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AIM 6: List the various operational risks that emerge in an electronic payments system and explain the connections across these risks.

 

1、A condition in which a bank has a negative balance with the Federal Reserve Bank at some time during the business day is called a(n):

A) intra-day overdraft.
 
B) negative balance float.
 
C) discount window debit.
 
D) daylight overdraft.

nayizhenfeng

The correct answer is D

Banks are allowed to have negative intra-day balances in their accounts with the Federal Reserve Bank. These are referred to as “daylight overdrafts” because they are cleared before the close of the business day.

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2、When a payment is made by Fedwire, the credit risk is effectively born by:

A) all parties involved in the funds transfer. 
 
B) the receiving party.
 
C) the Federal Reserve. 
 
D) the paying party. 

nayizhenfeng

The correct answer is C

Because the Fed allows banks to run daylight overdrafts on their reserve accounts, the Fed bears the credit risk of bank failures until end-of-day settlement occurs.

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3、“Daylight overdraft risk” arises from:

A) the existence of private funds transfer systems such as CHIPS. 
 
B) the inability of banks to avoid negative inter-day balances in the reserve accounts with the Federal Reserve Bank. 
 
C) banks being allowed to have negative intra-day balances with the Federal Reserve Bank and the Federal Reserve Bank guaranteeing payment for every wire transfer. 
 
D) large customers being allowed to have negative intra-day balances, with the banks guaranteeing payment of any wire transfers.

nayizhenfeng

The correct answer is C

Banks are allowed to have negative intra-day balances in their accounts with the Federal Reserve Bank. The Federal Reserve Bank guarantees the payment of every wire transfer and could potentially be forced to cover wires that banks could not support in their closing day balances.