Morgan Stanley 2015 Annual Report Download - page 114

• posting margin and/or collateral to clearinghouses, clearing agencies, exchanges, banks, securities firms and other
financial counterparties;
• placing funds on deposit at other financial institutions to support the Company’s clearing and settlement obligations;
and
• investing or trading in securities and loan pools, whereby the value of these assets may fluctuate based on realized
or expected defaults on the underlying obligations or loans.
The Company incurs credit risk in its Wealth Management business segment, primarily through lending to individuals and
entities, including, but not limited to, the following:
• margin loans collateralized by securities;
• securities-based and other forms of secured loans; and
• single-family residential mortgage loans in conforming, non-conforming or home equity lines of credit (“HELOC”)
form, primarily to existing Wealth Management clients.
Monitoring and Control.
In order to help protect the Company from losses, the Credit Risk Management Department establishes Company-wide
practices to evaluate, monitor and control credit risk exposure at the transaction, obligor and portfolio levels. The Credit Risk
Management Department approves extensions of credit, evaluates the creditworthiness of the counterparties and borrowers
on a regular basis, and ensures that credit exposure is actively monitored and managed. The evaluation of counterparties and
borrowers includes an assessment of the probability that an obligor will default on its financial obligations and any losses
that may occur when an obligor defaults. In addition, credit risk exposure is actively managed by credit professionals and
committees within the Credit Risk Management Department and through various risk committees, whose membership
includes individuals from the Credit Risk Management Department. A comprehensive and global Credit Limits Framework
is utilized to manage credit risk levels across the Company. The Credit Limits Framework is calibrated within the Company’s
risk tolerance and includes single-name limits and portfolio concentration limits by country, industry and product type.
The Credit Risk Management Department ensures transparency of material credit risks, compliance with established limits and
escalation of risk concentrations to appropriate senior management. The Credit Risk Management Department also works
closely with the Market Risk Department and applicable business units to monitor risk exposures and to perform stress tests to
identify, analyze and control credit risk concentrations arising in the lending and trading activities. The stress tests shock market
factors (e.g., interest rates, commodity prices, credit spreads), risk parameters (e.g., default probabilities and loss given default),
recovery rates and expected losses in order to assess the impact of stresses on exposures, profit and loss, and the Company’s
capital position. Stress and scenario tests are conducted in accordance with established Company policies and procedures.
Credit Evaluation.
The evaluation of corporate and institutional counterparties and borrowers includes assigning obligor credit ratings, which
reflect an assessment of an obligor’s probability of default and loss given default. Credit evaluations typically involve the
assessment of financial statements; leverage; liquidity; capital strength; asset composition and quality; market capitalization;
access to capital markets; adequacy of collateral, if applicable; and in the case of certain loans, cash flow projections and debt
service requirements. The Credit Risk Management Department also evaluates strategy, market position, industry dynamics,
management and other factors that could affect the obligor’s risk profile. Additionally, the Credit Risk Management Department
evaluates the relative position of the Company’s exposure in the borrower’s capital structure and relative recovery prospects, as
well as adequacy of collateral (if applicable) and other structural elements of the particular transaction.
The evaluation of consumer borrowers is tailored to the specific type of lending. Margin and securities-based loans are
evaluated based on factors that include, but are not limited to, the amount of the loan, the degree of leverage and the quality,
diversification, price volatility and liquidity of the collateral. The underwriting of residential real estate loans includes, but is
not limited to, review of the obligor’s income, net worth, liquidity, collateral, loan-to-value ratio and credit bureau
information. Subsequent credit monitoring for individual loans is performed at the portfolio level, and collateral values are
monitored on an ongoing basis.
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