Morgan Stanley 2015 Annual Report Download - page 92

The Basel Committee is in the process of considering revisions to various provisions of the Basel III framework that, if
adopted by the U.S. banking agencies, could result in substantial changes to U.S. Basel III. In particular, the Basel
Committee has finalized a new methodology for calculating counterparty credit risk exposures in derivatives transactions, the
standardized approach for measuring counterparty credit risk exposures, and revised frameworks for market risk and
securitization capital requirements. In addition, the Basel Committee has proposed revisions to various regulatory capital
standards, including for credit risk, operational risk and interest rate risk in the banking book. In each case, the impact of
these revised standards on the Company and its U.S. Bank Subsidiaries is uncertain and depends on future rulemakings by
the U.S. banking agencies.
Calculation of Risk-Based Capital Ratios. On February 21, 2014, the Federal Reserve and the OCC approved the
Company’s and its U.S. Bank Subsidiaries’ respective use of the U.S. Basel III advanced internal ratings-based approach for
determining credit risk capital requirements and advanced measurement approaches for determining operational risk capital
requirements to calculate and publicly disclose their risk-based capital ratios beginning with the second quarter of 2014,
subject to the “capital floor” discussed below (the “Advanced Approach”). As a U.S. Basel III Advanced Approach banking
organization, the Company is required to compute risk-based capital ratios calculated using both (i) standardized approaches
for calculating credit risk RWAs and market risk RWAs (the “Standardized Approach”); and (ii) an advanced internal
ratings-based approach for calculating credit risk RWAs, an advanced measurement approach for calculating operational risk
RWAs, and an advanced approach for calculating market risk RWAs under U.S. Basel III.
To implement a provision of the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”),
U.S. Basel III subjects Advanced Approach banking organizations that have been approved by their regulators to exit the
parallel run, such as the Company, to a permanent “capital floor.” Beginning on January 1, 2015, as a result of the capital
floor, the Company’s binding risk-based capital ratios for regulatory purposes are the lower of the capital ratios computed
under the Advanced Approach or the Standardized Approach under U.S. Basel III. The U.S. Basel III Standardized Approach
modifies certain U.S. Basel I-based methods for calculating RWAs and prescribes new standardized risk weights for certain
types of assets and exposures. The capital floor applies to the calculation of the minimum risk-based capital requirements, the
capital conservation buffer, the countercyclical capital buffer (if deployed by banking regulators) and the global systemically
important bank (“G-SIB”) capital surcharge.
The methods for calculating each of the Company’s risk-based capital ratios will change through January 1, 2022 as aspects
of U.S. Basel III are phased in. These ongoing methodological changes may result in differences in the Company’s reported
capital ratios from one reporting period to the next that are independent of changes to its capital base, asset composition, off-
balance sheet exposures or risk profile.
Calculation of the U.S. Basel III Capital Ratios on a Transitional and Fully Phased-In Basis.
Transition Period Fully Phased In(1)
Second to Fourth
Quarter of 2014 2015 to 2017
2018 and
Onward
Regulatory Capital (Numerator
of risk-based capital and leverage ratios) .......................................... U.S. Basel III Transitional(2) U.S. Basel III
RWAs (Denominator of
risk-based capital ratios) .................Standardized Approach .................. U.S. Basel I and Basel 2.5 U.S. Basel III Standardized Approach
Advanced Approach ..................... U.S. Basel III Advanced Approach
Denominator of leverage ratios ..............Tier 1 Leverage Ratio .................... Adjusted Average On-Balance Sheet Assets(3)
Supplementary Leverage Ratio ........... Adjusted Average
On-Balance Sheet Assets(3)
and Certain Off-Balance
Sheet Exposures
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