Chapter+13+Answers+to+end-of-chapter+questions - CHAPTER...

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CHAPTER 13TECHNOLOGY AND OTHER OPERATIONAL RISKS Chapter outline What are the Sources of Operational Risk? Technological Innovation and Profitability The Impact of Technology on Wholesale and Retail Financial Services Production Wholesale Financial Services Retail Financial Services The Effect of Technology on Revenues and Costs Technology and Revenues Technology and Costs Testing for Economies of Scale and Economies of Scope The Production Approach The Intermediation Approach Empirical Findings on Cost Economies of Scale and Scope and Implications for Technology Expenditures Economies of Scale and Scope, and X-Inefficiencies Technology and the Payments System Other Operational Risks Regulatory Issues and Technology and Operational Risks Instructor’s Resource Manual t/a Financial Institutions Management 2e by Lange, Saunders, Anderson, Thomson & Cornett 1
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Solutions for end-of-chapter questions 1. Explain how technological improvements can increase an FI’s interest and non-interest income and reduce interest and non-interest expenses. Use some specific examples. Technological improvements in the services provided by financial intermediaries help increase income and reduce costs in several ways: (a) Interest income: By making it easier to draw down on loans directly via computers, as well as by processing loan applications faster. (b) Interest expense: By enabling banks to access lower cost funds that are available directly from brokers and dealers through computers and screen-based trading. (c) Non-interest income: By making more non-loan products available to customers through the computers to customers such as letters of credit and commercial paper and derivatives. (d) Non-interest expense: By reducing processing and settlement fees, an area that has changed drastically for most FIs, especially in trading activities and in the use of automated teller machines (ATMs). 2. Table 13.1 shows the importance of fee revenue to the profitability of financial institutions. How might IT have helped this development of greater reliance on fee income than on interest margin? Technology has allowed FIs to deliver more technologically complex services through improvements in the IT environment: an example is the ability to offer far more sophisticated treasury services with improved pricing and management of derivatives exposure. Similarly, FIs have been able to offer more widespread facilities of the payments system to clients, such as direct debit of salaries and the everyday convenience of EFTPOS. From the banks’ perspective, these tend to generate fee revenue and help reduce their historical reliance on interest margin to contribute to profits. 3. Compare the effects of technology on a bank’s wholesale operations with the effects of technology on a bank’s retail operations. Give some specific examples. Generally the wholesale efforts have centred on the banks’ ability to improve the management of
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This note was uploaded on 08/21/2009 for the course FINS 3630 taught by Professor Yip during the Three '09 term at University of New South Wales.

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Chapter+13+Answers+to+end-of-chapter+questions - CHAPTER...

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