Morgan Stanley 2014 Annual Report Download - page 122

Resolution and Recovery Planning.
Pursuant to the Dodd-Frank Act, the Company is required to submit to the Federal Reserve and the FDIC an
annual resolution plan that describes its strategy for a rapid and orderly resolution under the U.S. Bankruptcy
Code in the event of material financial distress or failure of the Company. On August 5, 2014, the Federal
Reserve and the FDIC notified the Company and 10 other large banking organizations that certain shortcomings
in their 2013 resolution plans must be addressed in the 2015 resolution plans, which must be submitted on or
before July 1, 2015. If the Federal Reserve and the FDIC were to determine that the Company’s resolution plan is
not credible or would not facilitate an orderly resolution and the Company does not cure the plan’s deficiencies,
the Company or any of its subsidiaries may be subjected to more stringent capital, leverage, or liquidity
requirements or restrictions on its growth, activities, or operations, or the Company may be required to divest
assets or operations.
In addition, MSBNA must submit to the FDIC an annual resolution plan that describes MSBNA’s strategy for
rapid and orderly resolution in the event of the material financial distress or failure of MSBNA. On
December 17, 2014, the FDIC issued guidance regarding the resolution plans for insured depository institutions
such as MSBNA, including requirements with respect to failure scenarios and the development and analysis of a
range of realistic resolution strategies.
Further, the Company is required to submit an annual recovery plan to the Federal Reserve that outlines the steps
that management could take over time to reduce risk, increase liquidity, and conserve capital in times of
prolonged stress.
Certain of the Company’s foreign subsidiaries are also subject to resolution and recovery planning requirements
in the jurisdictions in which they operate.
Under the Dodd-Frank Act, certain financial companies, including bank holding companies such as the Company
and certain covered subsidiaries, can be subjected to resolution under an orderly liquidation authority with the
FDIC appointed as receiver with considerable powers. A financial company whose largest U.S. subsidiary is a
broker or dealer could be resolved under this authority only upon the recommendation of two-thirds of the
Federal Reserve Board and two-thirds of the SEC Commissioners, on their own initiative or at the request of the
U.S. Treasury Secretary, and in consultation with the FDIC as well as a determination by the U.S. Treasury
Secretary in consultation with the President of the U.S. In December 2013, the FDIC released its proposed single
point of entry strategy for resolution of a systemically important financial institution under the orderly liquidation
authority. The strategy involves placing the top-tier U.S. holding company in receivership and keeping its
operating subsidiaries open and out of insolvency proceedings by transferring the operating subsidiaries to a new
bridge holding company, recapitalizing the operating subsidiaries and imposing losses on the shareholders and
creditors of the holding company in receivership according to their statutory order of priority.
The Federal Reserve has indicated that it may also introduce a requirement that certain large bank holding
companies maintain a minimum amount of long-term debt at the holding company level to facilitate orderly
resolution of those firms. In November 2014, the Financial Stability Board (“FSB”) issued a policy proposal to
establish a minimum international standard for total loss-absorbing capacity (“TLAC”) for G-SIBs, in addition to
regulatory capital requirements, in order to enhance the loss-absorbing and recapitalization capacity of such
institutions in resolution. The FSB’s proposed minimum TLAC requirement would be set within the range of
16% to 20% of RWAs (excluding any applicable regulatory capital buffers, which would continue to be required
in addition to the minimum TLAC requirement) and at least twice the minimum Basel III Tier 1 leverage ratio
requirement. Regulators may also impose an additional TLAC requirement taking into account the G-SIB’s
recovery and resolution plans, systemic footprint, business model, risk profile and organizational structure. The
minimum TLAC requirement would apply to each entity to which resolution tools would be applied within a G-
SIB. The FSB has proposed eligibility criteria for liabilities to qualify as TLAC and a requirement that TLAC-
eligible liabilities be subordinated to non-TLAC-eligible liabilities. In addition, certain material entities that are
not resolution entities would be subject to an internal TLAC requirement. According to the FSB, the
conformance period for the TLAC requirement would not begin prior to January 1, 2019.
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