Morgan Stanley 2015 Annual Report Download - page 99

surcharge applicable to the Company and any applicable countercyclical buffer. Failure to maintain the full TLAC buffer
would result in restrictions on capital distributions and discretionary bonus payments to executive officers.
The proposal would also impose restrictions on certain liabilities that covered BHCs may incur or have outstanding,
including structured notes, as well as require all U.S. banking organizations supervised by the Federal Reserve with assets of
at least $1 billion to make certain deductions from capital for their investments in unsecured debt issued by covered BHCs.
The Company continues to evaluate the potential impact of these proposed requirements. The steps that the covered BHCs,
including the Company, may need to take to come into compliance with the final TLAC rules, including the amount and
form of LTD that must be refinanced or issued, will depend in substantial part on the ultimate eligibility requirements for
senior LTD and any grandfathering provisions in the final rules.
The main purpose of the Federal Reserve’s proposed minimum TLAC and LTD requirements is to ensure that covered
BHCs, including the Company, will have enough loss-absorbing resources at the point of failure to be recapitalized through
the conversion of eligible LTD to equity or otherwise by imposing losses on eligible LTD or other forms of TLAC where the
single point of entry (“SPOE”) resolution strategy is used. This strategy can be used under either the orderly liquidation
authority in Title II of the Dodd-Frank Act or the U.S. Bankruptcy Code and is being adopted by both U.S. resolution
authorities and by resolution authorities in other countries. As with other major financial companies, the combined
implication of the SPOE resolution strategy and the TLAC proposal to facilitate the orderly resolution of G-SIBs is that the
group’s losses will likely be imposed on the holders of eligible LTD and other forms of eligible TLAC issued by the top-tier
bank holding company before any of its losses are imposed on the holders of the debt securities of the group’s operating
subsidiaries or put U.S. taxpayers at risk (see “Business—Supervision and Regulation—Financial Holding Company—
Resolution and Recovery Planning” in Part I, Item 1 and “Risk Factors—Legal, Regulatory and Compliance Risk” in Part I,
Item 1A).
Capital Plans and Stress Tests.
Pursuant to the Dodd-Frank Act, the Federal Reserve has adopted capital planning and stress test requirements for large bank
holding companies, including the Company, which form part of the Federal Reserve’s annual Comprehensive Capital
Analysis and Review (“CCAR”) framework.
The Company must submit an annual capital plan to the Federal Reserve, taking into account the results of separate stress
tests designed by the Company and the Federal Reserve, so that the Federal Reserve may assess the Company’s systems and
processes that incorporate forward-looking projections of revenues and losses to monitor and maintain its internal capital
adequacy. The capital plan must include a description of all planned capital actions over a nine-quarter planning horizon,
including any issuance of a debt or equity capital instrument, any capital distribution (i.e., payments of dividends or stock
repurchases), and any similar action that the Federal Reserve determines could impact the bank holding company’s
consolidated capital. The capital plan must include a discussion of how the bank holding company will maintain capital
above the minimum regulatory capital ratios, including the U.S. Basel III requirements that are phased in over the planning
horizon, and serve as a source of strength to its subsidiary U.S. depository institutions under supervisory stress scenarios. In
addition, the Federal Reserve has issued guidance setting out its heightened expectations for capital planning practices at
certain large financial institutions, including the Company.
In November 2015, the Federal Reserve amended its capital plan and stress test rules, with effect from January 1, 2016, to
delay until 2017 the use of the supplementary leverage ratio requirement, defer indefinitely the use of the Advanced
Approach risk-based capital framework in capital planning and company-run stress tests, and incorporate the Tier 1 capital
deductions for certain investments in Volcker Rule covered funds into the pro forma minimum capital requirements for
capital plan and stress testing purposes. In addition, the Federal Reserve has indicated that it is considering whether and, if
so, how to incorporate the G-SIB capital surcharge in the CCAR and Dodd-Frank Act stress tests.
The capital plan rule requires that large bank holding companies receive no objection from the Federal Reserve before
making a capital distribution. In addition, even with an approved capital plan, the bank holding company must seek the
approval of the Federal Reserve before making a capital distribution if, among other reasons, the bank holding company
would not meet its regulatory capital requirements after making the proposed capital distribution. A bank holding company’s
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