FIN 465 Chapter 17

Settlement risk is important because 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

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. The above values 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. E. there is not enough information to determine economies of scale or scope.

A

Which is the most important banking area in which technology has an impact? A. Cash-management services. B. Residential mortgage lending. C. Issuance of certificates of deposit. D. Credit approval. E. None of the options.

A

Which of the following is NOT a retail banking service? 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

Which of the following partially explains why cash management services have not attracted customers in Europe to the degree that they have in the U.S.? A. Prevalence of nationwide branching and banking in Europe. B. Prevalence of interregional banking restrictions in Europe. C. Prohibitive charges imposed for the use of domestic telephone lines in Europe. D. Prohibitive charges imposed on such services in Europe. E. None of the options.

A

Which of the following wholesale services offered by FIs allows businesses to transfer and transact invoices, purchase orders, and shipping notices automatically? A. Electronic data exchange. B. E-commerce facilitation. C. Electronic billing. D. Electronic funds transfer. E. Account reconciliation.

A

How can noninterest 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. E. By complying with all government regulations.

A By improving the efficiency of management of information flows.

Some analysts and regulators regard this risk as potentially the greatest sources of instability in the financial markets today. A. Daylight overdraft risk B. Cybersecurity risk C. International technology transfer risk D. Competition risk E. Tax avoidance risk

A Daylight overdraft risk

Which of the following best describes economies of scale? 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. E. Cost increases are realized from using many of the same inputs to produce multiple products.

A The average cost of production decreases as the level of output increases.

Large-scale investment projects that lead to excess capacity and integration problems that create cost overruns and control problems are examples of A. diseconomies of scale. B. economies of scale. C. economies of scope. D. diseconomies of scope. E. constant returns to scale.

A diseconomies of scale

As banks have increased the use of technology over the past 20 years, 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. E. noninterest expense as a percent of total operating income has decreased as supporting branch banking has decreased in importance.

A noninterest income as a percent of total operating income has approximately doubled.

As of December 2014, which of the following accounts for the highest volume of noncash transactions worldwide? A. Checks. B. Card payments. C. Debit transfers. D. E-money payments. E. Credit transfers.

B

Which of the following is NOT a risk associated with an electronic transfer payment system? A. Daylight overdraft risk B. Wholesale and retail risk C. International technology transfer risk D. Competition risk E. Tax avoidance risk

B

Which of the following implies reduced unit costs as size or volume of assets increases? A. Diseconomies of scale. B. Economies of scale. C. Economies of scope. D. Diseconomies of scope. E. Constant returns to scale.

B Economies of scale.

How can interest expense 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. E. By complying with all government regulations.

B By obtaining access to low cost sources of funds.

As banks and other FIs increase the use of technology, an unintended consequence may be that A. cost savings are seldom realized. B. customers are driven away because they still want to interact with a person for certain transactions. C. innovation of new products tends to take longer periods of time to attract new customers. D. the marginal cost of adding new customers tends to increase at an increasing rate. E. None of the options.

B

As far as regulation is concerned, the increased use of technology A. allows easier monitory of depository institutions. B. aids institutions in regulatory avoidance. C. is not a concern of regulators. D. provides the opportunity for more severe regulatory penalties. E. makes heavily regulated markets easy to enter

B

As of December 2014, which of the following accounts for the highest volume of noncash transactions in the United States? A. Checks. B. Card payments. C. Debit transfers. D. E-money payments. E. Credit transfers.

B

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? A. Economies of scale. B. Diseconomies of scale. C. Economies of scope. D. Diseconomies of scope. E. Constant returns to scale.

B Diseconomies of scale.

Daylight overdrafts occur when 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 exceed the sum of all credits during the day. E. the sum of all credits transmitted over the system exceed the sum of all debits during the day.

B FI debits exceed credits during the day.

Which of the following statements is NOT true? A. The Federal Reserve operates the Fedwire electronic payments system while CHIPS is a private network. B. Fedwire is used to transfer funds from the Fed to the banking system while CHIPS is used to make interbank funds transfers. C. The Fed guarantees all payments on Fedwire while CHIPS transfers are provisional until settlement. D. Large daylight overdrafts are incurred on both Fedwire and CHIPS. E. Fedwire has a fee for daylight overdrafts but CHIPS does not.

B Fedwire is used to transfer funds from the Fed to the banking system while CHIPS is used to make interbank funds transfers.

The expenses relating to increased technological improvements made by FIs during the last several years has the most impact on which of the following? A. Interest expense. B. Noninterest expense. C. Net income. D. Provision for loan losses. E. Net securities gains or losses.

B Noninterest expense.

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 can you conclude about the cost structure of the market consisting of the two FIs? A. There are significant economies of scale because both companies A and B coexist in the industry. B. There are no significant economies of scale because company A is 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 because the unit costs decline as size increases. E. There are no significant economies of scale because the unit costs increase as size increases.

C

Technological advances and the ability to access a nationwide market from one location allowed the growth of Industrial Loan Corporations (ILCs) during the 1990s and illustrate competitive risks of other FIs. Which of the following is true of ILCs? A. They can only operate within the state where they are established. B. They are regulated by the Federal Reserve. C. The deposits of ILCs are insured by the FDIC. D. ILCs are subsidiaries of traditional commercial banks. E. Oversight of ILCs is provided by the Office of the Comptroller of the Currency.

C

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. $900,000. B. $600,000. C. $500,000. D. $400,000. E. $300,000.

C

What is float? 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.

C

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. A. ACb + s > ACb + ACs. B. ACb + s = ACb + ACs. C. ACb + s < ACb + ACs. D. TCb + s < TCb + TCs. E. TCb + s > TCb + TC

C

Which of the following observations is NOT true? 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 options

C

Which of the following wholesale services offered by FIs to businesses allows the FI to combine the e-mail capabilities of the internet with the FIs ability to process payments electronically through the interbank payment networks? A. Electronic data exchange. B. E-commerce facilitation. C. Electronic billing. D. Electronic funds transfer. E. Account reconciliation

C

On Fedwire, daylight overdraft 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. E. is not a potential source of instability in the financial markets.

C invites a fee is 50 basis points, quoted as an annual rate on the basis of a 24-hour day.

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? A. Technology risk. B. Operational efficiency. C. Agency conflicts. D. Diseconomies of scale. E. Diseconomies of scope.

C Agency conflicts.

How can noninterest operating income of an FI be increased 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. E. By complying with all government regulations

C By linking services to the quality of the FI's technology.

Which of the following implies reduced unit costs as the range of products offered increases inputs in producing multiple products? A. Diseconomies of scale. B. Economies of scale. C. Economies of scope. D. Diseconomies of scope. E. Constant returns to scale.

C Economies of scope.

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

C Efficiency may be related to non-quantifiable variables such as managerial ability.

Which of the following best describes economies of scope? A. They occur when the average cost of production decreases as the level of output increases. B. They are effects on costs related to managerial ability and other hard-to-quantify factors. C. They occur when cost savings are realized from using many of the same inputs to produce multiple products. D. They occur when the average cost of production increases as the level of output increases. E. They occur when cost increases are realized from using many of the same inputs to produce multiple products.

C They occur when cost savings are realized from using many of the same inputs to produce multiple products.

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? A. 0.40 for A and 2.50 for B. B. 2.50 for both A and B. C. 2.50 for A and 0.40 for B. D. 0.40 for both A and B. E. Insufficient information.

D

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

D

How can interest income of an FI be increased 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. E. By complying with all government regulations.

D By innovating new interest earning products.

Which of the following occurs if the costs of joint production of FI services are higher than they would be if they were produced independently? A. Economies of scale. B. Diseconomies of scale. C. Economies of scope. D. Diseconomies of scope. E. Constant returns to scale.

D Diseconomies of scope.

Which of the following is NOT TRUE concerning The Clearing House Internet Payment System (CHIPS)? A. It has similar intra-day net payment flows as Fedwire. B. It does not charge explicit fees for intraday overdrafts. C. It is a privately operated payments network. D. It allows users end the day with an overdraft, but only for two consecutive days in a row. E. It makes available $3 billion each day to cover each day's payment transactions.

D It allows users end the day with an overdraft, but only for two consecutive days in a row.

Suppose that the doubling of a bank's deposit funding allows the bank to triple its loan output. What can you conclude about the bank's production technology? A. It exhibits economies of scale using the production approach. B. It exhibits diseconomies of scale using the production approach. C. It exhibits diseconomies of scale using the intermediation approach. D. It exhibits economies of scale using the intermediation approach. E. It exhibits neither economies nor diseconomies of scale.

D t exhibits economies of scale using the intermediation approach.

As of December 2014, which of the following represented the highest percent of the dollar value of noncash transactions in the United States? A. Credit transfers. B. Card payments. C. Debit transfers. D. E-money payments. E. Credit transfers

E

As of December 2014, which of the following represented the highest percent of the dollar value of noncash transactions worldwide? A. Checks. B. Card payments. C. Debit transfers. D. E-money paymen E. Credit transfers.

E

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? 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.

E

Which of the following is NOT a source of operational risk for an FI? A. Capital assets. B. Customer relationships. C. Technology. D. Employees. E. Positive duration gap.

E

Which of the following is NOT a wholesale banking service? A. Controlled disbursement accounts. B. Account reconciliation. C. Electronic funds transfer. D. Electronic initiation of letters of credit. E. Automated teller machines.

E

Which of the following is a centralized collection service for corporate payments that helps reduce the float? A. Funds concentration. B. Electronic billing. C. Treasury management. D. Controlled disbursement accounts. E. Wholesale lockbox.

E

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

E

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

E All of the options.