The 'risk-taking channel of monetary policy, coined by Borio and Zhu of the BIS, refers to the impact of policy rate changes on risk perceptions or risk-tolerance. Under this channel, prolonged low levels of interest rates could lead to higher riskiness of portfolios, mispricing of assets, and looser price and non-price terms in the extension of funding. There are several hypotheses on how bank risk-taking behaviour

Source: Huey, T. T and Li, D.C.S, Measuring bank risk-taking behavior: Risk-taking Monetary policy

channel in Malaysia, Bank of International Settlement, 2016.

a) Based on the above statement, evaluate the impact of risk-taking behavior of Islamic banks when the bulk of Islamic assets of debt financing instruments are contracted under murabaha principles. (7 marks)

b) Corporate Y receives financing of $10 million with a 5-year maturity. The financing is secured by a guarantee of $10 million from Bank X (A rated). Half of the guarantee is secured with AAA Islamic treasury bills and the other half with BBB securities with a risk weight (RW) set at 50%. The bank opts to obtain largest capital relief possible from the various risk mitigants. Find the Risk Weighted Assets (RWA). (6 marks)