MS Morgan Stanley

By Justin Baer 

Morgan Stanley has the capital to keep lending in a severe economic downturn, the Federal Reserve calculated Thursday in the first stage of its annual stress tests.

At the low point of a hypothetical recession, Morgan Stanley's common equity Tier 1 ratio, which is a measure of high-quality capital as a share of risk-weighted assets, was 9.1%, exceeding the 4.5% level the Fed views as a minimum, the central bank estimated.

Morgan Stanley's Tier 1 leverage ratio, which measures high-quality capital as a share of all assets, was 4.9%, exceeding a 4% minimum.

The stress tests simulate a worldwide recession. The results were under the Fed's "severely adverse" scenario of financial stress, which this year includes a 10% U.S. unemployment rate, significant losses in corporate and commercial real estate lending portfolios, and negative rates on short-term U.S. Treasury securities.

The results will factor into the Fed's decision next week about whether to approve the bank's plan for rewarding shareholders with dividends or potential share buybacks. Banks whose capital ratios dropped close to minimum levels may choose to scale back their dividend or buyback plans before the Fed announces its final decision Wednesday. That day the banks can choose to announce whether they are raising their dividends or buying back more shares, important for enhancing shareholder returns.

Morgan Stanley increased both its dividend and stock buyback request last year, and analysts have expected the firm to step up with an even bigger capital-return plan following the 2016 tests.

The Fed approved Morgan Stanley's capital plan last year. That occurred after the firm revised its initial plan request due to its performance on the first part of the stress-test results. This involved it scrapping plans to buy back some $5 billion in preferred shares.

A Morgan Stanley spokesman declined to comment.

Write to Justin Baer at justin.baer@wsj.com

(END) Dow Jones Newswires

June 23, 2016 17:42 ET (21:42 GMT)

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