Morgan Stanley 2014 Annual Report Download - page 113

Approach”). As an Advanced Approach banking organization, the Company is required to compute risk-based
capital ratios 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 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.” In 2014, as a result of the capital floor, an Advanced Approach banking organization’s
binding risk-based capital ratios were the lower of its ratios computed under the Advanced Approach and U.S.
Basel I as supplemented by Basel 2.5. Beginning on January 1, 2015, the Company’s 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 as well as
the capital conservation buffer, the countercyclical capital buffer (if deployed by banking regulators), and, if
adopted, the proposed global systemically important bank (“G-SIB”) buffer.
The methods for calculating each of the Company’s risk-based capital ratios will change through January 1, 2022
as U.S. Basel III’s revisions to the numerator and denominator are phased in and as the Company calculates
RWAs using the Advanced Approach and the Standardized Approach. 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 the Company’s capital base, asset composition, off-balance sheet exposures or risk
profile.
The basis for the calculation of the Company’s U.S. Basel III capital ratios, on a transitional and fully phased-in
basis, are presented below:
Transition Period Fully Phased-In(1)
First Quarter of
2014
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(3) ........... U.S. Basel I and Basel 2.5 U.S. Basel III
Standardized Approach
Advanced Approach(4) ............. U.S. Basel III Advanced Approach
Denominator of leverage ratios ........ Tier 1 Leverage Ratio .............. Adjusted Average On-Balance Sheet Assets(5)
Supplementary Leverage Ratio(6) .... Adjusted Average
On-Balance Sheet Assets(5)
and Certain Off-Balance
Sheet Exposures
(1) By the beginning of 2018, U.S. Basel III rules defining capital (numerator of capital ratios) will be fully phased in, except for the
exclusion of non-qualifying trust preferred securities from Tier 2 capital, which will be fully phased-in as of January 1, 2022. In addition,
the Company will also be subject to a greater than 2.5% Common Equity Tier 1 capital conservation buffer, a G-SIB capital surcharge (if
adopted) and, if deployed by banking regulators, up to a 2.5% Common Equity Tier 1 countercyclical buffer, all of which will be fully
phased in by the beginning of 2019. The capital conservation buffer, the G-SIB capital surcharge and, if deployed, the countercyclical
buffer apply in addition to each of the Company’s Common Equity Tier 1, Tier 1 and Total capital ratios. The requirements for these
additional capital buffers will be phased in beginning in 2016.
(2) Beginning June 30, 2014, as a result of the Company’s and the Company’s U.S. Subsidiary Banks’ completion of the Advanced
Approach parallel run, the amount of expected credit loss that exceeds eligible credit reserves must be deducted 20% from Common
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