1.0 IntroductionIn general, risk can be define as the possibility of suffering from harm or loss or even in danger. Risk also a factor, thing, element, or course involving uncertain danger or a hazard. While in the financial risk, risk is defined as risk that can give bad effect, harm, and problems to the financial environment such as to the financial market, financial institutions, business, economics and other institutions that involved with financing activities. These risk should be look very series as it is involving our country economics.Financial risk can be divided by two categories that are, systematic risk and unsystematic risk. Systematic risk is the risk inherent to the entire market or an entire market segment, where it is also known as diversifiable risk, volatility or market risk affects the overall market, and it is not just a particular stock or industry. Systematic risk is both unpredictable and impossible to completely avoid. It cannot be reduced through diversification, but only through hedging or by using the right assets allocation strategy. While, Unsystematic risk is the risk that company or industrys specific danger that is inherent in each investment. It is also known as non-systematic risk, specific risk, diversifiable risk or residual risk, which can be reduced through diversification. There are many types of risk involving the financial environment such as, interest rate risk, market risk, credit risk, liquidity risk, foreign exchange risk, sovereign risk, technological risk & operation risk and insolvency risk. In this paper, we will show how BNM will control or overcome this risk with suitable methods.

1.1 History of Financial Crisis in MalaysiaFinancial Crisis in 1998In the 1980s and 1990s, many developing countries fell into an external debt-led financial crisis. In the first generation of these crises, the inability to service debt was due to a combination of factors, including depression in commodity export prices, increase in the price of oil imports, a rapid increase in foreign loans and the inability to utilise these loans productively or appropriately.In the 1990s, several more countries (including the more economically advanced of the developing countries) experienced financial crises. A main cause of many of these second-generation crises was the inappropriate design and implementation of capital account liberalisation. Some countries that had hitherto succeeded in attaining high economic growth rates and in using export expansion for this growth, faced difficulties in managing rapid liberalisation in financial flows. In 1997 several East Asian countries began to experience serious financial problems. Due to financial deregulation, they had received large inflows of capital, including bank loans denominated in foreign currencies and portfolio capital especially foreign purchase of equity in the local stock exchanges. A significant part of the foreign loans was not channelled to activities that yielded revenue in foreign exchange, and thus a mismatch occurred, at least in the short term, so that pressures built up on foreign reserves.In Malaysia, the ringgit came under speculative attack and also declined significantly. However, the country had not liberalised its capital account to the same extent as the other three countries, at least in one important respect the local companies were allowed to obtain foreign loans only with Central Bank permission, which would be given only if and to the extent that the borrower could show that the loan would be used for activities that would yield revenue in foreign exchange that could be used for loan servicing. Partly as a result of this restriction, Malaysias debt situation remained manageable, although the situation was also fragile, as there was also a possibility of debt-servicing difficulty if the ringgit depreciated even more sharply, or if there was a rapid enough outflow of capital.The currency depreciation had several negative effects. Firstly, it increased the burden of external debt servicing. At the start of the crisis, the countrys external debt servicing position was rather comfortable. However, the depreciation increased the debt burden in that the debtors had to pay more in local currency amount; several large Malaysian companies that had taken foreign loans made large losses.

Secondly, the continuous changes in the exchange rate were very destabilising as traders and enterprises were unable to conduct business in a predictable way as the prices of imports and exports (in local currency terms) kept changing. Thirdly, the prospect of continuous decline in the ringgits rate contributed to a sharp fall in the value of shares in the stock market and the inflow of foreign portfolio funds in the stock market was reversed. One positive effect was that those involved in exports (including producers of commodities such as palm oil and petroleum) obtained higher incomes. Due to the serious adverse effects of currency depreciation, stabilising the ringgit became perhaps the over-riding concern of the policy makers during the crisis.Another major effect on the economy was the very steep decline in the value of shares in the stock market. The Kuala Lumpur Stock Exchange (KLSE) index fell from a high of over 1,000 in July 1997 to a low point of 262 in September 1998. This affected the credit-worthiness of many companies and individuals that had used the value of their shares as collateral for loans and it thus also affected the banks. The fall also had a negative effect on consumer sentiment and spending as investors saw their wealth dwindling. The third major concern was the prospect of large capital outflows as the confidence of foreigners and residents in the economy fell.

Financial Crisis in 2008As a highly open economy, Malaysia was, however, not insulated from the global economic downturn. The deterioration in global economic conditions and the major correction in commodity prices in the second half of 2008 saw Malaysias GDP moderate to 0.1% in the final quarter of 2008. The domestic economy experienced the full impact of the global recession in the first quarter of 2009, declining by 6.2%. The concerted and pre-emptive measures taken by the Bank Negara Malaysia (BNM), through the accelerated implementation of fiscal stimulus measures, supported by the easing of monetary policy and the introduction of comprehensive measures to sustain access to financing and mitigate any impact of the heightened risk aversion among banks contributed towards stabilising the domestic economy in the second quarter and its subsequent recovery in the second half of the year. The economy resumed its growth momentum in the fourth quarter, growing by 4.4%. This resulted in the economy contracting by only 1.7% in 2009. Continued expansion in domestic demand and increased external demand led to the strong growth of 10.1% in the first quarter of 2010.The global financial crisis of 2008-2009, with its epicentre in the United States, has brought enormous ramifications for the world economy. What started as an asset bubble caused by an array of financial derivatives that drove the sub-prime mortgage boom, exploded into a housing and banking crisis with a cascading effect on consumer and investment demand. From a housing crisis, it quickly grew into a banking crisis with the investment and merchant banks first absorbing the impact before it spread to the commercial banks. With the United States economy contracting sharply, it sent ripples across export-dependent Asian economies, which began to face a contraction as a consequence. Hence, although the Malaysian economy was insulated from the direct effects of financial exposure because the new derivatives were not allowed into the country, the global financial crisis has cast doubt on the Governments plans to achieve vision 2020 due to a collapse in exports and a slowdown in foreign direct investment.

1.2 The Effects of Poor Management of Risk in Financial Environment to the MalaysiaFirst of all risk can be harmful to our country where it can leads to many problems to the economics. Poor management of risk in the national currency can leads to unstable value of ringgit Malaysia currency. This is important where, if the currency is not stable or the value is falling down such as the problems faces by Indonesia, where their currency value is very low. This will affect the price of imports between countries. Such as when our country still need to import certain of goods from other country such as foods, because of the problems of sarcasm or limited resources. Thus, the price of imports goods increases. Then, when our currency becomes unstable, it will cause the investor from another country to pull back their investment and decide not to invest in our country.Other than that, poor management in financial systems also can cause the economics to become unstable or occurs problems in the economics. This can effects the businesses in the country. When business in the country is not goods, this will affects their rate of productions in goods and services. Thus affects our country (GDP) or gross domestic productions. GDP will shows our country performance in a year. This is important to shows that our country development and rate of productions.Then, when there is poor management, there will lead to the speculations or predicting on the problems of deflations to our country in the future. From the previous experiences that faced by our country and others country in 1997 to 1998. At that time, There occurs the currency value of many countries becomes unstable which force our Prime Minister, Tun. Dr Mahathir Mohammad to peg the currency value of ringgit Malaysia. Furthermore at the time, the inflations problems happen and also the unemployment occurs. In financial environments also, poor managements in banking institutions is a bad effects where, when there is problems in banking services such as technological and operational risk, this will effects the services of the banks. Which, basically the society trust the banks institutions on safe keeping their properties and moneys. If the services of the banks is not trusted then, people will no longer keep their money at the banks. This will cause the economics activities to slow down, where banks as the companies which activate the economics is no longer in goods performances.Investment also one of the main source of economic sources or which generating our economics. However when other country looks at our economy as unstable, then their trust on getting profits at our country is reduced. Then they will pull out their investment in which this will leads to decreasing in monetary economics thus the developments activities in our country.2.0 Types of RisksInterest Rate RiskInterest rate risk can be defined as a risk that investments value will change according to the level of interest rate, whether it spread between two rates that are in the shape of investment curve or in any other interest rate relationship. The changes can affect securities inversely but it can be reduced by diversifying or hedging the investment.This risk occurs because of the prices and reinvestment income characteristics of long term assets react differently to changes in market than the prices and interest expense characteristics of short term deposits. Furthermore, in process of asset transformation that are buy primary securities and issue secondary securities or liabilities part of the function is mismatching of maturities of assets and liabilities exposing financial intermediaries to interest rate risk. The primary securities purchased by the financing institutions often have maturity and liquidity characteristics that are differently from the secondary securities issued by financial institutions. As an example, bank buys medium to long term bonds and makes medium term loans with funds raised by issuing short term deposits.In this risk, it divided into two that are refinancing risk and reinvestment risk. Refinancing risk is an uncertainty of the earning rate on the deployment of assets that have matured. It occurs when financial intermediary holds assets with maturities that are less than the maturities of its liabilities. For example, if a bank has a 10 year fixed rate loan funded by two year time deposit, the bank will bears a risk of borrowing new deposits or refinancing at a higher rate in two years. Hence, the interest rate increases would reduce net interest income. The bank will get benefit if the rates fall as the cost of renewing the deposits would decrease, while the earning rate on the assets would not change. In that case, net interest income would increase.For reinvestment risk, it is the uncertainty of the earning rate on the redeployment of assets that have matured. This can happened when financial institutions holds assets with maturities that are less than the maturities than the maturities of its liabilities. For example, a bank has two year loan funded by 10 year fixed rate time deposit, the bank faces the risk that it might be forced to lend at lower rates after two years. Besides, this reinvestment risk may cause the realized yields on the assets to differ from the a priori expected yields.

Market riskDefinition of market risk is the possibility for an investor to experience losses due to the factors that affect the total performance of the financial markets. In addition, market risk also called systematic risk, it cannot be eliminated through diversification even it can be hedged. This risk is a major natural disaster that will cause a decline in income from deposit taking and lending matched by increased reliance on income trading. Market risk also can be defined as a risk that the value of an investment will decrease due to the moves in market factors. It is also closely related to the interest rate and foreign exchange risk. The fluctuation frequently refers to the standard deviation of the change in value of financial instrument with a specific time. It is also often been used to quantity risk of the instrument over the period of time. The volatility is typically expressed in annualized terms, it may either be an absolute number or a fraction of the initial value.Liquidity RiskLiquidity risk is the uncertainty that financial intermediary may need to obtain large amounts of cash to meet the withdrawals of depositors or other liability claimants. In normal economic activity, depository financial intermediaries meet cash withdrawals by accepting new deposits and borrowing funds in the short term money markets. While in harsh liquidity crises, the financial intermediary may need to sell assets at significant losses in order to generate cash quickly.This risk occurs when depositors demand immediate cash or liability and holders of off balance sheet exercises right to borrow. Interest rate changes can also lead to liquidity problems where high interest rates may cause liquidity withdrawals as depositors seek higher returns elsewhere.

Credit riskCredit risk can be defined as a risk that loss of principal of a financial reward stemming from a borrowers failure to repay a loan or otherwise meet a contractual obligation. This risk arises whenever a borrower is expecting for assuming this risk by the way of interest payments from the borrower or the issuer of a debt obligation.It is also can be defined as a risk of non-payment of borrowing provided to a borrower on maturity date and arises due to promised cash flows on the financial claims that are fixed coupon bonds and bank loans held by Financial Intermediaries will not be paid in full. When no default, the financial intermediaries earn coupon on the bonds and interest on the loans. On the other hand, when it is default, the financial intermediaries earns zero interest and may lost part or all of the principal lent. For example, life insurance companies and depository institutions generally must wait a longer time for returns to be realized than money market mutual funds and property casualty insurance companies.In this credit risk is divided into two that are firm-specific credit risk and systematic credit risk. Firm-specific credit risk more to the likelihood that specific individual assets may deteriorate in quality. Systematic credit risk involves macroeconomic factors that may increase the default risk of all firms in the economy. Besides, portfolio theory in finance has shown that firm specific credit risk can be diversified away if a portfolio of well diversified stocks is held. If financial intermediaries holds well diversified assets, the financial intermediaries will face only systematic credit risk that will be affected by the general condition of the economy. The risks specific to anyone customer will not be a significant portion of the financial intermediaries overall credit risk. Sovereign riskThis risk is also known as the Country risk. This risk refers to the risk of the foreign Central Bank will change its foreign exchange regulations, where they significantly reducing or completely nulling the value of foreign exchange contract. Other than that, when a foreign country is not willing or not able to repay a loan, then the financial intermediaries can be the alternatives. Other than that, these risks also occur from the repayments from foreign borrowers interrupted because of foreign government. Then, the leverage available to ensures or increase repayment probabilities is control over the future supply of loans or funds to the country concerned. Furthermore, there is a result of exposure to foreign government in which may impose restrictions on repayments to foreigner.

Foreign Exchange RiskThis risk refers to the risks of investments value changing an also import and export activities due to the changes in currency exchange rates. Currency such as United State s currency(US dollar), European s currency( Euro), UKs currency(pound sterling), Thailands currency (baht) and also Malaysians currency(ringgit Malaysia). Foreign exchange risks is also the risk that investor will have to close out in a long or short position in a foreign currency at a loss due to the worst movement in exchange rates. It is also known as currency risk or exchange rate risk.When dealings with foreign currency, we exposed to a certain risk, where this risk usually affects businesses that doing export and/or import activities. Other than that, it is also affect the investor who making an international investments. For examples, if money must be converted to another currency to make certain investment, then any changes in the currency exchange rates will cause the investments value to either decreases or increases when the investment is sold or converted back into the original currency. Furthermore, this risk can also occurred when the businesses does not really aware on the other countries background, where the targeted countrys currency is unstable. The characteristic of exchange rates that it can go both up and down can tempting the investor to gamble. This is extremely risky, where it could end with a significant financial loss.Insolvency riskThis risk is refer to the risk of insufficient capital to offset sudden decline in value of assets. It is also known as bankruptcy risk. The original cause of these risk may be excessive interest rate, market, credit, off-balance-sheet, technological, sovereign, and liquidity risks. Insolvency can also be referred to the situations when an individual or organization can no longer meet its financial obligations with its lender or lenders as debts is higher than assets. Insolvency also can lead to insolvency proceedings, where, legal action will be taken against the insolvency entity. Thus, the assets can be liquidated to pay off the outstanding debts. Further explanations, before a person or the company gets involved in the insolvency proceedings, they should be involved in more informal arrangements with creditors, such as in making an alternative payment arrangements. Insolvency risk can occur from poor cash management, a reduction in the forecasted cash inflow or from an increase in cash expenses.

Technological & Operational riskTechnology risk occurs when investment in new technologies does not generate the cost savings expected in the expansion in financial services. In the terms of economic of scale, it is occurred when the averages cost of the productions is decreases with the expansion in the amount of financial services provided. While, economics of scope occurs when the Financial Institutions is able to lower the cost of the productions of the new product while the inputs is similar to those used for other products. Furthermore, technology risk also refers to the unpredicted environment of the implementation of new technology in the operations of the financial institution. While, Operational risk refers to the failure of the back room support operations that is needed to maintain the smooth functioning of the operations of financial institutions, which include the settlement, clearing and other transaction-related activity.

3.0 How Bank Negara Malaysia (BNM) control the risk using monetary policies under Qualitative and Quantitative or other methods?The primary objective of monetary policy is to regulate the nations supply of money and credit. BNM will use this to control the level of banks reserves and it can be used to reduce risk in financial environment. BNM used interest rate regulation to reduce the interest rate risk in financial environment. BNM has influence on bank liquidity and the availability and cost of bank credit through the regulation of interest rates charged on bank loans as well as the rates of interest offered for bank deposits. BNM will setting up the minimum lending rates for banks and ceiling on interest rates that may be offered by banks for deposits accounts. This will avoid the banks from being bankrupt. In that case, interest rate risk can be control by implemented this measures to the banks itself.Foreign exchange risk can be minimized by using an appropriate hedging technique. The most direct method of hedging this risk is a forward contract, which enables the exporter to sell a set amount of foreign currency at a pre-agreed exchange rate with a delivery date from three days to one year into the future. Accordingly, when using forward contracts to hedge this risk, exporters are advised to pick forward delivery dates conservatively. If the foreign currency is collected sooner, the exporter can hold on to it until the delivery date or can swap the old foreign exchange contract for a new one with a new delivery date at a minimal cost. Note that there are no fees or charges for forward contracts since the lender hopes to make a spread by buying at one price and selling to someone else at a higher price. Furthermore, The Central Bank issues licenses or operating permit to deposit Money banks and also control the operation of the banking system. From this advantage, The Bank Negara Malaysia(BNM) can persuades banks in Malaysia to follow certain paths such as credit control or expansion, increased savings mobilization and promotions of exports through financial support, which otherwise they may not do on the basis of their risk and return assessment.In overcome or reduced the financial risks, BNM can use this instruments in order to overcome the financial risks. Under these method or instrument, BNM have the power in controlling the operations in the banking system within the country.

Foreign exchange risk is basically occurs when the exchange rates suddenly changing either going up or down. This is due to some factors which are, the foreign countrys background, such as the economic conditions on the particular country. Such as China, where their economic conditions is not really stable where their fluctuations of currency is not predictable which can be extremely risky especially for the investor or big company in our country which included the banks institutions. Thus, to overcome or reduce these risks, BNM can controls the operation of the banking system by persuade or advising the bank in Malaysia to not dealing with the country which have very unstable economics Sovereign Risk/ Country risk. BNM can also advise the investor or import and/or export company to do precautions on these risks.BNM also used value at risk to monitor and control market risk. The board provides a strategic, long term asset allocation study, usually based on mean-variance portfolio optimization, also taking into account liabilities. This study determines the amounts to be invested in various asset classes that are domestic stocks, domestic bonds, foreign stocks, foreign bonds, and perhaps additional classes such as emerging markets, real estate, and venture capital. The fund may delegate the actual management of funds to a stable of outside managers, which is periodically reviewed for specific guidelines defining the universe of assets they can invest in, with some additional restrictions such as duration, maximum deviations from equity sector weights, or maximum amounts of foreign currency to hedge or cross-hedge. Typically, risk is only measured ex-post, after the facts from historical data.Liquidity risk can be control by assesses the liquidity crisis. It can be done by assessing the adequacy of its short-term liquidity to meet crisis situations such as significant deposit outflows. In assessing the impact on the licensed institutions funding and cash flow projections, licensed institutions may adopt behavioural assumptions for borrowers and depositors such as increase in depositor withdrawal rate. Furthermore, credit tightening also can control this risk. It also can be done by stressing the impact of credit and counterparty lines tightening and estimate and anticipate alternative funding costs and sources in a difficult market environment due to the downgraded of licensed institutions rating. Then determine how it would affect the current business and the pricing and competitiveness of future business. This also can be minimized with speed and time period by estimate the speed and duration of the extreme market moves and how well the portfolio can withstand it.

In credit risk, BNM will monitoring and reviewing banks. The process of evaluating and reviewing credit exposures regularly is fundamental to measuring and reporting exposures accurately. Banking institutions need to develop and implement comprehensive procedures and information systems to monitor the condition of individual credits and related single borrowers across the banking institutions various portfolios. Reviews of individual credits must be performed at least once a year. However, problem credits and credits where there are indications of deterioration in credit quality should be reviewed at more frequent intervals. This risk also can be control by using selective credit control. As credit risk refers to the risk of loss of principle or loss of a financial resources that comes from borrowers failure to repay the loan back, or otherwise the borrower will meet a contractual obligations. Then, BNM can used the selected credit control method or instrument to limits or to controls the limit of credits. Where, BNM limit the amounts of available borrowing, so that the amount of borrowing is lower and the interest rates is also lower, in which to prevent the problems of unable or fail to repay the loan. In that case, BNM will know how to control this risk by doing this method. Statutory reserves requirements (SRR) can be used to control the insolvency risk. As this risk refer to the risk that a company or a banks have more debts or liabilities compared to the assets, where the problem is when the companys equity or capital cannot cover the loss or debts in which this problem can leads to bankruptcy. In order to overcome this risk, Bank Negara Malaysia (BNM) can used statutory reserve requirements instruments, where before the situations happen, BNM should increase the statutory reserve requirements for the banks as when the SRR rates increased, it will avoid the problem as the company or banks will have more equity to cover their debts.

4.0 ConclusionThis process is a long term cycle and its importance should not be missed at any time. All steps need be followed, risk identification not being enough for saving an organization from disappearing from the market. Risk identification should be done with better care, and all risks must be recognized and treated carefully. The evaluation of potential threats, vulnerabilities and possible damage is very important. After this valuation is done, necessary controls should be implemented in terms of cost effectiveness and the level of risk reduced by the implementation. To identify the most appropriate controls a cost analysis has to be done. Its results help managers implement the most efficient controls that bring the greatest benefit to the organization.Risk management helps them to be better control the business practices and improve the business process. If the results of risk analysis are well understood and the right measures are implemented, the organization not only that will not disappear from the market, but will grow and more easily obtain the targeted results.

5.0 ReferencesJoyce, J. (2013).The IMF and global financial crises: Phoenix rising?New York: Cambridge University Press.Matz, L. (2007).Liquidity risk measurement and management: A practitioner's guide to global best practices. Place of publication not identified: John Wiley & Sons (Asia) Pte.A.GHANI, R. (2011). MONEY AND FOREIGN EXCHANGE MARKET. InThe development of Malaysian financial institutions. Shah Alam: University Publication Centre, Universiti Teknologi Mara.C.Hull, J. (2007).Risk management and financial institutions. Upper Saddle River, NJ: Pearson Prentice Hall.Mishkin, F., & Eakins, S. (2009). Risk Management in Financial Institutions. InFinancial markets and institutions(6th ed.). Boston: Pearson Prentice Hall.

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