Update to correct revenue information and include Morgan Stanley comment.
Diverging estimates of losses during an immediate and severe economic downturn are important, given Morgan Stanley's relatively low pass rate in the 2013 stress tests.
Overall, the Fed projects Morgan Stanley would lose about $20 billion in a financial crisis, pushing the bank's Tier 1 common equity ratio as low as 5.7%, just above the 5% level needed to remain well-capitalized, under regulatory guidelines.In contrast, Morgan Stanley projects its overall losses would be just $12.6 billion, with a minimum Tier 1 common ratio of 6.7%, under the Fed's stressed economic scenario. But the difference in calculations may simply hinge on how Morgan Stanley sees its revenue in a time of crisis and not accounting adjustments related its credit spreads, as an earlier version of this article indicated. Morgan Stanley spokesperson Mark Lake confirmed late on Friday that the bank did not project any increase in revenue related to a debit valuation adjustment in the firms calculation of its finances in a stressed economic scenario. The adjustment relates to accounting gains that banks like Morgan Stanley book when their credit spreads widen. There is a $5.1 billion difference in what each test sees as the bank's revenue in a stressed economy. While Morgan Stanley pegs its pre-provision net revenue at $6.3 billion under a stressed scenario, the Fed sees just $1.2 in revenue in its crisis-like stress test. While the $5.1 billion figure is also about equal to a confusing piece of accounting, a debit valuation adjustment that helped to reduce Morgan Stanley's losses during the 2008 financial crisis, Lake, the Morgan Stanley spokesperson confirmed the bank is not projecting any DVA gain in its own stress test calculations. The DVA adjustments allow banks to book revenue when their credit spreads widen on eroding investor confidence. It reverses in good times, meaning banks like Morgan Stanley have seen very large negative hits to revenue as investor trust increases. The potential gain is equal to the amount a bank would gain if it bought back all of its debt at discounted prices, and what it would lose if buying debt back at higher prices.
Select the service that is right for you!COMPARE ALL SERVICES
- $2.5+ million portfolio
- Large-cap and dividend focus
- Intraday trade alerts from Cramer
- Weekly roundups
Access the tool that DOMINATES the Russell 2000 and the S&P 500.
- Buy, hold, or sell recommendations for over 4,300 stocks
- Unlimited research reports on your favorite stocks
- A custom stock screener
- Upgrade/downgrade alerts
- Diversified model portfolio of dividend stocks
- Alerts when market news affect the portfolio
- Bi-weekly updates with exact steps to take - BUY, HOLD, SELL
- Real Money + Doug Kass + 15 more Wall Street Pros
- Intraday commentary & news
- Ultra-actionable trading ideas
- 100+ monthly options trading ideas
- Actionable options commentary & news
- Real-time trading community
- Options TV