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Regulatory Requirements
12 Months Ended
Dec. 31, 2017
Regulatory Requirements  
Regulatory Requirements

14. Regulatory Requirements

Regulatory Capital Framework     

The Firm is an FHC under the Bank Holding Company Act of 1956, as amended, and is subject to the regulation and oversight of the Board of Governors of the Federal Reserve System (“Federal Reserve”). The Federal Reserve establishes capital requirements for the Firm, including well-capitalized standards, and evaluates the Firm’s compliance with such capital requirements. The OCC establishes similar capital requirements and standards for MSBNA and MSPBNA (collectively, our “U.S. Bank Subsidiaries”). The regulatory capital requirements are largely based on the Basel III capital standards established by the Basel Committee on Banking Supervision and also implement certain provisions of the Dodd-Frank Wall Street Reform and Consumer Protection Act.

Regulatory Capital Requirements

The Firm is required to maintain minimum risk-based and leverage capital ratios under the regulatory capital requirements. A summary of the calculations of regulatory capital, RWAs and transition provisions follows.

Minimum risk-based capital ratio requirements apply to Common Equity Tier 1 capital, Tier 1 capital and Total capital. Certain adjustments to and deductions from capital are required for purposes of determining these ratios, such as goodwill, intangible assets, certain deferred tax assets, other amounts in AOCI and investments in the capital instruments of unconsolidated financial institutions. Certain of these adjustments and deductions are also subject to transitional provisions.

In addition to the minimum risk-based capital ratio requirements, on a fully phased-in basis by 2019, the Firm will be subject to the following buffers:

  • A greater than 2.5% Common Equity Tier 1 capital conservation buffer;

  • The Common Equity Tier 1 G-SIB capital surcharge, currently at 3%; and

  • Up to a 2.5% Common Equity Tier 1 CCyB, currently set by U.S. banking agencies at zero.

The phase-in amount for each of the buffers was 50% of the fully phased-in buffer requirement in 2017, and increases to 75% in 2018. Failure to maintain the buffers will result in restrictions on the Firm’s ability to make capital distributions, including the payment of dividends and the repurchase of stock, and to pay discretionary bonuses to executive officers.

Risk-Weighted Assets

RWAs reflect both the Firm’s on- and off-balance sheet risk, as well as capital charges attributable to the risk of loss arising from the following:

  • Credit risk: The failure of a borrower, counterparty or issuer to meet its financial obligations to the Firm;

  • Market risk: Adverse changes in the level of one or more market prices, rates, indices, volatilities, correlations or other market factors, such as market liquidity; and

  • Operational risk: Inadequate or failed processes or systems, from human factors or from external events (e.g., fraud, theft, legal and compliance risks, cyber attacks or damage to physical assets).

The Firm’s risk-based capital ratios for purposes of determining regulatory compliance are the lower of the capital ratios computed under (i) the standardized approaches for calculating credit risk and market risk RWAs (“Standardized Approach”) and (ii) the applicable advanced approaches for calculating credit risk, market risk and operational risk RWAs (“Advanced Approach”).

The Firm’s Regulatory Capital and Capital Ratios

At December 31, 2017, the Firm’s ratios are based on the Standardized Approach transitional rules. At December 31, 2016, the Firm’s ratios were based on the Advanced Approach transitional rules.

Regulatory Capital
At December 31, 2017
$ in millionsAmountRatioMinimum Capital Ratio1
Common Equity Tier 1 capital$61,13416.5%7.3%
Tier 1 capital69,93818.9%8.8%
Total capital80,27521.7%10.8%
Tier 1 leverage8.3%4.0%
Total RWAs$369,578N/AN/A
Adjusted average assets2842,270N/AN/A
At December 31, 2016
$ in millionsAmountRatioMinimum Capital Ratio1
Common Equity Tier 1 capital$60,39816.9%5.9%
Tier 1 capital68,09719.0%7.4%
Total capital78,64222.0%9.4%
Tier 1 leverage8.4%4.0%
Total RWAs$358,141N/AN/A
Adjusted average assets2811,402N/AN/A

1. Percentages represent minimum regulatory capital ratios under the transitional rules.

2. 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 quarter ended December 31, 2017 and December 31, 2016, respectively, adjusted for disallowed goodwill, transitional intangible assets, certain deferred tax assets, certain investments in the capital instruments of unconsolidated financial institutions and other adjustments.

U.S. Bank Subsidiaries’ Regulatory Capital and Capital Ratios

The Firm’s U.S. Bank Subsidiaries are subject to similar regulatory capital requirements as the Firm. Failure to meet minimum capital requirements can initiate certain mandatory and discretionary actions by regulators that, if undertaken, could have a direct material effect on the U.S. Bank Subsidiariesand the Firm’s financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, each of the U.S. Bank Subsidiaries must meet specific capital guidelines that involve quantitative measures of its assets, liabilities and certain off-balance sheet items as calculated under regulatory accounting practices.

Each U.S. depository institution subsidiary of the Firm must be well-capitalized in order for the Firm to continue to qualify as an FHC and to continue to engage in the broadest range of financial activities permitted for financial holding companies. Under regulatory capital requirements adopted by the U.S. federal banking agencies, U.S. depository institutions must maintain certain minimum capital ratios in order to be considered well-capitalized. At December 31, 2017 and December 31, 2016, the Firm’s U.S. Bank Subsidiaries maintained capital at levels sufficiently in excess of the universally mandated well-capitalized requirements to address any additional capital needs and requirements identified by the U.S. federal banking regulators.

At December 31, 2017 and December 31, 2016, the U.S. Bank Subsidiaries’ ratios are based on the Standardized Approach transitional rules.

MSBNA’s Regulatory Capital
At December 31, 2017
$ in millionsAmountRatioMinimum Capital Ratio1
Common Equity Tier 1 capital$15,19620.5%6.5%
Tier 1 capital15,19620.5%8.0%
Total capital15,45420.8%10.0%
Tier 1 leverage15,19611.8%5.0%
At December 31, 2016
$ in millionsAmountRatioMinimum Capital Ratio1
Common Equity Tier 1 capital$13,39816.9%6.5%
Tier 1 capital13,39816.9%8.0%
Total capital14,85818.7%10.0%
Tier 1 leverage13,39810.5%5.0%

1. Capital ratios that are required in order to be considered well-capitalized for U.S. regulatory purposes.

MSPBNA’s Regulatory Capital
At December 31, 2017
$ in millionsAmountRatioMinimum Capital Ratio1
Common Equity Tier 1 capital$6,21524.4%6.5%
Tier 1 capital6,21524.4%8.0%
Total capital6,25824.6%10.0%
Tier 1 leverage6,2159.7%5.0%
At December 31, 2016
$ in millionsAmountRatioMinimum Capital Ratio1
Common Equity Tier 1 capital$5,58926.1%6.5%
Tier 1 capital5,58926.1%8.0%
Total capital5,62626.3%10.0%
Tier 1 leverage5,58910.6%5.0%

1. Capital ratios that are required in order to be considered well-capitalized for U.S. regulatory purposes.

U.S. Broker-Dealer Regulatory Capital Requirements
MS&Co. Regulatory Capital
$ in millionsAt December 31, 2017At December 31, 2016
Net capital$10,142$10,311
Excess net capital8,0188,034

MS&Co. is a registered U.S. broker-dealer and registered futures commission merchant and, accordingly, is subject to the minimum net capital requirements of the SEC and the CFTC. MS&Co. has consistently operated with capital in excess of its regulatory capital requirements.

As an Alternative Net Capital broker-dealer, and in accordance with the market and credit risk standards of Appendix E of SEC Rule 15c3-1, MS&Co. is subject to minimum net capital and tentative net capital requirements. In addition, MS&Co. must notify the SEC if its tentative net capital falls below certain levels. At December 31, 2017 and December 31, 2016, MS&Co. has exceeded its net capital requirement and has tentative net capital in excess of the minimum and notification requirements.

MSSB LLC Regulatory Capital
$ in millionsAt December 31, 2017At December 31, 2016
Net capital$2,567$3,946
Excess net capital2,4003,797

MSSB LLC is a registered U.S. broker-dealer and introducing broker for the futures business and, accordingly, is subject to the minimum net capital requirements of the SEC. MSSB LLC has consistently operated with capital in excess of its regulatory capital requirements.

Other Regulated Subsidiaries    

MSIP, a London-based broker-dealer subsidiary, is subject to the capital requirements of the PRA, and MSMS, a Tokyo-based broker-dealer subsidiary, is subject to the capital requirements of the Financial Services Agency. MSIP and MSMS have consistently operated with capital in excess of their respective regulatory capital requirements.

Certain other U.S. and non-U.S. subsidiaries of the Firm are subject to various securities, commodities and banking regulations, and capital adequacy requirements promulgated by the regulatory and exchange authorities of the countries in which they operate. These subsidiaries have consistently operated with capital in excess of their local capital adequacy requirements.

Restrictions on Payments

The regulatory capital requirements referred to above, and certain covenants contained in various agreements governing indebtedness of the Firm, may restrict the Firm’s ability to withdraw capital from its subsidiaries. The following table represents net assets of consolidated subsidiaries that may be restricted as to the payment of cash dividends and advances to the Parent Company.

$ in millionsAtDecember 31, 2017At December 31, 2016
Restricted net assets$29,894$25,258