Morgan Stanley 2014 Annual Report Download - page 119

On a fully phased-in basis, the Company will be subject to the following minimum capital ratios under U.S.
Basel III: Common Equity Tier 1 capital ratio of 4.5%; Tier 1 capital ratio of 6.0%; Total capital ratio of 8.0%;
Tier 1 leverage ratio of 4.0%; and supplementary leverage ratio of 3.0%. In addition, on a fully phased-in basis
by 2019, the Company will be subject to a greater than 2.5% Common Equity Tier 1 capital conservation buffer
and, if deployed by banking regulators, up to a 2.5% Common Equity Tier 1 countercyclical buffer. The capital
conservation buffer and countercyclical capital buffer, if any, apply over each of the Company’s Common Equity
Tier 1, Tier 1 and Total risk-based capital ratios. Failure to maintain such buffers will result in restrictions on the
Company’s ability to make capital distributions, including the payment of dividends and the repurchase of stock
and to pay discretionary bonuses to executive officers. In addition, in December 2014, the Federal Reserve issued
a proposed rule that would impose a risk-based capital surcharge on U.S. bank holding companies that are
identified as G-SIBs. See “G-SIB Capital Surcharge” herein. Beginning in 2018, the Company will also be
subject to enhanced supplementary leverage ratio standards (see “Supplementary Leverage Ratio” herein).
Capital Plans and Stress Tests.
Pursuant to the Dodd-Frank Act, the Federal Reserve has adopted capital planning and stress test requirements
for large bank holding companies, including the Company, which form part of the Federal Reserve’s annual
Comprehensive Capital Analysis and Review (“CCAR”) framework. Under the Federal Reserve’s capital plan
rule, the Company must submit an annual capital plan to the Federal Reserve, taking into account the results of
separate stress tests designed by the Company and the Federal Reserve, so that the Federal Reserve may assess
the Company’s systems and processes that incorporate forward-looking projections of revenues and losses to
monitor and maintain its internal capital adequacy. The capital plan rule requires that such companies receive no
objection from the Federal Reserve before making a capital distribution. In addition, even with an approved
capital plan, a large bank holding company must seek the approval of the Federal Reserve before making a
capital distribution if, among other reasons, it would not meet its regulatory capital requirements after making the
proposed capital distribution. In addition, the Federal Reserve’s final rule on stress testing under the Dodd-Frank
Act requires the Company to conduct semi-annual company-run stress tests. The rule also subjects the Company
to an annual supervisory stress test conducted by the Federal Reserve. The Company received no objection to its
2014 capital plan (see “Capital Management” herein). The Company expects that, on March 11, 2015, the
Federal Reserve will provide its response to the Company’s 2015 capital plan, which was submitted to the
Federal Reserve on January 5, 2015. On January 5, 2015, the Company submitted the results of its semi-annual
stress test to the Federal Reserve. On March 5, 2015, the Federal Reserve will publish summary results of the
supervisory stress tests of each large bank holding company, including the Company. In addition, the Company is
required to disclose a summary of the results of its company-run stress tests within 15 days of the date the
Federal Reserve discloses the results of the supervisory stress test.
In February 2014, the Federal Reserve issued a final rule specifying how large bank holding companies,
including the Company, must incorporate U.S. Basel III into their capital plans and Dodd-Frank Act stress tests
beginning with the October 1, 2014 cycle. Among other things, the final rule requires a large bank holding
company to project its Tier 1 Common capital ratio using the methodology of U.S. Basel I as supplemented by
Basel 2.5 and its Common Equity Tier 1 ratio using U.S. Basel III Standardized Approach after giving effect to
transition provisions. The final rule also requires Advanced Approach banking organizations that have exited
from the parallel run, including the Company, to incorporate the Advanced Approach into their capital planning
and company-run stress tests beginning with the October 1, 2015 cycle. In October 2014, the Federal Reserve
revised its capital planning and stress testing regulations to, among other things, generally limit a large bank
holding company’s ability to make capital distributions (other than scheduled payments on Additional Tier 1 and
Tier 2 capital instruments) if the bank holding company’s net capital issuances are less than the amount indicated
in its capital plan, and to shift the start and submission dates of the capital plan and stress test cycles beginning
with the 2016 cycle.
The Dodd-Frank Act also requires each of the Company’s U.S. Subsidiary Banks to conduct an annual stress test.
MSBNA submitted its 2015 annual company-run stress tests to the OCC on January 5, 2015 and will publish a
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