Morgan Stanley 2014 Annual Report Download - page 121

leverage ratio estimate is a non-GAAP financial measure that the Company considers to be a useful measure for
evaluating compliance with new regulatory capital requirements that have not yet become effective. The
Company expects to achieve a supplementary leverage ratio of greater than 5% in 2015 through accretion of
capital and other actions which may include derivative portfolio compression and other balance sheet
optimization.
The Company’s estimated supplementary leverage ratio is based upon its current interpretation and expectations
regarding the implementation of applicable regulations and remains subject to ongoing review and revision. The
Company’s expectations are subject to risks and uncertainties that may cause actual results to differ materially
from estimates based on these regulations. Further, these expectations should not be taken as projections of what
the Company’s supplemental leverage ratios or earnings, assets or exposures will actually be at future dates. For
a discussion of risks and uncertainties that may affect the future results of the Company, see “Risk Factors” in
Part I, Item 1A.
Required Capital.
The Company’s required capital (“Required Capital”) estimation is based on the Required Capital framework, an
internal capital adequacy measure. This framework is a risk-based and leverage use-of-capital measure, which is
compared with the Company’s regulatory capital to ensure that the Company maintains an amount of going
concern capital after absorbing potential losses from extreme stress events, where applicable, at a point in time.
The Company defines the difference between its regulatory capital and aggregate Required Capital as Parent
capital. Average Common Equity Tier 1 capital, aggregate Required Capital and Parent capital for 2014 were
approximately $57.6 billion, $38.4 billion and $19.2 billion, respectively. The Company generally holds Parent
capital for prospective regulatory requirements, including U.S. Basel III transitional deductions and adjustments
expected to reduce the Company’s capital through 2018. The increase in Parent capital from December 31, 2013
to December 31, 2014 was primarily driven by these transitional provisions. The Company also holds Parent
capital for organic growth, acquisitions and other capital needs.
Common Equity Tier 1 capital and common equity attribution to the business segments is based on capital usage
calculated by the Required Capital framework as well as each business segment’s relative contribution to total
Company Required Capital. Required Capital is assessed at each business segment and further attributed to
product lines. This process is intended to align capital with the risks in each business segment in order to allow
senior management to evaluate returns on a risk-adjusted basis. The Required Capital framework will evolve
over time in response to changes in the business and regulatory environment and to incorporate enhancements in
modeling techniques. The Company will continue to evaluate the framework with respect to the impact of future
regulatory requirements, as appropriate.
The following table presents the Company’s business segments’ and Parent’s average Common Equity Tier 1
capital and average common equity for 2014 and average Tier 1 Common capital and average common equity for
2013:
December 31, 2014 (U.S. Basel III) December 31, 2013 (U.S. Basel I + Basel 2.5)
Average
Common Equity
Tier 1 Capital
Average
Common
Equity
Average
Tier 1 Common
Capital
Average
Common
Equity
(dollars in billions)
Institutional Securities ............... $31.3 $32.2 $32.7 $37.9
Wealth Management ................ 5.2 11.2 4.3 13.2
Investment Management ............. 1.9 2.9 1.7 2.8
Parent capital ...................... 19.2 19.0 9.0 8.0
Total ......................... $57.6 $65.3 $47.7 $61.9
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