Morgan Stanley 2009 Annual Report Download - page 81

Economic Capital.
The Company’s economic capital framework estimates the amount of equity capital required to support the
businesses over a wide range of market environments while simultaneously satisfying regulatory, rating agency
and investor requirements. The framework continued to evolve over time in response to changes in the business
and regulatory environment and to incorporate enhancements in modeling techniques.
Economic capital is assigned to each business segment and sub-allocated to product lines. Each business segment
is capitalized as if it were an independent operating entity. This process is intended to align equity capital with
the risks in each business in order to allow senior management to evaluate returns on a risk-adjusted basis (such
as return on equity and shareholder value added).
Economic capital is based on regulatory capital plus additional capital for stress losses. The Company assesses
stress loss capital across various dimensions of market, credit, business and operational risks. Economic capital
requirements are met by regulatory Tier 1 capital. For a further discussion of the Company’s Tier 1 capital, see
“Regulatory Requirements” herein. The difference between the Company’s Tier 1 capital and aggregate
economic capital requirements denotes the Company’s unallocated capital position.
The Company uses economic capital to allocate Tier 1 capital and common equity to its business segments. The
following table presents the Company’s allocated average Tier 1 capital and average common equity for 2009
and fiscal 2008:
2009 Fiscal 2008
Average
Tier 1
Capital
Average
Common
Equity
Average
Tier 1
Capital
Average
Common
Equity
(dollars in billions)
Institutional Securities ......................................... $23.6 $18.1 $25.8 $22.9
Global Wealth Management Group .............................. 2.7 4.6 1.7 1.5
Asset Management ........................................... 2.5 2.2 3.0 3.0
Unallocated capital ........................................... 18.3 8.1 6.6 4.9
Total from continuing operations ............................ 47.1 33.0 37.1 32.3
Discontinued operations ....................................... 0.7 1.1 0.8 1.3
Total .................................................. $47.8 $34.1 $37.9 $33.6
Average Tier 1 capital and common equity allocated to the Institutional Securities business segment decreased
compared with fiscal 2008 driven by reductions in market and operational risk exposures. In addition, common
equity allocated to the Institutional Securities business segment further decreased due to tightening of the
Company’s own credit spreads. Average Tier 1 capital and common equity allocated to the Global Wealth
Management Group business segment increased from fiscal 2008 driven by higher operational risk associated
with the addition of Smith Barney’s business activities in connection with the MSSB transaction. Average
common equity increases were also driven by the MSSB-related goodwill and intangibles. Average Tier 1 capital
and common equity allocated to Asset Management decreased from fiscal 2008, primarily due to sales of the
segment’s investments.
The Company generally uses available unallocated capital for prospective regulatory requirements, organic
growth, acquisitions and other capital needs while maintaining adequate capital ratios. For a discussion of risk-
based capital ratios, see “Regulatory Requirements” herein.
Liquidity and Funding Management Policies.
The primary goal of the Company’s liquidity management and funding activities is to ensure adequate funding
over a wide range of market environments. Given the mix of the Company’s business activities, funding
requirements are fulfilled through a diversified range of secured and unsecured financing.
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