Morgan Stanley 2015 Annual Report Download - page 221

MORGAN STANLEY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
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, regulatory and compliance risks; or damage to physical
assets). The Company may incur operational risks across the full scope of its business activities, including revenue-
generating activities (e.g., sales and trading) and support and control groups (e.g., information technology and trade
processing). In addition, given the evolving regulatory and litigation environment across the financial services industry and
the fact that operational risk RWAs incorporate the impact of such related matters, operational risk RWAs may increase in
future periods.
On February 21, 2014, the Federal Reserve and the OCC approved the Company’s and its U.S. Bank Subsidiaries’ 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 a U.S. Basel III Advanced Approach banking organization, the Company is required to compute
risk-based capital ratios calculated 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.” Beginning on January 1, 2015, as a result of the capital floor, the Company’s
binding risk-based capital 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. In 2014, the Company’s binding risk-based capital ratios for regulatory purposes were the lower of the capital
ratios computed under the Advanced Approach under U.S. Basel III or U.S. banking regulators’ U.S. Basel I-based rules
(“U.S. Basel I”) as supplemented by rules that implemented the Basel Committee’s market risk capital framework
amendment, commonly referred to as “Basel 2.5”. The capital floor applies to the calculation of the minimum risk-based
capital requirements, the capital conservation buffer, the countercyclical capital buffer (if deployed by banking regulators),
and the global systemically important bank capital surcharge.
The methods for calculating each of the Company’s risk-based capital ratios will change through January 1, 2022 as aspects
of U.S. Basel III are phased in. 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 its capital base, asset composition, off-
balance sheet exposures or risk profile.
The Company’s Regulatory Capital and Capital Ratios.
At December 31, 2015, the Company’s risk-based capital ratios were lower under the Advanced Approach transitional rules;
however, the risk-based capital ratios for its U.S. Bank Subsidiaries were lower under the Standardized Approach transitional
rules.
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