Morgan Stanley 2015 Annual Report Download - page 93

(1) Beginning in 2018, U.S. Basel III rules defining capital (numerator of capital ratios) will be fully phased in, except for the exclusion of non-qualifying trust
preferred securities from Tier 2 capital, which will be fully phased in as of January 1, 2022. In addition, the Company will also be subject to a greater than 2.5%
Common Equity Tier 1 capital conservation buffer, a G-SIB capital surcharge and, if deployed by banking regulators, up to a 2.5% Common Equity Tier 1
countercyclical buffer, all of which will be fully phased in by the beginning of 2019. The capital conservation buffer, the G-SIB capital surcharge and, if
deployed, the countercyclical buffer apply in addition to each of the Company’s Common Equity Tier 1, Tier 1 and Total capital ratios. The requirements for
these additional capital buffers will be phased in beginning in 2016. For information on the recently adopted G-SIB capital surcharge, see “G-SIB Capital
Surcharge” herein.
(2) In 2015, as a result of the Company’s and its U.S. Bank Subsidiaries’ completion of the Advanced Approach parallel run, the amount of expected credit loss that
exceeds eligible credit reserves must be deducted 40% from Common Equity Tier 1 capital and 60% from Additional Tier 1 capital. Over the next two years, this
deduction from Common Equity Tier 1 capital will incrementally increase and the amount deducted from Additional Tier 1 capital will correspondingly decrease
until fully phased in by the beginning of 2018. In addition, under the Advanced Approach framework, the allowance for loan losses cannot be included in Tier 2
capital. Instead, an Advanced Approach banking organization may include in Tier 2 capital any eligible credit reserves that exceed its total expected credit losses
to the extent that the excess reserve amount does not exceed 0.6% of its Advanced Approach credit risk RWAs. The allowance for loan losses may continue to
be included in Tier 2 capital for purposes of calculating capital ratios under the Standardized Approach, up to 1.25% of credit risk RWAs.
(3) In accordance with U.S. Basel III, adjusted average assets represent the denominator of the Tier 1 leverage ratio and are composed of the average daily balance
of consolidated on-balance sheet assets under U.S. GAAP during the calendar quarter, adjusted for disallowed goodwill, transitional intangible assets, certain
deferred tax assets, certain investments in the capital instruments of unconsolidated financial institutions and other adjustments.
Regulatory Capital Ratios.
Regulatory Capital Ratios and Minimum Regulatory Capital Ratios Applicable under U.S. Basel III.
At December 31, 2015
Minimum Regulatory
Capital Ratio
Actual Capital Ratio
U.S. Basel III Transitional/
Standardized Approach
U.S. Basel III Transitional/
Advanced Approach Calendar Year 2015
Common Equity Tier 1 capital ratio ................ 16.4% 15.5% 4.5%
Tier 1 capital ratio ............................. 18.4% 17.4% 6.0%
Total capital ratio .............................. 22.0% 20.7% 8.0%
Tier 1 leverage ratio ............................ 8.3% N/A 4.0%
N/A—Not Applicable.
For the Company to remain a financial holding company, its U.S. Bank Subsidiaries must qualify as “well-capitalized” under
the higher capital requirements of U.S. Basel III by maintaining a Total risk-based capital ratio of at least 10%, a Tier 1 risk-
based capital ratio of at least 8%, a Common Equity Tier 1 risk-based capital ratio of at least 6.5%, and a Tier 1 leverage
ratio of at least 5%. The Federal Reserve has not yet revised the “well-capitalized” standard for financial holding companies
to reflect the higher capital standards in U.S. Basel III. Assuming that the Federal Reserve would apply the same or very
similar well-capitalized standards to financial holding companies, each of the Company’s risk-based capital ratios and Tier 1
leverage ratio at December 31, 2015 would have exceeded the revised well-capitalized standard. The Federal Reserve may
require the Company and its peer financial holding companies to maintain risk- and leverage-based capital ratios
substantially in excess of mandated minimum levels, depending upon general economic conditions and a financial holding
company’s particular condition, risk profile and growth plans.
At December 31, 2015, the Company’s capital ratios calculated under the U.S. Basel III Advanced Approach were lower than
those calculated under the U.S. Basel III Standardized Approach and, therefore, are the binding ratios for the Company as a
result of the capital floor. At December 31, 2014, the Company’s capital ratios calculated under the U.S. Basel III Advanced
Approach were lower than those calculated under the Standardized Approach, represented as the 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” and, therefore, are the binding ratios.
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