Morgan Stanley 2014 Annual Report Download - page 264

MORGAN STANLEY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Calculation of Risk-Based Capital Ratios. The Company is required to calculate and hold capital against
credit, market and operational risk-weighted assets (“RWAs”). RWAs reflect both on- and off-balance sheet risk
of the Company. Credit risk RWAs reflect capital charges attributable to the risk of loss arising from a borrower
or counterparty failing to meet its financial obligations. Market risk RWAs reflect capital charges attributable to
the risk of loss resulting from adverse changes in market prices and other factors. Operational risk RWAs reflect
capital charges attributable to the risk of loss resulting from inadequate or failed processes, people and systems or
from external events (e.g., fraud, theft, legal and compliance risks or damage to physical assets).
On February 21, 2014, the Federal Reserve and the OCC approved the Company’s and its U.S. Subsidiary
Banks’ 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 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 Wall Street Reform and Consumer Protection 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 and, if deployed by banking regulators,
the countercyclical capital 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 Company’s Regulatory Capital and Capital Ratios. Beginning with the second quarter of 2014, the
Company and its U.S. Subsidiary Banks’ risk-based capital ratios for regulatory purposes are the lower of each
ratio calculated using RWAs under U.S. Basel I as supplemented by Basel 2.5 and the Advanced Approach. At
December 31, 2014, the Company’s risk-based capital ratios were lower under the Advanced Approach
transitional rules; however, the risk-based capital ratios for the Company’s U.S. Subsidiary Banks were lower
under U.S. Basel I as supplemented by Basel 2.5.
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