Morgan Stanley 2014 Annual Report Download - page 120

summary of its stress test results between March 15 and March 31, 2015. MSPBNA will submit its annual
company-run stress tests to the OCC in March 2015, and publish the summary results between June 15 and
June 30, 2015. In June 2014, the OCC issued a proposed rule to, among other things, shift the timing of the
annual stress testing cycle that applies to the Company’s U.S. Subsidiary Banks beginning with the 2016 cycle.
G-SIB Capital Surcharge.
Although U.S. Basel III is in effect, the U.S. banking agencies and the Basel Committee have each proposed, or
are considering proposing, revisions to the regulatory capital framework that would modify the regulatory capital
standards governing the Company and the Company’s U.S. Subsidiary Banks. In December 2014, the Federal
Reserve issued a proposed rule that would impose risk-based capital surcharges on U.S. bank holding companies
that are identified as G-SIBs. Although the Federal Reserve’s proposal is based upon the Basel Committee’s
international G-SIB surcharge framework, the methodologies proposed by the Federal Reserve generally would
result in G-SIB surcharges that are higher than the levels required by the Basel Committee framework and would
directly take into account the extent of each U.S. G-SIB’s reliance on short-term wholesale funding. Under the
proposal, a bank holding company identified as a G-SIB would calculate its G-SIB surcharge under two methods.
The first would consider the G-SIB’s size, interconnectedness, cross-jurisdictional activity, substitutability and
complexity, which is generally consistent with the methodology developed by the Basel Committee. The second
method would use similar inputs, but would replace substitutability with use of short-term wholesale funding and
generally would result in higher surcharges than the Basel Committee framework. A G-SIB’s surcharge would be
the higher of the surcharges determined under the two methods. Under the proposal, the G-SIB surcharge must be
satisfied using Common Equity Tier 1 capital and would function as an extension of the capital conservation
buffer. The Federal Reserve estimates that its proposal could result in G-SIB surcharges ranging from 1.0% to
4.5% of a G-SIB’s RWAs. The surcharge proposal would be phased in between January 1, 2016 and January 1,
2019.
Supplementary Leverage Ratio.
U.S. Basel III requires the Company and the Company’s U.S. Subsidiary Banks to comply with supplementary
leverage ratio requirements, which the U.S. banking agencies increased in 2014 above standards established by
the Basel Committee. Specifically, beginning in 2018, the Company must maintain a Tier 1 supplementary
leverage capital buffer of greater than 2% in addition to the 3% minimum supplementary leverage ratio (for a
total of greater than 5%), in order to avoid limitations on capital distributions, including dividends and stock
repurchases, and discretionary bonus payments to executive officers. In addition, beginning in 2018, the
Company’s U.S. Subsidiary Banks must maintain a supplementary leverage ratio of 6% to be considered “well-
capitalized.” The denominator of the supplementary leverage ratio, as revised by the U.S. banking agencies in
2014 to conform with revised leverage standards adopted by the Basel Committee, is calculated for each
reporting quarter based on the average daily balance of consolidated on-balance sheet assets under U.S. GAAP
less certain amounts deducted from Tier 1 capital at quarter-end and the average month-end balance of certain
off-balance sheet exposures associated with derivatives (including centrally cleared derivatives and sold credit
protection), repo-style transactions and other off-balance sheet items during the calendar quarter. The enhanced
supplementary leverage ratio standards will become effective for both the Company and its U.S. Subsidiary
Banks on January 1, 2018 with quarterly public disclosure beginning on January 1, 2015.
The Company estimates its pro forma supplementary leverage ratio to be approximately 4.7% at December 31,
2014. This estimate utilizes a fully phased-in U.S. Basel III Tier 1 capital numerator and a denominator of
approximately $1.19 trillion. The denominator represents the Company’s consolidated assets under U.S. GAAP
as adjusted, among other items, by: (i) the addition of the potential future exposure for derivative contracts
(including contracts cleared for clients), off-balance sheet exposures multiplied by their respective credit
conversion factors, counterparty credit risk associated with repo-style transactions and the effective notional
amount of sold credit protection reduced by certain qualifying purchased credit protection; and (ii) the
subtraction of certain amounts deducted from Tier 1 capital under U.S. Basel III. The pro forma supplementary
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