Morgan Stanley 2015 Annual Report Download - page 98

These fully phased-in basis pro forma estimates are based on the Company’s current understanding of U.S. Basel III and
other factors, which may be subject to change as the Company receives additional clarification and implementation guidance
from the Federal Reserve relating to U.S. Basel III and as the interpretation of the regulation evolves over time. The fully
phased-in basis pro forma Common Equity Tier 1 capital, RWAs and Common Equity Tier 1 risk-based capital ratio
estimates are non-GAAP financial measures that the Company considers to be useful measures for evaluating compliance
with new regulatory capital requirements that were not yet effective at December 31, 2015. These preliminary estimates are
subject to risks and uncertainties that may cause actual results to differ materially and should not be taken as a projection of
what the Company’s capital ratios, RWAs, earnings or other results 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.
The Company is subject to the following minimum capital ratios under U.S. Basel III: Common Equity Tier 1 capital ratio of
4.5%; Tier 1 capital ratio of 6.0%; Total capital ratio of 8.0%; and Tier 1 leverage ratio of 4.0%. In addition, on a fully
phased-in basis by 2019, the Company will be subject to a greater than 2.5% Common Equity Tier 1 capital conservation
buffer and, if deployed by banking regulators, up to a 2.5% Common Equity Tier 1 countercyclical buffer. The capital
conservation buffer and countercyclical capital buffer, if any, apply over each of the Company’s Common Equity Tier 1, Tier
1 and Total risk-based capital ratios. Failure to maintain such buffers will result in restrictions on the Company’s ability to
make capital distributions, including the payment of dividends and the repurchase of stock, and to pay discretionary bonuses
to executive officers. The Company is also subject to the G-SIB capital surcharge, which augments the capital conservation
buffer (see “G-SIB Capital Surcharge” herein), and a supplementary leverage ratio (see “Supplementary Leverage Ratio”
herein).
G-SIB Capital Surcharge.
In July 2015, the Federal Reserve issued a final rule imposing risk-based capital surcharges on U.S. bank holding companies
that are identified as G-SIBs, which include the Company. A G-SIB must calculate its G-SIB capital surcharge under two
methods and use the higher of the two surcharges. The first method considers the G-SIB’s size, interconnectedness, cross-
jurisdictional activity, substitutability and complexity, which is generally consistent with the methodology developed by the
Basel Committee. The second method uses similar inputs, but replaces substitutability with the use of short-term wholesale
funding and generally results in higher surcharges than the first method. The G-SIB capital surcharge must be satisfied using
Common Equity Tier 1 capital and functions as an extension of the capital conservation buffer. The Federal Reserve has
stated that, under the final rule and using the most recent available data, the estimated G-SIB surcharges will range from
1.0% to 4.5% of a GSIB’s RWAs. The Federal Reserve calculated the Company’s G-SIB surcharge at 3% in July 2015. The
surcharge will be phased in between January 1, 2016 and January 1, 2019, and the phase-in amount for 2016 is 25% of the
applicable surcharge (see “Pro Forma Regulatory Capital Ratios” herein).
Total Loss-Absorbing Capacity and Long-Term Debt Requirements.
The Federal Reserve has issued a proposed rule for top-tier bank holding companies of U.S. G-SIBs (“covered BHCs”),
including the Company, that establishes external total loss-absorbing capacity (“TLAC”) and long-term debt (“LTD”)
requirements. The proposal contains various definitions and restrictions, such as requiring eligible LTD to be unsecured,
have a remaining maturity of at least one year, and not have derivative-linked features, such as structured notes.
Under the proposal, a covered BHC would be required to maintain minimum external TLAC equal to the greater of 16% of
RWAs and 9.5% of its U.S. Basel III total leverage exposure (the denominator of its supplementary leverage ratio) by
January 1, 2019, increasing to the greater of 18% of RWAs and 9.5% of its U.S. Basel III total leverage exposure by
January 1, 2022. In addition, covered BHCs must meet a separate external LTD requirement equal to the greater of 6% of
RWAs plus the Method 2 G-SIB capital surcharge applicable to the Company, and 4.5% of its U.S. Basel III total leverage
exposure.
In addition, the proposed rule would impose a TLAC buffer on top of the external TLAC requirement. The TLAC buffer
must be composed solely of Common Equity Tier 1 capital, and the same Common Equity Tier 1 capital that is used to
satisfy the capital conservation buffer, the G-SIB surcharge, and the countercyclical buffer, if any, under U.S. Basel III may
be used to satisfy the TLAC buffer. The required buffer amount would be equal to the sum of 2.5%, the Method 1 G-SIB
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