accountability, while the credit default swap market created difficulties with settling trades and led to systemic market risk.

Question 15

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%, Bank B has assets of $20 million and average costs of 13% while Bank C has assets of $30 million with average costs of 12%.Average costs are measured as a proportion of total assets.The above figures indicate that:
A)there are significant economies of scale still present in the local markets
B)there are significant diseconomies of scale still present in the local markets
C)there are significant economies of scope still present in the local markets
D)there are significant diseconomies of scope still present in the local markets

Accepted Answer

The decreasing average costs with increasing size of banks indicate that there are still economies of scale present in the local market. Bank A has the highest average costs at 15%, while Bank C has the lowest average costs at 12%, despite having the largest assets. This suggests that Bank C is benefiting from economies of scale.

Question 16

Diseconomies of scale refers to the:
A)fall in an FI's average costs of production as its output decreases
B)fall in an FI's average costs of production as its output increases
C)fall in an FI's average costs of production as its output remains stable
D)increase in an FI's average costs of production as its output increases

Accepted Answer

Diseconomies of scale refer to the increase in an FI's average costs of production as its output increases. This can occur due to various reasons such as difficulties in managing larger operations, increased bureaucracy, and inefficiencies in communication and decision-making. As the scale of operations grow, these factors can lead to higher costs, reducing the benefits of economies of scale.

Question 17

Which of the following implies that small FI's are more cost efficient than large FI's, and that in a freely competitive environment for financial services, small FI's may outperform their larger counterparts?
A)economies of scale
B)diseconomies of scale
C)economies of scope
D)diseconomies of scope

Accepted Answer

Diseconomies of scale imply that as the size of the FI increases, the costs per unit also increase, which means that large FIs are less cost-efficient than small FIs. This suggests that small FIs may outperform their larger counterparts in a freely competitive environment for financial services.

Question 18

Which of the following statements is true?
A)The profitability of any product innovation is negatively related to the size of the stream of expected net cash flows from selling the services.
B)The profitability of any product innovation is positively related to the size of the stream of expected net cash flows from selling the services.
C)The profitability of any product innovation is unrelated to the size of the stream of expected net cash flows from selling the services.
D)The relationship depends on the FI's individual situation.

Accepted Answer

The profitability of a product innovation is likely to be positively related to the size of the stream of expected net cash flows from selling the services. A larger stream of cash flows means higher revenue and profitability for the financial institution. However, this is subject to the FI’s individual situation, which could impact the profitability of the product innovation.

Question 19

Smart cards allow customers to:
A)spend money for various transactions, whereby the transaction value will be directly debited from the customer's account
B)store and spend money for various transactions using a card that has a chip-storage device
C)spend money for various transactions without having to pay the balance until a pre-set due date
D)access their funds overseas

Accepted Answer

Smart cards have a chip-storage device that allows customers to store and spend money for various transactions without needing to directly debit from their account or pay a balance later.

Question 20

Potential reasons that technologically based product innovations result in a negative net present value are:
A)competitors' ability to mimic these products after long periods of time
B)uncertainties over revenues and costs of these projects
C)uncertainties over revenues and costs of these projects and competitors' ability to mimic these products after long periods of time
D)certainty of cash flows and competitors' ability to mimic these products quickly

Accepted Answer

Uncertainties over revenues and costs can lead to a negative net present value because they make it difficult to accurately forecast the financial outcomes of the project.

Quiz 17: Technology and Other Operational Risks

Economies of scope refers to the:

Which of the following statements is true?

Which of the following wholesale services offered by FI's to businesses allows the FI to combine the email capabilities of the internet with the FI's ability to process payments electronically through the interbank payment networks?

The most important banking area in which technology has impacted wholesale or corporate customer services is a financial institution's ability to provide:

Some of the most important retail payment product innovations are:

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

Diseconomies of scope refers to the:

Which of the following sources of operational risk are internally controllable by FI management?

ES account stands for:

Economies of scale refers to the:

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

A major advantage of EFTPOS is that:

The term daylight overdraft refers to a situation in which an FI's:

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

Diseconomies of scale refers to the:

Which of the following implies that small FI's are more cost efficient than large FI's, and that in a freely competitive environment for financial services, small FI's may outperform their larger counterparts?

Which of the following statements is true?

Smart cards allow customers to:

Potential reasons that technologically based product innovations result in a negative net present value are: