Morgan Stanley 2015 Annual Report Download - page 101

denominator of approximately $1,095.6 billion, which takes into consideration the Tier 1 capital deductions that would be
applicable in 2018 after the phased-in period has ended. The pro forma supplementary leverage exposures and pro forma
supplementary leverage ratios, both on transitional and fully phased-in bases, are non-GAAP financial measures that the
Company considers to be useful measures for evaluating compliance with new regulatory capital requirements that have not
yet become effective. The Company’s estimates 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 supplementary leverage ratios, 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 2015 were approximately $58.2 billion, $39.0 billion and $19.2 billion,
respectively. The Company generally holds Parent capital for prospective regulatory requirements, including for example,
supplementary leverage ratio and U.S. Basel III transitional deductions and adjustments expected to reduce its capital
through 2018. 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 the Company’s total Required
Capital. Required Capital is assessed for 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.
Average Common Equity Tier 1 Capital and Average Common Equity by Business Segment and Parent Capital.
2015 2014
Average Common
Equity Tier 1 Capital(1)
Average Common
Equity(1)
Average Common
Equity Tier 1 Capital(1)
Average Common
Equity(1)
(dollars in billions)
Institutional Securities .................... $ 32.8 $ 34.6 $ 31.3 $ 32.2
Wealth Management ..................... 4.9 11.2 5.2 11.2
Investment Management .................. 1.3 2.2 1.9 2.9
Parent capital ........................... 19.2 18.9 19.2 19.0
Total ................................ $ 58.2 $ 66.9 $ 57.6 $ 65.3
(1) Amounts are calculated on a monthly basis. Average Common Equity and average Common Equity Tier 1 capital are non-GAAP financial measures that the
Company and investors consider to be useful measures to assess capital adequacy.
Resolution and Recovery Planning.
Pursuant to the Dodd-Frank Act, the Company is required to submit to the Federal Reserve and the FDIC an annual
resolution plan that describes its strategy for a rapid and orderly resolution under the U.S. Bankruptcy Code in the event of
material financial distress or failure of the Company. The Company’s preferred resolution strategy, which is set out in its
2015 resolution plan, is an SPOE strategy. On August 5, 2014, the Federal Reserve and the FDIC notified the Company and
10 other large banking organizations that certain shortcomings in their 2013 resolution plans needed to be addressed in their
2015 resolution plans. If the Federal Reserve and the FDIC both were to determine that the Company’s 2015 resolution plan
is not credible or would not facilitate an orderly resolution and the Company does not cure the plan’s deficiencies, the
Company or any of its subsidiaries may be subjected to more stringent capital, leverage, or liquidity requirements or
restrictions on its growth, activities, or operations, or, after a two-year period, the Company may be required to divest assets
or operations.
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