Regulatory Requirements

12 Months Ended

Dec. 31, 2018

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, the“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-based capital ratios under regulatory capital requirements. A summary of the calculations of regulatory capital, RWA and transition provisions follows.

Minimum risk-based capital ratio requirements apply to Common Equity Tier 1 capital, Tier 1 capital and Total capital (which includes Tier 2 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.

In addition to the minimum risk-based capital ratio requirements, the Firm is subject to the following buffers in 2019:

●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.

In 2018 and 2017, each of the buffers was 75% and 50%, respectively, of the fully phased-in 2019 requirement noted above. Failure to maintain the buffers would 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

RWA reflects 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 RWA (“Standardized Approach”) and (ii) the applicable advanced approaches for calculating credit risk, market risk and operational risk RWA (“Advanced Approach”). At December 31, 2018, the Firm’s risk-based capital ratios are based on the Standardized Approach rules, while at December 31, 2017, the ratios were based on the Standardized Approach transitional rules.

The Firm’s Regulatory Capital and Capital Ratios
	At December 31, 2018
$ in millions	Required Ratio1		Amount	Ratio
Risk-based capital
Common Equity Tier 1 capital	8.6%	$	62,086	16.9%
Tier 1 capital	10.1%		70,619	19.2%
Total capital	12.1%		80,052	21.8%
Total RWA			367,309
Leverage-based capital
Tier 1 leverage	4.0%	$	70,619	8.4%
Adjusted average assets2			843,074
SLR3	5.0%		70,619	6.5%
Supplementary leverage exposure4			1,092,672
	At December 31, 2017
$ in millions	Required Ratio1		Amount	Ratio5
Risk-based capital
Common Equity Tier 1 capital	7.3%	$	61,134	16.5%
Tier 1 capital	8.8%		69,938	18.9%
Total capital	10.8%		80,275	21.7%
Total RWA			369,578
Leverage-based capital
Tier 1 leverage	4.0%	$	69,938	8.3%
Adjusted average assets2			842,270

1.Percentages represent minimum required regulatory capital ratios—for risk-based capital, the ratios are under the transitional rules.

2.Adjusted average assets represents the denominator of the Tier 1 leverage ratio and is composed of the average daily balance of consolidated on-balance sheet assets under U.S. GAAP during the quarters endedDecember 31, 2018 and December 31, 2017, adjusted for disallowed goodwill, intangible assets, certain deferred tax assets, certain investments in the capital instruments of unconsolidated financial institutions and other adjustments.

3. The SLR became effective as a capital standard on January 1, 2018.

4. Supplementary leverage exposure is the sum of Adjusted average assets used in the Tier 1 leverage ratio and other adjustments, primarily (i) potential future exposure for derivative exposures, gross-up for cash collateral netting where qualifying criteria are not met, and the effective notional principal amount of sold credit protection offset by qualifying purchased credit protection; (ii) the counterparty credit risk for repo-style transactions; and (iii) the credit equivalent amount for off-balance sheet exposures.

5. For risk- and leverage-based capital, regulatory compliance at December 31, 2017 was determined based on capital ratios calculated under transitional rules.

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

The OCC establishes capital requirements for the Firm’s U.S. Bank Subsidiaries and evaluates their compliance with such capital requirements. Regulatory capital requirements for the U.S. Bank Subsidiaries are calculated in a similar manner to the Firm’s regulatory capital requirements, although G-SIB capital surcharge requirements do not apply to the U.S. Bank Subsidiaries.

The OCC’s regulatory capital framework includes Prompt Corrective Action (“PCA”) standards, including “well-capitalized” PCA standards that are based on specified regulatory capital ratio minimums. For the Firm to remain an FHC, the U.S. Bank Subsidiaries must remain well-capitalized in accordance with the OCC’s PCA standards. In addition, failure by the U.S. Bank Subsidiaries to meet minimum capital requirements may result in certain mandatory and discretionary actions by regulators that, if undertaken, could have a direct material effect on the U.S. Bank Subsidiaries’ and the Firm’s financial statements.

At December 31,2018, the U.S. Bank Subsidiaries’ risk-based capital ratios are based on the Standardized Approach rules, while at December 31, 2017, the ratios were based on the Standardized Approach transitional rules. In each period, the ratios exceeded well-capitalized requirements.

MSBNA’s Regulatory Capital
	At December 31, 2018
$ in millions	Required Ratio1		Amount	Ratio
Risk-based capital
Common Equity Tier 1 capital	6.5%	$	15,221	19.5%
Tier 1 capital	8.0%		15,221	19.5%
Total capital	10.0%		15,484	19.8%
Leverage-based capital
Tier 1 leverage	5.0%	$	15,221	10.5%
SLR2	6.0%		15,221	8.2%
	At December 31, 2017
$ in millions	Required Ratio1		Amount	Ratio3
Risk-based capital
Common Equity Tier 1 capital	6.5%	$	15,196	20.5%
Tier 1 capital	8.0%		15,196	20.5%
Total capital	10.0%		15,454	20.8%
Leverage-based capital
Tier 1 leverage	5.0%	$	15,196	11.8%

MSPBNA’s Regulatory Capital
	At December 31, 2018
$ in millions	Required Ratio1		Amount	Ratio
Risk-based capital
Common Equity Tier 1 capital	6.5%	$	7,183	25.2%
Tier 1 capital	8.0%		7,183	25.2%
Total capital	10.0%		7,229	25.4%
Leverage-based capital
Tier 1 leverage	5.0%	$	7,183	10.0%
SLR2	6.0%		7,183	9.6%
	At December 31, 2017
$ in millions	Required Ratio1		Amount	Ratio3
Risk-based capital
Common Equity Tier 1 capital	6.5%	$	6,215	24.4%
Tier 1 capital	8.0%		6,215	24.4%
Total capital	10.0%		6,258	24.6%
Leverage-based capital
Tier 1 leverage	5.0%	$	6,215	9.7%

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

2.The SLR became effective as a capital standard on January 1, 2018.

3.For risk- and leverage-based capital, regulatory compliance at December 31, 2017 was determined based on capital ratios calculated under transitional rules.

U.S. Broker-Dealer Regulatory Capital Requirements
MS&Co. Regulatory Capital
$ in millions		At December 31, 2018		At December 31, 2017
Net capital	$	13,797	$	10,142
Excess net capital		11,333		8,018

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 31,2018 and December 31, 2017, 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 millions		At December 31, 2018		At December 31, 2017
Net capital	$	3,455	$	2,567
Excess net capital		3,313		2,400

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 millions		AtDecember 31, 2018		At December 31, 2017
Restricted net assets	$	29,222	$	29,894