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Morgan Stanley's Stress Test Math (Correct)

Stocks in this article: MS GS JPM C BAC

Update to correct revenue information and include Morgan Stanley comment.

NEW YORK ( TheStreet) -- Morgan Stanley (MS) is in sharp disagreement with the results of the Federal Reserve over how much the company would lose if a terrible recession were to begin this year.

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.

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