Morgan Stanley 2010 Annual Report Download - page 214

MORGAN STANLEY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Tourmaline’s funds pending the resolution of these issues and is seeking a judgment from the court resolving
them. On January 11, 2011, the court conducted a bench trial, but has not yet issued its ruling. Based on currently
available information, at December 31, 2010, the Company believes it is reasonably possible it could incur a loss
of approximately $273 million, resulting from the write-off of receivables from Tourmaline.
14. Regulatory Requirements.
Morgan Stanley. The Company is a financial holding company under the Bank Holding Company Act of 1956
and is subject to the regulation and oversight of the Board of Governors of the Federal Reserve System (the
“Federal Reserve”). The Federal Reserve establishes capital requirements for the Company, including well-
capitalized standards, and evaluates the Company’s compliance with such capital requirements. The Office of the
Comptroller of the Currency establishes similar capital requirements and standards for the Company’s national
bank subsidiaries.
The Company calculates its capital ratios and Risk Weighted Assets (“RWA”) in accordance with the capital
adequacy standards for financial holding companies adopted by the Federal Reserve. These standards are based
upon a framework described in the “International Convergence of Capital Measurement and Capital Standards,”
July 1988, as amended, also referred to as Basel I. In December 2007, the U.S. banking regulators published final
U.S. implementing regulation incorporating the Basel II Accord, which requires internationally active banking
organizations, as well as certain of their U.S. bank subsidiaries, to implement Basel II standards over the next
several years. The timeline set out in December 2007 for the implementation of Basel II in the U.S. may be
impacted by the developments concerning Basel III described below. Starting July 2010, the Company has been
reporting on a parallel basis under the current regulatory capital regime (Basel I), and Basel II followed by a
three-year transitional period.
In December 2009, the Basel Committee of Banking Supervision (the “Basel Committee”) released proposals on
risk-based capital, leverage and liquidity standards, known as Basel III. The proposal described new standards to
raise the quality of capital and strengthen counterparty credit risk capital requirements; introduced a leverage
ratio as a supplemental measure to the risk-based ratio and introduced a countercyclical buffer. The Basel III
proposals complement an earlier proposal for revisions to Market Risk Framework that increases capital
requirements for securitizations within the trading book. The Basel Committee published final rules in December
2010, which were ratified at the G-20 Leaders Summit in November 2010. The U.S. regulators will require
implementation of Basel III subject to an extended phase-in period. The Basel Committee is also working with
the Financial Stability Board to develop additional requirements for systemically important banks, which could
include capital surcharges.
At December 31, 2010, the Company was in compliance with Basel I capital requirements with ratios of Tier 1
capital to RWAs of 16.1% and total capital to RWAs of 16.5% (6% and 10% being well-capitalized for
regulatory purposes, respectively). In addition, financial holding companies are also subject to a Tier 1 leverage
ratio as defined by the Federal Reserve. The Company calculated its Tier 1 leverage ratio as Tier 1 capital
divided by adjusted average total assets (which reflects adjustments for disallowed goodwill, certain intangible
assets, deferred tax assets and financial and non-financial equity investments). The adjusted average total assets
are derived using weekly balances for the year.
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