Morgan Stanley 2014 Annual Report Download - page 114

Equity Tier 1 capital and 80% from Additional Tier 1 capital. Over the next several years, this deduction from Common Equity Tier 1
capital will incrementally increase and the amount deducted from Additional Tier 1 capital will correspondingly decrease, until fully
phased in by the beginning of 2018. In addition, under the Advanced Approach framework, the allowance for loan losses cannot be
included in Tier 2 capital. Instead, an Advanced Approach banking organization may include in Tier 2 capital any eligible credit reserves
that exceed its total expected credit losses to the extent that the excess reserve amount does not exceed 0.6% of its Advanced Approach
credit risk RWAs. The allowance for loan losses may continue to be included in Tier 2 capital for purposes of calculating capital ratios
under U.S. Basel I as supplemented by Basel 2.5 and under the Standardized Approach, up to 1.25% of credit risk RWAs.
(3) Beginning in 2015, the Company is required to calculate credit risk RWAs and market risk RWAs under the U.S. Basel III Standardized
Approach.
(4) Public reporting of Advanced Approach capital ratios began during the second quarter of 2014.
(5) In accordance with U.S. Basel III, adjusted average assets represent the Company’s average total on-balance sheet assets minus certain
amounts deducted from Tier 1 capital.
(6) Beginning in 2015, the Company is required to publicly disclose its supplementary leverage ratio, which will become effective as a
capital standard on January 1, 2018.
Beginning in the first quarter of 2014, the Company calculated the numerator of its risk-based capital ratios using
the amount of Common Equity Tier 1 capital, Tier 1 capital and total capital determined under U.S. Basel III,
subject to transitional arrangements. In the first quarter of 2014, the Company calculated the denominator of its
risk-based capital ratios using the existing U.S. Basel I-based rules as supplemented by Basel 2.5. Beginning in
the second quarter of 2014, the Company’s risk-based capital ratios for regulatory purposes were the lower of
each ratio calculated under U.S. Basel I as supplemented by Basel 2.5 and the Advanced Approach.
Regulatory Capital Ratios. The following table presents the Company’s regulatory capital ratios at
December 31, 2014, as well as the minimum required regulatory capital ratios applicable under U.S. Basel III in
2014. At December 31, 2014, the Company’s risk-based capital ratios (as a result of the capital floor) were based
on the Advanced Approach transitional rules.
At December 31, 2014
Actual Capital Ratio
Minimum Regulatory
Capital Ratio(1)
U.S. Basel III Transitional/
Advanced Approach
U.S. Basel III Transitional/
U.S. Basel I + Basel 2.5
Approach 2014
Common Equity Tier 1 capital ratio ..... 12.6% 14.7% 4.0%
Tier 1 capital ratio ................... 14.1% 16.5% 5.5%
Total capital ratio .................... 16.4% 19.4% 8.0%
Tier 1 leverage ratio(2) ............... 7.9% 7.9% 4.0%
(1) Percentages show minimum capital ratios for calendar year 2014 under U.S. Basel III transitional provisions.
(2) Tier 1 leverage ratio is defined as the ratio of Tier 1 capital to average total on-balance sheet assets minus certain amounts deducted from
Tier 1 capital in accordance with U.S. Basel III rules.
Effective January 1, 2015, for the Company to remain a financial holding company, its U.S. Subsidiary Banks
must qualify as “well-capitalized” under the higher capital requirements of U.S. Basel III by maintaining a total
risk-based capital ratio (total capital to risk-weighted assets) of at least 10%, a Tier 1 risk-based capital ratio of at
least 8%, a Common Equity Tier 1 risk-based capital ratio of at least 6.5%, and a Tier 1 leverage ratio (Tier 1
capital to average total consolidated assets) of at least 5%. The Federal Reserve has not yet revised the “well-
capitalized” standard for financial holding companies to reflect the higher capital standards in U.S. Basel III.
Assuming that the Federal Reserve would apply the same or very similar well-capitalized standards to financial
holding companies, each of the Company’s risk-based capital ratios and Tier 1 leverage ratio at December 31,
2014 would have exceeded the revised well-capitalized standard. The Federal Reserve may require the Company
and its peer financial holding companies to maintain risk and leverage-based capital ratios substantially in excess
of mandated minimum levels, depending upon general economic conditions and a financial holding company’s
particular condition, risk profile and growth plans.
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