2013 Annual Report
to Shareholders
Joseph L. Hooley
Chairman, President and
Chief Executive Officer
To Our Shareholders
Introduction
Our strong performance in 2013 focused on three key areas: growing our core businesses,
controlling our expenses and returning capital to our shareholders. While we benefited from strong equity
markets, we also executed on our strategic priorities against the headwinds of low interest rates and
increased regulatory requirements.
Summary Financial Results
A strong performance can only be built upon a strong foundation, and our revenue growth and
earnings in 2013 proved to be no exception to that rule. In 2013, our strategic investments in our
business enabled us to expand our range of solutions for clients. We balanced these investments with
continued expense control, including the savings we created from our ongoing implementation of our
Business Operations and Information Technology Transformation program. These actions, combined with
revenue growth, resulted in positive operating leverage1 for 2013 compared to 2012.
The strength of our foundation is also reflected in our performance against several key metrics. Our
2013 GAAP-basis diluted earnings per common share were $4.62, a 10 percent increase compared to
$4.20 in 2012, with 2013 GAAP-basis revenue of $9.88 billion, a 2 percent increase over 2012 revenue
of $9.65 billion. Our 2013 GAAP-basis return on average common shareholders’ equity was 10.5 percent,
compared to 10.3 percent in 2012. On an operating basis2, our 2013 diluted earnings per common share
were $4.54, up 15 percent from $3.95 in 2012. Operating-basis revenue increased 3 percent to $10.05
billion in 2013 from $9.73 billion in 2012, and operating-basis return on average common shareholders’
equity was 10.3 percent in 2013, up from 9.7 percent in 2012. Our 2013 core fee revenue, which is
composed of fees from asset servicing and asset management, increased 10 percent from 2012.
While we faced environmental challenges in 2013, we were able to leverage several competitive
advantages that will continue to help drive our success and our long-term value. These include:
• Our focused strategy fueled by macro trends, including globalization, retirement savings and
increased regulation and complexity;
• An extensive global footprint;
• Our strong capital position, with some of the highest ratios in the industry; and
• Number 1 or 2 positions in high-growth markets, such as servicing alternative investments3
and exchange-traded funds, or ETFs4.
We’ve found that globalization has made the world and the needs of our clients much more dynamic.
The ongoing expansion of investment and distribution channels continues to make markets more open
and accessible, enabling investors to consider opportunities worldwide. With our expansive footprint in
more than 100 geographic markets, we can support our clients with a consistent approach that uses local
insights to capitalize on opportunities in existing and developing markets. In 2013, approximately 43
percent of our total revenue came from outside the U.S., and approximately 33 percent of our new
business in asset servicing came from non-U.S. clients. In addition, approximately 48 percent of our
employees work outside of the U.S.
The promise and the impact of a global issue and a local solution are best demonstrated by our
approach to the significant opportunities provided by the evolution in retirement savings plans worldwide.
Retirement savings are increasing, with defined contribution, or DC, plans now comprising 43 percent of
global pension assets5. We expect this trend to encourage wider savings in developed markets, while
pension reform will be an important driver of investment assets in emerging markets. As a leading
servicer of both mutual funds and ETFs, the principal vehicles for DC plans, we are well positioned to
capitalize on these opportunities.
Delivering Value to Our Clients
Just as macro- and micro-level trends can influence our financial performance, we believe that it’s
our ability to focus on the macro and the micro that is at the heart of how we deliver value to our clients.
In 2013, we continued to experience strong demand for our solutions across our global client base -
resulting in commitments of more than $1 trillion of new assets to be serviced from both current and new
clients. Alternative investments, for example, are an important option for asset managers and owners to
combat a low-yield environment. Our alternative investment servicing business has grown at a compound
annual growth rate of 32 percent from 2005 to 2013 compared to a compound annual growth rate of 14
percent for the rest of the market6.
ETFs also remain a popular investment class. At the end of 2013, ETF assets under management
by State Street Global Advisors, or SSgA, reached a record level of $399 billion, representing a year-
over-year increase of 18 percent.
Transforming Our Operating Model
At the end of 2010 we announced our Business Operations and Information Technology
Transformation program. The core of this program is built on a simple idea - reducing costs while
improving the client experience. This includes utilizing Lean technologies designed to eliminate
redundant processes.
We have been standardizing and automating processes and, where feasible, leveraging our Centers
of Excellence to streamline operations. On the IT side, we’ve been migrating to our patented private
cloud computing environment, which is already enabling us to:
• Respond to client requests more rapidly,
• Develop new products more quickly, and
• Deliver products more efficiently.
In 2013, we achieved our targeted incremental pre-tax expense savings from the program of
approximately $220 million, and previously, we achieved incremental pre-tax expense savings of
approximately $112 million in 2012 and $86 million in 2011, in each case compared to our 2010
expenses from operations, all else being equal7. In 2014, we expect to continue to benefit from the
impact of this multi-year program with the development of new solutions. Our goal is to become a truly
digital enterprise with the agility necessary to respond quickly to our clients’ needs.
Optimizing Capital to Create Value
Creating value for our shareholders has always been one of our top priorities and an important
element of our long-term focus. Our financial strength and approach to capital management have
enabled us to maintain consistently strong regulatory capital ratios, both under Basel I as reported and as
estimated under the final U.S. Basel III standards. We’ve maintained these regulatory capital ratios while
also returning capital, in the form of common stock dividends and purchases of our common stock, to our
shareholders. In 2013, we purchased approximately 31.2 million shares of our common stock, including
24.7 million shares under the $2.1 billion program approved by our Board of Directors in March 2013 that
ran through March 2014. We declared a total of $1.04 per share in common stock dividends in 2013.
Pursuing New Opportunities
All new technical innovations, regulatory and market changes bring with them not only challenges,
but opportunities. With our experience in servicing complex investment structures and products, we are
well positioned to deliver additional flexible solutions for our clients. Every day, the world creates 2.5
quintillion bytes of data8. We already safe keep a critical mass of data for our clients, and combined with
our innovative, proprietary research, we can offer clients sophisticated data and analytics solutions that
deliver improved insights into their portfolios.
We know that gathering, standardizing and reconciling an overwhelming amount of data is a real
concern for our clients. In a 2013 survey, we commissioned with the Economist Intelligence Unit of more
than 400 asset owners and managers globally, 9 out of 10 cited data and analytics as a key strategic
priority.
To help our clients manage this challenge, we created a new business called State Street Global
Exchange. As a trusted partner to the world’s largest asset owners and asset managers, we intend to
meet market demand for more sophisticated data and analytics solutions.
Supporting Our Communities
We measure our success not only by the bottom line, but also in the change we make in the
communities in which we live and work. In 2013, our employees volunteered more than 87,000 hours,
and our State Street Foundation provided $19.6 million in grants to nonprofit organizations globally,
including $4.5 million in employee contributions from our Matching Gift Program. This contributed to
State Street being listed as one of the top 100 Best Corporate Citizens by Corporate Responsibility
Magazine’s annual ranking for the seventh consecutive year.
The Way Ahead
These past few years have not been easy, but we’ve reacted by improving many aspects of our
business as well as by embracing change and creating innovative solutions for our clients. We are well
positioned to execute on our long-term strategy of building on our strong core, achieving a digital
enterprise, maintaining our capital strength and pursuing new opportunities.
We appreciate your investment in State Street, and we will continue to work hard to reward your
confidence in us.
Sincerely,
Joseph L. Hooley
Chairman, President and Chief Executive Officer
March 24, 2014
1 Operating leverage is defined as the rate of growth of total revenue less the rate of growth of total expenses, each as
determined on a non-GAAP, or operating basis. Also see note (2) below.
2 This letter to shareholders includes financial information presented on a GAAP basis as well as on a non-GAAP, or “operating”
basis. Management measures and compares certain financial information on an operating basis, as it believes that this
presentation supports meaningful comparisons from period to period and the analysis of comparable financial trends with
respect to State Street’s normal ongoing business operations. Management believes that operating-basis financial information,
which reports revenue from non-taxable sources, such as interest revenue from tax-exempt investment securities and
processing fees and other revenue associated with tax-advantaged investments, on a fully-taxable equivalent basis and
excludes the impact of revenue and expenses outside of the normal course of business, facilitates an investor’s understanding
and analysis of State Street’s underlying financial performance and trends in addition to financial information prepared and
reported in conformity with GAAP. Operating-basis, or non-GAAP, financial measures should be considered in addition to, not
as a substitute for or superior to, financial measures determined in conformity with GAAP.
3 No. 1 in alternative asset servicing globally. Sources: HFM Week 20th Biannual Assets Under Administration Survey (June
2013) and Custody Risk Alternative Fund Administration Survey 2013 (May 2013).
4 “ETF assets up 21.4% for year; top 3 providers hold their rank.” Randy Diamond. Pensions and Investments. September 16,
2013.
5 Towers Watson, Global Pensions Asset Study 2012.
6 Hedge Fund Market - Hedge Fund Research, January 2014; Private Equity Market - Prequin, January 2014; Real Estate
Market - Towers Watson, July 2013, PI Online (2005-2008).
7 These pre-tax expense savings relate only to the Business Operations and Information Technology Transformation program
and are based on projected improvement from our total 2010 expenses from operations, all else being equal. Our actual total
expenses have increased since 2010, and may in the future increase or decrease, due to other factors.
8 “Customer Analytics Pay Off.” IBM. January 2012.
CORPORATE INFORMATION
CORPORATE HEADQUARTERS
State Street Corporation
State Street Financial Center
One Lincoln Street
Boston, Massachusetts 02111-2900
Website: www.statestreet.com
General Inquiries: +1 617 786 3000
ANNUAL MEETING
Wednesday, May 14, 2014, 9:00 a.m. at Corporate Headquarters
TRANSFER AGENT
Registered shareholders wishing to change name or address information on their shares, transfer ownership
of stock, deposit certificates, report lost certificates, consolidate accounts, authorize direct deposit of dividends, or
receive information on our dividend reinvestment plan should contact:
American Stock Transfer & Trust Co., LLC
Operations Center
6201 15th Avenue
Brooklyn, NY 11219
Phone: +1 866 714 7293
Website: www.amstock.com
E-mail: info@amstock.com
STOCK LISTINGS
State Street's common stock is listed on the New York Stock Exchange under the ticker symbol STT.
SHAREHOLDER INFORMATION
For timely information about State Street's consolidated financial results and other matters of interest to
shareholders, and to request copies of our news releases and financial reports by fax or mail, please visit our
website at:
www.statestreet.com/stockholder
or call +1 877 639 7788 [NEWS STT] toll-free in the U.S. and Canada, or +1 678 999 4577 outside those
countries. These services are available 24 hours a day, seven days a week.
For copies of our Quarterly Reports on Form 10-Q, quarterly earnings press releases, Current Reports on
Form 8-K or additional copies of this Annual Report to Shareholders, please visit our website, call our shareholder
services telephone line described above, or write to Investor Relations at Corporate Headquarters. Copies are
provided without charge.
Investors and analysts interested in additional financial information may contact our Investor Relations
department at Corporate Headquarters, telephone +1 617 664 3477.
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
Form 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2013
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the transition period from to
Commission File No. 001-07511
STATE STREET CORPORATION
(Exact name of registrant as specified in its charter)
Massachusetts
04-2456637
(State or other jurisdiction of incorporation)
(I.R.S. Employer Identification No.)
One Lincoln Street
Boston, Massachusetts
(Address of principal executive office)
02111
(Zip Code)
617-786-3000
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
(Title of Each Class)
Common Stock, $1 par value per share
(Name of each exchange on which registered)
New York Stock Exchange
Depositary Shares, each representing a 1/4,000th ownership interest
in a share of Non-Cumulative Perpetual Preferred Stock, Series C,
without par value per share
New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act:
None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes
No
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes
No
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the
past 90 days. Yes
No
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to
be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the
registrant was required to submit and post such files). Yes
No
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§ 229.405 of this chapter) is not contained herein, and will not
be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K.
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the
definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer
Accelerated filer
Non-accelerated filer
Smaller reporting company
(Do not check if a smaller reporting
company)
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes
No
The aggregate market value of the voting and non-voting common equity held by non-affiliates computed by reference to the per share price ($65.21) at
which the common equity was last sold as of the last business day of the registrant’s most recently completed second fiscal quarter (June 28, 2013) was
approximately $29.06 billion.
The number of shares of the registrant’s common stock outstanding as of January 31, 2014 was 431,634,583.
Portions of the following documents are incorporated by reference into Parts of this Report on Form 10-K, to the extent noted in such Parts, as indicated
below:
(1) The registrant’s definitive Proxy Statement for the 2014 Annual Meeting of Shareholders to be filed pursuant to Regulation 14A on or before April 29, 2014
(Part III).
PART I
Item 1
Item 1A
Item 1B
Item 2
Item 3
Item 4
PART II
Item 5
Item 6
Item 7
Item 7A
Item 8
Item 9
Item 9A
Item 9B
PART III
Item 10
Item 11
Item 12
Item 13
Item 14
PART IV
Item 15
STATE STREET CORPORATION
Table of Contents
Business
Risk Factors
Unresolved Staff Comments
Properties
Legal Proceedings
Mine Safety Disclosures
Executive Officers of the Registrant
Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer
Purchases of Equity Securities
Selected Financial Data
Management’s Discussion and Analysis of Financial Condition and Results of
Operations
Quantitative and Qualitative Disclosures About Market Risk
Financial Statements and Supplementary Data
Changes in and Disagreements with Accountants on Accounting and Financial
Disclosure
Controls and Procedures
Other Information
Directors, Executive Officers and Corporate Governance
Executive Compensation
Security Ownership of Certain Beneficial Owners and Management and Related
Stockholder Matters
Certain Relationships and Related Transactions, and Director Independence
Principal Accounting Fees and Services
Exhibits, Financial Statement Schedules
SIGNATURES
EXHIBIT INDEX
3
16
38
38
39
41
42
43
47
48
122
122
212
212
214
214
214
214
215
215
215
216
217
PART I
ITEM 1. BUSINESS
GENERAL
State Street Corporation, the parent company, is a financial holding company organized in 1969 under the laws
of the Commonwealth of Massachusetts. For purposes of this Form 10-K, unless the context requires otherwise,
references to “State Street,” “we,” “us,” “our” or similar terms mean State Street Corporation and its subsidiaries on
a consolidated basis. The parent company provides financial and managerial support to our legal and operating
subsidiaries. Through our subsidiaries, including our principal banking subsidiary, State Street Bank and Trust
Company, referred to as State Street Bank, we provide a broad range of financial products and services to
institutional investors worldwide.
As of December 31, 2013, we had consolidated total assets of $243.29 billion, consolidated total deposits of
$182.27 billion, consolidated total shareholders' equity of $20.38 billion and 29,430 employees. Our executive
offices are located at One Lincoln Street, Boston, Massachusetts 02111 (telephone (617) 786-3000). We operate in
more than 100 geographic markets worldwide, including the U.S., Canada, Europe, the Middle East and Asia.
We make available on the “Investor Relations” section of our corporate website at www.statestreet.com, free of
charge, all reports we electronically file with, or furnish to, the Securities and Exchange Commission, or SEC,
including our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q and Current Reports on Form 8-K, as
well as any amendments to those reports, as soon as reasonably practicable after those documents have been filed
with, or furnished to, the SEC. These documents are also accessible on the SEC’s website at www.sec.gov. We
have included the website addresses of State Street and the SEC in this report as inactive textual references only.
Information on those websites is not part of this Form 10-K.
We have Corporate Governance Guidelines, as well as written charters for the Executive Committee, the
Examining & Audit Committee, the Executive Compensation Committee, the Risk and Capital Committee and the
Nominating and Corporate Governance Committee of our Board of Directors, or Board, and a Code of Ethics for
senior financial officers, a Standard of Conduct for Directors and a Standard of Conduct for our employees. Each of
these documents is posted on our website.
We provide additional disclosures required by applicable bank regulatory standards, including supplemental
qualitative and quantitative information with respect to market risk associated with our trading activities, and
summary results of semi-annual State Street-run stress tests which we conduct under the Dodd-Frank Wall Street
Reform and Consumer Protection Act, or Dodd-Frank Act, on the “Investor Relations” section of our website.
BUSINESS DESCRIPTION
Overview
We are a leader in providing financial services and products to meet the needs of institutional investors
worldwide, with $27.43 trillion of assets under custody and administration and $2.35 trillion of assets under
management as of December 31, 2013. Our clients include mutual funds, collective investment funds and other
investment pools, corporate and public retirement plans, insurance companies, foundations, endowments and
investment managers.
We conduct our business primarily through State Street Bank, which traces its beginnings to the founding of
the Union Bank in 1792. State Street Bank's current charter was authorized by a special Act of the Massachusetts
Legislature in 1891, and its present name was adopted in 1960. State Street Bank operates as a specialized bank,
referred to as a trust and custody bank, that services and manages assets on behalf of its institutional clients.
Additional Information
Additional information about our business activities is provided in the sections that follow. For information
about our management of credit and counterparty risk; liquidity risk; operational risk; market risk associated with our
trading activities; market risk associated with our non-trading, or asset-and-liability management, activities, primarily
composed of interest-rate risk; and capital, as well as other risks inherent in our businesses, refer to “Risk Factors”
included under Item 1A, the “Financial Condition” section of Management's Discussion and Analysis of Financial
Condition and Results of Operations, or Management's Discussion and Analysis, included under Item 7, and our
consolidated financial statements and accompanying notes included under Item 8, of this Form 10-K.
3
LINES OF BUSINESS
We have two lines of business: Investment Servicing and Investment Management.
Investment Servicing
Our Investment Servicing line of business performs core custody and related value-added functions, such as
providing institutional investors with clearing, payment and settlement services. Our financial services and products
allow our large institutional investor clients to execute financial transactions on a daily basis in markets across the
globe. As most institutional investors cannot economically or efficiently build their own technology and operational
processes necessary to facilitate their global securities settlement needs, our role as a global trust and custody
bank is generally to aid our clients to efficiently perform services associated with the clearing, settlement and
execution of securities transactions and related payments.
Our investment servicing products and services include: custody; product- and participant-level accounting;
daily pricing and administration; master trust and master custody; record-keeping; cash management; foreign
exchange, brokerage and other trading services; securities finance; deposit and short-term investment facilities;
loans and lease financing; investment manager and alternative investment manager operations outsourcing; and
performance, risk and compliance analytics.
We provide mutual fund custody and accounting services in the U.S. We offer clients a broad range of
integrated products and services, including accounting, daily pricing and fund administration. We service U.S. tax-
exempt assets for corporate and public pension funds, and we provide trust and valuation services for daily-priced
portfolios.
We are a service provider outside of the U.S. as well. In Germany, Italy, France and Luxembourg, we provide
depotbank services (a fund oversight role created by regulation) for retail and institutional fund assets, as well as
custody and other services to pension plans and other institutional clients. In the U.K., we provide custody services
for pension fund assets and administration services for mutual fund assets. As of December 31, 2013, we serviced
approximately $1.26 trillion of offshore assets in funds located primarily in Luxembourg, Ireland, the Cayman Islands
and Canada. As of December 31, 2013, we serviced $1.15 trillion of assets under administration in the Asia/Pacific
region, and in Japan, we serviced approximately 97% of the trust assets serviced by non-domestic trust banks.
We are an alternative asset servicing provider worldwide, servicing hedge, private equity and real estate funds.
As of December 31, 2013, we had approximately $1.25 trillion of alternative assets under administration.
Investment Management
We provide our Investment Management services through State Street Global Advisors, or SSgA. SSgA
provides a broad array of investment management, investment research and investment advisory services to
corporations, public funds and other sophisticated investors. SSgA offers strategies for managing financial assets,
including passive and active, such as enhanced indexing, using quantitative and fundamental methods for both U.S.
and global equities and fixed-income securities. SSgA also offers exchange-traded funds, or ETFs, such as the
SPDR® ETF brand.
Additional information about our lines of business is provided under “Line of Business Information” in
Management's Discussion and Analysis included under Item 7, and in note 25 to the consolidated financial
statements included under Item 8, of this Form 10-K.
COMPETITION
We operate in a highly competitive environment and face global competition in all areas of our business. Our
competitors include a broad range of financial institutions and servicing companies, including other custodial banks,
deposit-taking institutions, investment management firms, insurance companies, mutual funds, broker/dealers,
investment banks, benefits consultants, business service and software companies and information services firms.
As our businesses grow and markets evolve, we may encounter increasing and new forms of competition around
the world.
We believe that many key factors drive competition in the markets for our business. For Investment Servicing,
quality of service, economies of scale, technological expertise, quality and scope of sales and marketing, required
levels of capital and price drive competition, and are critical to our servicing business. For Investment
Management, key competitive factors include expertise, experience, availability of related service offerings, quality
of service and performance, and price.
4
Our competitive success may depend on our ability to develop and market new and innovative services, to
adopt or develop new technologies, to bring new services to market in a timely fashion at competitive prices, to
continue and expand our relationships with existing clients, and to attract new clients.
SUPERVISION AND REGULATION
State Street is registered with the Federal Reserve as a bank holding company pursuant to the Bank Holding
Company Act of 1956. The Bank Holding Company Act, with certain exceptions, limits the activities in which we and
our non-banking subsidiaries may engage to those that the Federal Reserve considers to be closely related to
banking, or to managing or controlling banks. These limits also apply to non-banking entities that we are deemed to
“control” for purposes of the Bank Holding Company Act, which may include companies of which we own or control
more than 5% of a class of voting shares. The Federal Reserve may order a bank holding company to terminate
any activity, or its ownership or control of a non-banking subsidiary, if the Federal Reserve finds that the activity,
ownership or control constitutes a serious risk to the financial safety, soundness or stability of a banking subsidiary
or is inconsistent with sound banking principles or statutory purposes. The Bank Holding Company Act also
requires a bank holding company to obtain prior approval of the Federal Reserve before it acquires substantially all
the assets of any bank, or ownership or control of more than 5% of the voting shares of any bank.
The parent company is qualified as, and has elected to become, a financial holding company, which increases
to some extent the scope of activities in which it may engage. A financial holding company and the entities under its
control are permitted to engage in activities considered “financial in nature” as defined by the Bank Holding
Company Act and the Federal Reserve’s implementing rules and interpretations, and therefore State Street may
engage in a broader range of activities than permitted for bank holding companies and their subsidiaries that have
not elected to become financial holding companies. Financial holding companies may engage directly or indirectly
in activities that are defined to be financial in nature, either de novo or by acquisition, provided that the financial
holding company gives the Federal Reserve after-the-fact notice of the new activities. Activities defined to be
financial in nature include, but are not limited to, the following: providing financial or investment advice;
underwriting; dealing in or making markets in securities; making merchant banking investments, subject to
significant limitations; and any activities previously found by the Federal Reserve to be closely related to banking.
In order to maintain our status as a financial holding company, we and each of our depository institution subsidiaries
must be well capitalized and well managed, as defined in applicable regulations and determined in part by the
results of regulatory examinations, and must comply with Community Reinvestment Act obligations. Failure to
maintain these standards may ultimately permit the Federal Reserve to take enforcement actions against us and
restrict our ability to engage in activities defined to be financial in nature.
The Dodd-Frank Act, which became law in July 2010, has had, and will continue to have, a significant effect on
the regulatory structure of the financial markets and supervision of bank holding companies, banks and other
financial institutions. The Dodd-Frank Act, among other things: established the Financial Stability Oversight
Council, or FSOC, to monitor systemic risk posed by financial institutions; enacted new restrictions on proprietary
trading and private-fund investment activities by banks and their affiliates, commonly known as the “Volcker
rule” (refer to our discussion of the Volcker rule provided below under “Regulatory Capital Adequacy and Liquidity
Standards” in this “Supervision and Regulation” section); created a new framework for the regulation of derivatives
and the entities that engage in derivatives trading; altered the regulatory capital treatment of trust preferred and
other hybrid capital securities; revised the assessment base that is used by the Federal Deposit Insurance
Corporation, or FDIC, to calculate deposit insurance premiums; and required large financial institutions to develop
plans for their resolution under the U.S. Bankruptcy Code (or other specifically applicable insolvency regime) in the
event of material financial distress or failure.
In addition, regulatory change is being implemented internationally with respect to financial institutions,
including, but not limited to, the implementation of the Basel III capital and liquidity standards (refer to “Regulatory
Capital Adequacy and Liquidity Standards” below in this “Supervision and Regulation” section and “Financial
Condition - Capital” in Management's Discussion and Analysis included under Item 7 of this Form 10-K for a
discussion of Basel III) and the Alternative Investment Fund Managers Directive, or AIFMD, the European Market
Infrastructure Resolution, or EMIR, anticipated revisions to the European collective investment fund, or UCITS,
directive, revisions to the Markets in Financial Instruments Directive, or MIFID, and ongoing review of European
Union data protection regulation.
Many aspects of our business are subject to regulation by other U.S. federal and state governmental and
regulatory agencies and self-regulatory organizations (including securities exchanges), and by non-U.S.
governmental and regulatory agencies and self-regulatory organizations. Some aspects of our public disclosure,
5
corporate governance principles and internal control systems are subject to the Sarbanes-Oxley Act of 2002, the
Dodd-Frank Act and regulations and rules of the SEC and the New York Stock Exchange.
Regulatory Capital Adequacy and Liquidity Standards
Like other U.S. bank holding companies, we and our depository institution subsidiaries are subject to the
current U.S. minimum risk-based capital and leverage ratio guidelines, referred to as Basel I. As noted above, the
status of our parent company as a financial holding company also requires that we and our depository institution
subsidiaries maintain specified regulatory capital ratio levels. As of December 31, 2013, our regulatory capital
levels on a consolidated basis, and the regulatory capital levels of State Street Bank, our principal banking
subsidiary, exceeded the currently applicable minimum capital requirements under Basel I and the requirements we
must meet for the parent company to qualify as a financial holding company.
In 2004, the Basel Committee released an enhanced capital adequacy framework, referred to as Basel II.
Basel II requires large and internationally active banking organizations, such as State Street, which generally rely
on sophisticated risk management and measurement systems, to better align the use of those systems with their
determination of regulatory capital requirements. In 2007, U.S. banking regulators jointly issued final rules to
implement the Basel II framework in the U.S. The framework does not supersede or change the existing prompt
corrective action and leverage capital requirements applicable to banking organizations in the U.S., and explicitly
reserves the regulators' authority to require organizations to hold additional capital where appropriate.
In 2010, the Basel Committee on Banking Supervision, or Basel Committee, reached an agreement on the
Basel III capital standards, which are designed to increase the quality and quantity of regulatory capital and
enhance the risk coverage of the regulatory capital framework. Basel III also introduces an internationally-agreed-
upon leverage ratio that serves to supplement the risk-based capital ratios.
In July 2013, U.S. banking regulators issued a final rule implementing Basel III in the U.S. The U.S. Basel III
final rule replaces the existing Basel I- and Basel II-based capital regulations in the United States. As an “advanced
approaches” banking organization (refer to the “Financial Condition - Capital” section of Management's Discussion
and Analysis included under Item 7 of this Form 10-K for a discussion of advanced approaches), State Street
became subject to the U.S. Basel III final rule beginning on January 1, 2014. However, certain aspects of the U.S.
Basel III final rule, including the new minimum risk-based and leverage capital ratios, capital buffers, regulatory
adjustments and deductions and revisions to the calculation of risk-weighted assets under the so-called
“standardized approach,” will commence at a later date or be phased in over several years.
Among other things, the U.S. Basel III final rule introduces a minimum common equity tier 1 risk-based capital
ratio of 4.5%, raises the minimum tier 1 risk-based capital ratio from 4% to 6%, and, for advanced approaches
banking organizations such as State Street, imposes a minimum supplementary tier 1 leverage ratio of 3%, the
numerator of which is tier 1 capital and the denominator of which includes both on-balance sheet assets and certain
off-balance sheet exposures. In addition to the supplementary leverage ratio, State Street is subject to a minimum
tier 1 leverage ratio of 4%, which differs from the supplementary leverage ratio primarily in that the denominator of
the tier 1 leverage ratio is quarterly average on-balance sheet assets.
The U.S. Basel III final rule also introduces a capital conservation buffer and a countercyclical capital buffer
that add to the minimum risk-based capital ratios. Specifically, the final rule limits a banking organization’s ability to
make capital distributions and discretionary bonus payments to executive officers if it fails to maintain a common
equity tier 1 capital conservation buffer of more than 2.5% of total risk-weighted assets and, if deployed during
periods of excessive credit growth, a common equity tier 1 countercyclical capital buffer of up to 2.5% of total risk-
weighted assets, above each of the minimum common equity tier 1, and tier 1 and total risk-based capital ratios.
Banking regulators have initially set the countercyclical capital buffer at zero.
To maintain the status of our parent company as a financial holding company, we and our insured depository
institution subsidiaries are required to be “well-capitalized” by maintaining capital ratios above the minimum
requirements. Effective beginning on January 1, 2015, the “well-capitalized” standard for our banking subsidiaries
will be revised to reflect the higher capital requirements in the U.S. Basel III final rule.
In addition to introducing new capital ratios and buffers, the U.S. Basel III final rule revises the eligibility criteria
for regulatory capital instruments and provides for the phase-out of existing capital instruments that do not satisfy
the new criteria. For example, existing trust preferred capital securities are being phased out from tier 1 capital over
a two-year period beginning on January 1, 2014 and ending on January 1, 2016, and subsequently, the qualification
of these securities as tier 2 capital will be phased out over a multi-year transition period beginning on January 1,
2016 and ending on January 1, 2022. We had trust preferred capital securities of $950 million outstanding as of
December 31, 2013.
6
Under the U.S. Basel III final rule, certain new items will be deducted from common equity tier 1 capital and
certain existing regulatory capital deductions will be modified. Among other things, the final rule requires significant
investments in the common stock of unconsolidated financial institutions, as defined, and certain deferred tax
assets that exceed specified individual and aggregate thresholds to be deducted from common equity tier 1 capital.
As an advanced approaches banking organization, after-tax unrealized gains and losses on investment securities
classified as available for sale, which are excluded from tier 1 capital under Basel I and Basel II, will be included in
State Street’s and State Street Bank's tier 1 capital, subject to a phase-in schedule.
Beginning on January 1, 2015, the U.S. Basel III final rule will replace the existing Basel I-based approach for
calculating risk-weighted assets with the U.S. Basel III standardized approach that, among other things, modifies
certain existing risk weights and introduces new methods for calculating risk-weighted assets for certain types of
assets and exposures. The final rule also revised the existing Basel II-based advanced approaches capital rules to
implement Basel III and certain provisions of the Dodd-Frank Act. In December 2013, the Federal Reserve made
certain technical revisions to the new market risk capital rule, to which we became subject beginning on January 1,
2013.
We are currently in the qualification, or parallel run, period that must be completed prior to our full
implementation of the Basel III advanced approaches capital rules. During this qualification period, we must
demonstrate to the satisfaction of the Federal Reserve that our models, systems and processes for calculating
capital comply with the qualitative and quantitative requirements in the Basel III advanced approaches capital rules.
While we are in the qualification period, we must report our risk-based capital calculations under the Basel III
advanced approaches capital rules to the Federal Reserve. Upon completion of the qualification period and with
the approval of the Federal Reserve, we will begin to use the Basel III advanced approaches capital rules to
calculate our risk-based capital ratios. However, under the U.S. banking regulators’ implementation of a provision of
the Dodd-Frank Act, we will be subject to a capital floor which is currently based on Basel I and will, beginning in
2015, be based on the U.S. Basel III standardized approach. As a result, we will be required to calculate our risk-
based capital ratios under both the Basel III advanced approach and either the Basel I or Basel III standardized
approach, as applicable, and we will be subject to the more stringent of the risk-based capital ratios calculated
under the standardized approach and those calculated under the advanced approach in the assessment of our
capital adequacy under the prompt corrective action framework.
On February 21, 2014, we were notified by the Federal Reserve that we have completed our parallel run
period and will be required to begin using the advanced approaches framework as provided in the Federal
Reserve's July 2013 Basel III final rule in the determination of our risk-based capital requirements. Pursuant to this
notification, we will use the advanced approaches framework to calculate and publicly disclose our risk-based
capital ratios beginning with the second quarter of 2014. Under the July 2013 Basel III final rule, we must meet the
minimum risk-based capital ratios under both the advanced approaches and generally applicable risk-based capital
frameworks in Basel III and Basel I, respectively.
In addition to the U.S. Basel III final rule, the Dodd-Frank Act requires the Federal Reserve to establish more
stringent capital requirements for large bank holding companies, including State Street. The Federal Reserve has
indicated that it intends to address this requirement by, among other things, implementing the Basel Committee’s
capital surcharge for “global systemically important banks,” or G-SIBs. The Financial Stability Board, or FSB, has
identified 29 institutions worldwide as G-SIBs and assigned each G-SIB a common equity tier 1 capital surcharge
ranging from 1.0% to 2.5% of the respective G-SIB's risk-weighted assets. We have been identified as a G-SIB with
a capital surcharge of 1.0%. This surcharge is subject to change from time to time by the FSB. The FSB has stated
that it intends to update its list of G-SIBs annually.
The Federal Reserve has also indicated that it may introduce a requirement that certain large bank holding
companies maintain a minimum amount of long-term debt at the holding company level to facilitate their orderly
resolution in the event of material financial distress or failure. Depending on the ultimate regulation, our parent
company could be required to issue additional long-term debt to comply with this requirement. If issued, this
additional long-term debt will likely increase our interest expense and reduce our net interest revenue. We cannot
predict the magnitude or the timing of the impact at this time.
The following table presents our tier 1 common ratio as of December 31, 2013, calculated using Basel I
standards, and our estimated tier 1 common ratios as of December 31, 2013, calculated in conformity with the
Basel III final rule under both the standardized approach and the advanced approach. These estimated Basel III tier
1 common ratios are preliminary, reflect tier 1 common equity calculated under the Basel III final rule as applicable
on its January 1, 2014 effective date, and are based on our present understanding of the final rule's impact. As
indicated above, under the Basel III final rule, the more stringent of the Basel III tier 1 common ratios calculated by
7
us under the standardized and advanced approaches will apply in the assessment of our capital adequacy under
the prompt corrective action framework.
December 31, 2013
(Dollars in millions)
Tier 1 capital
Less:
Trust preferred capital securities
Preferred stock
Plus:
Other
Tier 1 common capital
Total risk-weighted assets
Tier 1 common ratio
Currently
Applicable
Regulatory
Requirements(1)
13,895
$
Basel III Final Rule
Standardized
Approach
(Estimated)(2)
Basel III Final Rule
Advanced
Approach
(Estimated)(2)
$
13,216
$
13,216
950
491
—
12,454
80,126
15.5%
$
$
475
491
87
475
491
87
12,337
121,562
$
$
10.1%
12,337
104,919
11.8%
$
$
Minimum tier 1 common ratio requirement, assuming full
implementation on January 1, 2019
Capital conservation buffer, assuming full implementation on January
1, 2019
Minimum tier 1 common ratio requirement, including capital
conservation buffer, assuming full implementation on January 1,
2019(3)
4.5
2.5
7.0
4.5
2.5
7.0
(1) Using Basel I standards, the tier 1 common ratio was calculated by dividing (a) tier 1 risk-based capital, calculated in conformity with Basel I, less non-
common elements including qualifying trust preferred capital securities and qualifying perpetual preferred stock, or tier 1 common capital, by (b) total
risk-weighted assets, calculated in conformity with Basel I.
(2) As of December 31, 2013, for purposes of the calculations in conformity with the Basel III final rule, capital and total risk-weighted assets under both the
standardized approach and the advanced approach were calculated using our estimates, based on the provisions of the final rule expected to affect
capital in 2014. The tier 1 common ratio was calculated by dividing (a) tier 1 common capital, as described in footnote (1), but with tier 1 risk-based
capital calculated in conformity with the final rule, by (b) total risk-weighted assets, calculated in conformity with the Basel III final rule. These estimated
Basel III tier 1 common ratios are preliminary, reflect tier 1 common equity calculated under the Basel III final rule as applicable on its January 1, 2014
effective date, and are based on our present understanding of the final rule's impact.
• Under both the standardized and advanced approaches, tier 1 risk-based capital decreased by $679 million, as a result of applying the estimated
effect of the Basel III final rule to Basel I tier 1 risk-based capital of $13.90 billion as of December 31, 2013.
• Under both the standardized and advanced approaches, estimated tier 1 common capital used in the calculation of the tier 1 common ratio was
$12.34 billion, reflecting the adjustments to Basel I tier 1 risk-based capital described in the first bullet above. Tier 1 common capital used in the
calculation was therefore calculated as adjusted tier 1 risk-based capital of $13.22 billion less non-common elements of capital, composed of trust
preferred capital securities of $475 million, preferred stock of $491 million, and other adjustments of $87 million as of December 31, 2013,
resulting in estimated tier 1 common capital of $12.34 billion. As of December 31, 2013, there was no qualifying minority interest in subsidiaries.
• Under the standardized approach, total risk-weighted assets used in the calculation of the estimated tier 1 common ratio increased by $41.44
billion as a result of applying the provisions of the Basel III final rule to Basel I total risk-weighted assets of $80.13 billion as of December 31, 2013.
Under the advanced approach, total risk-weighted assets used in the calculation of the estimated tier 1 common ratio increased by $24.79 billion
as a result of applying the provisions of the final rule to Basel I total risk-weighted assets of $80.13 billion as of December 31, 2013.
The primary differences between total risk-weighted assets under Basel I and total risk-weighted assets under the Basel III final rule include the
following: under Basel I, credit risk is quantified using pre-determined risk weights and asset classes, and in part, uses external credit ratings, while the
Basel III final rule, specifically the standardized and advanced approaches, introduces a broader range of pre-determined risk weights and asset
classes, uses certain alternatives to external credit ratings, includes additional adjustments for operational risk (under the advanced approach) and
counterparty credit risk, and revises the treatment of equity exposures. In particular, asset securitization exposures receive higher risk weights under
both the standardized and advanced approaches in the Basel III final rule compared to Basel I.
(3) The minimum tier 1 common ratio requirement does not reflect the countercyclical capital buffer under the Basel III final rule, or the capital buffer for
large bank holding companies identified as G-SIBs prescribed by the Basel Committee (G-SIBs are described earlier in this “Regulatory Capital
Adequacy and Liquidity Standards” section); such countercyclical capital buffer, which is initially set at zero, would be established by banking regulators
under certain economic conditions, and U.S. banking regulators have not yet issued a proposal to implement the prescribed capital buffer for
systemically important financial institutions.
The estimated Basel III tier 1 common ratio as of December 31, 2013 presented above, calculated under the
advanced approach in conformity with the Basel III final rule, reflects calculations and determinations with respect to
our capital and related matters as of December 31, 2013, based on State Street and external data, quantitative
formulae, statistical models, historical correlations and assumptions, collectively referred to as “advanced systems,”
in effect and used by State Street for those purposes as of the time we filed this Form 10-K. Significant components
of these advanced systems involve the exercise of judgment by us and our regulators, and our advanced systems
may not accurately represent or calculate the scenarios, circumstances, outputs or other results for which they are
designed or intended.
8
Due to the influence of changes in these advanced systems, whether resulting from changes in data inputs,
regulation or regulatory supervision or interpretation, State Street-specific or market activities or experiences or
other updates or factors, we expect that our advanced systems and our capital ratios calculated in conformity with
the Basel III final rule will change and may be volatile over time, and that those latter changes or volatility could be
material as calculated and measured from period to period.
Supplementary Leverage Ratio
In July 2013, U.S. banking regulators jointly issued a Notice of Proposed Rulemaking, or NPR, which proposes
to enhance leverage ratio standards for the largest, most systemically significant U.S. banking organizations. The
July 2013 NPR applies to any U.S. bank holding company with at least $700 billion in consolidated total assets or at
least $10 trillion in total assets under custody, referred to as a covered bank holding company, and any insured
depository institution subsidiary of such bank holding company. We expect the standards to apply to State Street
and State Street Bank based on our total assets under custody.
Under Basel I, the tier 1 leverage ratio is calculated by dividing tier 1 capital by adjusted quarterly average on-
balance sheet assets. The Basel III final rule provides for a leverage ratio similar to Basel I, as well as a
supplementary leverage ratio for advanced approaches banking organizations. This supplementary leverage ratio
adds certain off-balance sheet exposures, such as those related to derivative contracts and unfunded lending
commitments, to the denominator of the ratio calculation.
Under the July 2013 NPR, as a covered bank holding company, we would be required to maintain a
supplementary tier 1 leverage ratio of at least 5%, which is 2% above the similar minimum Basel III supplementary
tier 1 leverage ratio of 3% referenced earlier in this “Regulatory Capital Adequacy and Liquidity Standards”
section. Failure to exceed the 5% supplementary tier 1 leverage ratio would subject us to restrictions on our
capital distributions and discretionary bonus payments. In addition to this leverage buffer for covered bank holding
companies, the July 2013 NPR would require insured depository institution subsidiaries of covered bank holding
companies, like State Street Bank, to maintain a 6% supplementary tier 1 leverage ratio to be considered “well
capitalized.” We are one of eight large U.S. banking organizations to which the July 2013 NPR would apply, and the
July 2013 NPR would not apply to all banking organizations with which we compete. If finalized as currently
proposed, the new supplementary tier 1 leverage ratio requirements will be effective beginning on January 1, 2018.
The July 2013 NPR is a proposed rule and subject to interpretation, regulatory guidance, industry and other
comment and issuance in the form of a final rule.
Separately, in January 2014, the Basel Committee finalized its revisions to the denominator of the Basel III
supplementary tier 1 leverage ratio. The revised denominator differs from the denominator of the supplementary
leverage ratio in the July 2013 NPR and the U.S. Basel III final rule in several important respects that could
adversely affect the calculation of our ratio, including the treatment of derivative contracts, securities financing
transactions and certain off-balance sheet exposures. U.S. banking regulators may issue rules to implement these
revisions.
Liquidity Coverage Ratio and Net Stable Funding Ratio
In addition to capital standards, Basel III introduced two quantitative liquidity standards: the liquidity coverage
ratio, or LCR, and the net stable funding ratio, or NSFR.
The LCR requires banking organizations to maintain a minimum amount of liquid assets to withstand a short-
term liquidity stress period of thirty days. It is intended to promote the short-term resilience of the liquidity risk
profile of internationally active banking organizations, improve the banking industry's ability to absorb shocks arising
from financial and economic stress, and improve the measurement and management of liquidity risk. In October
2013, U.S. banking regulators issued an NPR to implement the LCR in the U.S. Among other things, the proposed
LCR standard would require covered banking organizations, which includes us and State Street Bank, to maintain
an amount of high-quality liquid assets, or HQLAs, equal to or greater than 100% of the banking organization’s total
net cash outflows over a 30-calendar-day standardized supervisory liquidity stress scenario.
The U.S. LCR proposal is more stringent in certain respects than the Basel Committee’s version of the LCR,
and includes a generally narrower definition of HQLAs, a different methodology for calculating net cash outflows
during the 30-calendar-day stress scenario, and a shorter, two-year phase-in period that ends on December 31,
2016. The October 2013 NPR is a proposed rule and may be modified before being finalized. At such time as the
Federal Reserve issues a final rule regarding the LCR, the specifications of such rule, such as the eligibility of
assets as HQLAs, the calculation of net outflows, including the treatment of operational deposits, and the timing of
indeterminate maturities, could have a material effect on our business activities, including the management and
9
composition of our investment securities portfolio and our ability to extend committed contingent credit facilities to
our clients.
The NSFR requires banking organizations to maintain a stable funding profile in relation to the composition of
their assets and off-balance sheet activities. The NSFR is defined as the amount of available stable funding relative
to the amount of required stable funding. This ratio should be equal to at least 100% on an ongoing basis. The
amount of available stable funding refers to the portion of capital and liabilities expected to be reliable over a one-
year horizon. The amount of stable funding required of banking organizations is a function of the liquidity
characteristics and residual maturities of their assets and off-balance sheet exposures. In January 2014, the Basel
Committee proposed revisions to the original December 2010 version of the NSFR. Many of the proposed changes
relate to the prescribed available stable funding factors and required stable funding factors used to calculate the
NSFR. The Basel Committee continues to contemplate the introduction of the NSFR, including any final revisions,
as a minimum standard by January 1, 2018. U.S. banking regulators have not yet issued an NPR to implement the
NSFR.
In addition to the LCR and NSFR, the Federal Reserve has indicated that it may introduce additional
regulatory measures related to short-term wholesale funding in the form of securities financing transactions, such as
repurchase agreements, reverse repurchase agreements, securities borrowing and lending transactions and margin
loans.
Failure to meet current and future regulatory capital requirements could subject us to a variety of enforcement
actions, including the termination of State Street Bank's deposit insurance by the FDIC, and to certain restrictions
on our business, including those that are described above in this “Supervision and Regulation” section.
For additional information about our regulatory capital position and our regulatory capital adequacy, as well as
current and future regulatory capital requirements, refer to “Financial Condition - Capital” in Management's
Discussion and Analysis included under Item 7, and note 15 to the consolidated financial statements included under
Item 8, of this Form 10-K.
Capital Planning, Stress Tests and Dividends
Pursuant to the Dodd-Frank Act, the Federal Reserve has adopted capital planning and stress test
requirements for large bank holding companies, including us, which form part of the Federal Reserve’s annual
Comprehensive Capital Analysis and Review, or CCAR, framework. Under the Federal Reserve’s capital plan final
rule, we must submit an annual capital plan to the Federal Reserve, taking into account the results of separate
stress tests designed by us and by the Federal Reserve.
The capital plan must include a description of all of our planned capital actions over a nine-quarter planning
horizon, including any issuance of a debt or equity capital instrument, any capital distribution, such as payments of
dividends on, or purchases of, our stock, and any similar action that the Federal Reserve determines could affect
our consolidated capital. The capital plan must include a discussion of how we will maintain capital above the
minimum regulatory capital ratios, including the minimum ratios under the U.S. Basel III final rule that are phased in
over the planning horizon, and above a tier 1 common risk-based capital ratio of 5%, and serve as a source of
strength to our U.S. depository institution subsidiaries under supervisory stress scenarios. The capital plan
requirements mandate that we receive no objection from the Federal Reserve before making a capital distribution.
In addition, even with a capital plan for which we have received no objection from the Federal Reserve, we must
seek the approval of the Federal Reserve before making a capital distribution if, among other reasons, we would not
meet our regulatory capital requirements after making the proposed capital distribution.
In addition to its capital planning requirements, the Federal Reserve has the authority to prohibit or to limit the
payment of dividends by the banking organizations it supervises, including us and State Street Bank, if, in the
Federal Reserve’s opinion, the payment of a dividend would constitute an unsafe or unsound practice in light of the
financial condition of the banking organization. All of these policies and other requirements could affect our ability to
pay dividends and purchase our stock, or require us to provide capital assistance to State Street Bank and any
other banking subsidiary.
We expect that, by March 31, 2014, the Federal Reserve will either provide a notice of non-objection or object
to our 2014 capital plan, which we submitted to the Federal Reserve in January 2014.
In October 2012, the Federal Reserve issued a final rule to implement its capital stress-testing requirements
under the Dodd-Frank Act that require us to conduct semi-annual State Street-run stress tests. Under this rule, we
are required to publicly disclose the summary results of our State Street-run stress tests under the severely adverse
economic scenario. In September 2013, we provided summary results of our 2013 semi-annual State Street-run
10
stress tests on the “Investor Relations” section of our corporate website. The rule also subjects us to an annual
supervisory stress test conducted by the Federal Reserve.
The Dodd-Frank Act also requires State Street Bank to conduct an annual stress test. State Street Bank
submitted its 2014 annual State Street Bank-run stress test to the Federal Reserve in January 2014.
The Volcker Rule
The Volcker rule became effective on July 21, 2012, and in December 2013, U.S. regulators issued final
regulations to implement the Volcker rule. The Volcker rule will, over time, prohibit “banking entities,” including us
and our subsidiaries, from engaging in certain prohibited “proprietary trading” activities, as defined in the final
Volcker rule regulations, subject to specified exemptions. The Volcker rule will also require banking entities to either
restructure or divest of certain investments in, and relationships with, “covered funds,” as defined in the final Volcker
rule regulations.
The classification of certain types of investment securities or structures, such as collateralized loan
obligations, or CLOs, as “covered funds” remains subject to market, and ultimately regulatory, interpretation, based
on the specific terms and other characteristics relevant to such investment securities and structures. As of
December 31, 2013, we held an aggregate of approximately $5.77 billion of investments in CLOs. As of the same
date, these investments had an aggregate pre-tax net unrealized gain of approximately $122 million, composed of
gross unrealized gains of $141 million and gross unrealized losses of $19 million. In the event that we or our
banking regulators conclude that such investments in CLOs, or other investments, are “covered funds,” we may be
required to divest of such investments. If other banking entities reach similar conclusions with respect to similar
investments held by them, the prices of such investments could decline significantly, and we may be required to
divest of such investments at a significant discount compared to the investments' book value. This could result in a
material adverse effect on our consolidated results of operations in the period in which such a divestment occurs or
on our consolidated financial condition.
Banking entities subject to the Volcker rule have until July 21, 2015 to bring all of their activities and
investments into conformity with the Volcker rule, subject to possible extensions. The final Volcker rule regulations
also require banking entities to establish extensive programs to ensure compliance with the restrictions of the
Volcker rule.
We are reviewing our activities that are affected by the final Volcker rule regulations and are taking steps to
bring those activities into conformity with the Volcker rule. We are also in the process of establishing the necessary
compliance programs to comply with the final Volcker rule regulations. Given the complexity of the new framework,
while we anticipate that the final rule will have some impact on our investment management and custody
operations, we have not completed a full evaluation of the impact of the final Volcker rule regulations. The impact of
the Volcker rule on us will ultimately depend on the interpretation and implementation by the five regulatory
agencies responsible for its oversight.
Enhanced Prudential Standards
The Dodd-Frank Act established a new regulatory framework to regulate banking organizations designated as
“systemically important financial institutions,” or SIFIs, and has subjected them to heightened prudential standards,
including heightened capital, leverage, liquidity and risk management requirements, single-counterparty credit limits
and early remediation requirements. Bank holding companies with $50 billion or more in consolidated assets, which
includes us, became automatically subject to the systemic-risk regime in July 2010.
The FSOC, established by the Dodd-Frank Act as discussed earlier, can recommend prudential standards,
reporting and disclosure requirements to the Federal Reserve for SIFIs, and must approve any finding by the
Federal Reserve that a financial institution poses a grave threat to financial stability and must undertake mitigating
actions. The FSOC is also empowered to designate systemically important payment, clearing and settlement
activities of financial institutions, subjecting them to prudential supervision and regulation, and, assisted by the new
Office of Financial Research within the U.S. Department of the Treasury, also established by the Dodd-Frank Act,
can gather data and reports from financial institutions, including us.
In December 2011, the Federal Reserve issued proposed rules to implement the Dodd-Frank Act’s enhanced
prudential standards for large bank holding companies such as State Street. Among other provisions, the proposed
rules would require us to implement various liquidity-related risk management and corporate governance measures
and limit our aggregate credit exposure to any unaffiliated counterparty (together with that counterparty’s
subsidiaries) to 25% of our capital stock and surplus, as defined. Refer to the risk factor titled “We assume
significant credit risk to counterparties, many of which are major financial institutions. These financial institutions
and other counterparties may also have substantial financial dependencies with other financial institutions and
11
sovereign entities. This credit exposure and concentration could expose us to financial loss” included under Item
1A of this Form 10-K. In addition, the proposed rules would create a new early-remediation regime to address
financial distress or material management weaknesses determined with reference to four levels of early
remediation, including heightened supervisory review, initial remediation, recovery, and resolution assessment, with
specific limitations and requirements tied to each level.
The systemic-risk regime also provides that, for institutions deemed to pose a grave threat to U.S. financial
stability, the Federal Reserve, upon an FSOC vote, must limit that institution’s ability to merge, restrict its ability to
offer financial products, require it to terminate activities, impose conditions on activities or, as a last resort, require it
to dispose of assets. Upon a grave-threat determination by the FSOC, the Federal Reserve must issue rules that
require financial institutions subject to the systemic-risk regime to maintain a debt-to-equity ratio of no more than 15
to 1 if the FSOC considers it necessary to mitigate the risk. The Federal Reserve also has the ability to establish
further standards, including those regarding contingent capital, enhanced public disclosures, and limits on short-
term debt, including off-balance sheet exposures.
Resolution Planning
As required by the Dodd-Frank Act, the FDIC and the Federal Reserve jointly issued a final rule pursuant to
which we are required to submit annually to the Federal Reserve and the FDIC a plan for our rapid and orderly
resolution under the Bankruptcy Code (or other specifically applicable insolvency regime) in the event of material
financial distress or failure, referred to as a “resolution plan.” The FDIC also issued a final rule pursuant to which
State Street Bank is required to submit annually to the FDIC a plan for resolution in the event of its failure. We and
State Street Bank submitted our most recent annual resolution plans to the Federal Reserve and the FDIC on
October 1, 2013.
Orderly Liquidation Authority
Under the Dodd-Frank Act, certain financial companies, including bank holding companies such as State
Street, and certain covered subsidiaries, can be subjected to a new orderly liquidation authority. The U.S. Treasury
Secretary, in consultation with the President, must first make certain extraordinary financial distress and systemic
risk determinations, and action must be recommended by two-thirds of the FDIC Board and two-thirds of the
Federal Reserve Board. Absent such actions, we, as a bank holding company, would remain subject to the U.S.
Bankruptcy Code.
The orderly liquidation authority went into effect in July 2010, and rulemaking is proceeding in stages, with
some regulations now finalized and others planned but not yet proposed. If we were subject to the orderly
liquidation authority, the FDIC would be appointed as our receiver, which would give the FDIC considerable powers
to resolve us, including: (1) the power to remove officers and directors responsible for our failure and to appoint new
directors and officers; (2) the power to assign assets and liabilities to a third party or bridge financial company
without the need for creditor consent or prior court review; (3) the ability to differentiate among creditors, including
by treating junior creditors better than senior creditors, subject to a minimum recovery right to receive at least what
they would have received in bankruptcy liquidation; and (4) broad powers to administer the claims process to
determine distributions from the assets of the receivership to creditors not transferred to a third party or bridge
financial institution.
In December 2013, the FDIC released its proposed single-point-of-entry strategy for resolution of a SIFI under
the orderly liquidation authority. The FDIC’s release outlines how it would use its powers under the orderly
liquidation authority to resolve a SIFI by placing its top-tier U.S. holding company in receivership and keeping its
operating subsidiaries open and out of insolvency proceedings by transferring the operating subsidiaries to a new
bridge holding company, recapitalizing the operating subsidiaries and imposing losses on the shareholders and
creditors of the holding company in receivership according to their statutory order of priority.
Derivatives
Title VII of the Dodd-Frank Act imposes a new regulatory structure on the over-the-counter derivatives market,
including requirements for clearing, exchange trading, capital, margin, reporting and record-keeping. In addition,
certain swaps and other derivatives activities are required to be “pushed out” of insured depository institutions and
conducted in separately capitalized non-bank affiliates. Title VII also requires certain persons to register as a “major
swap participant” or a “swap dealer.” The Commodity Futures Trading Commission, or CFTC, the SEC and other
U.S. regulators have adopted and are still in the process of adopting regulations to implement Title VII. Through this
rulemaking process, the CFTC has established, among other things, reporting and record-keeping obligations,
margin and capital requirements, the scope of registration requirements, and what swaps are required to be
12
centrally cleared and exchange-traded. The CFTC has also issued rules to enhance the oversight of clearing and
trading entities. The SEC is in the process of proposing and finalizing similar regulations.
State Street Bank has registered provisionally with the CFTC as a swap dealer. As a provisionally-registered
swap dealer, State Street Bank is subject to significant regulatory obligations regarding its swap activity and the
supervision, examination and enforcement powers of the CFTC and other regulators. In December 2013, the CFTC
granted State Street Bank a limited-purpose swap dealer designation. Under this limited-purpose designation,
interest-rate swap activity engaged in by State Street Bank’s Global Treasury group is not subject to certain of the
swap regulatory requirements otherwise applicable to swaps entered into by a registered swap dealer, subject to a
number of conditions. For all other swap transactions, our swap activities remain subject to all applicable swap
dealer regulations.
Money Market Funds
In 2012, the FSOC proposed several recommendations for money market mutual fund reform, which included
requiring money market funds to use a floating net asset value, mandating a capital buffer and requiring a hold-back
on redemptions for certain shareholders, and the FSB endorsed recommendations proposed by the International
Organization of Securities Commissions, or IOSCO, including requiring money market funds to adopt a floating net
asset value. In June 2013, the SEC proposed U.S. reforms, which would require certain SEC-registered money
market funds to transact at the floating net asset value or, alternatively, allow such funds to continue to transact at a
stable share price but impose liquidity fees and investor redemption gates in times of stress. Reforms proposed by
the SEC would also create additional disclosure and reporting requirements for the funds. Money market reforms
are also being considered in Europe. The timing and content of final new regulations in the U.S. or Europe remain
uncertain. The requirements and standards provided for in any new regulations, including those of the nature
described in the FSOC or IOSCO recommendations or in the proposed SEC reforms, have the potential to
significantly alter the business models of money market fund sponsors and asset managers, including many of our
servicing clients and SSgA, and may result in reduced levels of investment in money market funds. These effects
could have adverse impacts on our business, our operations or our consolidated results of operations.
Subsidiaries
The Federal Reserve is the primary federal banking agency responsible for regulating us and our subsidiaries,
including State Street Bank, with respect to both our U.S. and non-U.S. operations.
Our banking subsidiaries are subject to supervision and examination by various regulatory authorities. State
Street Bank is a member of the Federal Reserve System, its deposits are insured by the FDIC and it is subject to
applicable federal and state banking laws and to supervision and examination by the Federal Reserve, as well as by
the Massachusetts Commissioner of Banks, the FDIC, and the regulatory authorities of those states and countries
in which State Street Bank operates a branch. Our other subsidiary trust companies are subject to supervision and
examination by the Office of the Comptroller of the Currency, the Federal Reserve or by the appropriate state
banking regulatory authorities of the states in which they are organized and operate. Our non-U.S. banking
subsidiaries are subject to regulation by the regulatory authorities of the countries in which they operate. As of
December 31, 2013, the capital of each of these banking subsidiaries exceeded the minimum legal capital
requirements set by those regulatory authorities.
We and our subsidiaries that are not subsidiaries of State Street Bank are affiliates of State Street Bank under
federal banking laws, which impose restrictions on various types of transactions, including loans, extensions of
credit, investments or asset purchases by or from State Street Bank, on the one hand, to us and those of our
subsidiaries, on the other. Transactions of this kind between State Street Bank and its affiliates are limited with
respect to each affiliate to 10% of State Street Bank’s capital and surplus, as defined by the aforementioned
banking laws, and to 20% in the aggregate for all affiliates, and in some cases are also subject to strict collateral
requirements. Under the Dodd-Frank Act, effective in July 2012, derivatives, securities borrowing and securities
lending transactions between State Street Bank and its affiliates became subject to these restrictions. The Dodd-
Frank Act also expanded the scope of transactions required to be collateralized. In addition, the Volcker rule
generally prohibits similar transactions between the parent company or any of its affiliates and “covered funds” for
which we or any of our affiliates serve as the investment manager, investment adviser, commodity trading advisor or
sponsor and other “covered funds” organized and offered pursuant to specific exemptions in the final Volcker rule
regulations.
Federal law also requires that certain transactions with affiliates be on terms and under circumstances,
including credit standards, that are substantially the same, or at least as favorable to the institution, as those
prevailing at the time for comparable transactions involving other non-affiliated companies. Alternatively, in the
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absence of comparable transactions, the transactions must be on terms and under circumstances, including credit
standards, that in good faith would be offered to, or would apply to, non-affiliated companies. State Street Bank is
also prohibited from engaging in certain tie-in arrangements in connection with any extension of credit or lease or
sale of property or furnishing of services. Federal law provides as well for a depositor preference on amounts
realized from the liquidation or other resolution of any depository institution insured by the FDIC.
SSgA Funds Management, Inc., or SSgA FM, and State Street Global Advisors Limited, or SSgA Ltd., act as
investment advisers to investment companies registered under the Investment Company Act of 1940. SSgA FM,
incorporated in Massachusetts in 2001 and headquartered in Boston, Massachusetts, is registered with the SEC as
an investment adviser under the Investment Advisers Act of 1940. SSgA Ltd., incorporated in 1990 as a U.K. limited
company and domiciled in the U.K., is also registered with the SEC as an investment adviser under the Investment
Advisers Act of 1940. SSgA Ltd. is also authorized and regulated by the U.K. Financial Conduct Authority, or FCA,
and is an investment firm under the Markets in Financial Instruments Directive. SSgA FM and SSgA Ltd. each offer
a variety of asset management solutions, including active, enhanced and passive equity, active and passive fixed-
income, cash management, multi-asset class solutions and real estate. In addition, a major portion of our
investment management activities are conducted by State Street Bank, which is subject to supervision primarily by
the Federal Reserve with respect to these activities.
Our U.S. broker/dealer subsidiary is registered as a broker/dealer with the SEC, is subject to regulation by the
SEC (including the SEC’s net capital rule) and is a member of the Financial Industry Regulatory Authority, a self-
regulatory organization. The U.K. broker/dealer business operates through our subsidiary, State Street Global
Markets International Limited, which is registered in the U.K. as a regulated securities broker, is authorized and
regulated by the FCA and is an investment firm under the Market in Financial Instruments Directive. It is also a
member of the London Stock Exchange. In accordance with the rules of the FCA, the U.K. broker/dealer publishes
information on its risk management objectives and on policies associated with its regulatory capital requirements
and resources. Many aspects of our investment management activities are subject to federal and state laws and
regulations primarily intended to benefit the investment holder, rather than our shareholders.
Our activities as a futures commission merchant are subject to regulation by the CFTC in the U.S. and various
regulatory authorities internationally, as well as the membership requirements of the applicable clearinghouses.
These laws and regulations generally grant supervisory agencies and bodies broad administrative powers,
including the power to limit or restrict us from conducting our investment management activities in the event that we
fail to comply with such laws and regulations, and examination authority. Our business related to investment
management and trusteeship of collective trust funds and separate accounts offered to employee benefit plans is
subject to the Employee Retirement Income Security Act, or ERISA, and is regulated by the U.S. Department of
Labor.
Our businesses, including our investment management and securities and futures businesses, are also
regulated extensively by non-U.S. governments, securities exchanges, self-regulatory organizations, central banks
and regulatory bodies, especially in those jurisdictions in which we maintain an office. For instance, the FCA, the
Prudential Regulatory Authority, or PRA, the London Stock Exchange, and the Euronext.Liffe regulate our activities
in the U.K.; the Federal Financial Supervisory Authority and Deutsche Borse AG regulate our activities in Germany;
and the Financial Services Agency, the Bank of Japan, the Japanese Securities Dealers Association and several
Japanese securities and futures exchanges, including the Tokyo Stock Exchange, regulate our activities in Japan.
We have established policies, procedures, and systems designed to comply with the requirements of these
organizations. However, as a global financial services institution, we face complexity and costs related to
regulation.
The majority of our non-U.S. asset servicing operations are conducted pursuant to the Federal Reserve's
Regulation K through State Street Bank’s Edge Act subsidiary or through international branches of State Street
Bank. An Edge Act corporation is a corporation organized under federal law that conducts foreign business
activities. In general, banks may not make investments in their Edge Act corporations (and similar state law
corporations) that exceed 20% of their capital and surplus, as defined, and the investment of any amount in excess
of 10% of capital and surplus requires the prior approval of the Federal Reserve.
In addition to our non-U.S. operations conducted pursuant to Regulation K, we also make new investments
abroad directly (through us or through our non-banking subsidiaries) pursuant to the Federal Reserve's Regulation
Y, or through international bank branch expansion, which are not subject to the investment limitations applicable to
Edge Act subsidiaries.
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We and certain of our subsidiaries are subject to the Bank Secrecy Act of 1970, as amended by the USA
PATRIOT Act of 2001, which contains anti-money laundering, or AML, and financial transparency provisions and
requires implementation of regulations applicable to financial services companies, including standards for verifying
client identification and monitoring client transactions and detecting and reporting suspicious activities. AML laws
outside the U.S. contain similar requirements. We have implemented policies, procedures and internal controls that
are designed to comply with all applicable AML laws and regulations. Compliance with applicable AML and related
requirements is a common area of review for financial regulators, and our level of compliance with these
requirements could result in fines, penalties, lawsuits, regulatory sanctions or difficulties in obtaining approvals,
restrictions on our business activities or harm to our reputation.
We are also subject to the Massachusetts bank holding company statute. Requirements of the statute include,
among other things, prior approval by the Massachusetts Board of Bank Incorporation for our acquisition of more
than 5% of the voting shares of any additional bank and for other forms of bank acquisitions.
Deposit Insurance
FDIC-insured depository institutions are required to pay deposit insurance assessments to the FDIC. The
Dodd-Frank Act made permanent the general $250,000 deposit insurance limit for insured deposits.
The FDIC’s Deposit Insurance Fund, or DIF, is funded by assessments on insured depository institutions. The
FDIC assesses DIF premiums based on an insured depository institution's average consolidated total assets, less
the average tangible equity of the insured depository institution during the assessment period. For larger
institutions, such as State Street Bank, assessments are determined based on regulatory ratings and forward-
looking financial measures to calculate the assessment rate, which is subject to adjustments by the FDIC, and the
assessment base.
The Dodd-Frank Act also directed the FDIC to determine whether and to what extent adjustments to the
assessment base are appropriate for “custody banks.” During 2011, the FDIC concluded that certain liquid assets
could be excluded from the deposit insurance assessment base of custody banks that satisfy specified institutional
eligibility criteria. This has the effect of reducing the amount of DIF insurance premiums due from custody banks.
State Street Bank is a custody bank for this purpose. The custody bank assessment adjustment may not exceed
total transaction account deposits identified by the institution as being directly linked to a fiduciary or custody and
safekeeping asset.
Prompt Corrective Action
The FDIC Improvement Act of 1991 requires the appropriate federal banking regulator to take “prompt
corrective action” with respect to a depository institution if that institution does not meet certain capital adequacy
standards. While these regulations apply only to banks, such as State Street Bank, the Federal Reserve is
authorized to take appropriate action against a parent bank holding company, such as our parent company, based
on the under-capitalized status of any banking subsidiary. In certain instances, we would be required to guarantee
the performance of the capital restoration plan for our under-capitalized banking subsidiary.
Support of Subsidiary Banks
Under Federal Reserve guidelines, which were codified in the Dodd-Frank Act, a bank holding company such
as our parent company is required to act as a source of financial and managerial strength to its banking
subsidiaries. This requirement means that we are expected to commit resources to State Street Bank and any
other banking subsidiary in circumstances in which we otherwise might not do so absent such a requirement. In the
event of bankruptcy, any commitment by us to a federal bank regulatory agency to maintain the capital of a banking
subsidiary will be assumed by the bankruptcy trustee and will be entitled to a priority payment.
Insolvency of an Insured U.S. Subsidiary Depository Institution
If the FDIC is appointed the conservator or receiver of an FDIC-insured U.S. subsidiary depository institution,
such as State Street Bank, upon its insolvency or certain other events, the FDIC has the ability to transfer any of the
depository institution’s assets and liabilities to a new obligor without the approval of the depository institution’s
creditors, enforce the terms of the depository institution’s contracts pursuant to their terms or repudiate or disaffirm
contracts or leases to which the depository institution is a party.
Additionally, the claims of holders of deposit liabilities and certain claims for administrative expenses against
an insured depository institution would be afforded priority over other general unsecured claims against such an
institution, including claims of debt holders of the institution and, under current interpretation, depositors in non-U.S.
offices, in the liquidation or other resolution of such an institution by any receiver. As a result, such persons would
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be treated differently from and could receive, if anything, substantially less than the depositors in U.S. offices of the
depository institution.
ECONOMIC CONDITIONS AND GOVERNMENT POLICIES
Economic policies of the U.S. government and its agencies influence our operating environment. Monetary
policy conducted by the Federal Reserve directly affects the level of interest rates, which may affect overall credit
conditions of the economy. Monetary policy is applied by the Federal Reserve through open market operations in
U.S. government securities, changes in reserve requirements for depository institutions, and changes in the
discount rate and availability of borrowing from the Federal Reserve. Government regulation of banks and bank
holding companies is intended primarily for the protection of depositors of the banks, rather than for the
shareholders of the institutions and therefore may, in some cases, be adverse to the interests of those
shareholders. We are similarly affected by the economic policies of non-U.S. government agencies, such as the
European Central Bank, or ECB.
STATISTICAL DISCLOSURE BY BANK HOLDING COMPANIES
The following information, included under Items 6, 7 and 8 of this Form 10-K, is incorporated by reference
herein:
“Selected Financial Data” table (Item 6) - presents return on average common equity, return on average
assets, common dividend payout and equity-to-assets ratios.
“Distribution of Average Assets, Liabilities and Shareholders’ Equity; Interest Rates and Interest Differential”
table (Item 8) - presents consolidated average balance sheet amounts, related fully taxable-equivalent interest
earned and paid, related average yields and rates paid and changes in fully taxable-equivalent interest revenue and
interest expense for each major category of interest-earning assets and interest-bearing liabilities.
“Investment Securities” section included in Management's Discussion and Analysis (Item 7) and note 4,
“Investment Securities,” to the consolidated financial statements (Item 8) - disclose information regarding book
values, market values, maturities and weighted-average yields of securities (by category).
Note 1, “Summary of Significant Accounting Policies - Loans and Leases,” to the consolidated financial
statements (Item 8) - discloses our policy for placing loans and leases on non-accrual status.
“Loans and Leases” section included in Management’s Discussion and Analysis (Item 7) and note 5, “Loans
and Leases,” to the consolidated financial statements (Item 8) - discloses distribution of loans, loan maturities and
sensitivities of loans to changes in interest rates.
“Loans and Leases” and “Cross-Border Outstandings” sections of Management’s Discussion and Analysis
(Item 7) - discloses information regarding cross-border outstandings and other loan concentrations of State Street.
“Credit Risk Management” section included in Management’s Discussion and Analysis (Item 7) and note 5,
“Loans and Leases,” to the consolidated financial statements (Item 8) - present the allocation of the allowance for
loan losses, and a description of factors which influenced management’s judgment in determining amounts of
additions or reductions to the allowance, if any, charged or credited to results of operations.
“Distribution of Average Assets, Liabilities and Shareholders’ Equity; Interest Rates and Interest Differential”
table (Item 8) - discloses deposit information.
Note 9, “Short-Term Borrowings,” to the consolidated financial statements (Item 8) - discloses information
regarding short-term borrowings of State Street.
ITEM 1A. RISK FACTORS
Forward-Looking Statements
This Form 10-K, as well as other reports submitted by us under the Securities Exchange Act of 1934,
registration statements filed by us under the Securities Act of 1933, our annual report to shareholders and other
public statements we may make, contain statements (including statements in Management's Discussion and
Analysis included under Item 7 of this Form 10-K) that are considered “forward-looking statements” within the
meaning of U.S. securities laws, including statements about industry, regulatory, economic and market trends,
management's expectations about our financial performance, capital, market growth, acquisitions, joint ventures
and divestitures, new technologies, services and opportunities and earnings, management's confidence in our
strategies and other matters that do not relate strictly to historical facts. Terminology such as “plan,” “expect,”
“intend,” “forecast,” “outlook,” “believe,” “anticipate,” “estimate,” “seek,” “may,” “will,” “trend,” “target,” “strategy” and
“goal,” or similar statements or variations of such terms, are intended to identify forward-looking statements,
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although not all forward-looking statements contain such terms.
Forward-looking statements are subject to various risks and uncertainties, which change over time, are based
on management's expectations and assumptions at the time the statements are made, and are not guarantees of
future results. Management's expectations and assumptions, and the continued validity of the forward-looking
statements, are subject to change due to a broad range of factors affecting the national and global economies, the
equity, debt, currency and other financial markets, as well as factors specific to State Street and its subsidiaries,
including State Street Bank. Factors that could cause changes in the expectations or assumptions on which
forward-looking statements are based cannot be foreseen with certainty and include, but are not limited to:
•
•
•
•
•
the financial strength and continuing viability of the counterparties with which we or our clients do business
and to which we have investment, credit or financial exposure, including, for example, the direct and indirect
effects on counterparties of the sovereign-debt risks in the U.S., Europe and other regions;
increases in the volatility of, or declines in the level of, our net interest revenue, changes in the composition
or valuation of the assets recorded in our consolidated statement of condition (and our ability to measure
the fair value of investment securities) and the possibility that we may change the manner in which we fund
those assets;
the liquidity of the U.S. and international securities markets, particularly the markets for fixed-income
securities and inter-bank credits, and the liquidity requirements of our clients;
the level and volatility of interest rates and the performance and volatility of securities, credit, currency and
other markets in the U.S. and internationally;
the credit quality, credit-agency ratings and fair values of the securities in our investment securities portfolio,
a deterioration or downgrade of which could lead to other-than-temporary impairment of the respective
securities and the recognition of an impairment loss in our consolidated statement of income;
• our ability to attract deposits and other low-cost, short-term funding, and our ability to deploy deposits in a
profitable manner consistent with our liquidity requirements and risk profile;
•
the manner and timing with which the Federal Reserve and other U.S. and foreign regulators implement the
Dodd-Frank Act changes to the Basel III capital framework and European legislation, such as the Alternative
Investment Fund Managers Directive and Undertakings for Collective Investment in Transferable Securities
Directives, with respect to the levels of regulatory capital we must maintain, our credit exposure to third
parties, margin requirements applicable to derivatives, banking and financial activities and other regulatory
initiatives in the U.S. and internationally, including regulatory developments that result in changes to our
structure or operating model, increased costs or other changes to how we provide services;
• adverse changes in the regulatory capital ratios that we are required or will be required to meet, whether
arising under the Dodd-Frank Act or the Basel III capital and liquidity standards, or due to changes in
regulatory positions, practices or regulations in jurisdictions in which we engage in banking activities,
including changes in internal or external data, formulae, models, assumptions or other advanced systems
used in the calculation of our capital ratios that cause changes in those ratios as they are measured from
period to period;
•
increasing requirements to obtain the prior approval of the Federal Reserve or our other regulators for the
use, allocation or distribution of our capital or other specific capital actions or programs, including
acquisitions, dividends and equity purchases, without which our growth plans, distributions to shareholders,
equity purchase programs or other capital initiatives may be restricted;
• changes in law or regulation, or the enforcement of law or regulation, that may adversely affect our
business activities or those of our clients or our counterparties, and the products or services that we sell,
including additional or increased taxes or assessments thereon, capital adequacy requirements, margin
requirements and changes that expose us to risks related to the adequacy of our controls or compliance
programs;
•
financial market disruptions or economic recession, whether in the U.S., Europe, Asia or other
regions;
• our ability to promote a strong culture of risk management, operating controls, compliance oversight and
governance that meet our expectations and those of our clients and our regulators;
•
the results of, and costs associated with, government investigations, litigation and similar claims, disputes,
or proceedings;
• delays or difficulties in the execution of our previously announced Business Operations and Information
Technology Transformation program, which could lead to changes in our estimates of the charges,
expenses or savings associated with the planned program and may cause volatility of our earnings;
17
•
•
the potential for losses arising from our investments in sponsored investment funds;
the possibility that our clients will incur substantial losses in investment pools for which we act as agent, and
the possibility of significant reductions in the liquidity or valuation of assets underlying those pools;
• our ability to anticipate and manage the level and timing of redemptions and withdrawals from our
collateral pools and other collective investment products;
•
the credit agency ratings of our debt and depository obligations and investor and client perceptions
of our financial strength;
• adverse publicity, whether specific to State Street or regarding other industry participants or industry-wide
factors, or other reputational harm;
• our ability to control operational risks, data security breach risks and outsourcing risks, and our
ability to protect our intellectual property rights, the possibility of errors in the quantitative models we use to
manage our business and the possibility that our controls will prove insufficient, fail or be
circumvented;
• dependencies on information technology and our ability to control related risks, including cyber-crime and
other threats to our information technology infrastructure and systems and their effective operation both
independently and with external systems, and complexities and costs of protecting the security of our
systems and data;
• our ability to grow revenue, control expenses, attract and retain highly skilled people and raise the capital
necessary to achieve our business goals and comply with regulatory requirements;
• changes or potential changes to the competitive environment, including changes due to regulatory and
technological changes, the effects of industry consolidation and perceptions of State Street as a suitable
service provider or counterparty;
• changes or potential changes in how and in what amounts clients compensate us for our services, and the
mix of services provided by us that clients choose;
• our ability to complete acquisitions, joint ventures and divestitures, including the ability to obtain regulatory
approvals, the ability to arrange financing as required and the ability to satisfy closing conditions;
•
the risks that our acquired businesses and joint ventures will not achieve their anticipated financial and
operational benefits or will not be integrated successfully, or that the integration will take longer than
anticipated, that expected synergies will not be achieved or unexpected negative synergies will be
experienced, that client and deposit retention goals will not be met, that other regulatory or operational
challenges will be experienced, and that disruptions from the transaction will harm our relationships with our
clients, our employees or regulators;
• our ability to recognize emerging needs of our clients and to develop products that are responsive to such
trends and profitable to us, the performance of and demand for the products and services we offer, and the
potential for new products and services to impose additional costs on us and expose us to increased
operational risk;
• changes in accounting standards and practices; and
• changes in tax legislation and in the interpretation of existing tax laws by U.S. and non-U.S. tax authorities
that affect the amount of taxes due.
Actual outcomes and results may differ materially from what is expressed in our forward-looking statements
and from our historical financial results due to the factors discussed in this section and elsewhere in this Form 10-K
or disclosed in our other SEC filings. Forward-looking statements should not be relied on as representing our
expectations or beliefs as of any date subsequent to the time this Form 10-K is filed with the SEC. We undertake no
obligation to revise our forward-looking statements after the time they are made. The factors discussed above and
in this section generally are not intended to be a complete summary of all risks and uncertainties that may affect our
businesses. We cannot anticipate all developments that may adversely affect our consolidated results of operations
and financial condition.
Forward-looking statements should not be viewed as predictions, and should not be the primary basis on
which investors evaluate State Street. Any investor in State Street should consider all risks and uncertainties
disclosed in our SEC filings, including our filings under the Securities Exchange Act of 1934, in particular our reports
on Forms 10-K, 10-Q and 8-K, or registration statements filed under the Securities Act of 1933, all of which are
accessible on the SEC's website at www.sec.gov or on the “Investor Relations” section of our website at
www.statestreet.com.
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Risk Factors
In the normal course of our business activities, we are exposed to a variety of risks. The following is a
discussion of various risk factors applicable to State Street. Additional information about our risk management
framework is included under “Risk Management” in Management’s Discussion and Analysis included under Item 7
of this Form 10-K. Additional risks beyond those described in Management's Discussion and Analysis or in the
following discussion may be inherent in our activities or operations as currently conducted, or as we may conduct
them in the future, or in the markets in which we operate or may in the future operate.
Credit and Counterparty, Liquidity and Market Risks
We assume significant credit risk to counterparties, many of which are major financial institutions. These
financial institutions and other counterparties may also have substantial financial dependencies with other
financial institutions and sovereign entities. This credit exposure and concentration could expose us to
financial loss.
The financial markets are characterized by extensive interdependencies among numerous parties, including
banks, central banks, broker/dealers, collective investment funds, insurance companies and other financial
institutions. Many financial institutions also hold, or are exposed to, loans, sovereign debt, fixed-income securities,
derivatives, counterparty and other forms of credit risk in amounts that are material to their financial condition. As a
result of our own business practices and these interdependencies, we and many of our clients have concentrated
counterparty exposure to other financial institutions, particularly large and complex institutions, and sovereign
issuers. Although we have procedures for monitoring both individual and aggregate counterparty risk, significant
individual and aggregate counterparty exposure is inherent in our business, as our focus is on servicing large
institutional investors.
From time to time, we assume concentrated credit risk at the individual obligor, counterparty or group level.
Such concentrations may be material and can from time to time exceed 10% of our consolidated total shareholders'
equity. Our material counterparty exposures change daily, and the counterparties or groups of related counterparties
to which our risk exposure exceeds 10% of our consolidated total shareholders' equity are also variable during any
reported period; however, our largest exposures tend to be to other financial institutions.
Concentration of counterparty exposure presents significant risks to us and to our clients because the failure or
perceived weakness of our counterparties (or in some cases of our clients' counterparties) has the potential to
expose us to risk of financial loss. Changes in market perception of the financial strength of particular financial
institutions or sovereign issuers can occur rapidly, are often based on a variety of factors and are difficult to predict.
Since mid-2007, the continued instability of the financial markets has resulted in many financial institutions
becoming significantly less creditworthy, as reflected in the credit downgrades of numerous large U.S. and non-U.S.
financial institutions in recent years. Also, credit downgrades to several sovereign issuers (including the U.S.,
Austria, France, Greece, Italy, the Netherlands, Portugal and Spain) and other issuers have stressed the perceived
creditworthiness of financial institutions, many of which invest in, accept collateral in the form of, or value other
transactions based on the debt or other securities issued by sovereign or other issuers. Further economic, political
or market turmoil or developments, including with respect to federal budget or federal debt-ceiling concerns in the
U.S. or the reduction in levels of quantitative easing in the U.S. and other developed countries, may lead to stress
on sovereign issuers, and increase the potential for sovereign defaults or restructurings, additional credit-rating
downgrades or the departure of sovereign issuers from common currencies or economic unions. As a result, we
may be exposed to increased counterparty risks, either resulting from our role as principal or because of
commitments we make in our capacity as agent for some of our clients.
The degree of client demand for short-term credit tends to increase during periods of market turbulence, which
may expose us to further counterparty-related risks. For example, investors in collective investment vehicles for
which we act as custodian may experience significant redemption activity due to adverse market or economic news
that was unanticipated by the fund's manager. Our relationship with our clients, the nature of the settlement process
and limitations in our systems may result in the extension of short-term credit in such circumstances. For some
types of clients, we provide credit to allow them to leverage their portfolios, which may expose us to potential loss if
the client experiences investment losses or other credit difficulties.
In addition to our exposure to financial institutions, we are from time to time exposed to concentrated credit risk
at the industry or country level, potentially exposing us to a single market or political event or a correlated set of
events. We are also generally not able to net exposures across counterparties that are affiliated entities and may
not be able in all circumstances to net exposures to the same legal entity across multiple products. As a
consequence, we may incur a loss in relation to one entity or product even though our exposure to an entity's
affiliates or across product types is over-collateralized. Our use of unaffiliated subcustodians and changing
19
regulatory requirements with respect to our financial exposures in the event those subcustodians are unable to
return a client’s assets also expose us to credit exposure to those subcustodians. Moreover, not all of our
counterparty exposure is secured, and when our exposure is secured, the realizable value of the collateral may
have declined by the time we exercise our rights against that collateral. This risk may be particularly acute if we are
required to sell the collateral into an illiquid or temporarily-impaired market.
On behalf of clients enrolled in our securities lending program, we lend securities to banks, broker/dealers and
other institutions. In most circumstances, we indemnify our clients for the fair market value of those securities
against a failure of the borrower to return such securities. Borrowers are generally required to provide collateral
equal to a contractually-agreed percentage equal to or in excess of the fair value of the loaned securities. As the fair
value of the loaned securities changes, additional collateral is provided by the borrower or collateral is returned to
the borrower. In addition, our clients often purchase securities or other financial instruments from financial
counterparties, including broker/dealers, under repurchase arrangements, frequently as a method of reinvesting the
cash collateral they receive from lending their securities. Under these arrangements, the counterparty is obligated to
repurchase these securities or financial instruments from the client at the same price (plus an agreed rate of return)
at some point in the future. The value of the collateral is intended to exceed the counterparty's payment obligation,
and collateral is adjusted daily to account for shortfall under, or excess over, the agreed-upon collateralization level.
As with the securities lending program, we agree to indemnify our clients from any loss that would arise on a default
by the counterparty under these repurchase arrangements if the proceeds from the disposition of the securities or
other financial assets held as collateral are less than the amount of the repayment obligation by the client's
counterparty. In such instances of counterparty default, for both securities lending and repurchase agreements, we,
rather than our client, are exposed to the risks associated with collateral value.
We also engage in certain off-balance sheet activities that involve risks. For example, we provide benefit-
responsive contracts, known as wraps, to defined contribution plans that offer a stable value option to their
participants. During the financial crisis, the book value of obligations under many of these contracts exceeded the
market value of the underlying portfolio holdings. Concerns regarding the portfolio of investments protected by such
contracts, or regarding the investment manager overseeing such an investment option, may result in redemption
demands from stable value products covered by benefit-responsive contracts at a time when the portfolio's market
value is less than its book value, potentially exposing us to risk of loss. Similarly, we provide credit facilities in
connection with the remarketing of U.S. municipal obligations, potentially exposing us to credit exposure to the
municipalities issuing such bonds and to their increased liquidity demands. In the current economic environment,
where municipal credits are subject to increased investor concern, the risks associated with such businesses
increase. Further, our off-balance sheet activities also include our agreement, described above, to indemnify our
clients for the fair market value of those securities against a failure of the borrower to return such securities.
Under evolving regulatory restrictions on credit exposure, which are anticipated to include a broadening of the
measure of credit exposure, we may be required to limit our exposures to specific issuers or groups, including
financial institutions and sovereign issuers, to levels that we may currently exceed. These credit exposure
restrictions under such evolving regulations may adversely affect our businesses and may require that we modify
our operating models or the policies and practices we use to manage our consolidated statement of condition.
Although our overall business is subject to these interdependencies, several of our business units are
particularly sensitive to them, including our Global Treasury group, our currency trading business, our securities
finance business, and our investment management business. Given the limited number of strong counterparties in
the current market, we are not able to mitigate all of our and our clients' counterparty credit risk.
Our investment securities portfolio, consolidated financial condition and consolidated results of operations
could be adversely affected by changes in interest rate, market and credit risks.
Our investment securities portfolio represented approximately 48% of our consolidated total assets as of
December 31, 2013, and the gross interest revenue associated with our investment portfolio represented
approximately 22% of our consolidated total gross revenue for the year ended December 31, 2013. As such, our
consolidated financial condition and results of operations are materially exposed to the risks associated with our
investment portfolio, including, without limitation, changes in interest rates, credit spreads, credit performance,
credit ratings, our access to liquidity, foreign exchange markets, mark-to-market valuations, and our ability to
profitably reinvest repayments of principal with respect to these securities. The low interest-rate environment that
has persisted since the financial crisis began in mid-2007, and may continue in 2014 and beyond, limits our ability
to achieve a net interest margin consistent with our historical averages.
Our investment securities portfolio represents a greater proportion of our consolidated statement of condition
and our loan and lease portfolios represent a smaller proportion (approximately 6% of our consolidated total assets
as of December 31, 2013), in comparison to many other major financial institutions. In some respects, the
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accounting and regulatory treatment of our investment securities portfolio may be less favorable to us than a more
traditional held-for-investment lending portfolio or a portfolio of U.S. Treasury securities. For example, under the
U.S. Basel III final rule issued in July 2013, after-tax changes in the fair value of investment securities classified as
available for sale will be included in tier 1 capital. Since loans held for investment are not subject to a fair-value
accounting framework, changes in the fair value of loans (other than incurred credit losses) are not similarly
included in the determination of tier 1 capital under the U.S. Basel III final rule. Due to this differing treatment, we
may experience increased variability in our tier 1 capital relative to other major financial institutions whose loan-and-
lease portfolios represent a larger proportion of their consolidated total assets than ours.
Our investment portfolio continues to have significant concentrations in certain classes of securities, including
agency and non-agency residential mortgage-backed securities, commercial mortgage-backed securities and other
asset-backed securities, and securities with concentrated exposure to consumers. These classes and types of
securities experienced significant liquidity, valuation and credit quality deterioration during the financial disruption
that began in mid-2007. We also hold non-U.S. mortgage-backed and asset-backed securities with exposures to
European countries, whose sovereign-debt markets have experienced increased stress since 2011 and may
continue to experience stress in the future. For further information, refer to the risk factor titled “Our businesses
have significant European operations, and disruptions in European economies could have a material adverse effect
on our consolidated results of operations or financial condition.”
Further, we hold a portfolio of U.S. state and municipal bonds. In view of the budget deficits that a number of
states and municipalities currently face, the risks associated with this portfolio have increased.
If market conditions similar to those experienced in 2007 and 2008 were to recur, our investment portfolio
could experience a decline in liquidity and market value, regardless of our credit view of our portfolio holdings. For
example, we recorded significant losses not related to credit in connection with the consolidation of our off-balance
sheet asset-backed commercial paper conduits in 2009 and the repositioning of our investment portfolio in 2010
with respect to these asset classes. In addition, deterioration in the credit quality of our portfolio holdings could
result in other-than-temporary impairment. Our investment portfolio is further subject to changes in both U.S. and
non-U.S. (primarily in Europe) interest rates, and could be negatively affected by a quicker-than-anticipated
increase in interest rates. In addition, while approximately 89% of the carrying value of the securities in our
investment portfolio was composed of securities rated “AAA” or “AA” as of December 31, 2013, if a material portion
of our investment portfolio were to experience credit-rating declines below investment grade, our capital ratios as
calculated pursuant to the Basel III regulatory capital and liquidity standards could be adversely affected. This risk
is greater with portfolios of investment securities than with loans or holdings of U.S. Treasury securities.
Our business activities expose us to interest-rate risk.
In our business activities, we assume interest-rate risk by investing short-term deposits received from our
clients in our investment portfolio of longer- and intermediate-term assets. Our net interest revenue is affected by
the levels of interest rates in global markets, changes in the relationship between short- and long-term interest
rates, the direction and speed of interest-rate changes, and the asset and liability spreads relative to the currency
and geographic mix of our interest-earning assets and interest-bearing liabilities. Our ability to anticipate these
changes or to hedge the related on- and off-balance sheet exposures can significantly influence the success of our
asset-and-liability management activities and the resulting level of our net interest revenue. The impact of changes
in interest rates will depend on the relative duration and fixed- or floating-rate nature of our assets and liabilities.
Sustained lower interest rates, a flat or inverted yield curve and narrow interest-rate spreads generally have a
constraining effect on our net interest revenue. For additional information about the effects on interest rates on our
business, refer to “Financial Condition - Market Risk - Asset-and-Liability Management Activities” in Management's
Discussion and Analysis included under Item 7 of this Form 10-K.
If we are unable to continuously attract deposits and other short-term funding, our consolidated financial
condition, including our regulatory capital ratios, our consolidated results of operations and our business
prospects, could be adversely affected.
Liquidity management is critical to the management of our consolidated statement of condition and to our
ability to service our client base. We generally use our liquidity to:
• extend credit to our clients in connection with our custody business;
• meet clients' demands for return of their deposits; and
• manage the pool of long- and intermediate-term assets that are included in the investment securities carried
in our consolidated statement of condition.
Because the demand for credit by our clients is difficult to predict and control, and may be at its peak at times
of disruption in the securities markets, and because the average maturity of our investment securities portfolio is
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longer than the contractual maturity of our client deposit base, we need to continuously attract, and are dependent
on access to, various sources of short-term funding. During periods of market uncertainty, the level of client deposits
held by us has in recent years tended to increase; however, since such deposits are considered to be transitory, we
have historically deposited so-called excess deposits with U.S. and non-U.S. central banks and in other highly liquid
but low-yielding instruments. These levels of excess client deposits, as a consequence, have increased our net
interest revenue but have adversely affected our net interest margin.
In managing our liquidity, our primary source of short-term funding is client deposits, which are predominantly
transaction-based deposits by institutional investors. Our ability to continue to attract these deposits, and other
short-term funding sources such as certificates of deposit and commercial paper, is subject to variability based on a
number of factors, including volume and volatility in the global securities markets, the relative interest rates that we
are prepared to pay for these deposits and the perception of safety of these deposits or short-term obligations
relative to alternative short-term investments available to our clients, including the capital markets.
In addition, we may be exposed to liquidity or other risks in managing asset pools for third parties that are
funded on a short-term basis, or for which the clients participating in these products have a right to the return of
cash or assets on limited notice. These business activities include, among others, securities finance collateral pools,
money market and other short-term investment funds and liquidity facilities utilized in connection with municipal
bond programs. If clients demand a return of their cash or assets, particularly on limited notice, and these
investment pools do not have the liquidity to support those demands, we could be forced to sell investment
securities at unfavorable prices, damaging our reputation as an asset manager and potentially exposing us to
claims related to our management of the pools.
The availability and cost of credit in short-term markets are highly dependent on the markets' perception of our
liquidity and creditworthiness. Our efforts to monitor and manage our liquidity risk may not be successful or
sufficient to deal with dramatic or unanticipated changes in the global securities markets or other event-driven
reductions in liquidity. As a result of such events, our cost of funds may increase, thereby reducing our net interest
revenue, or we may need to dispose of a portion of our investment securities portfolio, which, depending on market
conditions, could result in a loss from such sales of investment securities being recorded in our consolidated
statement of income.
Our business and capital-related activities, including our ability to return capital to shareholders and
purchase our capital stock, may be adversely affected by our implementation of the revised regulatory
capital and liquidity standards that we must meet under Basel III, the Dodd-Frank Act and other regulatory
initiatives, or in the event our capital plan or post-stress capital ratios are determined to be insufficient as a
result of regulatory capital stress testing.
In July 2013, U.S. banking regulators issued a final rule implementing the Basel III capital standards in the U.S.
The U.S. Basel III final rule replaces the existing Basel I- and Basel II-based capital regulations. As a so-called
“advanced approaches” banking organization, we became subject to the U.S. Basel III final rule on January 1, 2014.
We are currently in the qualification, or parallel run, period that must be completed prior to our full implementation of
the Basel III advanced approaches capital rules. During the parallel run period, we must demonstrate to the
satisfaction of the Federal Reserve that our models, systems and processes for calculating capital comply with the
qualitative and quantitative requirements in the Basel III advanced approaches capital rules.
During or subsequent to this qualification period, the Federal Reserve may determine that we are not in
compliance with certain aspects of the advanced approaches capital rules and may require us to take certain
actions to come into compliance that could adversely affect our business operations, our regulatory capital
structure, our capital ratios or our financial performance, or otherwise restrict our growth plans or strategies. In
addition, banking regulators could change the Basel III capital standards or their interpretations as they apply to us,
including changes to these standards or interpretations made in regulations implementing provisions of the Dodd-
Frank Act, which could adversely affect us and our ability to comply with the Basel III advanced approaches capital
rules.
On February 21, 2014, we were notified by the Federal Reserve that we have completed our parallel run
period and will be required to begin using the advanced approaches framework as provided in the Federal
Reserve's July 2013 Basel III final rule in the determination of our risk-based capital requirements. Pursuant to this
notification, we will use the advanced approaches framework to calculate and publicly disclose our risk-based
capital ratios beginning with the second quarter of 2014. Under the July 2013 Basel III final rule, we must meet the
minimum risk-based capital ratios under both the advanced approaches and generally applicable risk-based capital
frameworks in Basel III and Basel I, respectively.
Our current assessment of the implications of the U.S. Basel III final rule indicates a potential impact which
could be material to our businesses and our profitability, as well as to our regulatory capital ratios. The U.S. Basel III
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final rule requires us to apply the “Simplified Supervisory Formula Approach,” referred to as the SSFA, to determine
the risk weights of securitization exposures, such as asset-backed securities, carried in our investment securities
portfolio. In contrast, the existing capital rules provided for a ratings-based approach under which external credit
ratings were used to determine the risk weight of securitization exposures. The Dodd-Frank Act prohibits the use of
external credit ratings in federal regulations, resulting in the elimination of the ratings-based approach by the U.S.
Basel III final rule. Currently, our investment securities portfolio contains significant holdings of mortgage- and
asset-backed securities that are highly rated by credit rating agencies, for which the SSFA would apply higher
regulatory risk weights compared to Basel I and Basel II. At the same time, certain of our securitization exposures
with lower credit ratings would receive lower regulatory risk weights under the SSFA compared to Basel I and
Basel II.
Based on the composition of our investment portfolio with respect to the types of securities and related
external credit ratings as of December 31, 2013, application of the SSFA would materially increase our total risk-
weighted assets relative to those calculated under Basel I and Basel II, and correspondingly decrease our
regulatory risk-based capital ratios. As a result, we are re-evaluating the composition of our investment portfolio in
order to maintain an investment strategy appropriately aligned with the capital requirements under Basel III. This
re-evaluation could result in the reinvestment of cash flows from our portfolio securities into different types of
investments, which could materially and adversely affect our consolidated results of operations by reducing our net
interest revenue and which could increase the amount of credit risk inherent in our consolidated statement of
condition.
There remains considerable uncertainty with respect to multiple provisions of the U.S. Basel III final rule, and
the timing and manner in which they will be applied to us. Models implemented under the U.S. Basel III final rule,
particularly those implementing the Basel III advanced approaches capital rules, remain subject to regulatory review
and approval. In addition, the U.S. Basel III final rule contains additional new requirements, such as a
supplementary leverage ratio, and further capital and liquidity requirements are under consideration by U.S. and
international banking regulators, such as a liquidity coverage and a net stable funding ratio, each of which has the
potential to have significant effects on our capital and liquidity planning and activities.
For example, the specification of the various elements of the U.S. liquidity coverage ratio in the final rule, when
adopted, such as the eligibility of assets as high-quality liquid assets, the calculation of net outflows, including the
treatment of operational deposits, and the timing of indeterminate maturities, could have a material effect on our
business activities, including the management and composition of our investment securities portfolio and our ability
to extend committed contingent credit facilities to our clients. The full effects of the Basel III final rule, and of other
regulatory initiatives related to capital or liquidity, on State Street and State Street Bank are therefore subject to
further evaluation and also to further regulatory guidance, action or rule-making. In general, as an identified “global
systemically important bank,” or G-SIB, we generally expect to be held to the most stringent provisions under the
U.S. Basel capital framework.
We are also required by the Federal Reserve to conduct periodic stress testing of our business operations and
to develop an annual capital plan as part of the Federal Reserve's Comprehensive Capital Analysis and Review
process, which process is used by the Federal Reserve to evaluate our management of capital, the adequacy of our
regulatory capital and the potential requirement for us to maintain capital levels above regulatory minimums. The
planned capital actions in our capital plan, including common stock purchases and dividends, may be objected to by
the Federal Reserve, potentially requiring us to revise our stress-testing or capital management approaches,
resubmit our capital plan or postpone, cancel or alter our planned capital actions. In addition, changes in our
business strategy, merger or acquisition activity or unanticipated uses of capital could result in a change in our
capital plan and its associated capital actions, and may require resubmission of the capital plan to the Federal
Reserve for approval. We also expect to be subject to asset quality reviews and stress testing by other regulators,
such as the ECB.
Our implementation of the new capital and liquidity requirements, including our capital plan, may not be
approved or may be objected to by the Federal Reserve, and the Federal Reserve may impose capital requirements
in excess of our expectations or require us to maintain levels of liquidity that are higher than we may expect, and
which may adversely affect our consolidated revenues. In the event that our implementation of new capital and
liquidity requirements under Basel III, the Dodd-Frank Act or other regulatory initiatives or our current capital
structure are determined not to conform with current and future capital requirements, our ability to deploy capital in
the operation of our business or our ability to distribute capital to shareholders or to purchase our capital stock may
be constrained, and our business may be adversely affected. Likewise, in the event that regulators in other
jurisdictions in which we have banking subsidiaries determine that our capital or liquidity levels do not conform with
current and future regulatory requirements, our ability to deploy capital, our levels of liquidity or our business
operations in those jurisdictions may be adversely affected.
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For additional information about the above matters, refer to “Business - Supervision and Regulation -
Regulatory Capital Adequacy and Liquidity Standards” included under Item 1, and “Financial Condition - Capital” in
Management's Discussion and Analysis included under Item 7, of this Form 10-K.
Our businesses have significant European operations, and disruptions in European economies could
have a material adverse effect on our consolidated results of operations or financial condition.
Since 2011, Greece, Ireland, Italy, Portugal, Spain and other European economies have experienced, and in
the future may experience, difficulties in financing their deficits and servicing their outstanding debt. Eurozone
instability and sovereign debt concerns, and the downgraded credit ratings of associated sovereign debt and
European financial institutions, have contributed to the volatility in the financial markets. This reduced confidence
has led to support for Greece, Ireland, Portugal, and Spain by Eurozone countries and the International Monetary
Fund. The ECB has also purchased European sovereign debt to support these markets and the euro. Numerous
European governments, notably Italy and Spain, have also adopted austerity and other measures in an attempt to
contain the spread of sovereign-debt concerns.
Disagreement among Eurozone countries remains as to the management of current European sovereign-debt
concerns and their impact on European financial institutions. The decline in the market value of sovereign debt, and
the requirement as part of certain rescue packages for creditors to agree to material restructuring of outstanding
sovereign debt, have weakened the capital position of many European financial institutions. These institutions have
been, and may in the future be, required to raise additional capital to improve their capital positions.
These political disagreements, along with the interdependencies among European economies and financial
institutions and the substantial refinancing requirements of European sovereign issuers, have exacerbated concern
regarding the stability of the euro, European financial markets generally and certain institutions in particular. Given
the scope of our European operations, clients and counterparties, disruptions in the European financial markets, the
failure to resolve fully and contain sovereign-debt concerns, continued recession in significant European
economies, the attempt of a country to abandon the euro, the failure of a significant European financial institution,
even if not an immediate counterparty to us, or persistent weakness in the euro, could have a material adverse
impact on our consolidated results of operations or financial condition.
The conditions since 2007 in the global economy and financial markets have adversely affected us, and
they have increased the uncertainty and unpredictability we face in managing our businesses.
Our businesses have been significantly affected by global economic conditions since 2007 and their impact on
financial markets. Global credit and other financial markets have at times suffered from substantial volatility,
illiquidity and disruption. The resulting economic pressure and lack of confidence in the financial stability of certain
countries, and in the financial markets generally, have adversely affected our business, as well as the businesses of
our clients and our significant counterparties. This environment, and the potential for continuing or additional
disruptions, have also affected overall confidence in financial institutions, have further exacerbated liquidity and
pricing issues within the fixed-income securities markets, have increased the uncertainty and unpredictability we
face in managing our businesses, and have had an adverse effect on our consolidated results of operations and
financial condition.
While global economies and financial markets showed some signs of stabilizing during 2013, numerous global
financial services firms and the sovereign debt of some nations experienced credit downgrades and recessionary
issues. The occurrence of additional disruptions in global markets, continued uncertainty with respect to federal
budget and federal debt-ceiling concerns in the U.S., continued economic or political uncertainty in Europe, or the
worsening of economic conditions, could further adversely affect our businesses and the financial services industry
in general, and also increase the difficulty and unpredictability of aligning our business strategies, our infrastructure
and our operating costs in light of current and future market and economic conditions.
Market disruptions can adversely affect our consolidated results of operations if the value of assets under
custody, administration or management decline, while the costs of providing the related services remain constant
due to the high fixed costs associated with this business. These factors can reduce the profitability of our asset-
based fee revenue and could also adversely affect our transaction-based revenue, such as revenues from securities
finance and foreign exchange activities, and the volume of transactions that we execute for or with our clients.
Further, the degree of volatility in foreign exchange rates can affect our foreign exchange trading revenue. In
general, increased currency volatility tends to increase our market risk but also increases our foreign exchange
revenue. Conversely, periods of lower currency volatility tend to decrease our market risk but also decrease our
foreign exchange revenue.
In addition, as our business grows globally and as a greater percentage of our revenue is earned in currencies
other than U.S. dollars, our exposure to foreign currency volatility could affect our levels of consolidated revenue,
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our consolidated expenses and our consolidated results of operations, as well as the value of our investment in our
non-U.S. operations and our investment portfolio holdings. As our product offerings expand, in part as we seek to
take advantage of perceived opportunities arising under various regulatory reforms and resulting market changes,
the degree of our exposure to various market and credit risks will evolve, potentially resulting in greater revenue
volatility. We also will need to make additional investments to develop the operational infrastructure and to enhance
our risk management capabilities to support these businesses, which may increase the operating expenses of such
businesses or, if our risk management resources fail to keep pace with product expansion, result in increased risk of
loss from such businesses.
We may need to raise additional capital in the future, which may not be available to us or may only be
available on unfavorable terms.
We may need to raise additional capital in order to maintain our credit ratings in response to regulatory
changes, including capital rules, or for other purposes, including financing acquisitions and joint ventures. However,
our ability to access the capital markets, if needed, will depend on a number of factors, including the state of the
financial markets. In the event of rising interest rates, disruptions in financial markets, negative perceptions of our
business or our financial strength, or other factors that would increase our cost of borrowing, we cannot be sure of
our ability to raise additional capital, if needed, on terms acceptable to us. Any diminished ability to raise additional
capital, if needed, could adversely affect our business and our ability to implement our business plan, capital plan
and strategic goals, including the financing of acquisitions and joint ventures.
Any downgrades in our credit ratings, or an actual or perceived reduction in our financial strength, could
adversely affect our borrowing costs, capital costs and liquidity and cause reputational harm.
Major independent rating agencies publish credit ratings for our debt obligations based on their evaluation of a
number of factors, some of which relate to our performance and other corporate developments, including
financings, acquisitions and joint ventures, and some of which relate to general industry conditions. We anticipate
that the rating agencies will review our ratings regularly based on our consolidated results of operations and
developments in our businesses. One or more of the major independent credit rating agencies have in the recent
past downgraded, and may in the future downgrade, our credit ratings, or have negatively revised their outlook for
our credit ratings. In November 2013, Moody’s Investors Service downgraded the long-term senior and
subordinated debt ratings for State Street Bank.
The current market environment and our exposure to financial institutions and other counterparties, including
sovereign entities, increase the risk that we may not maintain our current ratings, and we cannot provide assurance
that we will continue to maintain our current credit ratings. Downgrades in our credit ratings may adversely affect
our borrowing costs, our capital costs and our ability to raise capital and, in turn, our liquidity. A failure to maintain an
acceptable credit rating may also preclude us from being competitive in certain products.
Additionally, our counterparties, as well as our clients, rely on our financial strength and stability and evaluate
the risks of doing business with us. If we experience diminished financial strength or stability, actual or perceived,
including the effects of market or regulatory developments, our announced or rumored business developments or
consolidated results of operations, a decline in our stock price or a reduced credit rating, our counterparties may be
less willing to enter into transactions, secured or unsecured, with us; our clients may reduce or place limits on the
level of services we provide them or seek other service providers; or our prospective clients may select other
service providers,all of which may have other adverse effects on our reputation.
The risk that we may be perceived as less creditworthy relative to other market participants is higher in the
current market environment, in which the consolidation, and in some instances failure, of financial institutions,
including major global financial institutions, have resulted in a smaller number of much larger counterparties and
competitors. If our counterparties perceive us to be a less viable counterparty, our ability to enter into financial
transactions on terms acceptable to us or our clients, on our or our clients' behalf, will be materially compromised. If
our clients reduce their deposits with us or select other service providers for all or a portion of the services we
provide to them, our revenues will decrease accordingly.
Operational, Business and Reputational Risks
We face extensive and changing government regulation in the U.S. and in foreign jurisdictions in which we
operate, which may increase our costs and expose us to risks related to compliance.
Most of our businesses are subject to extensive regulation by multiple regulatory bodies, and many of the
clients to which we provide services are themselves subject to a broad range of regulatory requirements. These
regulations may affect the scope of, and the manner and terms of delivery of, our services. As a financial institution
with substantial international operations, we are subject to extensive regulation and supervisory oversight, both in
and outside of the U.S. This regulation and supervisory oversight affects, among other things, the scope of our
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activities and client services, our capital and organizational structure, our ability to fund the operations of our
subsidiaries, our lending practices, our dividend policy, our common stock purchase actions, the manner in which
we market our services, and our interactions with foreign regulatory agencies and officials.
Several aspects of the regulatory environment in which we operate, and related risks, are discussed below.
Additional information is provided in “Business - Supervision and Regulation” included under Item 1 of this
Form 10-K.
The Dodd-Frank Act, which became law in July 2010, has had, and will continue to have, a significant impact
on the regulatory structure of the global financial markets and has imposed, and is expected to continue to impose,
significant additional costs on us. While U.S. banking regulators have finalized many regulations to implement
various provisions of the Dodd-Frank Act, they plan to propose or finalize additional implementing regulations in the
future. In light of the further rule-making required to fully implement the Dodd-Frank Act, as well as the discretion
afforded to federal regulators, the full impact of this legislation on us, our business strategies and financial
performance is not known at this time and may not be known for a number of years. Several elements of the Dodd-
Frank Act, such as the Volcker rule and enhanced prudential standards for financial institutions designated as
“systemically important financial institutions,” or SIFIs, impose or are expected to impose significant additional
operational, compliance and risk management costs both in the near-term, as we develop and integrate appropriate
systems and procedures, and on a recurring basis thereafter, as we monitor, support and refine those systems and
procedures.
A number of regulations implementing the Dodd-Frank Act that are not yet final are anticipated to be finalized
in 2014, with compliance dates soon thereafter, and, as a result of and together with regulatory change in Europe,
the costs and impact on our operations of the post-financial crisis regulatory reform are accelerating. We may not
anticipate completely all areas in which the Dodd-Frank Act or other regulatory initiatives could affect our business
or influence our future activities or the full effects or extent of related operational, compliance, risk management or
other costs.
The FDIC and the Federal Reserve jointly issued a final rule under the Dodd-Frank Act pursuant to which we
are required to submit annually to the Federal Reserve and the FDIC a plan, known as a resolution plan, for our
rapid and orderly resolution under the Bankruptcy Code (or other specifically applicable insolvency regime) in the
event of material financial distress or failure. The FDIC also issued a final rule pursuant to which State Street Bank
is required to submit annually to the FDIC a plan for resolution in the event of its failure. We and State Street Bank
submitted our most recent annual resolution plan to the Federal Reserve and the FDIC on October 1, 2013. If the
FDIC and the Federal Reserve should determine that our resolution plan is not credible or would not facilitate an
orderly resolution under the Bankruptcy Code, we could be subject to more stringent capital, leverage or liquidity
requirements, restrictions on our growth, activities or operations, or be required to divest certain of our assets or
operations.
Other provisions of the Dodd-Frank Act and its implementing regulations, such as new rules for swap market
participants, additional regulation of financial system utilities, the designation of non-bank institutions as SIFIs, and
further requirements to facilitate orderly liquidation of large institutions, could adversely affect certain of our
business operations and our competitive position, and could also negatively affect the operational and competitive
positions of our clients. The final effects of the Dodd-Frank Act on our business will depend largely on the scope and
timing of the implementation of the Dodd-Frank Act by regulatory bodies, which in many cases have been delayed,
and the exercise of discretion by these regulatory bodies.
The breadth of our business activities, together with the scope of our global operations and varying business
practices in relevant jurisdictions, increase the complexity and costs of meeting our regulatory compliance
obligations, including in areas that are receiving significant regulatory scrutiny. We are, therefore, subject to related
risks of non-compliance, including fines, penalties, lawsuits, regulatory sanctions or difficulties in obtaining
approvals, limitations on our business activities, or reputational harm, any of which may be significant. For
example, the global nature of our client base requires us to comply with complex regulations relating to money
laundering and anti-terrorist monitoring of our clients. Regulatory scrutiny of compliance with these and other
regulations is increasing and our operations are subject to regulations from multiple jurisdictions. The overall
evolving regulatory landscape in each jurisdiction in which we operate, including requirements or restrictions on our
service offerings or opportunities for new service offerings, particularly when applied on a cross-border basis, is not
necessarily consistent with the requirements or regulatory objectives of other jurisdictions in which we have clients
or operations. This evolving regulatory landscape may interfere with our ability to conduct our operations, with our
pursuit of a common global operating model or with our ability to compete effectively with other financial institutions
operating in those jurisdictions or which may be subject to different regulatory requirements than apply to us.
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In particular, non-U.S. regulation and initiatives may be inconsistent or conflict with current or proposed
regulations in the U.S., which could create increased compliance and other costs that would adversely affect
business, operations or profitability. Our designation under the Dodd-Frank Act in the U.S. as a SIFI, and our
identification by the Financial Stability Board as a G-SIB, to which certain regulatory capital surcharges may apply,
will subject us to incrementally higher capital and prudential requirements, and may result in increased scrutiny of
our activities and potential further regulatory requirements, than those applicable to some of the financial institutions
with which we compete as a custodian or asset manager.
We are further affected by other regulatory initiatives, including, but not limited to, the implementation of the
Basel III capital and liquidity standards, including proposed revisions to the U.S. leverage ratio and Basel III
supplementary leverage ratio, and the Alternative Investment Fund Managers Directive, or AIFMD, and the
European Market Infrastructure Resolution, or EMIR, anticipated revisions to the European collective investment
fund, or UCITS, directive revisions to the Markets in Financial Instruments Directive and ongoing review of
European Union data protection regulation. Proposed or potential regulations in the U.S. and Europe with respect to
money market funds, short-term wholesale funding, such as repurchase agreements or securities lending, or other
“shadow banking” activities, could also adversely affect not only our own operations but also the operations of the
clients to which we provide services. In Europe, the AIFMD increases the responsibilities and potential liabilities of
custodians to certain of their clients for asset losses, and proposed revisions to the regulations affecting UCITS are
anticipated to incorporate similar, potentially more strict, standards.
EMIR requires the reporting of all derivatives to a trade repository, the mandatory clearing of certain derivatives
trades via a central counterparty and risk mitigation techniques for derivatives not cleared via a central counterparty.
EMIR will impact our business activities, and increase costs, in various ways, some of which may be adverse.
Further, the European Commission's proposal to introduce a proposed financial transaction tax or similar proposals
elsewhere, if adopted, could materially effect the location and volume of financial transactions or otherwise alter the
conduct of financial activities, any of which could have a material adverse effect on our business and on our
consolidated results of operations or financial condition.
The Dodd-Frank Act and these other international regulatory changes could limit our ability to pursue certain
business opportunities, increase our regulatory capital requirements, alter the risk profile of certain of our core
activities and impose additional costs on us, otherwise adversely affect our business, our consolidated results of
operations or financial condition and have other negative consequences, including a reduction of our credit ratings.
Different countries may respond to the market and economic environment in different and potentially conflicting
manners, which could increase the cost of compliance for us.
The evolving regulatory environment, including changes to existing regulations and the introduction of new
regulations, may also contribute to decisions we may make to suspend, reduce or withdraw from existing
businesses, activities or initiatives. In addition to potential lost revenue associated with any such suspensions,
reductions or withdrawals, any such suspensions, reductions or withdrawals may result in significant restructuring or
related costs or exposures.
If we do not comply with governmental regulations, we may be subject to fines, penalties, lawsuits, delays, or
difficulties in obtaining regulatory approvals or restrictions on our business activities or harm to our reputation, which
may significantly and adversely affect our business operations and, in turn, our consolidated results of operations.
The willingness of regulatory authorities to impose meaningful sanctions, and the level of fines and penalties
imposed in connection with regulatory violations, have increased substantially since the financial crisis. Regulatory
agencies may, at times, limit our ability to disclose their findings, related actions or remedial measures. Similarly,
many of our clients are subject to significant regulatory requirements and retain our services in order for us to assist
them in complying with those legal requirements. Changes in these regulations can significantly affect the services
that we are asked to provide, as well as our costs.
In addition, adverse publicity and damage to our reputation arising from the failure or perceived failure to
comply with legal, regulatory or contractual requirements could affect our ability to attract and retain clients. If we
cause clients to fail to comply with these regulatory requirements, we may be liable to them for losses and
expenses that they incur. In recent years, regulatory oversight and enforcement have increased substantially,
imposing additional costs and increasing the potential risks associated with our operations. If this regulatory trend
continues, it could adversely affect our operations and, in turn, our consolidated results of operations.
Our calculations of credit, market and operational risk exposures, total risk-weighted assets and capital
ratios for regulatory purposes depend on data inputs, formulae, models, correlations, and assumptions that
are subject to changes over time, which changes, in addition to our consolidated financial results, could
materially change our risk exposures, our total risk-weighted assets and our capital ratios from period to
period.
27
To calculate our credit, market and operational risk exposures, our total risk-weighted assets and our capital
ratios for regulatory purposes, the Basel III capital and liquidity standards involve the use of current and historical
data, including our own loss data and claims experience and similar information from other industry participants,
market volatility measures, interest rates and spreads, asset valuations, credit exposures, and the creditworthiness
of our counterparties. These calculations also involve the use of quantitative formulae, statistical models, historical
correlations and significant assumptions. We refer to the data, formulae, models, correlations, and assumptions, as
well as our related internal processes, as our “advanced systems.” While our advanced systems are generally
quantitative in nature, significant components involve the exercise of judgment by us and by our regulators based,
among other factors, on our and the financial services industry's evolving experience. Any of these judgments or
other elements of our advanced systems may not, individually or collectively, accurately represent or calculate the
scenarios, circumstances, outputs or other results for which they are designed or intended.
In addition, our advanced systems are subject to update and periodic revalidation in response to changes in
our business activities and our historical experiences, forces and events experienced by the market broadly or by
individual financial institutions, changes in regulations and regulatory interpretations and other factors, and are also
subject to continuing regulatory review and approval. For example, a significant operational loss experienced by
another financial institution, even if we do not experience a related loss, could result in a material change in our
advanced systems and a corresponding material change in our risk exposures, our total risk-weighted assets and
our capital ratios compared to prior periods. Due to the influence of changes in our advanced systems, whether
resulting from changes in data inputs, regulation or regulatory supervision or interpretation, State Street-specific or
more general market, or individual financial institution-specific, activities or experiences, or other updates or factors,
we expect that our advanced systems and our credit, market and operational risk exposures, our total risk-weighted
assets and our capital ratios calculated under the Basel III capital and liquidity standards will change, and may be
volatile, over time, and that those latter changes or volatility could be material as calculated and measured from
period to period.
Our businesses may be adversely affected by regulatory enforcement and litigation.
In the ordinary course of our business, we are subject to various regulatory, governmental and law
enforcement inquiries, investigations and subpoenas. These may be directed generally to participants in the
businesses in which we are involved or may be specifically directed at us. In regulatory enforcement matters, claims
for disgorgement, the imposition of penalties and the imposition of other remedial sanctions are possible.
From time to time, our clients, or the government on their or its own behalf, make claims and take legal action
relating to, among other things, our performance of our fiduciary or contractual responsibilities. In any such claims
or actions, demands for substantial monetary damages may be asserted against us and may result in financial
liability or an adverse effect on our reputation or on client demand for our products and services. In regulatory
settlements since the financial crisis, the fines imposed by regulators have increased substantially and may exceed
in some cases the profit earned or harm caused by the regulatory or other breach. We are currently subject to both
regulatory inquiries and civil litigation with respect to the provision of foreign exchange execution services to
institutional investors that are also custody clients. These regulatory matters and litigation have the potential to have
a material adverse effect on our consolidated results of operations for the period in which the relevant matter is
resolved or an accrual is determined to be required, on our consolidated financial condition or on our reputation.
The potential exposure from such matters, if any, is difficult to estimate because the basis on which some
claims may be brought remains uncertain or the legal theories being applied are untested in the courts. For
additional information concerning these matters, refer to the risk factor titled “We face litigation and governmental
and client inquiries in connection with our execution of indirect foreign exchange trades with custody clients; these
issues have adversely affected our revenue from such trading and may cause our revenue from such trading to
decline in the future.”
In many cases, we are required to self-report inappropriate or non-compliant conduct to the authorities, and
our failure to do so may represent an independent regulatory violation. Even when we promptly bring the matter to
the attention of the appropriate authorities, we may nonetheless experience regulatory fines, liabilities to clients,
harm to our reputation or other adverse effects in connection with self-reported matters.
Further, we may become subject to regulatory scrutiny, inquiries or investigations associated with broad,
industry-wide concerns, and potentially client-related inquiries or claims, whether or not we engaged in the relevant
activities, and could experience associated increased costs or harm to our reputation. For example, we are a major
foreign exchange dealer and also publish a commonly used foreign exchange benchmark. Many participants in the
foreign exchange industry are presently experiencing increased regulatory scrutiny concerning alleged potential
manipulation in foreign exchange markets, particularly with respect to published benchmarks. This industry scrutiny
may result in the assertion of claims against us, regulatory actions or investigations or increased regulation, which
28
may decrease the volume and profitability of our foreign exchange trading activities. Our revenue worldwide from
direct foreign exchange sales and trading services totaled $304 million in 2013, $263 million in 2012 and $352
million in 2011.
In view of the inherent difficulty of predicting the outcome of legal and regulatory matters, we cannot provide
assurance as to the outcome of any pending or potential matter or, if determined adversely against us, the costs
associated with any such matter, particularly where the claimant seeks very large or indeterminate damages or
where the matter presents novel legal theories, involves a large number of parties or is at a preliminary stage. We
may be unable to accurately estimate our exposure to litigation risk when we record balance sheet reserves for
probable and estimable loss contingencies. As a result, any reserves we establish to cover any settlements,
judgments or regulatory fines may not be sufficient to cover our actual financial exposure. The resolution of certain
pending or potential legal or regulatory matters could have a material adverse effect on our consolidated results of
operations for the period in which the relevant matter is resolved or an accrual is determined to be required, on our
consolidated financial condition or on our reputation.
We face litigation and governmental and client inquiries in connection with our execution of indirect foreign
exchange trades with custody clients; these issues have adversely affected our revenue from such trading
and may cause our revenue from such trading to decline in the future.
Our custody clients are not required to execute foreign exchange transactions with us. To the extent they
execute foreign exchange trades with us, they generally execute a greater volume using our direct methods of
execution at negotiated rates or spreads than they execute using our “indirect” methods at rates we establish.
Where our clients or their investment managers choose to use our indirect foreign exchange execution methods,
generally they elect that service for trades of smaller size or for currencies where regulatory or operational
requirements cause trading in such currencies to present greater operational risk and costs for them. Given the
nature of these trades and other features of our indirect foreign exchange service, we generally charge higher rates
for indirect execution than we charge for other trades, including trades in the interbank currency market.
In October 2009, the Attorney General of the State of California commenced an action under the California
False Claims Act and California Business and Professional Code related to services State Street provides to certain
California state pension plans. The California Attorney General asserts that the pricing of certain foreign exchange
transactions for these pension plans was governed by the custody contracts for these plans and that our pricing
was not consistent with the terms of those contracts and related disclosures to the plans, and that, as a result, State
Street made false claims and engaged in unfair competition. The Attorney General asserts actual damages of
approximately $100 million for periods from 2001 to 2009 and seeks additional penalties, including treble damages.
This action is in the discovery phase.
We provide custody and principal foreign exchange services to government pension plans in other
jurisdictions. Since the commencement of the litigation in California, attorneys general and other governmental
authorities from a number of jurisdictions, as well as U.S. Attorney's offices, the U.S. Department of Labor and the
U.S. Securities and Exchange Commission, have requested information or issued subpoenas in connection with
inquiries into the pricing of our foreign exchange services. We continue to respond to such inquiries and subpoenas.
Given that many of these inquiries are ongoing, we can provide no assurance that litigation or regulatory
proceedings will not be brought against us or as to the nature of the claims that might be alleged. Such litigation or
proceedings may be brought on theories similar to those advanced in California or Washington or on alternative
theories of liability.
We offer indirect foreign exchange services such as those we offer to the California pension plans to a broad
range of custody clients in the U.S. and internationally. We have responded and are responding to information
requests from a number of clients concerning our indirect foreign exchange rates. In February 2011, a putative class
action was filed in federal court in Boston seeking unspecified damages, including treble damages, on behalf of all
custodial clients that executed certain foreign exchange transactions with State Street from 1998 to 2009. The
putative class action alleges, among other things, that the rates at which State Street executed foreign currency
trades constituted an unfair and deceptive practice under Massachusetts law and a breach of the duty of loyalty.
Two other putative class actions are currently pending in federal court in Boston alleging various violations of ERISA
on behalf of all ERISA plans custodied with us that executed indirect foreign exchange transactions with State
Street from 1998 onward. The complaints allege that State Street caused class members to pay unfair and
unreasonable rates for indirect foreign exchange transactions with State Street. The complaints seek unspecified
damages, disgorgement of profits, and other equitable relief.
We cannot provide any assurance as to the outcome of the pending proceedings, or whether other
proceedings might be commenced against us by clients or government authorities. For example, the New York
Attorney General and the United States Attorney for the Southern District of New York, each of which has brought
29
indirect foreign exchange-related legal proceedings against one of our competitors, have made inquiries to us about
our indirect foreign exchange execution methods. We expect that plaintiffs will seek to recover their share of all or a
portion of the revenue that we have recorded from providing indirect foreign exchange services.
The following table summarizes our estimated total revenue worldwide from indirect foreign exchange trading
services for the years ended December 31:
(In millions)
Revenue from indirect foreign exchange
trading
2013
2012
2011
2010
2009
2008
$
285
$
248
$
331
$
336
$
369
$
462
We believe that the amount of our revenue from such services has been of a similar or lesser order of
magnitude for many years prior to 2008. Our revenue calculations related to indirect foreign exchange services
reflect a judgment concerning the relationship between the rates we charge for indirect foreign exchange execution
and indicative interbank market rates near in time to execution. Our revenue from foreign exchange trading
generally depends on the difference between the rates we set for indirect trades and indicative interbank market
rates on the date trades settle.
We cannot predict the outcome of any pending matters or whether a court, in the event of an adverse
resolution, would consider our revenue to be the appropriate measure of damages. The resolution of pending
matters or the resolution of any that may be initiated, filed or threatened could have a material adverse effect on our
consolidated results of operations, our consolidated financial condition and our reputation.
The heightened regulatory and media scrutiny on indirect foreign exchange services has resulted in pressure
on our pricing of these services, and clients have reduced the volume of trades executed through these services,
each of which has had and is anticipated to continue to have an adverse impact on our revenue from, and the
profitability of, these services. Some custody clients or their investment managers have elected to change the
manner in which they execute foreign exchange with us or have decided not to use our foreign exchange execution
methods. We do not expect the market, regulatory and other pressures on our indirect foreign exchange services to
decrease in 2014. We intend to continue to offer our custody clients a range of execution options for their foreign
exchange needs; however, the range of services, costs and profitability vary by service options. We cannot provide
assurance that clients or investment managers who choose to use less or none of our indirect foreign exchange
services, or to use alternatives to our existing indirect foreign exchange services, will choose the alternatives offered
by us. Accordingly, our revenue earned from providing these services may decline further.
We may not be successful in implementing our announced multi-year program to transform our operating
model or our other strategic initiatives.
In order to maintain and grow our business, we must continuously make strategic decisions about our current
and future business plans, including plans to target cost initiatives and enhance operational efficiencies, our plans
for entering or exiting business lines or geographic markets, our plans for acquiring or disposing of businesses and
our plans to build new systems and other infrastructure, to engage third-party service providers and to address
staffing needs. In late 2010, we announced a multi-year program to enhance service excellence and innovation,
increase efficiencies and position us for accelerated growth. We continued our implementation of this program
during 2013, and it is targeted for completion at the end of 2014.
Operating model transformations, including this program, entail significant risks. The program, and any future
strategic or business plan we implement, may prove to be inadequate for the achievement of the stated objectives,
may result in increased or unanticipated costs or risks, may result in earnings volatility, may take longer than
anticipated to implement, may involve elements reliant on the performance of third parties and may not be
successfully implemented.
In particular, elements of the program include investment in new technologies, such as private processing
clouds, to increase global computing capabilities, and also the development of new, and the evolution of existing,
methods and tools to accelerate the pace of innovation, the introduction of new services and solutions, the use of
service providers associated with components of our technology infrastructure and application maintenance and
support, and the enhancement of the security of our systems. The transition to new operating models and
technology infrastructure may cause disruptions in our relationships with clients, employees and vendors and may
present other unanticipated technical, operational or other hurdles.
The success of the program and our other strategic plans could also be affected by market disruptions and
unanticipated changes in the overall market for financial services and the global economy. We also may not be able
to abandon or alter these plans without significant loss, as the implementation of our decisions may involve
significant capital outlays, often far in advance of when we expect to generate any related revenues or cost
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expectations. Accordingly, our business, our consolidated results of operations and our consolidated financial
condition may be adversely affected by any failure or delay in our strategic decisions, including the program or
elements thereof. For additional information about the program, see “Consolidated Results of Operations -
Expenses” in Management's Discussion and Analysis included under Item 7 of this Form 10-K.
We may incur losses arising from our investments in sponsored investment funds, which could be material
to our consolidated results of operations in the periods incurred.
In the normal course of business, we manage various types of sponsored investment funds through SSgA.
The services we provide to these sponsored investment funds generate management fee revenue, as well as
servicing fees from our other businesses. From time to time, we may invest cash in the funds, which we refer to as
seed capital, in order for the funds to establish a performance history for newly launched strategies. These funds
may meet the definition of variable interest entities, as defined by GAAP, and if we are deemed to be the primary
beneficiary of these funds, we include them in our consolidated financial statements. The funds follow specialized
investment company accounting rules which prescribe fair value for the underlying investment securities held by the
funds.
In the aggregate, we expect any financial losses that we realize over time from these seed investments to be
limited to the actual fair value of the amount invested in the consolidated fund, which is based on the fair value of
the underling investment securities held by the funds. However, in the event of a fund wind-down, gross gains and
losses of the fund may be recognized for financial accounting purposes in different periods during the time the fund
is consolidated but not wholly owned. Although we expect the actual economic loss to be limited to the amount
invested, our losses in any period for financial accounting purposes could exceed the value of our economic
interests in the fund and could exceed the value of our initial seed capital investment.
The net assets of any consolidated fund are solely available to settle the liabilities of the fund and to settle any
investors’ ownership redemption requests, including any seed capital invested in the fund by State Street. We are
not contractually required to provide financial or any other support to any of our sponsored investment funds and
are subject to regulators that prohibit or limit our ability to do so. In addition, neither creditors nor equity investors in
the sponsored investment funds have any recourse to State Street’s general credit.
In instances where we are not deemed to be the primary beneficiary of the sponsored investment fund, we do
not include the funds in our consolidated financial statements. Our risk of loss associated with these
unconsolidated funds primarily represents our seed capital investment, which could become realized as a result of
poor investment performance. However, the amount of loss we may recognize during any period would be limited
to the carrying amount of our investment.
Our reputation and business prospects may be damaged if our clients incur substantial losses in
investment pools in which we act as agent or are restricted in redeeming their interests in these investment
pools.
We manage assets on behalf of clients in several forms, including in collective investment pools, money
market funds, securities finance collateral pools, cash collateral and other cash products and short-term investment
funds. In addition to the impact on the market value of client portfolios, at various times since 2007, the illiquidity
and volatility of both the global fixed-income and equity markets have negatively affected the investment
performance of certain of our products and our ability to manage client inflows and outflows from our pooled
investment vehicles.
Our management of collective investment pools on behalf of clients exposes us to reputational risk and, in
some cases, operational losses. If our clients incur substantial losses in these pools, particularly in money market
funds (where there is a general market expectation that net asset value will not drop below $1.00 per share) or
other constant-net-asset-value products, receive redemptions as in-kind distributions rather than in cash, or
experience significant under-performance relative to the market or our competitors' products, our reputation could
be significantly harmed, which harm could significantly and adversely affect the prospects of our associated
business units. Because we often implement investment and operational decisions and actions over multiple
investment pools to achieve scale, we face the risk that losses, even small losses, may have a significant effect in
the aggregate.
Within our asset management business, we manage investment pools, such as mutual funds and collective
investment funds, that generally offer our clients the ability to withdraw their investments on short notice, generally
daily or monthly. This feature requires that we manage those pools in a manner that takes into account both
maximizing the long-term return on the investment pool and retaining sufficient liquidity to meet reasonably
anticipated liquidity requirements of our clients. The importance of maintaining liquidity varies by product type, but it
31
is a particularly important feature in money market funds and other products designed to maintain a constant net
asset value of $1.00.
During the market disruption that accelerated following the bankruptcy of Lehman Brothers, the liquidity in
many asset classes, particularly short- and long-term fixed-income securities, declined dramatically, and providing
liquidity to meet all client demands in these investment pools without adversely affecting the return to non-
withdrawing clients became more difficult. For clients that have invested directly or indirectly in certain of the
collateral pools and have sought to terminate their participation in lending programs, we have required, in
accordance with the applicable client arrangements, that these withdrawals from the collateral pools take the form
of partial in-kind distributions of securities. In the case of SSgA funds that engage in securities lending, we
implemented limitations, which were terminated in 2010, on the portion of an investor's interest in such fund that
may be withdrawn during any month.
If higher than normal demands for liquidity from our clients were to return to post-Lehman-Brothers-bankruptcy
levels or increase, managing the liquidity requirements of our collective investment pools could become more
difficult. If such liquidity problems were to recur, our relationships with our clients may be adversely affected, and,
we could, in certain circumstances, be required to consolidate the investment pools into our consolidated statement
of condition; levels of redemption activity could increase; and our consolidated results of operations and business
prospects could be adversely affected. In addition, if a money market fund that we manage were to have
unexpected liquidity demands from investors in the fund that exceeded available liquidity, the fund could be required
to sell assets to meet those redemption requirements, and selling the assets held by the fund at a reasonable price,
if at all, may then be difficult.
In 2008, we imposed restrictions on cash redemptions from the agency lending collateral pools, as the per-unit
market value of those funds' assets had declined below the constant $1.00 the funds employ to effect purchase and
redemption transactions. Both the decline of the funds' net asset value below $1.00 and the imposition of
restrictions on redemptions had a significant client, reputational and regulatory impact on us, and the recurrence of
such or similar circumstances in the future could adversely impact our consolidated results of operations and
financial condition.
In December 2010, in order to increase participants' control over the degree of their participation in the lending
program, we divided certain agency lending collateral pools into liquidity pools, from which clients could obtain cash
redemptions, and duration pools, which are restricted and operate as liquidating accounts. We believe that our
practice of effecting purchases and redemptions of units of the collateral pools, and other constant-net-asset-value
products, at $1.00 per unit, notwithstanding that the underlying portfolios have a market value of less than $1.00 per
unit, complied and continue to comply with the terms of our unregistered cash collateral pools and was in the best
interests of participants in the agency lending program.
Participants in the agency lending program who received units of the duration pool, or who previously received
in-kind redemptions from the agency lending collateral pools, could seek to assert claims against us in connection
with either their loss of liquidity or unrealized mark-to-market losses. If such claims were successfully asserted, such
a resolution could adversely affect our consolidated results of operations in future periods.
While it is currently not our intention, and we do not have contractual or other obligations to do so, we have in
the past guaranteed, and may in the future guarantee, liquidity to investors desiring to make withdrawals from a
fund or otherwise take actions to mitigate the impact of market conditions on our clients and if permitted by
applicable laws. Making a significant amount of such guarantees could adversely affect our own consolidated
liquidity and financial condition. Because of the size of the investment pools that we manage, we may not have the
financial ability or regulatory authority to support the liquidity or other demands of our clients. The extreme volatility
in the equity markets has led to the potential for the return on passive and quantitative products to deviate from their
target returns.
Any decision by us to provide financial support to an investment pool to support our reputation in
circumstances where we are not statutorily or contractually obligated to do so could result in the recognition of
significant losses, could adversely affect the regulatory view of our capital levels or plans and could, in certain
situations, require us to consolidate the investment pools into our consolidated statement of condition. Any failure of
the pools to meet redemption requests, or under-performance of our pools relative to similar products offered by our
competitors, could harm our business and our reputation.
The potential reputational impact from any decision to support or not to support a fund, and from restrictions on
redemptions, is most acute in connection with money market funds and other cash products that employ a constant
net asset value of $1.00 for purposes of effecting subscriptions and redemptions. The continued use of constant-
net-asset-value funds, such as money market funds, or the imposition of further conditions on the offering of such
funds, is currently under active consideration in both the U.S. and Europe. The adoption of certain of the proposals
32
under discussion could expose us to increased risk of loss or could make such products less attractive, potentially
affecting our revenue from cash pools that we manage or service.
Our businesses may be negatively affected by adverse publicity or other reputational harm.
Our relationship with many of our clients is predicated on our reputation as a fiduciary and a service provider
that adheres to the highest standards of ethics, service quality and regulatory compliance. Adverse publicity,
regulatory actions or fines, litigation, operational failures, the failure to meet client expectations or fiduciary or other
obligations could materially and adversely affect our reputation, our ability to attract and retain clients or our sources
of funding for the same or other businesses. For example, as discussed earlier in this “Risk Factors” section, we
have experienced adverse publicity with respect to our indirect foreign exchange services, and this adverse publicity
has contributed to a shift of client volume to other foreign exchange execution methods. Similarly, as discussed
earlier in this “Risk Factors” section, regulatory and reputational issues in our transition management business in
the U.K. in 2010 and 2011 adversely affected our revenue from that business in 2012 and 2013. Preserving and
enhancing our reputation also depends on maintaining systems, procedures and controls that address known risks
and regulatory requirements, as well as our ability to identify and mitigate additional risks that arise due to changes
in our businesses and the marketplaces in which we operate, the regulatory environment and client expectations.
Our controls and procedures may fail or be circumvented, our risk management policies and procedures
may be inadequate, and operational risk could adversely affect our consolidated results of operations.
We may fail to identify and manage risks related to a variety of aspects of our business, including, but not
limited to, operational risk, interest-rate risk, foreign exchange risk, trading risk, fiduciary risk, legal and compliance
risk, liquidity risk and credit risk. We have adopted various controls, procedures, policies and systems to monitor
and manage risk. While we currently believe that our risk management process is effective, we cannot provide
assurance that those controls, procedures, policies and systems will always be adequate to identify and manage
the internal and external, including service provider, risks in our various businesses. Risks that individuals, either
employees or contractors, consciously circumvent established control mechanisms to, for example, exceed trading
or investment management limitations, or commit fraud, are particularly challenging to manage through a control
framework. The financial and reputational impact of control failures can be significant. Persistent or repeated issues
with respect to controls may raise concerns among regulators regarding our culture, governance and control
environment. While we seek to contractually limit our financial exposure to operational risk, the degree of protection
that we are able to achieve varies, and our potential exposure may be greater than the revenue we anticipate that
we will earn from the client relationship.
In addition, our businesses and the markets in which we operate are continuously evolving. We may fail to fully
understand the implications of changes in our businesses or the financial markets and fail to adequately or timely
enhance our risk framework to address those changes. If our risk framework is ineffective, either because it fails to
keep pace with changes in the financial markets, regulatory requirements, our businesses, our counterparties,
clients or service providers or for other reasons, we could incur losses, suffer reputational damage or find ourselves
out of compliance with applicable regulatory or contractual mandates or expectations.
Operational risk is inherent in all of our business activities. As a leading provider of services to institutional
investors, we provide a broad array of services, including research, investment management, trading services and
investment servicing that expose us to operational risk. In addition, these services generate a broad array of
complex and specialized servicing, confidentiality and fiduciary requirements, many of which involve the opportunity
for human, systems or process errors. We face the risk that the control policies, procedures and systems we have
established to comply with our operational requirements will fail, will be inadequate or will become outdated. We
also face the potential for loss resulting from inadequate or failed internal processes, employee supervision or
monitoring mechanisms, service-provider processes or other systems or controls, which could materially affect our
future consolidated results of operations. Given the volume of transactions we process on a daily basis, operational
losses represent a potentially significant financial risk for our business. Operational errors that result in us remitting
funds to a failing or bankrupt entity may be irreversible, and may subject us to losses.
We may also be subject to disruptions from external events that are wholly or partly beyond our control, which
could cause delays or disruptions to operational functions, including information processing and financial market
settlement functions. In addition, our clients, vendors and counterparties could suffer from such events. Should
these events affect us, or the clients, vendors or counterparties with which we conduct business, our consolidated
results of operations could be negatively affected. When we record balance sheet accruals for probable and
estimable loss contingencies related to operational losses, we may be unable to accurately estimate our potential
exposure, and any accruals we establish to cover operational losses may not be sufficient to cover our actual
financial exposure, which could have a material adverse effect on our consolidated results of operations.
33
Cost shifting to non-U.S. jurisdictions may expose us to increased operational risk and reputational harm
and may not result in expected cost savings.
We actively strive to achieve cost savings by shifting certain business processes and business support
functions to lower-cost geographic locations, such as Poland, India and China. We may accomplish this shift by
establishing operations in lower-cost locations, by outsourcing to vendors in various jurisdictions or through joint
ventures. This effort exposes us to the risk that we may not maintain service quality, control or effective
management within these operations. In addition, we are exposed to the relevant macroeconomic, political and
similar risks generally involved in doing business in those jurisdictions. The increased elements of risk that arise
from conducting certain operating processes in some jurisdictions could lead to an increase in reputational risk.
During periods of transition, greater operational risk and client concern exist with respect to maintaining a high level
of service delivery. The extent and pace at which we are able to move functions to lower-cost locations may also be
affected by regulatory and client acceptance issues. Such relocation of functions also entails costs, such as
technology and real estate expenses, that may offset or exceed the expected financial benefits of the lower-cost
locations. In addition, the financial benefits of lower-cost locations may diminish over time.
Development of new products and services may impose additional costs on us and may expose us to
increased operational risk.
Our financial performance depends, in part, on our ability to develop and market new and innovative services
and to adopt or develop new technologies that differentiate our products or provide cost efficiencies, while avoiding
increased related expenses. The introduction of new products and services can entail significant time and
resources, including regulatory approvals. Substantial risks and uncertainties are associated with the introduction of
new products and services, including technical and control requirements that may need to be developed and
implemented, rapid technological change in the industry, our ability to access technical and other information from
our clients and the significant and ongoing investments required to bring new products and services to market in a
timely manner at competitive prices. Regulatory and internal control requirements, capital requirements, competitive
alternatives, vendor relationships and shifting market preferences may also determine if such initiatives can be
brought to market in a manner that is timely and attractive to our clients. Failure to successfully manage these risks
in the development and implementation of new products or services could have a material adverse effect on our
business and reputation, as well as on our consolidated results of operations and financial condition.
We depend on information technology, and any failures of or damage to, attack on or unauthorized access
to our information technology systems or facilities, or those of third parties with which we do business,
including as a result of cyber-attacks, could result in significant limits on our ability to conduct our
operations and activities, costs and reputational damage.
Our businesses depend on information technology infrastructure, both internal and external, to, among other
things, record and process a large volume of increasingly complex transactions and other data, in many currencies,
on a daily basis, across numerous and diverse markets and jurisdictions. During 2012 and 2013, several financial
services firms suffered successful cyber-attacks launched both domestically and from abroad, resulting in the
disruption of services to clients, loss or misappropriation of sensitive or private data and reputational harm.
Our computer, communications, data processing, networks, backup, business continuity or other operating,
information or technology systems and facilities, including those that we outsource to other providers, may fail to
operate properly or become disabled, overloaded or damaged as a result of a number of factors, including events
that are wholly or partially beyond our control, which could adversely affect our ability to process transactions,
provide services or maintain systems availability, maintain compliance and internal controls or otherwise
appropriately conduct our business activities. For example, there could be sudden increases in transaction volumes,
electrical or telecommunications outages, cyber-attacks or employee or contractor error or malfeasance. In addition,
updates to these systems and facilities often involve implementation, integration and security risks.
The third parties with which we do business or which facilitate our business activities, including financial
intermediaries and technology infrastructure and service providers, are also susceptible to the foregoing risks
(including regarding the third parties with which they are similarly interconnected or on which they otherwise rely),
and our or their business operations and activities may therefore be adversely affected, perhaps materially, by
failures, terminations, errors or malfeasance by, or attacks or constraints on, one or more financial, technology or
infrastructure institutions or intermediaries with whom we or they are interconnected or conduct business.
In particular, we, like other financial services firms, will continue to face increasing cyber-security threats,
including computer viruses, malicious code, distributed denial of service attacks, phishing attacks, information
security breaches or employee or contractor error or malfeasance that could result in the unauthorized release,
gathering, monitoring, misuse, loss or destruction of our, our clients' or other parties' confidential, proprietary or
other information or otherwise disrupt, compromise or damage our or our clients' or other parties' business assets,
34
operations and activities. We therefore could experience significant related costs and exposures, including lost or
constrained ability to provide our services or maintain systems availability to clients, regulatory inquiries,
enforcements, actions and fines, loss of confidential, personal or proprietary information, litigation, damage to our
reputation or property and enhanced competition.
Any theft, loss or other misappropriation of the confidential information we possess could have an adverse
impact on our business and could subject us to regulatory actions, litigation and other adverse effects.
Our businesses and relationships with clients are dependent on our ability to maintain the confidentiality of our
and our clients' trade secrets and confidential information (including client transactional data and personal data
about our employees, our clients and our clients' clients). Unauthorized access to such information may occur,
resulting in its theft, loss or other misappropriation. Any theft, loss or other misappropriation of confidential
information could have a material adverse impact on our competitive position, our relationships with our clients and
our reputation and could subject us to regulatory inquiries, enforcement and fines, civil litigation and possible
financial liability or costs.
We may not be able to protect our intellectual property, and we are subject to claims of third-party
intellectual property rights.
Our potential inability to protect our intellectual property and proprietary technology effectively may allow
competitors to duplicate our technology and products and may adversely affect our ability to compete with them. To
the extent that we do not protect our intellectual property effectively through patents or other means, other parties,
including former employees, with knowledge of our intellectual property may leave and seek to exploit our
intellectual property for their own or others' advantage. In addition, we may infringe on claims of third-party patents,
and we may face intellectual property challenges from other parties. We may not be successful in defending against
any such challenges or in obtaining licenses to avoid or resolve any intellectual property disputes. Third-party
intellectual rights, valid or not, may also impede our deployment of the full scope of our products and service
capabilities in all jurisdictions in which we operate or market our products and services. The intellectual property of
an acquired business may be an important component of the value that we agree to pay for such a business.
However, such acquisitions are subject to the risks that the acquired business may not own the intellectual property
that we believe we are acquiring, that the intellectual property is dependent on licenses from third parties, that the
acquired business infringes on the intellectual property rights of others, or that the technology does not have the
acceptance in the marketplace that we anticipated.
Competition for our employees is intense, and we may not be able to attract and retain the highly skilled
people we need to support our business.
Our success depends, in large part, on our ability to attract and retain key people. Competition for the best
people in most activities in which we engage can be intense, and we may not be able to hire people or retain them,
particularly in light of challenges associated with evolving compensation restrictions applicable, or which may
become applicable, to banks and some asset managers and that potentially are not applicable to other financial
services firms in all jurisdictions. The unexpected loss of services of key personnel could have a material adverse
impact on our business because of their skills, their knowledge of our markets, operations and clients, their years of
industry experience and, in some cases, the difficulty of promptly finding qualified replacement personnel. Similarly,
the loss of key employees, either individually or as a group, can adversely affect our clients' perception of our ability
to continue to manage certain types of investment management mandates or to provide other services to them.
We are subject to intense competition in all aspects of our business, which could negatively affect our
ability to maintain or increase our profitability.
The markets in which we operate across all facets of our business are both highly competitive and global.
These markets are changing as a result of new and evolving laws and regulations applicable to financial services
institutions. Regulatory-driven market changes cannot always be anticipated, and may adversely affect the demand
for, and profitability of, the products and services that we offer. In addition, new market entrants and competitors
may address changes in the markets more rapidly than we do, or may provide clients with a more attractive offering
of products and services, adversely affecting our business. We have also experienced, and anticipate that we will
continue to experience, pricing pressure in many of our core businesses. Many of our businesses compete with
other domestic and international banks and financial services companies, such as custody banks, investment
advisors, broker/dealers, outsourcing companies and data processing companies. Further consolidation within the
financial services industry could also pose challenges to us in the markets we serve, including potentially increased
downward pricing pressure across our businesses.
Some of our competitors, including our competitors in core services, have substantially greater capital
resources than we do. In some of our businesses, we are service providers to significant competitors. These
35
competitors are in some instances significant clients, and the retention of these clients involves additional risks,
such as the avoidance of actual or perceived conflicts of interest and the maintenance of high levels of service
quality and intra-company confidentiality. The ability of a competitor to offer comparable or improved products or
services at a lower price would likely negatively affect our ability to maintain or increase our profitability. Many of
our core services are subject to contracts that have relatively short terms or may be terminated by our client after a
short notice period. In addition, pricing pressures as a result of the activities of competitors, client pricing reviews,
and rebids, as well as the introduction of new products, may result in a reduction in the prices we can charge for our
products and services.
Acquisitions, strategic alliances, joint ventures and divestitures pose risks for our business.
As part of our business strategy, we acquire complementary businesses and technologies, enter into strategic
alliances and joint ventures and divest portions of our business. In 2013, we continued the integration of prior
acquisitions, including our 2012 acquisition of Goldman Sachs Administration Services, or GSAS. We undertake
transactions of varying sizes to, among other reasons, expand our geographic footprint, access new clients,
technologies or services, develop closer or more collaborative relationships with our business partners, efficiently
deploy capital or leverage cost savings or other business or financial opportunities. We may not achieve the
expected benefits of these transactions, which could result in increased costs, lowered revenues, ineffective
deployment of capital, regulatory concerns, exit costs or diminished competitive position or reputation.
Transactions of this nature also involve a number of risks and financial, accounting, tax, regulatory,
managerial, operational, cultural and employment challenges, which could adversely affect our consolidated results
of operations and financial condition. For example, the businesses that we acquire or our strategic alliances or joint
ventures may under-perform relative to the price paid or the resources committed by us; we may not achieve
anticipated cost savings; or we may otherwise be adversely affected by acquisition-related charges. Further, past
acquisitions, including our acquisition of GSAS, have resulted in the recognition of goodwill and other significant
intangible assets in our consolidated statement of condition. These assets are not eligible for inclusion in regulatory
capital under current requirements and proposals. In addition, we may be required to record impairment in our
consolidated statement of income in future periods if we determine that the value of these assets has declined.
Through our acquisitions or joint ventures, we may also assume unknown or undisclosed business,
operational, tax, regulatory and other liabilities, fail to properly assess known contingent liabilities or assume
businesses with internal control deficiencies. While in most of our transactions we seek to mitigate these risks
through, among other things, due diligence and indemnification provisions, these or other risk-mitigating provisions
we put in place may not be sufficient to address these liabilities and contingencies.
Various regulatory approvals or consents are generally required prior to closing of these transactions, which
may include approvals of the Federal Reserve and other domestic and non-U.S. regulatory authorities. These
regulatory authorities may impose conditions on the completion of the acquisition or require changes to its terms
that materially affect the terms of the transaction or our ability to capture some of the opportunities presented by the
transaction. Any such conditions, or any associated regulatory delays, could limit the benefits of the transaction.
Acquisitions or joint ventures we announce may not be completed if we do not receive the required regulatory
approvals, if regulatory approvals are significantly delayed or if other closing conditions are not satisfied.
The integration of our acquisitions results in risks to our business and other uncertainties.
The integration of acquisitions presents risks that differ from the risks associated with our ongoing operations.
Integration activities are complicated and time consuming and can involve significant unforeseen costs. We may not
be able to effectively assimilate services, technologies, key personnel or businesses of acquired companies into our
business or service offerings as anticipated, alliances may not be successful, and we may not achieve related
revenue growth or cost savings. We also face the risk of being unable to retain, or cross-sell our products or
services to, the clients of acquired companies or joint ventures. Acquisitions of investment servicing businesses
entail information technology systems conversions, which involve operational risks and may result in client
dissatisfaction and defection. Clients of investment servicing businesses that we have acquired may be competitors
of our non-custody businesses. The loss of some of these clients or a significant reduction in the revenues
generated from them, for competitive or other reasons, could adversely affect the benefits that we expect to achieve
from these acquisitions or cause impairment to goodwill and other intangibles.
With any acquisition, the integration of the operations and resources of the businesses could result in the loss
of key employees, the disruption of our and the acquired company's ongoing businesses or inconsistencies in
standards, controls, procedures or policies that could adversely affect our ability to maintain relationships with
clients or employees or to achieve the anticipated benefits of the acquisition. Integration efforts may also divert
management attention and resources.
36
Long-term contracts expose us to pricing and performance risk.
We enter into long-term contracts to provide middle office or investment manager and alternative investment
manager operations outsourcing services to clients, primarily for conversions, including services related but not
limited to certain trading activities, cash reporting, settlement and reconciliation activities, collateral management
and information technology development. We also enter into longer-term arrangements with respect to custody,
fund administration and depository services. These arrangements generally set forth our fee schedule for the term
of the contract and, absent a change in service requirements, do not permit us to re-price the contract for changes
in our costs or for market pricing. The long-term contracts for these relationships require, in some cases,
considerable up-front investment by us, including technology and conversion costs, and carry the risk that pricing
for the products and services we provide might not prove adequate to generate expected operating margins over
the term of the contracts.
The profitability of these contracts is largely a function of our ability to accurately calculate pricing for our
services, efficiently assume our contractual responsibilities in a timely manner, control our costs and maintain the
relationship with the client for an adequate period of time to recover our up-front investment. Our estimate of the
profitability of these arrangements can be adversely affected by declines in the assets under the clients'
management, whether due to general declines in the securities markets or client-specific issues. In addition, the
profitability of these arrangements may be based on our ability to cross-sell additional services to these clients, and
we may be unable to do so.
Performance risk exists in each contract, given our dependence on successful conversion and implementation
onto our own operating platforms of the service activities provided. Our failure to meet specified service levels or
implementation timelines may also adversely affect our revenue from such arrangements, or permit early
termination of the contracts by the client. If the demand for these types of services were to decline, we could see
our revenue decline.
Changes in accounting standards may be difficult to predict and may adversely affect our consolidated
financial statements.
New accounting standards, or changes to existing accounting standards, resulting both from initiatives of the
Financial Accounting Standards Board, or FASB, or their convergence efforts with the International Accounting
Standards Board, as well as changes in the interpretation of existing accounting standards, by the FASB or the SEC
or otherwise reflected in GAAP, potentially could affect our consolidated results of operations, cash flows and
financial condition. These changes are difficult to predict, and can materially affect how we record and report our
consolidated results of operations, cash flows, financial condition and other financial information. In some cases, we
could be required to apply a new or revised standard retroactively, resulting in the revised treatment of certain
transactions or activities, and, in some cases, the restatement of our consolidated financial statements for prior
periods.
Changes in tax laws, rules or regulations, challenges to our tax positions with respect to historical
transactions, and changes in the composition of our pre-tax earnings may increase our effective tax rate
and thus adversely affect our consolidated financial statements.
Our businesses can be directly or indirectly affected by new tax legislation, the expiration of existing tax laws
or the interpretation of existing tax laws worldwide. The U.S. federal government, Massachusetts, other state
governments and jurisdictions around the world continue to review proposals to amend tax laws, rules and
regulations applicable to our business that could have a negative impact on our after-tax earnings. In addition, the
expiration at the end of 2013 of certain U.S. tax laws that favorably affected the taxation of our non-U.S. operations
could begin to affect the results of those operations in 2014. Although these U.S. tax laws have previously expired
and been re-enacted, it is uncertain whether they will be re-enacted again.
In the normal course of our business, we are subject to review by U.S. and non-U.S. tax authorities. A review
by any such authority could result in an increase in our recorded tax liability. In addition to the aforementioned risks,
our effective tax rate is dependent on the nature and geographic composition of our pre-tax earnings and could be
negatively affected by changes in these factors.
The quantitative models we use to manage our business may contain errors that result in inadequate risk
assessments, inaccurate valuations or poor business decisions.
We use quantitative models to help manage many different aspects of our businesses. As an input to our
overall assessment of capital adequacy, we use models to measure the amount of credit risk, market risk,
operational risk, interest-rate risk and business risk we face. During the preparation of our consolidated financial
statements, we sometimes use models to measure the value of asset and liability positions for which reliable market
prices are not available. We also use models to support many different types of business decisions including trading
37
activities, hedging, asset-and-liability management and whether to change business strategy. In all of these uses,
errors in the underlying model or model assumptions, or inadequate model assumptions, could result in
unanticipated and adverse consequences. Because of our widespread usage of models, potential errors in models
pose an ongoing risk to us.
Additionally, we may fail to accurately quantify the magnitude of the risks we face. Our measurement
methodologies rely on many assumptions and historical analyses and correlations. These assumptions may be
incorrect, and the historical correlations on which we rely may not continue to be relevant. Consequently, the
measurements that we make for regulatory and economic capital may not adequately capture or express the true
risk profiles of our businesses. Additionally, as businesses and markets evolve, our measurements may not
accurately reflect this evolution. While our risk measures may indicate sufficient capitalization, we may in fact have
inadequate capital to conduct our businesses.
We may incur losses as a result of unforeseen events, including terrorist attacks, natural disasters, the
emergence of a pandemic or acts of embezzlement.
Acts of terrorism, natural disasters or the emergence of a pandemic could significantly affect our business. We
have instituted disaster recovery and continuity plans to address risks from terrorism, natural disasters and
pandemic; however, anticipating or addressing all potential contingencies is not possible for events of this nature.
Acts of terrorism, either targeted or broad in scope, or natural disasters could damage our physical facilities, harm
our employees and disrupt our operations. A pandemic, or concern about a possible pandemic, could lead to
operational difficulties and impair our ability to manage our business. Acts of terrorism, natural disasters and
pandemics could also negatively affect our clients, counterparties and service providers, as well as result in
disruptions in general economic activity and the financial markets.
ITEM 1B. UNRESOLVED STAFF COMMENTS
None.
ITEM 2. PROPERTIES
We occupy a total of approximately 8.3 million square feet of office space and related facilities worldwide, of
which approximately 7.4 million square feet are leased. Of the total leased space, approximately 3.3 million square
feet are located in eastern Massachusetts. An additional 1.5 million square feet are located elsewhere throughout
the U.S. and in Canada. We lease approximately 1.9 million square feet in the U.K. and elsewhere in Europe, and
approximately 700,000 square feet in the Asia/Pacific region.
Our headquarters is located at State Street Financial Center, One Lincoln Street, Boston, Massachusetts, a
36-story office building. Various divisions of our two lines of business, as well as support functions, occupy space in
this building. We lease the entire 1,025,000 square feet of the building, and a related underground parking garage,
at One Lincoln Street, under 20-year non-cancelable capital leases expiring in 2023. A portion of the lease
payments is offset by subleases for approximately 129,000 square feet of the building.
In 2012, construction began on the Channel Center, a build-to-suit office building located in Boston, designed
to consolidate our staff from various eastern Massachusetts locations. We expect to begin leasing the entire
500,000 square feet of this building beginning in early 2014. We occupy three buildings located in Quincy,
Massachusetts, one of which we own and two of which we lease. The buildings, containing a total of approximately
1.1 million square feet (720,000 square feet owned and 380,000 square feet leased), function as State Street
Bank's principal operations facilities.
We occupy other principal properties located in Missouri, New Jersey, New York, California and Ontario,
composed of five leased buildings containing a total of approximately 938,000 square feet, under leases expiring
from June 2015 to March 2025. Significant properties in the U.K. and Europe include nine buildings located in
England, Scotland, Poland, Ireland, Luxembourg, Germany, France and Italy, containing approximately 1.3 million
square feet under leases expiring from January 2019 through August 2034. Principal properties located in China
and Australia consist of three buildings containing approximately 420,000 square feet under leases expiring from
September 2015 through May 2021.
We believe that our owned and leased facilities are suitable and adequate for our business needs. Additional
information about our occupancy costs, including our commitments under non-cancelable leases, is provided in
note 20 to the consolidated financial statements included under Item 8 of this Form 10-K.
38
ITEM 3. LEGAL PROCEEDINGS
In the ordinary course of business, we and our subsidiaries are involved in disputes, litigation and regulatory
inquiries and investigations, both pending and threatened. These matters, if resolved adversely against us or
settled, may result in monetary damages, fines and penalties or require changes in our business practices. The
resolution or settlement of these matters is inherently difficult to predict. Based on our assessment of these pending
matters, we do not believe that the amount of any judgment, settlement or other action arising from any pending
matter is likely to have a material adverse effect on our consolidated financial condition. However, an adverse
outcome in certain of the matters described below could have a material adverse effect on our consolidated results
of operations for the period in which such matter is resolved or an accrual is determined to be required, on our
consolidated financial condition or on our reputation.
We evaluate our needs for accruals of loss contingencies related to legal proceedings on a case-by-case
basis. When we have a liability that we deem probable and can be reasonably estimated as of the date of our
consolidated financial statements, we accrue for our estimate of the loss. We consider a loss probable and
establish an accrual when we make or intend to make an offer of settlement. Once established, an accrual is
subject to subsequent adjustment as a result of additional information. The resolution of proceedings and the
reasonably estimable loss (or range thereof) are inherently difficult to predict, especially in the early stages of
proceedings. Even if a loss is probable, due to many complex factors, such as speed of discovery and the timing of
court decisions or rulings, a loss or range of loss might not be reasonably estimated until the later stages of the
proceeding.
As of December 31, 2013, our aggregate accruals for legal loss contingencies and regulatory matters totaled
approximately $119 million. To the extent that we have established accruals in our consolidated statement of
condition for probable loss contingencies, such accruals may not be sufficient to cover our ultimate financial
exposure associated with any settlements or judgments. We may be subject to proceedings in the future that, if
adversely resolved, would have a material adverse effect on our businesses or on our future consolidated financial
statements. Except where otherwise noted below, we have not established accruals with respect to the claims
discussed and do not believe that potential exposure is probable and can be reasonably estimated.
The following discussion provides information with respect to significant legal and regulatory matters.
SSgA
We have previously reported on two related ERISA class actions by investors in unregistered SSgA-managed
collective trust funds and common trust funds which challenge the division of our securities lending-related revenue
between those funds and State Street in its role as lending agent. In January 2014, we filed a motion to approve a
$10 million class settlement of the collective trust fund litigation. A final fairness hearing has been scheduled for
May 2014. The common trust fund class action remains pending. We have accrued $15 million in connection with
these matters, including the proposed class settlement.
Securities Finance
Two related participants in our agency securities lending program have brought suit against us challenging
actions taken by us in response to their withdrawal from the program. We believe that certain withdrawals by these
participants were inconsistent with the redemption policy applicable to the agency lending collateral pools and,
consequently, redeemed their remaining interests through an in-kind distribution that reflected the assets these
participants would have received had they acted in accordance with the collateral pools' redemption policy. In taking
these actions, we believe that we acted in the best interests of all participants in the collateral pools. The two
participants have asserted damages of $120 million, an amount that plaintiffs have stated was the difference
between the amortized cost and market value of the assets that State Street proposed to distribute to the plans in-
kind on or about August 2009. While management does not believe that such difference is an appropriate measure
of damages, we have been informed that the participants liquidated these securities in June 2013, and we estimate
the loss on those sales to be approximately $11 million. We have accrued $10 million in connection with this matter.
Foreign Exchange
We offer our custody clients and their investment managers the option to route foreign exchange transactions
to our foreign exchange desk through our asset servicing operation. We record as revenue an amount
approximately equal to the difference between the rates we set for those trades and indicative interbank market
rates at the time of settlement of the trade. As discussed more fully below, claims have been asserted on behalf of
certain current and former custody clients, and future claims may be asserted, alleging that our indirect foreign
exchange rates (including the differences between those rates and indicative interbank market rates at the time we
39
executed the trades) were not adequately disclosed or were otherwise improper, and seeking to recover, among
other things, the full amount of the revenue we obtained from our indirect foreign exchange trading with them.
In October 2009, the Attorney General of the State of California commenced an action under the California
False Claims Act and California Business and Professional Code related to services State Street provides to
California state pension plans. The California Attorney General asserts that the pricing of certain foreign exchange
transactions for these pension plans was governed by the custody contracts for these plans and that our pricing
was not consistent with the terms of those contracts and related disclosures to the plans, and that, as a result, State
Street made false claims and engaged in unfair competition. The Attorney General asserts actual damages of
approximately $100 million for periods from 2001 to 2009 and seeks additional penalties, including treble damages.
This action is in the discovery phase.
We provide custody and principal foreign exchange services to government pension plans in other
jurisdictions. Since the commencement of the litigation in California, attorneys general and other governmental
authorities from a number of jurisdictions, as well as U.S. Attorney's offices, the U.S. Department of Labor and the
SEC, have requested information or issued subpoenas in connection with inquiries into the pricing of our foreign
exchange services. We continue to respond to such inquiries and subpoenas.
We offer indirect foreign exchange services such as those we offer to the California state pension plans to a
broad range of custody clients in the U.S. and internationally. We have responded and are responding to
information requests from a number of clients concerning our indirect foreign exchange rates. In February 2011, a
putative class action was filed in federal court in Boston seeking unspecified damages, including treble damages,
on behalf of all custodial clients that executed certain foreign exchange transactions with State Street from 1998 to
2009. The putative class action alleges, among other things, that the rates at which State Street executed foreign
currency trades constituted an unfair and deceptive practice under Massachusetts law and a breach of the duty of
loyalty.
Two other putative class actions are currently pending in federal court in Boston alleging various violations of
ERISA on behalf of all ERISA plans custodied with us that executed indirect foreign exchange transactions with
State Street from 1998 onward. The complaints allege that State Street caused class members to pay unfair and
unreasonable rates for indirect foreign exchange transactions with State Street. The complaints seek unspecified
damages, disgorgement of profits, and other equitable relief.
We have not established an accrual with respect to any of the pending legal proceedings related to our indirect
foreign exchange services. We cannot provide any assurance as to the outcome of the pending proceedings, or
whether other proceedings might be commenced against us by clients or government authorities. We expect that
plaintiffs will seek to recover their share of all or a portion of the revenue that we have recorded from providing
indirect foreign exchange services.
The following table summarizes our estimated total revenue worldwide from indirect foreign exchange trading
services for the years ended December 31:
(In millions)
Revenue from indirect foreign exchange
trading
2013
2012
2011
2010
2009
2008
$
285
$
248
$
331
$
336
$
369
$
462
We believe that the amount of our revenue from such services has been of a similar or lesser order of
magnitude for many years prior to 2008. Our revenue calculations related to indirect foreign exchange trading
services reflect a judgment concerning the relationship between the rates we charge for indirect foreign exchange
execution and indicative interbank market rates near in time to execution. Our revenue from foreign exchange
trading generally depends on the difference between the rates we set for indirect trades and indicative interbank
market rates on the date trades settle.
We cannot predict the outcome of any pending matters or whether a court, in the event of an adverse
resolution, would consider our revenue to be the appropriate measure of damages.
Shareholder Litigation
Three shareholder-related complaints are currently pending in federal court in Boston. One complaint purports
to be a class action on behalf of State Street shareholders. The two other complaints purport to be class actions on
behalf of participants and beneficiaries in the State Street Salary Savings Program who invested in the program's
State Street common stock investment option. The complaints allege various violations of the federal securities
laws, common law and ERISA in connection with our public disclosures concerning our investment securities
portfolio, our asset-backed commercial paper conduit program, and our foreign exchange trading business. A fourth
40
complaint, a purported shareholder derivative action on behalf of State Street, was dismissed in September 2013.
We have accrued $12.5 million in connection with these matters.
Transition Management
In January 2014, we entered into a settlement with the U.K. Financial Conduct Authority as a result of our
having charged six clients of our U.K. transition management business during 2010 and 2011 amounts in excess of
the contractual terms. We agreed to and have paid a fine of £22.9 million, or approximately $37.8 million, which we
had fully accrued as of December 31, 2013. The SEC and the U.S. Attorney are conducting separate investigations
into this matter. As of December 31, 2013, in addition to the above-described settlement, we had remaining
accruals of approximately $13 million for other costs associated with the reimbursement of the affected clients and
indemnification costs.
Investment Servicing
State Street is named as a defendant in a series of related complaints by investment management clients of
TAG Virgin Islands, Inc., or TAG, who hold or held custodial accounts with State Street. The complaints, collectively,
allege various claims in connection with certain assets managed by TAG and custodied with State Street. In 2013,
we entered into settlements with certain of the TAG account holders. As of December 31, 2013, we had accrued
$4.6 million with respect to claims that have not been settled.
ITEM 4. MINE SAFETY DISCLOSURES
Not applicable.
41
EXECUTIVE OFFICERS OF THE REGISTRANT
The following table presents certain information with respect to each of our executive officers as of
February 21, 2014.
Name
Joseph L. Hooley
Joseph C. Antonellis
Michael W. Bell
Jeffrey N. Carp
John L. Klinck, Jr.
Andrew Kuritzkes
James J. Malerba
Peter O'Neill
Christopher Perretta
James S. Phalen
Scott F. Powers
Alison A. Quirk
Michael F. Rogers
Age
Position
56 Chairman, President and Chief Executive Officer
59 Vice Chairman
50 Executive Vice President and Chief Financial Officer
57 Executive Vice President, Chief Legal Officer and Secretary
50 Executive Vice President
53 Executive Vice President and Chief Risk Officer
59 Executive Vice President, Corporate Controller and Chief Accounting Officer
55 Executive Vice President
56 Executive Vice President
63 Executive Vice President
54 President and Chief Executive Officer of State Street Global Advisors
52 Executive Vice President
56 Executive Vice President
All executive officers are appointed by the Board and hold office at the discretion of the Board. No family
relationships exist among any of our directors and executive officers.
Mr. Hooley joined State Street in 1986 and has served as our President and Chief Executive Officer since
March 2010, prior to which he had served as President and Chief Operating Officer since April 2008. From 2002 to
April 2008, Mr. Hooley served as Executive Vice President and head of Investor Services and, in 2006, was
appointed Vice Chairman and Global Head of Investment Servicing and Investment Research and Trading.
Mr. Hooley was elected to serve on the Board of Directors effective October 22, 2009, and he was appointed
Chairman of the Board effective January 1, 2011.
Mr. Antonellis joined State Street in 1991 and has served as head of all Europe and Asia/Pacific Global
Services and Global Markets businesses since March 2010. Prior to this, in 2003, he was named head of
Information Technology and Global Securities Services. In 2006, he was appointed Vice Chairman with additional
responsibility as head of Investor Services in North America and Global Investment Manager Outsourcing Services.
Mr. Bell joined State Street in 2013 as Executive Vice President and Chief Financial Officer. Prior to joining
State Street, Mr. Bell served as executive vice president and chief financial officer of Manulife Financial Corporation,
a leading Canada-based financial services group with principal operations in Asia, Canada and the U.S., from 2009
to 2012. From 2002 to 2009, he served as executive vice president and chief financial officer at Cigna Corporation,
a global health services organization where he had previously served in several senior management positions,
including as President of Cigna Group Insurance.
Mr. Carp joined State Street in 2006 as Executive Vice President and Chief Legal Officer. Later in 2006, he
was also appointed Secretary. From 2004 to 2005, Mr. Carp served as executive vice president and general counsel
of Massachusetts Financial Services, an investment management and research company. From 1989 until 2004,
Mr. Carp was a senior partner at the law firm of Hale and Dorr LLP, where he was an attorney since 1982. Mr. Carp
served as State Street's interim Chief Risk Officer from February 2010 until September 2010.
Mr. Klinck joined State Street in 2006 and has served as Executive Vice President and global head of
Corporate Development and Global Relationship Management since March 2010, prior to which he served as
Executive Vice President and global head of Alternative Investment Solutions. Prior to joining State Street,
Mr. Klinck was with Mellon Financial Corporation, a global financial services company, from 1997 to 2006. During
that time, he served as vice chairman and president of its Investment Manager Solutions group and before that as
chairman for Mellon Europe, where he was responsible for the company’s investor services business in the region.
Mr. Kuritzkes joined State Street in 2010 as Executive Vice President and Chief Risk Officer. Prior to joining
State Street, Mr. Kuritzkes was a partner at Oliver, Wyman & Company, an international management consulting
firm, and led the firm’s Public Policy practice in North America. He joined Oliver, Wyman & Company in 1988, was a
managing director in the firm’s London office from 1993 to 1997, and served as vice chairman of Oliver, Wyman &
42
Company globally from 2000 until the firm’s acquisition by MMC in 2003. From 1986 to 1988, he worked as an
economist and lawyer for the Federal Reserve Bank of New York.
Mr. Malerba joined State Street in 2004 as Deputy Corporate Controller. In 2006, he was appointed Corporate
Controller and Chief Accounting Officer. Prior to joining State Street, he served as Deputy Controller at FleetBoston
Financial Corporation from 2000 and continued in that role after the merger with Bank of America Corporation in
2004.
Mr. O'Neill has served as Executive Vice President and head of Global Markets and Global Services in Europe,
the Middle East and Africa since November 2012 and prior to that he served as head of Global Markets and Global
Services in the Asia/Pacific region. He joined State Street in 1985 and has held several senior positions during his
tenure, including his appointment in January 2000 as managing director of State Street Global Markets in Europe.
This role was expanded in June 2006 to include responsibility for Investor Services for the U.K., Middle East and
Africa.
Mr. Perretta joined State Street in 2007 as Executive Vice President and Chief Information Officer. Prior to
joining State Street, from 2002 to 2007, Mr. Perretta was the chief information officer for General Electric
Commercial Finance, where he had previously served in several senior management positions. Prior to that, Mr.
Perretta was an associate partner at Arthur Anderson Consulting (now Accenture).
Mr. Phalen joined State Street in 1992 and has served as Executive Vice President and head of Global
Operations, Technology and Product Development since March 2010. Prior to that, starting in 2003, he served as
Executive Vice President of State Street and Chairman and Chief Executive Officer of CitiStreet, a global benefits
provider and retirement plan record keeper. In February 2005, he was appointed head of Investor Services in North
America. In 2006, he was appointed head of international operations for Investment Servicing and Investment
Research and Trading, based in Europe. From January 2008 until May 2008, he served on an interim basis as
President and Chief Executive Officer of SSgA, following which he returned to his role as head of international
operations for Investment Servicing and Investment Research and Trading.
Mr. Powers joined State Street in 2008 as President and Chief Executive Officer of State Street Global
Advisors. Prior to joining State Street, Mr. Powers served as Chief Executive Officer of Old Mutual US, the U.S.
operating unit of London-based Old Mutual plc, an international savings and wealth management company, from
2001 through 2008.
Ms. Quirk joined State Street in 2002, and since January 2012 has served as Chief Human Resources and
Citizenship Officer. She has served as Executive Vice President and head of Global Human Resources since March
2010. Prior to that, Ms. Quirk served as Executive Vice President in Global Human Resources and held various
senior roles in that group.
Mr. Rogers joined State Street in 2007 as part of our acquisition of Investors Financial Services Corp., and he
has served as Executive Vice President and head of Global Markets and Global Services - Americas since
November 2011. He has served as head of Global Services, including alternative investment solutions, for all of the
Americas since March 2010. Mr. Rogers was previously head of the Relationship Management group, a role which
he held beginning in 2009. From State Street's acquisition of Investors Financial Services Corp. in July 2007 to
2009, Mr. Rogers headed the post-acquisition Investors Financial Services Corp. business and its integration into
State Street. Before joining State Street at the time of the acquisition, Mr. Rogers spent 27 years at Investors
Financial Services Corp. and its predecessors in various capacities, most recently as President beginning in 2001.
PART II
ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND
ISSUER PURCHASES OF EQUITY SECURITIES
MARKET FOR REGISTRANT'S COMMON EQUITY
Our common stock is listed on the New York Stock Exchange under the ticker symbol STT. There were 3,269
shareholders of record as of January 31, 2014. The information required by this item concerning the market prices
of, and dividends on, our common stock during the past two years is provided under “Quarterly Summarized
Financial Information (Unaudited)” included under Item 8 of this Form 10-K, and is incorporated herein by reference.
In March 2013, our Board of Directors approved a new common stock purchase program authorizing the
purchase by us of up to $2.10 billion of our common stock through March 31, 2014.
43
The following table presents purchases of our common stock and related information for each of the months in
the quarter ended December 31, 2013. All shares of our common stock purchased during the quarter ended
December 31, 2013 were purchased under the above-described Board-approved program. We may employ third-
party broker/dealers to acquire shares on the open market in connection with our common stock purchase
programs.
(Dollars in millions, except per share amounts, shares
in thousands)
Period:
October 1 - October 31, 2013
November 1 - November 30, 2013
December 1 - December 31, 2013
Total
Total Number of
Shares Purchased
Under Publicly
Announced
Program
Average Price
Paid Per Share
Approximate
Dollar Value of
Shares Purchased
Under Publicly
Announced
Program
Approximate
Dollar Value of
Shares Yet to be
Purchased Under
Publicly
Announced
Program
2,709
$
67.47
$
3,600
1,693
71.27
71.27
8,002
$
69.98
$
183
256
121
560
$
$
797
541
420
420
Additional information about our common stock, including Board authorization with respect to purchases by us
of our common stock, is provided under “Capital” in Management's Discussion and Analysis included under Item 7,
and in note 13 to the consolidated financial statements included under Item 8, of this Form 10-K, and is
incorporated herein by reference.
RELATED STOCKHOLDER MATTERS
As a bank holding company, our parent company is a legal entity separate and distinct from its principal
banking subsidiary, State Street Bank, and its non-banking subsidiaries. The right of the parent company to
participate as a shareholder in any distribution of assets of State Street Bank upon its liquidation, reorganization or
otherwise is subject to the prior claims by creditors of State Street Bank, including obligations for federal funds
purchased and securities sold under repurchase agreements and deposit liabilities.
Payment of dividends by State Street Bank is subject to the provisions of the Massachusetts banking law,
which provide that State Street Bank's Board of Directors may declare, from State Street Bank's net profits (as
defined below), cash dividends annually, semi-annually or quarterly (but not more frequently) and can declare non-
cash dividends at any time. Under Massachusetts banking law, for purposes of determining the amount of cash
dividends that are payable by State Street Bank, “net profits” is defined as an amount equal to the remainder of all
earnings from current operations plus actual recoveries on loans and investments and other assets, after deducting
from the total thereof all current operating expenses, actual losses, accrued dividends on preferred stock, if any, and
all federal and state taxes.
No dividends may be declared, credited or paid so long as there is any impairment of State Street Bank's
capital stock. The approval of the Massachusetts Commissioner of Banks is required if the total of all dividends
declared by State Street Bank in any calendar year would exceed the total of its net profits for that year combined
with its retained net profits for the preceding two years, less any required transfer to surplus or to a fund for the
retirement of any preferred stock.
Under the Federal Reserve Act, the approval of the Federal Reserve would be required for the payment of
dividends by State Street Bank if the total amount of all dividends declared by State Street Bank in any calendar
year, including any proposed dividend, would exceed the total of its net income for such calendar year as reported
in State Street Bank's Consolidated Reports of Condition and Income for a Bank with Domestic and Foreign Offices
Only - FFIEC 031, commonly referred to as the “Call Report,” as submitted through the Federal Financial Institutions
Examination Council and provided to the Federal Reserve, plus its “retained net income” for the preceding two
calendar years. For these purposes, “retained net income,” as of any date of determination, is defined as an
amount equal to State Street Bank's net income (as reported in its Call Reports for the calendar year in which
retained net income is being determined) less any dividends declared during such year. In determining the amount
of dividends that are payable, the total of State Street Bank's net income for the current year and its retained net
income for the preceding two calendar years is reduced by any net losses incurred in the current or preceding two-
year period and by any required transfers to surplus or to a fund for the retirement of preferred stock.
Prior Federal Reserve approval also must be obtained if a proposed dividend would exceed State Street
Bank's “undivided profits” (retained earnings) as reported in its Call Reports. State Street Bank may include in its
44
undivided profits amounts contained in its surplus account, if the amounts reflect transfers of undivided profits made
in prior periods and if the Federal Reserve's approval for the transfer back to undivided profits has been obtained.
Under the prompt corrective action, or PCA, provisions adopted pursuant to the FDIC Improvement Act of
1991, State Street Bank may not pay a dividend when it is deemed, under the PCA framework, to be under-
capitalized, or when the payment of the dividend would cause State Street Bank to be under-capitalized. If State
Street Bank is under-capitalized for purposes of the PCA framework, it must cease paying dividends for so long as it
is deemed to be under-capitalized. Once earnings have begun to improve and an adequate capital position has
been restored, dividend payments may resume in accordance with federal and state statutory limitations and
guidelines.
In 2013, our parent company declared aggregate quarterly common stock dividends to its shareholders of
$1.04 per share, totaling approximately $463 million. In 2012, our parent company declared aggregate quarterly
common stock dividends to its shareholders of $0.96 per share, totaling approximately $456 million. Currently, the
payment of future common stock dividends by our parent company to its shareholders is subject to the review of our
capital plan by the Federal Reserve in connection with its CCAR process. Information about dividends declared by
our parent company and dividends from our subsidiary banks is provided under “Capital” in Management's
Discussion and Analysis included under Item 7, and in note 15 to the consolidated financial statements included
under Item 8, of this Form 10-K, and is incorporated herein by reference. Future dividend payments of State Street
Bank and our non-banking subsidiaries cannot be determined at this time. In addition, refer to “Business -
Supervision and Regulation - Capital Planning, Stress Tests and Dividends” included under Item 1 of this Form 10-K
and the risk factor titled “Our business and capital-related activities, including our ability to return capital to
shareholders and purchase our capital stock, may be adversely affected by our implementation of the revised
regulatory capital and liquidity standards that we must meet under Basel III, the Dodd-Frank Act and other
regulatory initiatives, or in the event our capital plan or post-stress capital ratios are determined to be insufficient as
a result of regulatory capital stress testing” included under Item 1A of this Form 10-K.
Information about our equity compensation plans is included under Item 12, and in note 14 to the consolidated
financial statements included under Item 8, of this Form 10-K, and is incorporated herein by reference.
45
SHAREHOLDER RETURN PERFORMANCE PRESENTATION
The graph presented below compares the cumulative total shareholder return on State Street's common stock
to the cumulative total return of the S&P 500 Index, the S&P Financial Index and the KBW Bank Index over a five-
year period. The cumulative total shareholder return assumes the investment of $100 in State Street common stock
and in each index on December 31, 2008 at the closing price on the last trading day of 2008, and also assumes
reinvestment of common stock dividends. The S&P Financial Index is a publicly available measure of 81 of the
Standard & Poor's 500 companies, representing 17 diversified financial services companies, 22 insurance
companies, 19 real estate companies and 23 banking companies. The KBW Bank Index seeks to reflect the
performance of banks and thrifts that are publicly traded in the U.S., and is composed of 24 leading national money
center and regional banks and thrifts.
State Street Corporation
S&P 500 Index
S&P Financial Index
KBW Bank Index
2008
2009
2010
2011
2012
2013
$
$
100
100
100
100
$
111
126
117
98
$
118
146
132
121
$
105
149
109
93
$
125
172
141
122
198
228
191
168
46
ITEM 6. SELECTED FINANCIAL DATA
(Dollars in millions, except per share amounts or where otherwise noted)
FOR THE YEAR ENDED DECEMBER 31:
Total fee revenue
Net interest revenue
Gains (losses) related to investment securities, net(1)
Total revenue
Provision for loan losses
Expenses:
Compensation and employee benefits
Information systems and communications
Transaction processing services
Occupancy
Claims resolution
Provision for legal exposure related to fixed-income strategies
Securities lending charge
Acquisition and restructuring costs, net(2)
Other
Total expenses
Income before income tax expense and extraordinary loss
Income tax expense(3)
Income before extraordinary loss
Extraordinary loss, net of taxes
Net income (loss)
Adjustments to net income (loss)(4)
Net income before extraordinary loss available to common shareholders
Net income (loss) available to common shareholders
PER COMMON SHARE:
Earnings per common share before extraordinary loss:
Basic
Diluted
Earnings (loss) per common share:
Basic
Diluted
Cash dividends declared
Closing market price (at year end)
AT YEAR END:
Investment securities
Average total interest-earning assets
Total assets
Deposits
Long-term debt
Total shareholders' equity
Assets under custody and administration (in billions)
Assets under management (in billions)
Number of employees
RATIOS:
Return on average common shareholders' equity before extraordinary loss
Return on average assets before extraordinary loss
Common dividend payout before extraordinary loss
Average common equity to average total assets
Net interest margin, fully taxable-equivalent basis
Tier 1 risk-based capital
Total risk-based capital
Tier 1 leverage ratio
2013
2012
2011
2010
2009
$
$
$
$
$
$
7,590
2,303
(9)
9,884
6
3,800
935
733
467
—
—
—
104
1,153
7,192
2,686
550
2,136
—
2,136
(34)
2,102
2,102
4.71
4.62
4.71
4.62
1.04
$
$
$
$
$
$
7,088
2,538
23
9,649
(3)
3,837
844
702
470
(362)
—
—
225
1,170
6,886
2,766
705
2,061
—
2,061
(42)
2,019
2,019
4.25
4.20
4.25
4.20
.96
$
$
$
$
$
$
7,194
2,333
67
9,594
—
3,820
776
732
455
—
—
—
269
1,006
7,058
2,536
616
1,920
—
1,920
(38)
1,882
1,882
3.82
3.79
3.82
3.79
.72
$
$
$
$
$
$
6,540
2,699
(286)
8,953
25
3,524
713
653
463
—
—
414
252
823
6,842
2,086
530
1,556
—
1,556
(16)
1,540
1,540
3.11
3.09
3.11
3.09
.04
$
5,935
2,564
141
8,640
149
3,037
656
583
475
—
250
—
49
916
5,966
2,525
722
1,803
(3,684)
$ (1,881)
(163)
$
1,640
$ (2,044)
$
3.50
3.46
$
(4.32)
(4.31)
.04
$
73.39
$
47.01
$
40.31
$
46.34
$
43.54
$ 116,914
178,101
243,291
182,268
9,699
20,378
27,427
2,345
29,430
$ 121,061
167,615
222,582
164,181
7,429
20,869
24,371
2,086
29,650
$ 109,153
147,657
216,827
157,287
8,131
19,398
21,807
1,845
29,740
$ 94,130
126,256
160,505
98,345
8,550
17,787
21,527
2,010
28,670
$ 93,576
122,923
157,946
90,062
8,838
14,491
18,795
1,951
27,310
10.5%
1.02
21.97
9.6
1.37
17.3
19.7
6.9
10.3%
1.05
22.43
10.1
1.59
19.1
20.6
7.1
10.0%
1.09
18.83
10.9
1.67
18.8
20.5
7.3
9.5%
1.02
1.29
10.8
2.24
20.5
22.0
8.2
13.2%
1.12
1.17
8.5
2.19
17.7
19.1
8.5
(1) Amount for 2012 reflected a $46 million loss from the sale of our Greek investment securities; amount for 2010 included a net loss of $344 million related to a
repositioning of our investment portfolio.
(2) Amounts for 2012 and 2011 reflected acquisition costs of $66 million and $71 million, respectively, offset by indemnification benefits of $40 million and $55 million,
respectively, for the assumption of income tax liabilities related to the 2010 acquisition of the Intesa securities services business.
(3) Amount for 2013 included a $71 million out-of-period benefit to adjust deferred taxes. Amounts for 2012 and 2011 reflected the net effects of certain tax matters
($7 million benefit and $55 million expense, respectively) associated with the 2010 Intesa acquisition. Amounts for 2011 and 2010 reflected discrete tax benefits of
$103 million and $180 million, respectively, attributable to costs incurred in terminating former conduit asset structures.
(4) Amounts for 2013, 2012 and 2011 represented preferred stock dividends and the allocation of earnings to participating securities using the two-class method.
Amount for 2010 represented the allocation of earnings to participating securities using the two-class method. Amounts for 2009 represented dividends and
discount related to preferred stock issued in connection with the U.S. Treasury's Troubled Asset Relief Program in 2008 and redeemed in 2009.
47
STATE STREET CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Table of Contents
General
Overview of Financial Results
Consolidated Results of Operations
Total Revenue
Fee Revenue
Net Interest Revenue
Gains (Losses) Related to Investment Securities, Net
Provision for Loan Losses
Expenses
Income Tax Expense
Line of Business Information
Consolidated Results of Operations - Comparison of 2012 and 2011
Overview of Consolidated Results of Operations
Total Revenue
Expenses
Income Tax Expense
Financial Condition
Investment Securities
Loans and Leases
Cross-Border Outstandings
Risk Management
Credit Risk Management
Liquidity Risk Management
Operational Risk Management
Market Risk Management
Trading Activities
Asset-and-Liability Management Activities
Model Risk Management
Business Risk Management
Capital
Off-Balance Sheet Arrangements
Significant Accounting Estimates
Recent Accounting Developments
48
49
50
53
54
54
61
64
64
65
69
69
72
72
73
74
75
75
77
84
87
88
92
94
100
102
102
106
109
109
110
119
119
122
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
GENERAL
State Street Corporation, or the parent company, is a financial holding company headquartered in Boston,
Massachusetts. Unless otherwise indicated or unless the context requires otherwise, all references in this
Management's Discussion and Analysis to “State Street,” “we,” “us,” “our” or similar terms mean State Street
Corporation and its subsidiaries on a consolidated basis. Our principal banking subsidiary is State Street Bank and
Trust Company, or State Street Bank. As of December 31, 2013, we had consolidated total assets of $243.29
billion, consolidated total deposits of $182.27 billion, consolidated total shareholders' equity of $20.38 billion and
29,430 employees. With $27.43 trillion of assets under custody and administration and $2.35 trillion of assets under
management as of December 31, 2013, we are a leading specialist in meeting the needs of institutional investors
worldwide.
We have two lines of business:
Investment Servicing provides services for mutual funds, collective investment funds and other investment
pools, corporate and public retirement plans, insurance companies, foundations and endowments worldwide.
Products include custody; product- and participant-level accounting; daily pricing and administration; master trust
and master custody; record-keeping; cash management; foreign exchange, brokerage and other trading services;
securities finance; deposit and short-term investment facilities; loans and lease financing; investment manager and
alternative investment manager operations outsourcing; and performance, risk and compliance analytics to support
institutional investors.
Investment Management, through State Street Global Advisors, or SSgA, provides a broad array of investment
management, investment research and investment advisory services to corporations, public funds and other
sophisticated investors. SSgA offers strategies for managing financial assets, including passive and active, such as
enhanced indexing, using quantitative and fundamental methods for both U.S. and global equities and fixed-income
securities. SSgA also offers exchange-traded funds, or ETFs, such as the SPDR® ETF brand.
For financial and other information about our lines of business, refer to “Line of Business Information” included
in this Management's Discussion and Analysis and in note 25 to the consolidated financial statements included
under Item 8 of this Form 10-K.
This Management's Discussion and Analysis should be read in conjunction with the consolidated financial
statements and accompanying notes to consolidated financial statements included under Item 8 of this Form 10-K.
Certain previously reported amounts presented have been reclassified to conform to current-year presentation.
We prepare our consolidated financial statements in conformity with accounting principles generally accepted
in the U.S., referred to as GAAP. The preparation of financial statements in conformity with GAAP requires
management to make estimates and assumptions in its application of certain accounting policies that materially
affect the reported amounts of assets, liabilities, equity, revenue and expenses.
The significant accounting policies that require us to make estimates and assumptions that are difficult,
subjective or complex about matters that are uncertain and may change in subsequent periods are accounting for
fair value measurements; other-than-temporary impairment of investment securities; and impairment of goodwill and
other intangible assets. These significant accounting policies require the most subjective or complex judgments,
and underlying estimates and assumptions could be subject to revision as new information becomes available. An
understanding of the judgments, estimates and assumptions underlying these significant accounting policies is
essential in order to understand our reported consolidated results of operations and financial condition.
Certain financial information provided in this Management's Discussion and Analysis is prepared on both a
GAAP, or reported basis, and a non-GAAP, or operating basis, including certain non-GAAP measures used in the
calculation of identified regulatory capital ratios. We measure and compare certain financial information on an
operating basis, as we believe that this presentation supports meaningful comparisons from period to period and
the analysis of comparable financial trends with respect to State Street's normal ongoing business operations. We
believe that operating-basis financial information, which reports non-taxable revenue, such as interest revenue
associated with tax-exempt investment securities, on a fully taxable-equivalent basis, facilitates an investor's
understanding and analysis of State Street's underlying financial performance and trends in addition to financial
information prepared and reported in conformity with GAAP.
49
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Continued)
We also believe that the use of certain non-GAAP measures in the calculation of identified regulatory capital
ratios is useful in understanding State Street's capital position and is of interest to investors. Operating-basis
financial information should be considered in addition to, not as a substitute for or superior to, financial information
prepared in conformity with GAAP. Any non-GAAP, or operating-basis, financial information presented in this
Management’s Discussion and Analysis is reconciled to its most directly comparable GAAP-basis measure.
This Management's Discussion and Analysis contains statements that are considered “forward-looking
statements” within the meaning of U.S. securities laws. Forward-looking statements are based on our current
expectations about financial performance, capital, market growth, acquisitions, joint ventures and divestitures, new
technologies, services and opportunities and earnings, management's confidence in our strategies and other
matters that do not relate strictly to historical facts. These forward-looking statements involve certain risks and
uncertainties which could cause actual results to differ materially. We undertake no obligation to revise the forward-
looking statements contained in this Management's Discussion and Analysis to reflect events after the time we file
this Form 10-K with the SEC. Additional information about forward-looking statements and related risks and
uncertainties is provided in “Risk Factors” included under Item 1A of this Form 10-K.
OVERVIEW OF FINANCIAL RESULTS
Years Ended December 31,
(Dollars in millions, except per share amounts)
Total fee revenue
Net interest revenue
Gains (losses) related to investment securities, net
Total revenue
Provision for loan losses
Total expenses
Income before income tax expense
Income tax expense(1)
Net income
Adjustments to net income:
Dividends on preferred stock
Earnings allocated to participating securities
Net income available to common shareholders
Earnings per common share:
Basic
Diluted
Average common shares outstanding (in thousands):
Basic
Diluted
Cash dividends declared per common share
Return on average common equity
2013
2012
2011
$
7,590
$
7,088
$
7,194
2,303
(9)
9,884
6
7,192
2,686
550
2,538
23
9,649
(3)
6,886
2,766
705
2,333
67
9,594
—
7,058
2,536
616
$
2,136
$
2,061
$
1,920
(26)
(8)
(29)
(13)
(20)
(18)
$
2,102
$
2,019
$
1,882
$
$
4.71
4.62
$
4.25
4.20
3.82
3.79
446,245
455,155
474,458
481,129
492,598
496,072
$
1.04
$
.96
$
.72
10.5%
10.3%
10.0%
(1) Amount for 2013 included an out-of-period income tax benefit of $71 million to adjust deferred taxes. Additional information about this out-of-
period benefit is provided under “Income Tax Expense” in this Management's Discussion and Analysis and in note 23 to the consolidated
financial statements included under Item 8 of this Form 10-K. Amounts for 2012 and 2011 reflected the net effects of certain tax matters ($7
million benefit and $55 million expense, respectively) associated with the 2010 Intesa acquisition. Amount for 2011 reflected a discrete income
tax benefit of $103 million attributable to costs incurred in terminating former conduit asset structures.
The following “Highlights” and “Financial Results” sections provide information related to significant events, as
well as highlights of our consolidated financial results for 2013 presented in the table above. More detailed
information about our consolidated financial results, including comparisons of our results for 2013 to those for 2012,
is provided under “Consolidated Results of Operations,” which follows these sections.
50
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Continued)
Highlights
In March 2013, following the Federal Reserve's review of our 2013 capital plan, with respect to which the
Federal Reserve did not object to the capital actions we proposed, our Board of Directors approved a new common
stock purchase program authorizing the purchase by us of up to $2.10 billion of our common stock through
March 31, 2014. In connection with this and a prior Board-approved program, we undertook the following activities
in 2013:
• From April 1, 2013 through December 31, 2013, under the above-described March 2013 program, we
purchased approximately 24.7 million shares of our common stock at an average price of $68.05 per share
and an aggregate cost of $1.68 billion.
•
•
In the first quarter of 2013, in completion of a separate program approved by the Board in March 2012, we
purchased an aggregate of 6.5 million shares of our common stock at an average price of $54.95 per share
and an aggregate cost of $360 million.
In 2013, under both programs combined, we purchased approximately 31.2 million shares of our common
stock at an average price of $65.30 per share and an aggregate cost of approximately $2.04 billion.
As of December 31, 2013, approximately $420 million remained available for purchases of our common stock
under the March 2013 program.
In 2012, under the March 2012 program, we purchased an aggregate of 33.4 million shares of our common
stock, at an aggregate cost of $1.44 billion.
In February 2013, we declared a quarterly common stock dividend of $0.26 per share. This dividend
represented an 8% increase over the quarterly common stock dividend of $0.24 per share declared by us in
December 2012. In all of 2013, we declared aggregate quarterly common stock dividends of $1.04 per share,
totaling approximately $463 million, compared to declarations of aggregate quarterly common stock dividends of
$0.96 per share, totaling approximately $456 million, in 2012.
The Federal Reserve is currently conducting a review of 2014 capital plans submitted in January 2014 by us and
other large bank holding companies. The levels at which we will be able to declare dividends and purchase shares of
our common stock after March 2014 will depend on the Federal Reserve's assessment of our capital plan and our
projected performance under the stress scenarios. While we anticipate that the Federal Reserve will not object to the
continued return of capital to our shareholders through dividends and/or common stock purchases in 2014, we cannot
provide assurance with respect to the Federal Reserve's assessment of our capital plan, or that we will be able to
continue to return capital to our shareholders at any specific level.
Additional information about our common stock purchase program and our common stock dividends is
provided under “Financial Condition – Capital” in this Management's Discussion and Analysis. In addition,
information about dividends from our subsidiary banks is provided in “Related Stockholder Matters” included under
Item 5, and in note 15 to the consolidated financial statements included under Item 8, of this Form 10-K.
In November 2013, we issued $1.0 billion of 3.70% senior notes due November 20, 2023. In addition, in May
2013, we issued $1.50 billion of senior and subordinated debt, composed of $500 million of 1.35% senior notes due
May 15, 2018 and $1.0 billion of 3.10% subordinated notes due May 15, 2023. Additional information about these
debt issuances is provided in note 10 to the consolidated financial statements included under Item 8 of this Form
10-K.
In 2013, in connection with our continued implementation of our Business Operations and Information
Technology Transformation program, we achieved incremental pre-tax expense savings of approximately $220
million, and as previously reported, we achieved incremental pre-tax expense savings of approximately $112 million
in 2012 and $86 million in 2011, in each case compared to our 2010 expenses from operations, all else being equal.
These pre-tax expense savings relate only to the Business Operations and Information Technology Transformation
program and are based on projected improvement from our total 2010 expenses from operations. Our actual total
expenses have increased since 2010, and may in the future increase or decrease, due to other factors. Additional
information with respect to the program is provided under “Consolidated Results of Operations - Expenses” in this
Management's Discussion and Analysis.
In January 2014, we entered into a settlement agreement with the U.K. Financial Conduct Authority as a result
of our having charged six clients of our U.K. transition management business amounts in excess of the contractual
terms in 2010 and 2011. We agreed to and paid a fine of approximately $38 million in January 2014, which we had
accrued as of December 31, 2013. We incurred aggregate pre-tax costs in 2013 in connection with this matter of
approximately $69 million, composed of the following:
51
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Continued)
• Revenue rebates to affected clients of approximately $4 million, recorded as a reduction of other trading,
transition management and brokerage revenue, a component of brokerage and other trading services
revenue;
• Securities processing costs of approximately $27 million, recorded in securities processing costs
(recoveries), a component of other expenses; and
• The above-described regulatory fine of approximately $38 million, recorded in other expenses.
In addition to the above, we recorded approximately $15 million of revenue rebates in 2011 and approximately
$17 million of revenue rebates and other costs in 2012 related to this matter. The securities processing costs
described above reflected probable and estimable costs as of December 31, 2013 related to an operating loss. We
resolved this in February 2014 at an additional cost of approximately $12 million. We have incurred total costs
associated with this matter, since it arose in 2010, of approximately $113 million, excluding legal and professional
fees. Additional information about this transition management matter is provided under “Legal and Regulatory
Matters” in note 11 to the consolidated financial statements included under Item 8 of this Form 10-K.
Financial Results
Total revenue for 2013 increased 2% compared to 2012, as a combined 10% increase in aggregate servicing
fee and management fee revenue and a 5% increase in trading services revenue were partly offset by declines in
net interest revenue and securities finance revenue of 9% and 11%, respectively.
Servicing fee revenue for 2013 increased 9% compared to 2012, mainly the result of stronger global equity
markets, the impact of net new business installed, and the addition of revenue from the Goldman Sachs
Administration Services, or GSAS, business, acquired in October 2012. Servicing fees generated outside the U.S.
in both 2013 and 2012 were approximately 42% of total servicing fees for those periods. Management fee revenue
increased 11% compared to 2012, primarily the result of stronger equity markets and the impact of net new
business installed. Management fees generated outside the U.S. in 2013 and 2012 were approximately 36% and
37%, respectively, of total management fees for those periods.
Trading services revenue for 2013, composed of revenue generated by foreign exchange trading and
brokerage and other trading services, increased 5% compared to 2012. Revenue from foreign exchange trading
was up 15%, with estimated indirect foreign exchange revenue up 15% and direct sales and trading foreign
exchange revenue up 16%, from the prior year, with both increases mainly the result of higher client volumes,
currency volatility and spreads. Brokerage and other trading services revenue declined 5% compared to 2012,
primarily reflective of the impact of lower distribution fees associated with the SPDR® Gold ETF, which resulted from
lower average gold prices and net outflows from the SPDR® Gold ETF. Securities finance revenue declined 11% for
2013 compared to 2012, generally the result of lower spreads and slightly lower lending volumes.
Net interest revenue for 2013 declined 9% compared to 2012, generally the result of lower yields on earning
assets related to lower global interest rates, partly offset by lower funding costs. The decline in net interest revenue
also reflected the continued impact of the reinvestment of pay-downs on existing investment securities in lower-
yielding investment securities. Net interest revenue for 2013 and 2012 included $137 million and $215 million,
respectively, of discount accretion related to investment securities added to our consolidated statement of condition
in connection with our consolidation of the commercial paper conduits in 2009.
Net interest margin, calculated on fully taxable-equivalent net interest revenue, declined 22 basis points to
1.37% in 2013 from 1.59% in 2012. Continued elevated levels of client deposits, amid continued market
uncertainty, increased our average interest-earning assets, but negatively affected our net interest margin, as we
generally placed a portion of these deposits with U.S. and non-U.S. central banks and earned the relatively low
interest rates paid by the central banks on these balances. Discount accretion, fully taxable-equivalent net interest
revenue and net interest margin are discussed in more detail under “Consolidated Results of Operations - Net
Interest Revenue” in this Management's Discussion and Analysis.
Total expenses for 2013 increased 4% compared to 2012. Total expenses for 2013 reflected aggregate credits
of $85 million, recorded in other expenses, related to gains and recoveries associated with Lehman Brothers-related
assets. Total expenses for 2012 reflected a credit of $362 million, composed of recoveries associated with the 2008
Lehman Brothers bankruptcy, and aggregate credits of $30 million related to litigation and other settlement
recoveries associated with Lehman Brothers-related matters. Excluding all of the Lehman Brothers-related credits
recorded in 2013 and 2012, total expenses were essentially flat in the 2013-to-2012 comparison, at $7.28 billion for
2013 ($7.19 billion plus $85 million) compared to $7.28 billion for 2012 ($6.89 billion plus $362 million and $30
million).
52
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Continued)
Compensation and employee benefits expenses were down 1% in 2013 compared to 2012, primarily due to
savings associated with the implementation of our Business Operations and Information Technology Transformation
program and lower benefit costs, partly offset by an increase in costs to support new business and higher incentive
compensation. Information systems and communications expenses increased 11% compared to 2012, primarily
from the planned transition of certain functions to third-party service providers in connection with the implementation
of our Business Operations and Information Technology Transformation program and costs to support new
business. Transaction processing services expenses were higher by 4%, the result of higher equity market values
and higher transaction volumes in the asset servicing business. Finally, other expenses declined 1%, mainly the
result of the above-described 2013 gains and recoveries associated with Lehman Brothers-related assets.
Additional information with respect to our expenses is provided under “Consolidated Results of Operations -
Expenses” in this Management's Discussion and Analysis.
In 2013, our global services business secured mandates for approximately $1.02 trillion of new business in
assets to be serviced; of the total, $858 billion was installed prior to December 31, 2013, with the remaining $158
billion expected to be installed in 2014. The new business not installed by December 31, 2013 was not included in
our assets under custody and administration as of that date, and had no impact on our servicing fee revenue for
2013, as the assets are not included until their installation is complete and we begin to service them. Once
installed, the assets generate servicing fee revenue in subsequent periods in which the assets are serviced. The
$1.02 trillion of new asset servicing business represents gross new business, and is not net of transfers of assets by
us to subcustodians.
We will provide one or more of various services for these new assets to be serviced, including accounting,
bank loan servicing, compliance reporting and monitoring, custody, depository banking services, foreign exchange,
fund administration, hedge fund servicing, middle-office outsourcing, performance and analytics, private equity
administration, real estate administration, securities finance, transfer agency, and wealth management services.
In 2013, SSgA had approximately $5 billion of net lost business in assets to be managed, generally composed
of $34 billion of net outflows from alternative investments, partly offset by net inflows of $13 billion into managed
cash, net inflows of $6 billion into equities, net inflows of $4 billion into multi-asset-class solutions and net inflows of
$3 billion each into fixed-income and securities lending funds.
An additional $13 billion of new business awarded to SSgA but not installed by December 31, 2013 was not
included in our assets under management as of that date, and had no impact on our management fee revenue for
2013, as the assets are not included until their installation is complete and we begin to manage them. Once
installed, the assets generate management fee revenue in subsequent periods in which the assets are managed.
CONSOLIDATED RESULTS OF OPERATIONS
This section discusses our consolidated results of operations for 2013 compared to 2012, and should be read
in conjunction with the consolidated financial statements and accompanying notes included under Item 8 of this
Form 10-K. A comparison of consolidated results of operations for 2012 with those for 2011 is provided later in this
Management's Discussion and Analysis under “Consolidated Results of Operations - Comparison of 2012 and
2011.”
53
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Continued)
TOTAL REVENUE
Years Ended December 31,
(Dollars in millions)
Fee revenue:
Servicing fees
Management fees
Trading services:
Foreign exchange trading
Brokerage and other trading services
Total trading services
Securities finance
Processing fees and other
Total fee revenue
Net interest revenue:
Interest revenue
Interest expense
Net interest revenue
2013
2012
2011
% Change
2013 vs. 2012
$
4,819 $
1,106
4,414 $
993
4,382
917
9%
11
589
472
1,061
359
245
7,590
2,714
411
2,303
511
499
1,010
405
266
7,088
3,014
476
2,538
683
537
1,220
378
297
7,194
2,946
613
2,333
15
(5)
5
(11)
(8)
7
(10)
(14)
(9)
Gains (losses) related to investment securities, net
(9)
23
67
Total revenue
$
9,884 $
9,649 $
9,594
2
Our broad range of services generates fee revenue and net interest revenue. Fee revenue generated by our
investment servicing and investment management businesses is augmented by trading services, securities finance
and processing fees and other revenue. We earn net interest revenue from client deposits and short-term
investment activities by providing deposit services and short-term investment vehicles, such as repurchase
agreements and corporate commercial paper, to meet clients' needs for high-grade liquid investments, and investing
these sources of funds and additional borrowings in assets yielding a higher rate.
Fee Revenue
Servicing and management fees collectively composed approximately 78% of our total fee revenue for 2013,
compared to 76% for 2012. The level of these fees is influenced by several factors, including the mix and volume of
our assets under custody and administration and our assets under management, the value and type of securities
positions held (with respect to assets under custody) and the volume of portfolio transactions, and the types of
products and services used by our clients, and is generally affected by changes in worldwide equity and fixed-
income security valuations and trends in market asset class preferences.
Generally, servicing fees are affected by changes in daily average valuations of assets under custody and
administration. Additional factors, such as the relative mix of assets serviced, the level of transaction volumes,
changes in service level, the nature of services provided, balance credits, client minimum balances, pricing
concessions and other factors, may have a significant effect on our servicing fee revenue.
Generally, management fees are affected by changes in month-end valuations of assets under management.
Management fees for certain components of managed assets, such as ETFs, are affected by daily average
valuations of assets under management. Management fee revenue is relatively more sensitive to market valuations
than servicing fee revenue, since a higher proportion of the underlying services provided, and the associated
management fees earned, are dependent on equity and fixed-income security valuations. Additional factors, such
as the relative mix of assets managed, changes in service level and other factors, may have a significant effect on
our management fee revenue. While certain management fees are directly determined by the values of assets
under management and the investment strategies employed, management fees reflect other factors as well,
including our relationship pricing for clients using multiple services.
Management fees for actively managed products are generally earned at higher rates than those for passive
products. Actively-managed products may also involve performance fee arrangements. Performance fees are
generated when the performance of certain managed funds exceeds benchmarks specified in the management
54
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Continued)
agreements. Generally, we experience more volatility with performance fees than with more traditional
management fees.
In light of the above, we estimate, using relevant information as of December 31, 2013 and assuming that all
other factors remain constant, that: (1) a 10% increase or decrease, over the relevant periods on and for which our
servicing and management fees are calculated, in worldwide equity valuations would result in a corresponding
change in our total revenue of approximately 2%; and (2) a 10% increase or decrease, over the relevant periods on
and for which our servicing and management fees are calculated, in worldwide fixed-income security valuations
would result in a corresponding change of approximately 1% in our total revenue.
The following table presents selected equity market indices. While the specific indices presented are
indicative of general market trends, the asset types and classes relevant to individual client portfolios can and do
differ, and the performance of associated relevant indices can therefore differ from the performance of the indices
presented.
Daily averages and the averages of month-end indices demonstrate worldwide changes in equity markets that
affect our servicing and management fee revenue. Year-end indices affect the values of assets under custody and
administration and assets under management as of those dates. The index names listed in the table are service
marks of their respective owners.
INDEX
S&P 500®
NASDAQ®
MSCI EAFE®
FEE REVENUE
Daily Averages of Indices
Averages of Month-End Indices
Year-End Indices
2013
2012
% Change
2013
2012
% Change
2013
2012
% Change
1,644
3,541
1,746
1,379
2,966
1,489
19 % 1,652
19
17
3,575
1,754
1,387
2,984
1,499
19 % 1,848
20
17
4,177
1,916
1,426
3,020
1,604
30 %
38
19
Years Ended December 31,
2013
2012
2011
% Change
2013 vs. 2012
(Dollars in millions)
Servicing fees
Management fees
Trading services:
Foreign exchange trading
Brokerage and other trading services
Total trading services
Securities finance
Processing fees and other
Total fee revenue
Servicing Fees
$
4,819
$
4,414
$
1,106
589
472
1,061
359
245
993
511
499
1,010
405
266
4,382
917
683
537
1,220
378
297
$
7,590
$
7,088
$
7,194
9%
11
15
(5)
5
(11)
(8)
7
Servicing fees include fee revenue from U.S. mutual funds, collective investment funds worldwide, corporate
and public retirement plans, insurance companies, foundations, endowments, and other investment pools. Products
and services include custody; product- and participant-level accounting; daily pricing and administration; master
trust and master custody; record-keeping; cash management; investment manager and alternative investment
manager operations outsourcing; and performance, risk and compliance analytics.
The 9% increase in servicing fees for 2013 compared to 2012 primarily resulted from stronger global equity
markets, the impact of net new business installed on current-period revenue and the addition of revenue from the
October 2012 GSAS acquisition. The combined daily averages of equity market indices, individually presented in
the foregoing “INDEX” table, increased approximately 19% for 2013 compared to 2012. For both 2013 and 2012,
servicing fees generated outside the U.S. were approximately 42% of total servicing fees.
The following tables present the components, financial instrument mix and geographic mix of assets under
custody and administration, as of the dates indicated:
55
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Continued)
COMPONENTS OF ASSETS UNDER CUSTODY AND ADMINISTRATION
As of December 31,
(Dollars in billions)
Mutual funds
Collective funds
Pension products
Insurance and other products
2013
2012
2011
2010
2009
2012-2013
Annual
Growth
Rate
2009-2013
Compound
Annual
Growth Rate
$
6,811
$
5,852
$
5,265
$
5,540
$
4,734
16%
10%
6,428
5,851
8,337
5,363
5,339
7,817
4,437
4,837
7,268
4,350
4,726
6,911
3,580
4,395
6,086
Total
$ 27,427
$ 24,371
$ 21,807
$ 21,527
$ 18,795
FINANCIAL INSTRUMENT MIX OF ASSETS UNDER CUSTODY AND ADMINISTRATION
20
10
7
13
16
7
8
10
2012-2013
Annual
Growth
Rate
2009-2013
Compound
Annual
Growth Rate
As of December 31,
(Dollars in billions)
Equities
Fixed-income
Short-term and other investments
2013
2012
2011
2010
2009
$ 15,050
$ 12,276
$ 10,849
$ 11,000
$
8,828
23%
9,072
3,305
8,885
3,210
8,317
2,641
7,875
2,652
7,236
2,731
2
3
13
14%
6
5
10
Total
$ 27,427
$ 24,371
$ 21,807
$ 21,527
$ 18,795
GEOGRAPHIC MIX OF ASSETS UNDER CUSTODY AND ADMINISTRATION(1)
As of December 31,
(In billions)
North America
Europe/Middle East/Africa
Asia/Pacific
2013
2012
2011
2010
2009
$
20,764
$
18,463
$
16,368
$
16,486
$
15,191
5,511
1,152
4,801
1,107
4,400
1,039
4,069
972
2,773
831
Total Assets Under Custody and Administration
$
27,427
$
24,371
$
21,807
$
21,527
$
18,795
(1) Geographic mix is based on the location at which the assets are serviced.
The increase in total assets under custody and administration from year-end 2012 to year-end 2013 primarily
resulted from stronger global equity markets and net client cash inflows, as well as net new business installations.
Asset levels as of December 31, 2013 did not reflect $158 billion of new business in assets to be serviced awarded
to us in 2013 but not installed prior to December 31, 2013. This new business will be reflected in assets under
custody and administration in future periods after installation, and will generate servicing fee revenue in subsequent
periods.
The value of assets under custody and administration is a broad measure of the relative size of various
markets served. Changes in the values of assets under custody and administration from period to period do not
necessarily result in proportional changes in our servicing fee revenue.
Management Fees
Through SSgA, we provide a broad range of investment management strategies, specialized investment
management advisory services and other financial services for corporations, public funds, and other sophisticated
investors. SSgA offers a broad array of investment management strategies, including passive and active, such as
enhanced indexing, using quantitative and fundamental methods for both U.S. and global equity and fixed-income
securities. SSgA also offers ETFs, such as the SPDR® ETF brand. While certain management fees are directly
determined by the values of assets under management and the investment strategies employed, management fees
reflect other factors as well, including our relationship pricing for clients who use multiple services, and the
benchmarks specified in the respective management agreements related to performance fees.
56
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Continued)
The 11% increase in management fees for 2013 compared to 2012 primarily resulted from stronger equity
markets and the impact of net new business installed on current-period revenue. Combined average daily and
average month-end equity market indices, individually presented in the foregoing “INDEX” table, increased
approximately 19% compared to 2012. Management fees generated outside the U.S. were approximately 36% of
total management fees for 2013 compared to 37% for 2012.
The following tables present assets under management by asset class and investment approach, ETFs by
asset class, and the geographic mix of assets under management, as of the dates indicated:
ASSETS UNDER MANAGEMENT BY ASSET CLASS AND INVESTMENT APPROACH(1)
As of December 31,
(Dollars in billions)
Equity:
Active
Passive
Total Equity
Fixed-Income:
Active
Passive
Total Fixed-Income
Cash(2)
Multi-Asset-Class Solutions:
Active
Passive
Total Multi-Asset-Class Solutions
Alternative Investments(3):
Active
Passive
Total Alternative Investments
2013
2012
2011
2010
2009
$
42
$
45
$
46
$
54
$
1,334
1,376
1,047
1,092
16
311
327
385
23
110
133
14
110
124
17
325
342
369
23
94
117
18
148
166
893
939
16
271
287
380
15
70
85
17
137
154
912
966
14
373
387
422
16
70
86
12
137
149
68
695
763
21
433
454
508
11
93
104
11
111
122
Total Assets Under Management
$
2,345
$
2,086
$
1,845
$
2,010
$
1,951
2012-2013
Annual
Growth
Rate
2009-2013
Compound
Annual
Growth Rate
(7)%
27
26
(11)%
18
16
(6)
(4)
(4)
4
—
17
14
(22)
(26)
(25)
12
(7)
(8)
(8)
(7)
20
4
6
6
—
—
5
(1) As of December 31, 2013, the presentation has been changed to align with the reporting of core businesses. Amounts previously reported
have been adjusted for comparative purposes.
(2) Includes both floating- and constant-net-asset-value portfolios held in commingled structures or separate accounts.
(3) Includes real estate investment trusts, currency and commodities, including SPDR® Gold Fund for which State Street is not the investment
manager, but acts as distribution agent. The decline in this asset class as of December 31, 2013 compared to December 31, 2012 mainly
resulted from net outflows from the SPDR® Gold Fund related to lower average gold prices.
EXCHANGE-TRADED FUNDS BY ASSET CLASS(1)
As of December 31,
(Dollars in billions)
2013
2012
2011
2010
2009
Alternative Investments
$
39
$
79
$
68
$
61
$
Cash
Equity
Fixed-Income
1
325
34
1
227
30
2
184
20
1
175
15
43
1
152
9
Total Exchange-Traded Funds
$
399
$
337
$
274
$
252
$
205
2012-2013
Annual
Growth
Rate
2009-2013
Compound
Annual
Growth Rate
(51)%
(2)%
—
43
13
18
—
21
39
18
(1) Exchange-traded funds are a component of assets under management presented above.
57
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Continued)
GEOGRAPHIC MIX OF ASSETS UNDER MANAGEMENT(1)
As of December 31,
(In billions)
North America
Europe/Middle East/Africa
Asia/Pacific
Total Assets Under Management
2013
2012
2011
2010
2009
$
$
1,456
$
1,288
$
1,190
$
1,332
$
1,272
560
329
480
318
428
227
452
226
479
200
2,345
$
2,086
$
1,845
$
2,010
$
1,951
(1) Geographic mix is based on client location or fund management location.
The increase in total assets under management from year-end 2012 to year-end 2013 resulted from stronger
global equity market valuations, partly offset by net lost business of $5 billion. The net lost business of
approximately $5 billion was generally composed of $34 billion of net outflows from alternative investments, partly
offset by net inflows of $13 billion into managed cash, net inflows of $6 billion into equities, net inflows of $4 billion
into multi-asset-class solutions and net inflows of $3 billion each into fixed-income and securities lending funds.
The following table presents activity in assets under management for the years ended December 31:
ASSETS UNDER MANAGEMENT
Years Ended December 31,
(In billions)
Balance at beginning of year
Net new (lost) business
Sales of U.S. Treasury portfolio of asset-backed securities(1)
Assets added from Bank of Ireland Asset Management acquisition
Market appreciation (depreciation)
Balance at end of year
2013
2012
2011
$
2,086
$
1,845
$
2,010
(5)
—
—
264
112
(31)
—
160
(30)
(125)
23
(33)
$
2,345
$
2,086
$
1,845
(1) Amounts were associated with the U.S. Treasury's winding down of its portfolio of agency-guaranteed mortgage-backed securities.
The net lost business of $5 billion for 2013 presented in the table did not include $13 billion of new asset
management business awarded to SSgA in 2013 but not installed prior to December 31, 2013. This new business
will be reflected in assets under management in future periods after installation, and will generate management fee
revenue in subsequent periods. Total assets under management as of December 31, 2013 included managed
assets lost but not yet liquidated. Lost business occurs from time to time and it is difficult to predict the timing of
client behavior in transitioning these assets. This timing can vary significantly.
Trading Services
The following table summarizes the components of trading services revenue for the years ended December 31:
Years Ended December 31,
(Dollars in millions)
Foreign exchange trading:
Direct sales and trading
Indirect foreign exchange trading
Total foreign exchange trading
Brokerage and other trading services:
Electronic foreign exchange trading
Other trading, transition management and brokerage
Total brokerage and other trading services
Total trading services revenue
2013
2012
2011
% Change
2013 vs. 2012
$
$
304
285
589
233
239
472
$
263
248
511
210
289
499
352
331
683
249
288
537
$ 1,061
$
1,010
$
1,220
16%
15
15
11
(17)
(5)
5
58
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Continued)
Trading services revenue is composed of revenue generated by foreign exchange, or FX, trading, as well as
revenue generated by brokerage and other trading services. We earn FX trading revenue by acting as a principal
market maker. We offer a range of FX products, services and execution models. Most of our FX products and
execution services can be grouped into three broad categories, which are further explained below: “direct sales and
trading FX,” “indirect FX” and “electronic FX trading.” With respect to electronic FX trading, we provide an execution
venue but do not act as agent or principal.
We also offer a range of brokerage and other trading products tailored specifically to meet the needs of the
global pension community, including transition management and commission recapture. In addition, we act as
distribution agent for the SPDR® Gold ETF. These products and services are differentiated by our position as an
agent of the institutional investor. Revenue earned from these brokerage and other trading products and services is
recorded in other trading, transition management and brokerage within brokerage and other trading services
revenue.
FX trading revenue is influenced by three principal factors: the volume and type of client FX transactions;
currency volatility; and the management of market risk associated with currencies and interest rates. Revenue
earned from direct sales and trading FX and indirect FX is recorded in FX trading revenue. Revenue earned from
electronic FX trading is recorded in brokerage and other trading services revenue.
The 5% increase in total trading services revenue for 2013 compared to 2012, composed of separate changes
related to FX trading and brokerage and other trading services, is explained below.
Total FX trading revenue increased 15% compared to 2012, primarily the result of higher client volumes,
currency volatility and spreads.
We enter into FX transactions with clients and investment managers that contact our trading desk directly.
These trades are all executed at negotiated rates. We refer to this activity, and our principal market-making
activities, as “direct sales and trading FX.” Alternatively, clients or their investment managers may elect to route FX
transactions to our FX desk through our asset-servicing operation; we refer to this activity as “indirect FX.” We
execute indirect FX trades as a principal at rates disclosed to our clients. We calculate revenue for indirect FX using
an attribution methodology based on estimated effective mark-ups/downs and observed client volumes. All other
FX trading revenue, other than this indirect FX revenue estimate, is considered by us to be direct sales and trading
FX revenue. Our clients that utilize indirect FX can, in addition to executing their FX transactions through dealers
not affiliated with us, transition from indirect FX to either direct sales and trading FX execution, including our “Street
FX” service that enables our clients to define their FX execution strategy and automate the FX trade execution
process, in which State Street continues to act as a principal market maker, or to one of our electronic trading
platforms.
For 2013 compared to 2012, our estimated indirect FX revenue increased 15%, while our direct sales and
trading FX revenue increased 16%. The increases in both comparisons mainly resulted from higher client volumes,
currency volatility and spreads.
We continue to expect that some clients may choose, over time, to reduce their level of indirect FX
transactions in favor of other execution methods, including either direct FX transactions or electronic FX trading
which we provide. To the extent that clients shift to other execution methods that we provide, our FX trading
revenue may decrease, even if volumes remain consistent.
Total brokerage and other trading services revenue declined 5% for 2013 compared to 2012. Our clients may
choose to execute FX transactions through one of our electronic trading platforms. This service generates revenue
through a “click” fee. For 2013 compared to 2012, our revenue from such electronic FX trading increased 11%,
mainly due to increases in client volumes.
Our revenue for 2013 from other trading, transition management and brokerage revenue declined 17%
compared to 2012. The decrease mainly resulted from a decline in distribution fees associated with the SPDR®
Gold ETF, which resulted from lower average gold prices and net outflows from the SPDR® Gold ETF, and a decline
in transition management revenue. With respect to the SPDR® Gold ETF, fees earned by us as distribution agent
are recorded in other trading, transition management and brokerage revenue within brokerage and other trading
services revenue, and not in management fee revenue. Our revenue from transition management, recorded in
brokerage and other trading services revenue, and related expenses in 2013 and 2012 were adversely affected by
compliance issues in our U.K. business, the reputational and regulatory impact of which may continue to adversely
affect our transition management revenue in future periods.
59
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Continued)
Securities Finance
Our agency securities finance business consists of two principal components: an agency lending program for
SSgA-managed investment funds with a broad range of investment objectives, which we refer to as the SSgA
lending funds, and an agency lending program for third-party investment managers and asset owners, which we
refer to as the agency lending funds.
Our securities finance business provides liquidity to the financial markets, as well as an effective means for
clients to earn incremental revenue on their securities portfolios. By acting as a lending agent and coordinating
loans between lenders and borrowers, we lend securities and provide liquidity to clients worldwide. Borrowers
provide collateral in the form of cash or securities to State Street in return for loaned securities. Borrowers are
generally required to provide collateral equal to a contractually-agreed percentage equal to or in excess of the fair
value of the loaned securities. As the fair value of the loaned securities changes, additional collateral is provided by
the borrower or collateral is returned to the borrower. Such movements are typically referred to as daily mark-to-
market collateral adjustments.
We also participate in securities lending transactions as a principal. As principal, we borrow securities from
the lending client and then lend such securities to the subsequent borrower, either a State Street client or a broker/
dealer. Our involvement as principal is utilized when the lending client is unable to, or elects not to, transact directly
with the market and requires us to execute the transaction and furnish the securities. In our role as principal, we
provide support to the transaction through our credit rating, and we have the ability to source securities through our
assets under custody and administration.
For cash collateral, our clients pay a usage fee to the provider of the cash collateral, and we invest the cash
collateral in certain investment vehicles or managed accounts as directed by the owner of the loaned securities. In
some cases, the investment vehicles or managed accounts may be managed by SSgA. The spread between the
yield on the investment vehicle and the usage fee paid to the provider of the collateral is split between the lender of
the securities and State Street as agent. For non-cash collateral, the borrower pays a fee for the loaned securities,
and the fee is split between the lender of the securities and State Street.
Securities finance revenue earned from our agency lending activities, which is composed of our split of both
the spreads related to cash collateral and the fees related to non-cash collateral, is principally a function of the
volume of securities on loan, the interest-rate spreads and fees earned on the underlying collateral, and our share
of the fee split. Securities finance revenue for 2013 compared to 2012 declined 11%. The decline was mainly due
to lower spreads and a slight decline in average lending volumes. Average spreads declined 17% for 2013
compared to 2012. Securities on loan averaged approximately $319 billion for 2013 compared to approximately
$323 billion for 2012, a 1% decline.
Market influences may continue to affect client demand for securities finance, and as a result our revenue
from, and the profitability of, our securities lending activities in future periods. In addition, proposed or anticipated
regulatory changes may affect the volume of our securities lending activity and related revenue and profitability in
future periods.
Processing Fees and Other
Processing fees and other revenue includes diverse types of fees and revenue, including fees from our
structured products business, fees from software licensing and maintenance, equity income from our joint venture
investments, gains and losses on sales of leased equipment and other assets, and amortization of our tax-
advantaged investments. Processing fees and other revenue for 2013 compared to 2012 declined 8%. The decline
was primarily due to the absence of both the fair-value adjustments related to our withdrawal from our fixed-income
trading initiative and the gain from the sale of a Lehman Brothers-related asset, both recorded in 2012, as well as
hedge ineffectiveness recorded in 2013. The decline in processing fees and other revenue was partly offset by an
increase in revenue associated with our investment in bank-owned life insurance for 2013 compared to 2012.
60
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Continued)
NET INTEREST REVENUE
Net interest revenue is defined as interest revenue earned on interest-earning assets less interest expense
incurred on interest-bearing liabilities. Interest-earning assets, which principally consist of investment securities,
interest-bearing deposits with banks, repurchase agreements, loans and leases and other liquid assets, are
financed primarily by client deposits, short-term borrowings and long-term debt. Net interest margin represents the
relationship between fully taxable-equivalent net interest revenue and average total interest-earning assets for the
period. Revenue that is exempt from income taxes, mainly that earned from certain investment securities (state and
political subdivisions), is adjusted to a fully taxable-equivalent basis using a federal statutory income tax rate of
35%, adjusted for applicable state income taxes, net of the related federal tax benefit.
The following table presents the components of average interest-earning assets and average interest-bearing
liabilities, related interest revenue and interest expense, and rates earned and paid, for the years indicated:
Years Ended December 31,
(Dollars in millions; fully taxable-
equivalent basis)
2013
Interest
Revenue/
Expense
Average
Balance
Rate
Average
Balance
2012
Interest
Revenue/
Expense
Rate
Average
Balance
2011
Interest
Revenue/
Expense
Rate
Interest-bearing deposits with banks
$ 28,946
$
125
.43% $ 26,823
$
141
.53% $ 20,241
$
149
.74%
Securities purchased under resale
agreements
Trading account assets
Investment securities
Loans and leases
Other interest-earning assets
Average total interest-earning assets
Interest-bearing deposits:
U.S.
Non-U.S.
Securities sold under repurchase agreements
Federal funds purchased
Other short-term borrowings
Long-term debt
Other interest-bearing liabilities
Interest-rate spread
Net interest revenue—fully taxable-equivalent
basis
Net interest margin—fully taxable-equivalent
basis
Tax-equivalent adjustment
Net interest revenue—GAAP basis
5,766
748
45
—
117,696
2,429
13,781
11,164
253
4
.77
—
2.06
1.84
.04
7,243
651
51
—
113,910
2,690
11,610
7,378
253
3
.71
—
2.36
2.19
.04
4,686
2,013
28
—
103,075
2,615
12,180
5,462
280
2
.61
—
2.54
2.30
.03
$178,101
$
2,856
1.60
$167,615
$
3,138
1.88
$147,657
$ 3,074
2.08
$ 8,862
$
100,391
8,436
298
3,785
8,415
6,457
.20% $ 4,049
$
10
83
1
—
59
232
26
411
.12% $ 9,333
$
89,059
7,697
784
4,676
7,008
5,898
$124,455
$
.08
.01
—
1.57
2.75
.40
.30
1.30%
19
147
1
1
71
222
15
476
.16
.01
.09
1.52
3.17
.26
.39
1.49%
84,011
9,040
845
5,134
8,966
3,535
11
209
10
—
86
289
8
$
2,445
$
2,662
$ 2,461
1.37%
1.59%
(142)
$
2,303
(124)
$
2,538
(128)
$ 2,333
.27%
.25
.11
—
1.67
3.22
.24
.53
1.55%
1.67%
Average total interest-bearing liabilities
$136,644
$
$115,580
$
613
For 2013 compared to 2012, average total interest-earning assets increased, mainly the result of the
investment of higher levels of client deposits in purchases of investment securities as well as in interest-bearing
deposits with banks. During the past year, our clients have continued to place elevated levels of deposits with us,
as low global interest rates have made deposits attractive relative to other investment options. Those client
deposits determined to be transient in nature have been placed with various central banks globally, whereas
deposits determined to be more stable have been invested in our investment securities portfolio or elsewhere to
support growth in other client-related activities.
Average loans and leases were higher for 2013 compared to 2012 due primarily to growth in mutual fund
lending. Higher levels of cash collateral provided in connection with our role as principal in certain securities
finance activities drove other interest-earning assets higher as this business grew. While these securities finance
activities support our overall profitability by generating securities finance revenue, they put downward pressure on
our net interest margin.
61
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Continued)
Net interest revenue for 2013 declined 9%, and on a fully taxable-equivalent basis declined 8%, compared to
2012. The decreases were primarily due to the impact of lower yields on interest-earning assets related to lower
global interest rates, partly offset by lower funding costs. The decrease also reflected the continued impact of the
reinvestment of pay-downs on existing investment securities in lower-yielding investment securities. These
decreases in net interest revenue were partly offset by the impact of growth in the investment portfolio on an
average basis year over year.
Subsequent to the commercial paper conduit consolidation in 2009, we have recorded aggregate discount
accretion in interest revenue of $1.91 billion ($621 million in 2009, $712 million in 2010, $220 million in 2011, $215
million in 2012 and $137 million in 2013). The timing and ultimate recognition of any applicable discount accretion
depends, in part, on factors that are outside of our control, including anticipated prepayment speeds and credit
quality. The impact of these factors is uncertain and can be significantly influenced by general economic and
financial market conditions. The timing and recognition of any applicable discount accretion can also be influenced
by our ongoing management of the risks and other characteristics associated with our investment securities
portfolio, including sales of securities which would otherwise generate accretion.
Depending on the factors discussed above, among others, we anticipate that, until the former conduit
securities remaining in our investment portfolio mature or are sold, discount accretion will continue to contribute,
though in declining amounts, to our net interest revenue. Assuming that we hold the remaining former conduit
securities to maturity, all else being equal, we expect the remaining former conduit securities carried in our
investment portfolio as of December 31, 2013 to generate aggregate discount accretion in future periods of
approximately $572 million over their remaining terms, with approximately half of this aggregate discount accretion
to be recorded over the next four years.
Changes in the components of interest-earning assets and interest-bearing liabilities are discussed in more
detail below. Additional detail about the components of interest revenue and interest expense is provided in note 18
to the consolidated financial statements included under Item 8 of this Form 10-K.
Interest-bearing deposits with banks, which include cash balances maintained at the Federal Reserve, the
European Central Bank and other non-U.S. central banks to satisfy reserve requirements, averaged $28.95 billion
for the year ended December 31, 2013, compared to $26.82 billion for the year ended December 31, 2012,
reflecting the impact of the placement of elevated levels of client deposits. Certain client deposits were determined
to be transient in nature and were placed with various central banks globally. In 2013, we diversified our investment
of these elevated client deposits, in part, through purchases of investment securities. If client deposits remain at or
close to current elevated levels, we expect to continue to invest client deposits in either money market assets,
including central bank deposits, or in investment securities, depending on our assessment of the underlying
characteristics of the deposits.
AAverage investment securities increased to $117.70 billion for the year ended December 31, 2013 from
$113.91 billion for the year ended December 31, 2012. The increase was generally the result of ongoing purchases
of securities, partly offset by maturities, sales and pay-downs. Period-end portfolio balances are more significantly
influenced by the timing of purchases, sales and runoff; as a result, average portfolio balances are a more effective
indication of trends in portfolio activity. Detail with respect to the investment portfolio as of December 31, 2013 and
2012 is provided in note 4 to the consolidated financial statements included under Item 8 of this Form 10-K. As of
December 31, 2013, investment securities rated “AAA” and “AA” represented approximately 89% of our investment
portfolio, consistent with the composition of our portfolio as of December 31, 2012.
Loans and leases averaged $13.78 billion for the year ended December 31, 2013, compared to $11.61 billion
for the year ended December 31, 2012. The increase was mainly related to mutual fund lending, which averaged
$7.61 billion for the year ended December 31, 2013 compared to $5.59 billion for the year ended December 31,
2012. The proportion of average short-duration liquidity to our average loan-and-lease portfolio declined to
approximately 27% for the year ended December 31, 2013 from approximately 29% for the year ended December
31, 2012. Short-duration advances provide liquidity to clients in support of their investment activities related to
securities settlement.
62
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Continued)
The following table presents average U.S. and non-U.S. short-duration advances for the years ended
December 31:
Years Ended December 31,
(In millions)
Average U.S. short-duration advances
Average non-U.S. short-duration advances
Average total short-duration advances
2013
2012
2011
$
$
2,356
$
1,972
$
1,393
1,393
3,749
$
3,365
$
1,994
1,585
3,579
Although average short-duration advances for the year ended December 31, 2013 increased compared to the
year ended December 31, 2012, such average advances remained low relative to historical levels, mainly the result
of clients continuing to hold higher levels of liquidity.
Average other interest-earning assets increased to $11.16 billion for the year ended December 31, 2013 from
$7.38 billion for the year ended December 31, 2012. The increased levels were primarily the result of higher levels
of cash collateral provided in connection with our participation in principal securities finance transactions.
Aggregate average interest-bearing deposits increased to $109.25 billion for the year ended December 31,
2013 from $98.39 billion for the year ended December 31, 2012. This increase was mainly due to higher levels of
non-U.S. transaction accounts associated with the growth of new and existing business in assets under custody and
administration. Future transaction account levels will be influenced by the underlying asset servicing business, as
well as market conditions, including the general levels of U.S. and non-U.S. interest rates.
Average other short-term borrowings declined to $3.79 billion for the year ended December 31, 2013 from
$4.68 billion for the year ended December 31, 2012, as higher levels of client deposits provided additional liquidity.
Average long-term debt increased to $8.42 billion for the year ended December 31, 2013 from $7.01 billion for the
year ended December 31, 2012. The increase primarily reflected the issuance of $1.0 billion of extendible notes by
State Street Bank in December 2012, the issuance of $1.5 billion of senior and subordinated debt in May 2013, and
the issuance of $1.0 billion of senior debt in November 2013. This increase was partly offset by maturities of $1.75
billion of senior debt in the second quarter of 2012.
Average other interest-bearing liabilities increased to $6.46 billion for the year ended December 31, 2013 from
$5.90 billion for the year ended December 31, 2012, primarily the result of higher levels of cash collateral received
from clients in connection with our participation in principal securities finance transactions.
Several factors could affect future levels of our net interest revenue and margin, including the mix of client
liabilities; actions of various central banks; changes in U.S. and non-U.S. interest rates; changes in the various yield
curves around the world; revised or proposed regulatory capital or liquidity standards, or interpretations of those
standards; the amount of discount accretion generated by the former conduit securities that remain in our
investment securities portfolio; and the yields earned on securities purchased compared to the yields earned on
securities sold or matured.
Based on market conditions and other factors, we continue to reinvest the majority of the proceeds from pay-
downs and maturities of investment securities in highly-rated securities, such as U.S. Treasury and agency
securities, federal agency mortgage-backed securities and U.S. and non-U.S. mortgage- and asset-backed
securities. The pace at which we continue to reinvest and the types of investment securities purchased will depend
on the impact of market conditions and other factors over time. We expect these factors and the levels of global
interest rates to dictate what effect our reinvestment program will have on future levels of our net interest revenue
and net interest margin.
63
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Continued)
Gains (Losses) Related to Investment Securities, Net
The following table presents net realized gains from sales of available-for-sale securities and the components
of net impairment losses, included in net gains and losses related to investment securities, for the years indicated:
Years Ended December 31,
(In millions)
Net realized gains from sales of available-for-sale securities
Losses from other-than-temporary impairment
Losses reclassified (from) to other comprehensive income
Net impairment losses recognized in consolidated statement of income
Gains (losses) related to investment securities, net
Impairment associated with expected credit losses
Impairment associated with management’s intent to sell impaired securities prior to recovery
in value
Impairment associated with adverse changes in timing of expected future cash flows
Net impairment losses recognized in consolidated statement of income
2013
2012
14
$
(21)
(2)
(23)
(9) $
(11) $
(6)
(6)
(23) $
55
(53)
21
(32)
23
(16)
—
(16)
(32)
$
$
$
$
From time to time, in connection with our ongoing management of our investment securities portfolio, we sell
available-for-sale securities to manage risk, to take advantage of favorable market conditions, or for other reasons.
In 2013 and 2012, we sold approximately $10.26 billion and $5.35 billion, respectively, of such investment securities
and recorded net realized gains of $14 million and $55 million, respectively, as presented in the table above.
The net realized gains recorded in 2012 reflected a realized loss of $46 million from the second-quarter sale of
all of our Greek investment securities, which had an aggregate carrying value of approximately $91 million. These
securities, which were previously classified as held to maturity, were sold as a result of the effect of significant
deterioration in the creditworthiness of the underlying collateral, including significant downgrades of the securities'
external credit ratings.
We regularly review our investment securities portfolio to identify other-than-temporary impairment of
individual securities. Additional information about investment securities, the gross gains and losses that compose
the net gains from sales of securities and other-than-temporary impairment is provided in note 4 to the consolidated
financial statements included under Item 8 of this Form 10-K.
PROVISION FOR LOAN LOSSES
We recorded a provision for loan losses of $6 million in 2013, compared to a negative provision of $3 million in
2012. The 2013 provision resulted from our exposure to non-investment-grade borrowers composed of senior
secured bank loans, which we purchased in connection with our participation in loan syndications in the non-
investment-grade lending market beginning in 2013. Additional information about these senior secured bank loans
is provided under “Financial Condition - Loans and Leases” in this Management's Discussion and Analysis, and in
note 5 to the consolidated financial statements included under Item 8 of this Form 10-K.
64
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Continued)
EXPENSES
The following table presents the components of expenses for the years indicated:
Years Ended December 31,
(Dollars in millions)
Compensation and employee benefits
Information systems and communications
Transaction processing services
Occupancy
Claims resolution
Acquisition costs
Restructuring charges, net
Other:
Professional services
Amortization of other intangible assets
Securities processing costs (recoveries)
Regulatory fees and assessments
Other
Total other
Total expenses
Number of employees at year-end
Expenses
2013
2012
2011
% Change
2013 vs. 2012
$ 3,800
$ 3,837
$ 3,820
935
733
467
—
76
28
392
214
52
72
423
844
702
470
(362)
26
199
381
198
24
61
506
776
732
455
—
16
253
347
200
(6)
53
412
1,153
1,170
1,006
$ 7,192
$ 6,886
$ 7,058
29,430
29,660
29,740
(1)%
11
4
(1)
3
8
(16)
(1)
4
Total expenses for 2013 increased 4% compared to 2012. Expenses for both years included credits related to
gains and recoveries associated with Lehman Brothers matters, as follows:
• Aggregate credits of $85 million recorded in other expenses for 2013, presented in “other” in the table
above, related to gains and recoveries associated with Lehman Brothers-related assets;
• Credit of $362 million for 2012, presented separately in the table above, composed of recoveries associated
with the 2008 Lehman Brothers bankruptcy; and
• Aggregate credits of $30 million recorded in other expenses for 2012, composed of $16 million presented in
“securities processing costs (recoveries)” and $14 million presented in “other” in the table above, related to
litigation and other settlement recoveries associated with Lehman Brothers-related matters.
Excluding the credits described above, total expenses for 2013 of $7.28 billion ($7.19 billion plus $85 million)
were essentially flat compared to expenses for 2012 of $7.28 billion ($6.89 billion plus $362 million and $30 million).
The 1% decline in compensation and employee benefits expenses for 2013 compared to 2012 primarily
resulted from lower staffing levels, including savings related to the implementation of our Business Operations and
Information Technology Transformation program, and lower benefit costs, partly offset by expenses to support new
business and acquisitions and higher incentive compensation. Compensation and employee benefits expenses for
2013 included approximately $84 million of costs related to the implementation of our Business Operations and
Information Technology Transformation program, compared to approximately $90 million for 2012. These costs are
not expected to recur subsequent to full implementation of the program.
The 11% increase in information systems and communications expenses for 2013 compared to 2012 was
primarily the result of the planned transition of certain functions to third-party service providers associated with
components of our technology infrastructure and application maintenance and support, as part of the Business
Operations and Information Technology Transformation program, as well as costs to support new business.
Additional information with respect to the impact of the Business Operations and Information Technology
Transformation program on future compensation and employee benefits and information systems and
communications expenses is provided in the following “Restructuring Charges” section.
The 4% increase in transaction processing services expenses for 2013 compared to 2012 generally reflected
higher equity market values and higher transaction volumes in the asset servicing business.
65
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Continued)
The decline in aggregate other expenses (professional services, amortization of other intangible assets,
securities processing costs (recoveries), regulatory fees and assessments and other) for 2013 compared to 2012
was mainly the result of the above-described credits of $85 million related to gains and recoveries associated with
Lehman Brothers-related assets. Excluding these credits from other expenses for 2013, and excluding the above-
described credits of $14 million from other expenses for 2012, other expenses for 2013 of $1.24 billion ($1.15 billion
plus $85 million) increased 5% compared to other expenses of $1.18 billion ($1.17 billion plus $14 million) for 2012.
The “other” category of other expenses was down 2% for 2013 to $508 million ($423 million plus $85 million) from
$520 million ($506 million plus $14 million) in 2012. The 5% increase in aggregate other expenses to $1.24 billion
in 2013 from $1.18 billion in 2012 was primarily related to the addition of amortization of other intangible assets
associated with the GSAS acquisition, completed in October 2012, and securities processing costs and fines
associated with regulatory matters in our U.K. transition management business.
Additional information about this transition management matter is provided under “Legal and Regulatory
Matters” in note 11 to the consolidated financial statements included under Item 8 of this Form 10-K.
Claims Resolution
As a result of the 2008 Lehman Brothers bankruptcy, we had various claims against Lehman Brothers entities
in bankruptcy proceedings in the U.S. and the U.K. We also had amounts asserted as owed, or return obligations, to
Lehman Brothers entities. The various claims and amounts owed arose from transactions that existed at the time
Lehman Brothers entered bankruptcy, including prime brokerage arrangements, foreign exchange transactions,
securities lending arrangements and repurchase agreements. In 2011, we reached an agreement with certain
Lehman Brothers estates in the U.S. to resolve the value of deficiency claims arising out of indemnified repurchase
transactions in the U.S., and the bankruptcy court allowed those claims in the amount of $400 million.
In September 2012, we reached an agreement to settle the claims against the Lehman Brothers estate in the
U.K. related to the close-out of securities lending and repurchase arrangements. This settlement resulted in a
return obligation for us and a certified claim against the Lehman Brothers estate, and resolved the contingent nature
of our rights and obligations with the Lehman Brothers estate.
In connection with our resolution of the indemnified repurchase and securities lending claims in the U.S. and
the U.K., we recognized a credit of approximately $362 million in our consolidated statement of income in 2012.
Both certified claims retained as part of the settlement agreements were subsequently sold at their respective fair
values, resulting in an additional gain of approximately $10 million, which was also recorded in our consolidated
statement of income in 2012.
In 2013, we received aggregate distributions totaling approximately $186 million from the Lehman Brothers
estates. Of the aggregate distributions received, $101 million was applied to reduce remaining Lehman Brothers-
related assets, primarily prime brokerage claim-related receivables, recorded in our consolidated statement of
condition; the remaining $85 million was recorded as an aggregate credit to other expenses in our consolidated
statement of income, as described earlier in this “Expenses” section.
Acquisition Costs
In 2013, we recorded acquisition costs of $76 million, compared to $66 million in 2012, with both amounts
related to previously disclosed acquisitions, mainly the 2012 GSAS and 2010 Intesa acquisitions. The 2012
acquisition costs were partly offset by an indemnification benefit of $40 million for the assumption of an income tax
liability related to the 2010 Intesa acquisition.
Restructuring Charges
Information with respect to our Business Operations and Information Technology Transformation program and
our 2011 and 2012 expense control measures, including charges, employee reductions and aggregate activity in the
related accruals, is provided in the following sections.
Business Operations and Information Technology Transformation Program
In November 2010, we announced a global multi-year Business Operations and Information Technology
Transformation program. The program includes operational, information technology and targeted cost initiatives,
including plans related to reductions in both staff and occupancy costs.
With respect to our business operations, we are standardizing certain core business processes, primarily
through our execution of the State Street Lean methodology, and driving automation of these business processes.
We are currently creating a new technology platform, including transferring certain core software applications to a
private cloud, and have expanded our use of third-party service providers associated with components of our
66
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Continued)
information technology infrastructure and application maintenance and support. We transferred the majority of our
core software applications to a private cloud in 2013, and we expect to transfer the remaining core applications in
2014.
To implement this program, we expect to incur aggregate pre-tax restructuring charges of approximately $400
million to $450 million over the four-year period ending December 31, 2014. To date, we have recorded aggregate
restructuring charges of $381 million in our consolidated statement of income, as presented in the following table by
type of cost:
(In millions)
2010
2011
2012
2013
Total
Employee-Related
Costs
Real Estate
Consolidation
Information
Technology Costs
Total
$
$
105
$
51
$
— $
85
27
13
230
$
7
20
13
91
41
20
(1)
$
60
$
156
133
67
25
381
Employee-related costs included severance, benefits and outplacement services. Real estate consolidation
costs resulted from actions taken to reduce our occupancy costs through the consolidation of leases and properties.
Information technology costs included transition fees related to the above-described expansion of our use of third-
party service providers.
In 2010, in connection with the program, we initiated the involuntary termination of 1,400 employees, or
approximately 5% of our global workforce, which we completed by the end of 2011. In addition, in connection with
our announcement in 2011 of the expansion of our use of third-party service providers associated with our
information technology infrastructure and application maintenance and support, as well as the continued execution
of the business operations transformation component of the program, we identified 1,340 additional involuntary
terminations and role eliminations, including 376 in 2013. As of December 31, 2013, we eliminated 1,278 of these
positions.
In connection with the continuing implementation of the program, we achieved incremental pre-tax expense
savings of approximately $220 million in 2013, and as previously reported, we achieved incremental pre-tax
expense savings of approximately $112 million in 2012 and $86 million in 2011, in each case compared to our 2010
expenses from operations, all else being equal. Incremental pre-tax expense savings to be achieved in 2014 are
expected to be approximately $130 million.
These pre-tax expense savings relate only to the Business Operations and Information Technology
Transformation program and are based on projected improvement from our total 2010 expenses from operations, all
else being equal. Our actual total expenses have increased since 2010, and may in the future increase or
decrease, due to other factors. The majority of the annual savings will affect compensation and employee benefits
expenses. These savings will be modestly offset by increases in information systems and communications
expenses as we implement the program.
Excluding the expected aggregate restructuring charges of $400 million to $450 million described earlier, we
expect the program to reduce our pre-tax expenses from operations, on an annualized basis, by approximately
$575 million to $625 million by the end of 2014 compared to 2010, all else being equal, with the full effect to be
realized in 2015. We expect the business operations transformation component of the program to result in
approximately $450 million of these savings and the information technology transformation component of the
program to result in approximately $150 million of these savings. As of December 31, 2013, we have achieved the
majority of these savings.
67
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Continued)
2011 Expense Control Measures
In the fourth quarter of 2011, in connection with expense control measures designed to calibrate our expenses
to our outlook for our capital markets-facing businesses in 2012, we took two actions. First, we withdrew from our
fixed-income trading initiative, in which we traded in fixed-income securities and derivatives as principal with our
custody clients and other third parties that trade in these securities and derivatives. Second, we undertook other
targeted staff reductions. As a result of these actions, we recorded aggregate pre-tax restructuring charges and
credits of $119 million in our consolidated statement of income, as presented in the following table by type of cost:
(In millions)
2011
2012
Total
Employee-Related
Costs
Fixed-Income
Trading Portfolio
38
$
$
Asset and Other
Write-Offs
Total
20
$
5
25
$
120
(1)
119
(9)
29
$
62
3
65
$
$
$
Employee-related costs included severance, benefits and outplacement services. We identified 442
employees to be involuntarily terminated as their roles were eliminated. As of December 31, 2013, we completed
these reductions.
Costs for the fixed-income trading portfolio resulted primarily from fair-value adjustments to the initiative's
trading portfolio related to our decision to withdraw from the initiative. In connection with our withdrawal in 2012, we
wound down that initiative's remaining trading portfolio. Costs for asset and other write-offs were related to asset
write-downs and contract terminations.
2012 Expense Control Measures
In the fourth quarter of 2012, in connection with expense control measures designed to better align our
expenses to our business strategy and related outlook for 2013, we identified additional targeted staff reductions.
As a result of these actions, we have recorded aggregate pre-tax restructuring charges of $136 million in our
consolidated statement of income, as presented in the following table by type of cost:
(In millions)
2012
2013
Total
Employee-Related
Costs
Asset and Other
Write-Offs
Total
$
$
129
$
(4)
125
$
$
4
7
11
$
133
3
136
Employee-related costs included severance, benefits and outplacement services. Costs for asset and other
write-offs were primarily related to contract terminations. We originally identified involuntary terminations and role
eliminations of 960 employees (630 positions after replacements). As of December 31, 2013, 782 positions were
eliminated through voluntary and involuntary terminations.
68
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Continued)
Aggregate Restructuring-Related Accrual Activity
The following table presents aggregate activity associated with accruals that resulted from the charges
associated with the Business Operations and Information Technology Transformation program and the 2011 and
2012 expense control measures:
(In millions)
Initial accrual
Payments
Balance as of December 31, 2010
Additional accruals for Business Operations
and Information Technology Transformation
program
Accruals for 2011 expense control measures
Payments and adjustments
Balance as of December 31, 2011
Additional accruals for Business Operations
and Information Technology Transformation
program
Additional accruals for 2011 expense control
measures
Accruals for 2012 expense control measures
Payments and adjustments
Balance as of December 31, 2012
Additional accruals for Business Operations
and Information Technology Transformation
program
Additional accruals for 2012 expense control
measures
Payments and adjustments
Employee-
Related
Costs
Real Estate
Consolidation
Information
Technology
Costs
Fixed-Income
Trading
Portfolio
Asset and
Other
Write-Offs
Total
$
105
$
51
$
— $
— $
— $
(15)
90
85
62
(75)
162
27
3
129
(126)
195
13
(4)
(154)
(4)
47
7
—
(15)
39
20
—
—
(10)
49
13
—
(13)
—
—
41
—
(8)
33
20
—
—
(48)
5
(1)
—
(4)
—
—
—
38
—
38
—
(9)
—
(29)
—
—
—
—
—
—
—
20
(5)
15
—
5
4
(11)
13
—
7
156
(19)
137
133
120
(103)
287
67
(1)
133
(224)
262
25
3
(13)
(184)
Balance as of December 31, 2013
$
50
$
49
$
— $
— $
7
$
106
Income Tax Expense
Income tax expense was $550 million in 2013 compared to $705 million in 2012. Our effective tax rate for
2013 was 20.5%, compared to 25.5% for 2012. The decline in the effective tax rate compared to 2012 was mainly
the result of the out-of-period income tax benefit described below, as well as our expansion of our tax-exempt
investment securities portfolio and an increase in renewable energy investments.
In the fourth quarter of 2013, we completed a multi-year tax data enhancement process, the final stages of
which identified a reconciliation difference in our deferred tax accounts, and we determined that our deferred tax
liabilities were overstated by $50 million and our deferred tax assets were understated by $21 million. We
evaluated the qualitative and quantitative effects of the resulting overstatement of income tax expense, and
concluded that such overstatement did not have a material effect on any prior full-year or quarterly consolidated
financial statements. Accordingly, in the fourth quarter of 2013, we recorded an adjustment in our consolidated
statement of income to correct this difference, which resulted in an out-of-period income tax benefit of $71 million.
Excluding the impact of this $71 million income tax benefit, income tax expense in 2013 would have been $621
million, compared to $705 million in 2012, and our effective tax rate for 2013 would have been 23.2%, compared to
25.5% for 2012.
LINE OF BUSINESS INFORMATION
We have two lines of business: Investment Servicing and Investment Management. Given our services and
management organization, the results of operations for these lines of business are not necessarily comparable with
those of other companies, including companies in the financial services industry. Information about our two lines of
business, as well as the revenues, expenses and capital allocation methodologies associated with them, is provided
in note 25 to the consolidated financial statements included under Item 8 of this Form 10-K.
69
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Continued)
The following table provides a summary of our line of business results for the periods indicated. The “Other”
column for 2013 included net acquisition and restructuring costs of $104 million; certain provisions for litigation
exposure and other costs of $65 million; and severance costs associated with reorganization of certain non-U.S.
operations of $11 million. The “Other” column for 2012 included the net realized loss from the sale of all of our
Greek investment securities of $46 million; a benefit related to claims associated with the 2008 Lehman Brothers
bankruptcy of $362 million; certain provisions for litigation exposure and other costs of $118 million; and net
acquisition and restructuring costs of $225 million. The “Other” column for 2011 included acquisition and
restructuring costs of $269 million. The amounts in the “Other” columns were not allocated to State Street's
business lines. Results for 2012 reflect reclassifications, for comparative purposes, related to management changes
in methodologies associated with allocations of capital and expenses reflected in results for 2013. Results for 2011
were not adjusted for these reclassifications.
Investment
Servicing
Investment
Management
Other
Total
2013
2012
2011
%
Change
2013 vs.
2012
2013
2012
2011
%
Change
2013 vs.
2012
2013
2012
2011
2013
2012
2011
Years Ended
December 31,
(Dollars in
millions, except
where otherwise
noted)
Fee revenue:
Servicing fees
$ 4,819
$ 4,414
$ 4,382
9% $ —
$ —
$ —
$ — $ — $ — $ 4,819
$ 4,414
$ 4,382
Management fees
Trading services
Securities finance
Processing fees
and other
—
994
324
238
—
912
363
259
—
1,131
333
284
Total fee revenue
6,375
5,948
6,130
1,106
993
917
67
35
7
98
42
7
89
45
13
1,215
1,140
1,064
9
(11)
(8)
7
Net interest
revenue
Gains (losses)
related to
investment
securities, net
2,221
2,464
2,231
(10)
82
74
102
(9)
69
67
—
—
—
11%
(32)
(17)
—
7
11
Total revenue
8,587
8,481
8,428
Provision for loan
losses
6
(3)
—
Total expenses
6,176
6,041
5,890
1
2
1,297
1,214
1,166
7
—
836
—
864
—
899
(3)
180
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
(46)
(46)
—
(19)
—
—
—
—
—
—
—
—
—
1,106
1,061
359
245
993
917
1,010
1,220
405
266
378
297
7,590
7,088
7,194
2,303
2,538
2,333
(9)
23
67
9,884
9,649
9,594
6
(3)
—
269
7,192
6,886
7,058
Income before
income tax
expense
$ 2,405
$ 2,443
$ 2,538
(2)
$
461
$
350
$
267
32
$ (180)
$
(27)
$ (269)
$ 2,686
$ 2,766
$ 2,536
Pre-tax margin
28%
29%
30%
36%
29%
23%
27%
29%
26%
Average assets
(in billions)
$203.24
$190.09
$170.45
$ 3.76
$ 3.72
$ 4.36
$207.00
$193.81
$174.81
Investment Servicing
Total revenue and total fee revenue in 2013 for our Investment Servicing line of business, as presented in the
preceding table, increased 1% and 7%, respectively, compared to 2012. The 7% increase in total fee revenue
mainly resulted from increases in servicing fees and trading services revenue, partly offset by declines in securities
finance revenue and processing fees and other revenue.
Servicing fees in 2013 increased 9% compared to 2012, primarily the result of stronger global equity markets,
the impact of net new business installed on current-period revenue and the addition of revenue from the October
2012 GSAS acquisition. Trading services revenue in 2013 increased 9% compared to 2012, mainly due to higher
foreign exchange trading revenue associated with higher client volumes, currency volatility and spreads.
Securities finance revenue in 2013 decreased 11% compared to 2012, primarily the result of lower spreads
and slightly lower average lending volumes. Processing fees and other revenue in 2013 decreased 8% compared
to 2012, primarily due to the absence of the fair-value adjustment related to our withdrawal from our fixed-income
trading initiative and the gain from the sale of a Lehman Brothers-related asset, both recorded in 2012, as well as
hedge ineffectiveness recorded in 2013. This decline was partly offset by an increase in revenue associated with
our investment in bank-owned life insurance for 2013 compared to 2012.
Servicing fees and gains (losses) related to investment securities, net, for our Investment Servicing business
line are identical to the respective consolidated results. Refer to “Servicing Fees,” and “Gains (Losses) Related to
70
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Continued)
Investment Securities, Net” under “Total Revenue” in this Management's Discussion and Analysis for a more in-
depth discussion. A discussion of trading services revenue, securities finance revenue and processing fees and
other revenue is provided under “Trading Services,” “Securities Finance” and “Processing Fees and Other” in “Total
Revenue.”
Net interest revenue in 2013 decreased 10% compared to 2012 primarily due to the impact of lower yields on
interest-earning assets related to lower global interest rates, partly offset by lower funding costs. The decrease also
reflected the continued impact of the reinvestment of pay-downs on existing investment securities in lower-yielding
investment securities. A discussion of net interest revenue is provided under “Net Interest Revenue” in “Total
Revenue.”
Total expenses in 2013 increased 2% compared to 2012. Information systems and communications expenses
increased, primarily the result of the planned transition of certain functions to third-party service providers
associated with components of our technology infrastructure and application maintenance and support as part of
the Business Operations and Information Technology Transformation program, as well as costs to support new
business.
Transaction processing services expenses increased in 2013 compared to 2012, mainly due to higher equity
market values and higher transaction volumes in the asset servicing business. Other expenses increased, primarily
due to increased donations, higher securities processing costs, the addition of amortization of other intangible
assets associated with the GSAS acquisition completed in October 2012, and higher regulatory fees and
assessments.
These expense increases were partly offset by declines in compensation and employee benefits expenses,
primarily driven by savings associated with the implementation of our Business Operations and Information
Technology Transformation program, partly offset by an increase in costs to support new business and higher
incentive compensation. A more detailed discussion of expenses is provided under “Expenses” in “Consolidated
Results of Operations.”
Investment Management
Total revenue and total fee revenue in 2013 for our Investment Management line of business, as presented in
the preceding table, both increased 7% compared to 2012. The increase in total fee revenue was generally
reflective of an increase in management fees, partly offset by a decline in trading services revenue.
Management fees in 2013 increased 11% compared to 2012, primarily the result of stronger equity market
valuations and the impact of net new business installed on current-period revenue. Trading services revenue
decreased 32% in 2013 compared to 2012, mainly due to the impact of lower distribution fees associated with the
SPDR® Gold ETF, which resulted from lower average gold prices and net outflows from the SPDR® Gold ETF.
Management fees for the Investment Management business line are identical to the respective consolidated
results. Refer to “Management Fees” in “Total Revenue” in this Management's Discussion and Analysis for a more
in-depth discussion. A discussion of trading services revenue is provided under “Trading Services” in “Total
Revenue.”
Total expenses in 2013 decreased 3% compared to 2012, mainly reflective of credits associated with Lehman
Brothers-related assets, partly offset by higher incentive compensation.
71
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Continued)
CONSOLIDATED RESULTS OF OPERATIONS - COMPARISON OF 2012 AND 2011
OVERVIEW OF CONSOLIDATED RESULTS OF OPERATIONS
Years Ended December 31,
(Dollars in millions, except per share amounts)
Total fee revenue
Net interest revenue
Gains (losses) related to investment securities, net
Total revenue
Provision for loan losses
Total expenses
Income before income tax expense
Income tax expense(1)
Net income
Adjustments to net income:
Dividends on preferred stock(2)
Earnings allocated to participating securities(3)
Net income available to common shareholders
Earnings per common share:
Basic
Diluted
Average common shares outstanding (in thousands):
Basic
Diluted
Return on average common equity
2012
2011
% Change
2012 vs. 2011
(1)%
9
1
(2)
7
7
$
$
$
$
$
7,088
2,538
23
9,649
(3)
6,886
2,766
705
2,061
$
(29)
(13)
2,019
4.25
4.20
$
$
7,194
2,333
67
9,594
—
7,058
2,536
616
1,920
(20)
(18)
1,882
3.82
3.79
474,458
481,129
492,598
496,072
10.3%
10.0%
(1) Amounts for 2012 and 2011 reflected the net effects of certain tax matters ($7 million benefit and $55 million expense, respectively)
associated with the 2010 Intesa acquisition. Amount for 2011 reflected a discrete income tax benefit of $103 million attributable to
costs incurred in terminating former conduit asset structures.
(2) Amount for 2012 included $8 million related to Series C Preferred stock and $21 million related to Series A Preferred stock; amount for
2011 related to Series A Preferred stock.
(3) Refer to note 24 to the consolidated financial statements included under Item 8 of this Form 10-K.
72
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Continued)
TOTAL REVENUE
Years Ended December 31,
(Dollars in millions)
Fee revenue:
Servicing fees
Management fees
Trading services revenue:
Foreign exchange trading
Brokerage and other trading services
Total trading services revenue
Securities finance
Processing fees and other
Total fee revenue
Net interest revenue:
Interest revenue
Interest expense
Net interest revenue
Gains related to investment securities, net
Total revenue
2012
2011
% Change
2012 vs. 2011
$
4,414
$
993
511
499
1,010
405
266
7,088
3,014
476
2,538
23
$
9,649
$
4,382
917
683
537
1,220
378
297
7,194
2,946
613
2,333
67
9,594
1%
8
(25)
(7)
(17)
7
(10)
(1)
2
(22)
9
(66)
1
Total revenue for 2012 increased 1% compared to 2011, primarily the result of increased servicing fee revenue
and management fee revenue, as well as a higher level of net interest revenue, partly offset by declines in trading
service revenue and processing fees and other revenue.
Servicing fees for 2012 increased 1% from 2011, mainly due to stronger equity markets, the impact of net new
business and revenue added from acquired businesses, partly offset by the impacts of the weaker euro and client
de-risking. In both 2012 and 2011, servicing fees generated outside the U.S. were approximately 42% of total
servicing fees. Management fees for 2012 increased 8% from 2011, primarily due to the impact of stronger equity
markets, net new business and higher performance fees. Management fees generated outside the U.S. in 2012
were approximately 37% of total management fees, compared to 41% in 2011, with the decline mainly the result of
higher levels of management fees generated in the U.S.
Trading services revenue for 2012 declined 17% compared to 2011, mainly the result of a decline in revenue
from foreign exchange trading, due to lower currency volatility, and changes in product mix, partly offset by higher
client volumes. Securities finance revenue for 2012 increased 7% from 2011 as a result of higher spreads across
all lending programs, partly offset by lower lending volumes.
Net interest revenue for 2012 increased 9% compared to 2011. The overall increase generally resulted from
higher levels of interest-earning assets, growth in the investment portfolio and lower funding costs. These increases
were partly offset by the impact of generally lower rates on interest-earning assets. Net interest revenue for 2012
and 2011 included $215 million and $220 million, respectively, of discount accretion related to investment securities
added to our consolidated statement of condition in connection with the commercial paper conduit consolidation in
2009.
We recorded net gains related to investment securities of $23 million for 2012, composed of net realized gains
of $55 million from sales of available-for-sale investment securities, net of $32 million of net impairment losses. The
net realized gains from sales of available-for-sale securities in 2012 reflected a loss of $46 million from the sale of
all of our Greek investment securities, which were previously classified as held to maturity. The sale was
undertaken as a result of the effect of significant deterioration in the creditworthiness of the underlying collateral,
including significant downgrades of the securities' external credit ratings. For 2011, we recorded net gains related
to investment securities of $67 million, composed of net realized gains of $140 million from sales of available-for-
sale investment securities, net of $73 million of net impairment losses.
The aggregate unrealized loss on securities for which other-than-temporary impairment was recorded in 2012
was $53 million. Of this total, $21 million related to factors other than credit, and was recognized, net of taxes, as a
component of other comprehensive income in our consolidated statement of condition. We recorded losses from
73
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Continued)
other-than-temporary impairment related to credit of the remaining $32 million in our 2012 consolidated statement of
income, compared to $73 million in 2011.
EXPENSES
Years Ended December 31,
(Dollars in millions)
Compensation and employee benefits
Information systems and communications
Transaction processing services
Occupancy
Claims resolution
Acquisition costs, net
Restructuring charges, net
Other:
Professional services
Amortization of other intangible assets
Securities processing (recoveries) costs
Regulatory fees and assessments
Other
Total other
Total expenses
Number of employees at year-end
Expenses
2012
2011
% Change
2012 vs. 2011
$
3,837
$
3,820
844
702
470
(362)
26
199
381
198
24
61
506
1,170
$
6,886
$
29,660
776
732
455
—
16
253
347
200
(6)
53
412
1,006
7,058
29,740
9%
(4)
3
10
(1)
15
23
16
(2)
Compensation and employee benefits expenses were relatively flat in 2012 compared to 2011, as costs added
from merit increases and acquisitions in 2012 were almost completely offset by the expense savings associated
with the 2011 expense control measures and the implementation of our Business Operations and Information
Technology Transformation program.
Information systems and communications expenses were higher primarily as a result of the impact of our
implementation of the Business Operations and Information Technology Transformation program, as we expanded
our use of service providers associated with components of our technology infrastructure and application
maintenance and support, as well as additional costs to support business growth. Transaction processing services
expenses declined primarily as a result of lower sub-custodian and external contract services costs related to
declines in transaction volumes in trading services and our withdrawal from the fixed-income trading initiative.
In 2012, we recorded acquisition costs of $66 million, mainly related to integration costs incurred in connection
with the 2012 GSAS and 2010 Intesa acquisitions. These acquisition costs were partly offset by an indemnification
benefit of $40 million for the assumption of an income tax liability related to the Intesa acquisition.
In 2012, we recorded aggregate restructuring charges of approximately $199 million, primarily including $67
million related to the continuing implementation of our Business Operations and Information Technology
Transformation program. The remaining net restructuring charges of $132 million for 2012 were composed of
charges of $133 million related to expense control measures initiated by us in 2012 and a net credit adjustment of
$(1) million related to expense control measures we initiated in 2011.
The charges for the Business Operations and Information Technology Transformation program consisted
mainly of costs related to employee severance and information technology. Charges associated with the expense
control measures included employee-related costs, principally costs related to severance, benefits and
outplacement services; fixed-income trading portfolio-related costs, which resulted from fair-value adjustments to
the initiative's trading portfolio related to our decision to withdraw from the initiative; and costs for asset write-downs
and contract terminations. As a result of the withdrawal from the fixed-income trading initiative in 2012, we wound
down that initiative's remaining derivatives portfolio.
74
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Continued)
The increase in aggregate other expenses (professional services, amortization of other intangible assets,
securities processing costs (recoveries), regulatory fees and assessments and other costs) for 2012 compared to
2011 resulted primarily from the impact of litigation and consulting costs on professional fees, higher levels of
securities processing costs and higher levels of regulatory fees and assessments.
Income Tax Expense
We recorded income tax expense of $705 million for 2012, compared to $616 million for 2011, and our
effective tax rate for 2012 was 25.5%, compared to 24.3% for 2011. The increases in both comparisons were
primarily associated with the impact of a discrete tax benefit of $103 million recorded in 2011 attributable to costs
incurred in terminating former conduit asset structures. In addition, income tax expense for 2012 and 2011 included
a net benefit of $7 million and expense of $55 million, respectively, related to the net effects of certain tax matters
associated with the 2010 Intesa acquisition.
FINANCIAL CONDITION
The structure of our consolidated statement of condition is primarily driven by the liabilities generated by our
Investment Servicing and Investment Management lines of business. Our clients' needs and our operating
objectives determine balance sheet volume, mix, and currency denomination. As our clients execute their
worldwide cash management and investment activities, they utilize deposits and short-term investments that
constitute the majority of our liabilities. These liabilities are generally in the form of interest-bearing transaction
account deposits, which are denominated in a variety of currencies; non-interest-bearing demand deposits; and
repurchase agreements, which generally serve as short-term investment alternatives for our clients.
Deposits and other liabilities generated by client activities are invested in assets that generally match the
liquidity and interest-rate characteristics of the liabilities, although the weighted-average maturities of our assets are
significantly longer than the contractual maturities of our liabilities. Our assets consist primarily of securities held in
our available-for-sale or held-to-maturity portfolios and short-duration financial instruments, such as interest-bearing
deposits with banks and securities purchased under resale agreements. The actual mix of assets is determined by
the characteristics of the client liabilities and our desire to maintain a well-diversified portfolio of high-quality assets.
The following table presents the components of our average total interest-earning and noninterest-earning
assets, average total interest-bearing and noninterest-bearing liabilities, and average preferred and common
shareholders' equity for the years ended December 31. Additional information about our average statement of
condition, primarily our interest-earning assets and interest-bearing liabilities, is included under “Consolidated
Results of Operations - Total Revenue - Net Interest Revenue” in this Management's Discussion and Analysis.
75
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Continued)
Years Ended December 31,
(In millions)
Assets:
Interest-bearing deposits with banks
Securities purchased under resale agreements
Trading account assets
Investment securities
Loans and leases
Other interest-earning assets
Total interest-earning assets
Cash and due from banks
Other noninterest-earning assets
Total assets
Liabilities and shareholders’ equity:
Interest-bearing deposits:
U.S.
Non-U.S.
Total interest-bearing deposits
Securities sold under repurchase agreements
Federal funds purchased
Other short-term borrowings
Long-term debt
Other interest-bearing liabilities
Total interest-bearing liabilities
Noninterest-bearing deposits
Other noninterest-bearing liabilities
Preferred shareholders’ equity
Common shareholders’ equity
2013
Average
Balance
2012
Average
Balance
$
28,946
$
26,823
$
$
5,766
748
117,696
13,781
11,164
178,101
3,747
25,182
7,243
651
113,910
11,610
7,378
167,615
3,811
22,384
207,030
$
193,810
8,862
$
100,391
109,253
8,436
298
3,785
8,415
6,457
9,333
89,059
98,392
7,697
784
4,676
7,008
5,898
136,644
124,455
36,294
13,561
490
20,041
36,512
12,660
515
19,668
Total liabilities and shareholders’ equity
$
207,030
$
193,810
76
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Continued)
Investment Securities
The following table presents the carrying values of investment securities by type as of December 31:
(In millions)
Available for sale:
U.S. Treasury and federal agencies:
Direct obligations
Mortgage-backed securities
Asset-backed securities:
Student loans(1)
Credit cards
Sub-prime
Other
Total asset-backed securities
Non-U.S. debt securities:
Mortgage-backed securities
Asset-backed securities
Government securities
Other
Total non-U.S. debt securities
State and political subdivisions
Collateralized mortgage obligations
Other U.S. debt securities
U.S. equity securities
Non-U.S. equity securities
U.S. money-market mutual funds
Non-U.S. money-market mutual funds
Total
Held to Maturity:
U.S. Treasury and federal agencies:
Direct obligations
Mortgage-backed securities
Asset-backed securities:
Student loans(1)
Credit cards
Other
Total asset-backed securities
Non-U.S. debt securities:
Mortgage-backed securities
Asset-backed securities
Government securities
Other
Total non-U.S. debt securities
State and political subdivisions
Collateralized mortgage obligations
Total
2013
2012
2011
$
709
$
841
$
2,836
23,563
32,212
30,021
14,542
16,421
8,210
1,203
5,064
9,986
1,399
4,677
29,019
32,483
16,545
10,487
1,404
3,465
31,901
11,029
11,405
10,875
5,390
3,761
4,727
24,907
10,263
5,269
4,980
34
1
422
7
6,218
3,199
4,306
4,303
1,671
2,825
25,128
19,674
7,551
4,954
5,298
31
1
1,062
121
7,047
3,980
3,615
27
3
613
115
$
99,174
$ 109,682
$
99,832
$
5,041
$
5,000
$
91
153
3,122
4,973
1,627
762
782
3,171
4,211
2,202
2
192
6,607
24
2,806
—
—
16
16
434
3
167
3,726
74
2,410
$
17,740
$
11,379
$
—
265
—
—
31
31
436
3
172
5,584
107
3,334
9,321
(1) Substantially composed of securities guaranteed by the federal government with respect to at least 97% of defaulted principal and accrued
interest on the underlying loans.
77
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Continued)
The increase in municipal securities as of December 31, 2013 compared to December 31, 2012, classified as
state and political subdivisions in the table above, generally resulted from the diversification of our investment
portfolio exposure by asset class, as we reduced our exposure to mortgage-backed securities. Additional
information about our investment securities portfolio is provided in note 4 to the consolidated financial statements
included under Item 8 of this Form 10-K.
We manage our investment securities portfolio to align with the interest-rate and duration characteristics of our
client liabilities and in the context of the overall structure of our consolidated statement of condition, in consideration
of the global interest-rate environment. We consider a well-diversified, high-credit quality investment securities
portfolio to be an important element in the management of our consolidated statement of condition.
Our portfolio is concentrated in securities with high credit quality, with approximately 89% of the carrying value
of the portfolio rated “AAA” or “AA” as of December 31, 2013. The following table presents the percentages of the
carrying value of the portfolio, by external credit rating, as of December 31:
AAA(1)
AA
A
BBB
Below BBB
2013
2012
70%
19
6
3
2
69%
19
7
3
2
100%
100%
(1) Includes U.S. Treasury and federal agency securities that are split-rated, “AAA” by Moody’s Investors Service and “AA+” by Standard & Poor’s.
As of December 31, 2013, the investment portfolio of approximately 10,510 securities was diversified with
respect to asset class. Approximately 74% of the aggregate carrying value of the portfolio as of that date was
composed of mortgage-backed and asset-backed securities, compared to approximately 77% as of December 31,
2012. The asset-backed portfolio, of which approximately 97% of the carrying value was floating-rate, consisted
primarily of student loan-backed and credit card-backed securities. Mortgage-backed securities were composed of
securities issued by the Federal National Mortgage Association and Federal Home Loan Mortgage Corporation, as
well as U.S. and non-U.S. large-issuer collateralized mortgage obligations.
In December 2013, U.S. regulators issued final regulations to implement the so-called “Volcker rule,” one of
many provisions of the Dodd-Frank Act. The Volcker rule will, among other things, require banking organizations
covered by the rule to either restructure or divest of certain investments in and relationships with “covered funds,”
as defined in the final Volcker rule regulations. The classification of certain types of investment securities or
structures, such as collateralized loan obligations, or CLOs, as “covered funds” remains subject to market, and
ultimately regulatory, interpretation, based on the specific terms and other characteristics relevant to such
investment securities and structures.
As of December 31, 2013, we held an aggregate of approximately $5.77 billion of investments in CLOs. As of
the same date, these investments had an aggregate pre-tax net unrealized gain of approximately $122 million,
composed of gross unrealized gains of $141 million and gross unrealized losses of $19 million. In the event that we
or our banking regulators conclude that such investments in CLOs, or other investments, are “covered funds,” we
may be required to divest of such investments. If other banking entities reach similar conclusions with respect to
similar investments held by them, the prices of such investments could decline significantly, and we may be required
to divest of such investments at a significant discount compared to the investments' book value. This could result in
a material adverse effect on our consolidated results of operations in the period in which such a divestment occurs
or on our consolidated financial condition.
Our investment securities portfolio represented approximately 48% and 54% of our consolidated total assets
as of December 31, 2013 and December 31, 2012, respectively, and the gross interest revenue generated by our
investment securities portfolio represented approximately 22% of our consolidated total gross revenue for 2013,
compared to approximately 25% of our consolidated total gross revenue for 2012.
Our investment securities portfolio represents a greater proportion of our consolidated statement of condition
as described above, and our loan-and-lease portfolio represents a smaller proportion (approximately 6% of our
consolidated total assets as of both December 31, 2013 and December 31, 2012), in comparison to many other
major banking organizations. In some respects, the accounting and regulatory treatment of our investment
78
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Continued)
securities portfolio may be less favorable to us than a more traditional held-for-investment lending portfolio or a
portfolio of U.S. Treasury securities. For example, under the July 2013 Basel III final rule, after-tax unrealized gains
and losses on investment securities classified as available for sale will be included in tier 1 capital. Since loans held
for investment are not subject to a fair-value accounting framework, changes in the fair value of loans (other than
incurred credit losses) are not similarly included in the determination of tier 1 capital under the Basel III final rule.
As a result of this differing treatment, we may experience increased variability in our tier 1 capital relative to other
major banking institutions whose loan-and-lease portfolios represent a larger proportion of their consolidated total
assets than ours.
Non-U.S. Debt Securities
Approximately 27% of the aggregate carrying value of our investment securities portfolio as of December 31,
2013 was composed of non-U.S. debt securities, compared to approximately 24% as of December 31, 2012. The
following table presents our non-U.S. debt securities available for sale and held to maturity, included in the
preceding table of investment securities carrying values, by significant country of issuer or location of collateral, as
of December 31:
(In millions)
Available for Sale:
United Kingdom
Australia
Netherlands
Canada
France
Germany
Japan
South Korea
Finland
Norway
Sweden
Austria
Spain
Mexico
Other
Total
Held to Maturity:
Australia
United Kingdom
Germany
Netherlands
Italy
Spain
Other
Total
2013
2012
$
9,357
$
10,263
3,551
3,471
2,549
1,581
1,410
971
744
397
369
142
83
65
55
162
$
$
24,907
$
2,216
$
1,474
1,263
934
270
206
244
4,035
3,006
2,274
1,364
1,836
1,173
257
259
210
72
—
67
70
242
25,128
2,189
920
—
—
276
209
132
$
6,607
$
3,726
Approximately 89% and 87% of the aggregate carrying value of these non-U.S. debt securities was rated
“AAA” or “AA” as of December 31, 2013 and 2012, respectively. The majority of these securities comprise senior
positions within the security structures; these positions have a level of protection provided through subordination
and other forms of credit protection. Approximately 72% of the aggregate carrying value of these non-U.S. debt
securities was floating-rate, and accordingly, the securities are considered to have minimal interest-rate risk. As of
December 31, 2013, these non-U.S. debt securities had an average market-to-book ratio of 101.3%, and an
aggregate pre-tax net unrealized gain of approximately $413 million, composed of gross unrealized gains of $483
million and gross unrealized losses of $70 million. These unrealized amounts included a pre-tax net unrealized gain
of $292 million, composed of gross unrealized gains of $314 million and gross unrealized losses of $22 million,
associated with non-U.S. debt securities available for sale.
79
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Continued)
As of December 31, 2013, the underlying collateral for these mortgage- and asset-backed securities primarily
included U.K. prime mortgages, Australian and Dutch mortgages and German automobile loans. The securities
listed under “Canada” were composed of Canadian government securities and corporate debt. The securities listed
under “France” were composed of automobile loans and corporate debt. The securities listed under “Japan” were
substantially composed of Japanese government securities. The securities listed under “South Korea” were
composed of South Korean government securities. The “other” category of available-for-sale securities included
approximately $68 million and $105 million of securities as of December 31, 2013 and 2012, respectively, related to
Portugal and Ireland, all of which were mortgage-backed securities. The “other” category of held-to-maturity
securities included approximately $130 million of securities as of both December 31, 2013 and 2012 related to
Portugal and Ireland, all of which were mortgage-backed securities.
Our aggregate exposure to Spain, Italy, Ireland and Portugal as of December 31, 2013 did not include any
direct sovereign debt exposure to any of these countries. Our indirect exposure to these countries totaled
approximately $740 million, which included approximately $574 million of mortgage- and asset-backed securities
with an aggregate pre-tax net unrealized gain of approximately $69 million as of December 31, 2013, composed of
gross unrealized gains of $84 million and gross unrealized losses of $15 million. We recorded other-than-temporary
impairment of $6 million on certain of these mortgage- and asset-backed securities in our consolidated statement of
income in 2013, all of which was associated with management's intent to sell an impaired security prior to its
recovery in value. In 2012, we recorded other-than-temporary impairment of $6 million on certain of these
mortgage- and asset-backed securities, all of which was associated with expected credit losses. We recorded no
other-than-temporary impairment on these mortgage- and asset-backed securities in 2011.
Eurozone crisis tensions appeared to ease to an extent in 2013, following renewed volatility at the end of the
first quarter of 2013. Economic performance remains weak in Spain, Italy, Ireland and Portugal. Throughout the
sovereign debt crisis, the major independent credit rating agencies have downgraded, and may in the future do so
again, U.S. and non-U.S. financial institutions and sovereign issuers which have been, and may in the future be,
significant counterparties to us, or whose financial instruments serve as collateral on which we rely for credit risk
mitigation purposes. As a result, we may be exposed to increased counterparty risk, leading to negative ratings
volatility.
Country risks with respect to Spain, Italy, Ireland and Portugal are identified, assessed and monitored by our
Country Risk Committee. Country limits are defined in our credit and counterparty risk guidelines, in conformity with
our credit and counterparty risk policy. These limits are monitored on a daily basis by Enterprise Risk Management.
These country exposures are subject to ongoing surveillance and stress test analysis, conducted by the investment
portfolio management team. The stress tests performed reflect the structure and nature of the exposure, its past
and projected future performance based on macroeconomic and environmental analysis, with key underlying
assumptions varied under a range of scenarios, reflecting downward pressure on collateral performance. The
results of the stress tests are presented to senior management and Enterprise Risk Management as part of the
surveillance process.
In addition, Enterprise Risk Management conducts separate stress-test analyses and evaluates the structured
asset exposures in these countries for the assessment of other-than-temporary impairment. The assumptions used
in these evaluations reflect expected downward pressure on collateral performance. Stress scenarios are subject to
regular review, and are updated to reflect changes in the economic environment, measures taken in response to the
sovereign debt crisis and collateral performance, with particular attention to these specific country exposures.
80
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Continued)
Municipal Securities
We carried an aggregate of approximately $10.29 billion of municipal securities, classified as state and political
subdivisions in the preceding table of investment securities carrying values, in our investment securities portfolio as
of December 31, 2013. Substantially all of these securities were classified as available for sale, with the remainder
classified as held to maturity. As of the same date, we also provided approximately $8.16 billion of credit and
liquidity facilities to municipal issuers as a form of credit enhancement. The following tables present our combined
credit exposure to state and municipal obligors that represented 5% or more of our aggregate municipal credit
exposure of approximately $18.45 billion and $16.12 billion across our businesses as of December 31, 2013 and
2012, respectively, grouped by state to display geographic dispersion:
December 31, 2013
(Dollars in millions)
State of Issuer:
Texas
New York
Massachusetts
California
Maryland
Total
December 31, 2012
(Dollars in millions)
State of Issuer:
Texas
New York
Massachusetts
California
New Jersey
Florida
Total
Total Municipal
Securities
Credit and
Liquidity Facilities
Total
% of Total
Municipal
Exposure
$
1,233
$
1,628
$
919
967
373
327
1,000
759
1,266
643
$
3,819
$
5,296
$
2,861
1,919
1,726
1,639
970
9,115
16%
10
9
9
5
Total Municipal
Securities
Credit and
Liquidity Facilities
Total
% of Total
Municipal
Exposure
$
1,091
$
1,957
$
486
869
190
867
148
973
508
1,158
—
680
3,048
1,459
1,377
1,348
867
828
19%
9
9
8
5
5
$
3,651
$
5,276
$
8,927
Our aggregate municipal securities exposure presented in the foregoing table was concentrated primarily with
highly-rated counterparties, with approximately 84% of the obligors rated “AAA” or “AA” as of December 31, 2013.
As of that date, approximately 64% and 34% of our aggregate exposure was associated with general obligation and
revenue bonds, respectively. In addition, we had no exposures associated with healthcare, industrial development
or land development bonds. The portfolios are also diversified geographically; the states that represent our largest
exposure are widely dispersed across the U.S.
Additional information with respect to our assessment of other-than-temporary impairment of our municipal
securities is provided in note 4 to the consolidated financial statements included under Item 8 of this Form 10-K.
81
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Continued)
The following table presents the carrying amounts, by contractual maturity, of debt securities available for sale
and held to maturity, and the related weighted-average contractual yields, as of December 31, 2013:
(Dollars in millions)
Available for sale(1):
U.S. Treasury and federal agencies:
Direct obligations
Mortgage-backed securities
Asset-backed securities:
Student loans
Credit cards
Sub-prime
Other
Total asset-backed
Non-U.S. debt securities:
Mortgage-backed securities
Asset-backed securities
Government securities
Other
Total non-U.S. debt securities
State and political subdivisions(2)
Collateralized mortgage obligations
Other U.S. debt securities
Under 1 Year
1 to 5 Years
6 to 10 Years
Over 10 Years
Amount
Yield
Amount
Yield
Amount
Yield
Amount
Yield
$
1
272
3.74% $
36
3.50% $
46
3.05% $
626
1.90
2,267
3.22
5,331
3.08
15,693
2.05%
3.06
927
2,629
33
304
3,893
883
432
2,727
1,201
5,243
690
421
299
.45
.53
1.43
.67
1.75
1.06
.71
2.69
4.62
4.76
4.39
6,400
3,366
20
1,603
11,389
5,791
4,235
1,034
2,871
13,931
3,152
1,633
3,919
.57
.65
2.41
.62
1.68
1.11
.46
2.31
4.59
3.29
3.95
4,546
2,215
2
1,438
8,201
150
592
—
655
1,397
3,884
1,240
729
.60
1.14
2.62
1.04
2.36
1.53
—
1.40
5.34
2.28
4.29
2,669
—
1,148
1,719
5,536
4,205
131
—
—
4,336
2,537
1,975
33
.75
—
.69
1.40
2.61
1.62
—
—
5.65
2.87
.79
Total
$ 10,819
$ 36,327
$ 20,828
$ 30,736
Held to maturity(1):
U.S. Treasury and federal agencies:
Direct Obligations
$
Mortgage-backed securities
Asset-backed securities
Student loans
Credit cards
Other
Total asset-backed
Non-U.S. debt securities:
Mortgage-backed securities
Asset-backed securities
Government securities
Other
Total non-U.S. debt securities
State and political subdivisions(2)
Collateralized mortgage obligations
Total
$
—
—
18
—
—
18
—
140
2
165
307
15
187
527
—% $
—
.37
—
—
—
.58
.31
1.11
5.53
3.12
—
22
152
278
493
923
1,141
1,828
—
25
2,994
9
1,065
—% $
5,000
2.09% $
5.00
18
5.00
41
51
.59%
5.36
.60
.66
.48
1.31
.95
—
.82
5.51
3.04
221
484
284
989
179
234
—
—
413
—
495
.87
.57
.59
3.67
.71
—
—
—
1.48
1,236
—
5
1,241
.74
—
.59
2,891
1.68
—
—
2
2,893
—
1,059
—
—
2.94
—
2.47
$
5,013
$
6,915
$
5,285
(1) The maturities of mortgage-backed securities, asset-backed securities and collateralized mortgage obligations are based on expected
principal payments.
(2) Yields were calculated on a fully taxable-equivalent basis, using applicable federal and state income tax rates.
Impairment
Impairment exists when the fair value of an individual security is below its amortized cost basis. Impairment of
a security is further assessed to determine whether such impairment is other-than-temporary. When the impairment
is deemed to be other-than-temporary, we record the loss in our consolidated statement of income. In addition, for
debt securities available for sale and held to maturity, we record impairment in our consolidated statement of
income when management intends to sell (or may be required to sell) the securities before they recover in value, or
82
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Continued)
when management expects the present value of cash flows expected to be collected from the securities to be less
than the amortized cost of the impaired security (a credit loss).
The following table presents the amortized cost and fair value, and associated net unrealized gains and
losses, of investment securities available for sale and held to maturity as of December 31:
(In millions)
Available for sale(2)
Held to maturity(2)
Total investment securities
Net after-tax unrealized gain (loss)
2013(1)
Net
Unrealized
Gains
(Losses)
Amortized
Cost
Fair Value
Amortized
Cost
2012(1)
Net
Unrealized
Gains
(Losses)
Fair Value
$ 99,159
$
15
$ 99,174
$ 108,563
$
1,119
$ 109,682
17,740
116,899
$
(180)
(165)
(96)
17,560
11,379
282
11,661
116,734
119,942
1,401
121,343
$
885
(1) Amounts excluded the remaining net unrealized losses primarily related to reclassifications of securities available for sale to securities
held to maturity in 2008, recorded in accumulated other comprehensive income, or AOCI, within shareholders' equity in our
consolidated statement of condition. Additional information is provided in note 13 to the consolidated financial statements included
under Item 8 of this Form 10-K.
(2) Securities available for sale are carried at fair value, with after-tax net unrealized gains and losses recorded in AOCI. Securities held
to maturity are carried at cost, and unrealized gains and losses are not recorded in our consolidated financial statements.
The aggregate decline to a net unrealized loss as of December 31, 2013 from a net unrealized gain as of
December 31, 2012 presented above was primarily attributable to changes in interest rates in 2013.
We conduct periodic reviews of individual securities to assess whether other-than-temporary impairment
exists. Our assessment of other-than-temporary impairment involves an evaluation of economic and security-
specific factors. Such factors are based on estimates, derived by management, which contemplate current market
conditions and security-specific performance. To the extent that market conditions are worse than management's
expectations, other-than-temporary impairment could increase, in particular the credit-related component that would
be recorded in our consolidated statement of income.
In the aggregate, we recorded net losses from other-than-temporary impairment of $23 million and $32 million
in the years ended December 31, 2013 and December 31, 2012, respectively. Additional information with respect to
this other-than-temporary impairment and net impairment losses, as well as information about our assessment of
impairment, is provided in note 4 to the consolidated financial statements included under Item 8 of this Form 10-K.
Given the exposure of our investment securities portfolio, particularly mortgage- and asset-backed securities,
to residential mortgage and other consumer credit risks, the performance of the U.S. housing market continues to
be a factor in the portfolio's credit performance. As such, our assessment of other-than-temporary impairment
relies, in part, on our estimates of trends in national housing prices in addition to trends in unemployment rates,
interest rates and the timing of defaults. Generally, indices that measure trends in national housing prices are
published in arrears. As of September 30, 2013, national housing prices, according to the Case-Shiller National
Home Price Index, had declined by approximately 21% peak-to-current. Overall, our evaluation of other-than-
temporary impairment as of December 31, 2013 included an expectation of a U.S. housing recovery characterized
by relatively modest growth in national housing prices over the next few years. In connection with our assessment
of other-than-temporary impairment with respect to relevant securities in our investment portfolio in future periods,
we will consider trends in national housing prices that we observe at those times, including the Case-Shiller
National Home Price Index, in addition to trends in unemployment rates, interest rates and the timing of defaults.
The other-than-temporary impairment of our investment securities portfolio continues to be sensitive to our
estimates of future cumulative losses. However, given our recent more positive outlook for U.S. national housing
prices, our sensitivity analysis indicates, as of December 31, 2013, that our investment securities portfolio is
currently less exposed to the overall housing price outlook relative to other factors, including unemployment rates
and interest rates, than it was as of December 31, 2012.
The residential mortgage servicing environment remains challenging, and the time line to liquidate distressed
loans continues to extend. The rate at which distressed residential mortgages are liquidated may affect, among
other things, our investment securities portfolio. Such effects could include the timing of cash flows or the credit
quality associated with the mortgages collateralizing certain of our residential mortgage-backed securities, which,
accordingly, could result in the recognition of additional other-than-temporary impairment in future periods.
83
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Continued)
Our evaluation of potential other-than-temporary impairment of mortgage-backed securities with collateral
located in Spain, Italy, Ireland and Portugal takes into account government intervention in the corresponding
mortgage markets and assumes a negative baseline macroeconomic environment for this region, due to a
combination of slow economic growth and government austerity measures. Our baseline view assumes a
recessionary period characterized by high unemployment and by additional declines in housing prices of between
12% and 19% across these four countries. Our evaluation of other-than-temporary impairment in our base case
does not assume a disorderly sovereign debt restructuring or a break-up of the Eurozone.
In addition, we perform stress testing and sensitivity analysis in order to assess the impact of more severe
assumptions on potential other-than-temporary impairment. We estimate, for example, that in more stressful
scenarios in which unemployment, gross domestic product and housing prices in these four countries deteriorate
more than we expected as of December 31, 2013, other-than-temporary impairment could increase by a range of
approximately $11 million to $40 million. This sensitivity estimate is based on a number of factors, including, but not
limited to, the level of housing prices and the timing of defaults. To the extent that such factors differ significantly
from management's current expectations, resulting loss estimates may differ materially from those stated.
Excluding other-than-temporary impairment recorded in 2013, management considers the aggregate decline
in fair value of the remaining investment securities and the resulting gross unrealized losses as of December 31,
2013 to be temporary and not the result of any material changes in the credit characteristics of the securities.
Additional information about these gross unrealized losses is provided in note 4 to the consolidated financial
statements included under Item 8 of this Form 10-K.
Loans and Leases
The following table presents our U.S. and non-U.S. loans and leases, by segment, as of and for the years
ended December 31 (excluding the allowance for loan losses):
(In millions)
Institutional:
U.S.
Non-U.S.
Commercial real estate:
U.S.
Total loans and leases
Average loans and leases
2013
2012
2011
2010
2009
$ 10,623
$ 9,645
$ 7,115
$ 7,001
$ 6,637
2,654
2,251
2,478
4,192
3,571
209
411
460
764
600
$ 13,486
$ 12,307
$ 10,053
$ 11,957
$ 10,808
$ 13,781
$ 11,610
$ 12,180
$ 12,094
$ 9,703
The increase in loans in the institutional segment presented in the table above was mainly related to an
increase in mutual fund lending and our investment in the non-investment-grade lending market through
participations in loan syndications, specifically senior secured bank loans. Senior secured bank loans are more fully
described below, and additional information about all of our loan-and-lease segments, as well as underlying
classes, is provided in note 5 to the consolidated financial statements included under Item 8 of this Form 10-K.
The institutional segment is composed of the following classes: investment funds, commercial and financial,
purchased receivables and lease financing. The investment funds class includes lending to mutual and other
collective investment funds and short-duration advances to fund clients to provide liquidity in support of their
transaction flows associated with securities settlement activities. The commercial-and-financial class includes
lending to corporate borrowers, including broker/dealers, as well as purchased loans composed of senior secured
bank loans. The purchased receivables class represent undivided interests in securitized pools of underlying third-
party receivables added in connection with the 2009 conduit consolidation. Lease financing includes our investment
in leveraged lease financing.
In 2013, we diversified our loan-and-lease exposure by investing in the non-investment-grade lending market
through participations in loan syndications. These senior secured bank loans totaled approximately $724 million as
of December 31, 2013. In addition, as of the same date, we had binding unfunded commitments totaling an
additional $211 million to participate in such syndications. We expect to increase our level of participation in these
loan syndications in future periods. We had no investment in senior secured bank loans as of December 31, 2012
or in any prior years.
These loans, which we have rated “speculative” under our internal risk-rating framework (refer to note 5 to the
consolidated financial statements included under Item 8 of this Form 10-K), are externally rated “BBB,” “BB” or “B,”
with approximately 94% of the loans rated “BB” or “B.” These loans present more significant exposure to potential
84
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Continued)
credit losses than higher-rated loans. However, we seek to mitigate such exposure, in part through the limitation of
our investment to larger, more liquid credits underwritten by major global financial institutions, the application of our
internal credit analysis process to each potential investment, and diversification by counterparty and industry
segment. As of December 31, 2013, our allowance for loan losses included approximately $6 million related to
these commercial-and-financial loans.
Aggregate short-duration advances to our clients included in the investment funds and commercial-and-
financial classes of the institutional segment were $2.45 billion and $3.30 billion as of December 31, 2013 and
2012, respectively. As of December 31, 2013 and 2012, unearned income deducted from our investment in
leveraged lease financing was $121 million and $131 million, respectively, for U.S. leases and $298 million and
$334 million, respectively, for non-U.S. leases.
The commercial real estate, or CRE, segment is composed of the loans acquired in 2008 pursuant to
indemnified repurchase agreements with an affiliate of Lehman as a result of the Lehman Brothers bankruptcy.
These loans, which are primarily collateralized by direct and indirect interests in commercial real estate, were
recorded at their then-current fair value, based on management's expectations with respect to future cash flows
from the loans using appropriate market discount rates as of the date of acquisition.
As of December 31, 2013 and 2012, we held an aggregate of approximately $130 million and $197 million,
respectively, of CRE loans which were modified in troubled debt restructurings. No impairment loss was recognized
upon restructuring of the loans, as the discounted cash flows of the modified loans exceeded the carrying amount of
the original loans as of the modification date. No loans were modified in troubled debt restructurings in 2013 or
2012.
No institutional loans were 90 days or more contractually past due as of December 31, 2013, 2012, 2011,
2010 or 2009. As of December 31, 2013 and 2012, no CRE loans were 90 days or more contractually past due.
Although a portion of the CRE loans was 90 days or more contractually past due as of December 31, 2011, 2010
and 2009, we did not report them as past-due loans, because in conformity with GAAP, the interest earned on these
loans is based on an accretable yield resulting from management’s expectations with respect to the future cash
flows for each loan relative to both the timing and collection of principal and interest as of the reporting date, not the
loans’ contractual payment terms. These cash-flow estimates are updated quarterly to reflect changes in
management’s expectations, which consider market conditions.
We generally place loans on non-accrual status once principal or interest payments are 60 days past due, or
earlier if management determines that full collection is not probable. Loans 60 days past due, but considered both
well-secured and in the process of collection, may be excluded from non-accrual status. For loans placed on non-
accrual status, revenue recognition is discontinued. As of December 31, 2013 and 2012, no CRE loans were on
non-accrual status.
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MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Continued)
The following table presents contractual maturities for loan and lease balances as of December 31, 2013:
(In millions)
Institutional:
Investment funds:
U.S.
Non-U.S.
Commercial and financial:
U.S.
Non-U.S.
Purchased receivables:
U.S.
Non-U.S.
Lease financing:
U.S.
Non-U.S.
Total institutional
Commercial real estate:
U.S.
Total loans and leases
Total
Under 1 Year
1 to 5 Years
Over 5 Years
$
8,695
$
7,313
$
1,378
$
1,718
1,455
1,372
154
217
26
339
756
447
77
83
2
—
—
13,277
9,377
263
447
51
—
24
7
265
2,435
4
—
478
26
134
—
332
491
1,465
209
—
209
—
$
13,486
$
9,377
$
2,644
$
1,465
The following table presents the classification of loan and lease balances due after one year according to
sensitivity to changes in interest rates as of December 31, 2013:
(In millions)
Loans and leases with predetermined interest rates
Loans and leases with floating or adjustable interest rates
Total
$
$
3,151
958
4,109
As of December 31, 2013 and 2012, the allowance for loan losses was $28 million and $22 million,
respectively. The following table presents activity in the allowance for loan losses for the years ended December
31:
(In millions)
Allowance for loan losses:
Beginning balance
Provision for loan losses:
Commercial real estate
Institutional
Charge-offs:
Commercial real estate
Institutional
Recoveries:
Commercial real estate
Ending balance
2013
2012
2011
2010
2009
$
22
$
22
$
100
$
79
$
18
—
6
—
—
—
28
$
(3)
—
—
—
3
$
22
$
9
(9)
(78)
—
—
22
22
3
(4)
—
—
$
100
$
124
25
(72)
(19)
3
79
The provision in 2013, which was related to the institutional loans segment, resulted from our exposure to non-
investment-grade borrowers composed of senior secured bank loans, more fully described above. These loans
were purchased in connection with our participation in loan syndications in the non-investment-grade lending
market beginning in 2013, in connection with the diversification of our loan-and-lease exposure.
Loans and leases are reviewed on a regular basis, and any provisions for loan losses that are recorded reflect
management’s estimate of the amount necessary to maintain the allowance for loan losses at a level considered
appropriate to absorb estimated incurred credit losses in the loan and lease portfolio. With respect to CRE loans,
management considers its expectations with respect to future cash flows from those loans and the value of
86
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Continued)
available collateral. These expectations are based, among other things, on an assessment of economic conditions,
including conditions in the commercial real estate market and other factors.
Cross-Border Outstandings
Cross-border outstandings are amounts payable to us by non-U.S. counterparties which are denominated in
U.S. dollars or other non-local currency, as well as non-U.S. local currency claims not funded by local currency
liabilities. Our cross-border outstandings consist primarily of deposits with banks; loans and lease financing,
including short-duration advances; investment securities; amounts related to foreign exchange and interest-rate
contracts; and securities finance. In addition to credit risk, cross-border outstandings have the risk that, as a result
of political or economic conditions in a country, borrowers may be unable to meet their contractual repayment
obligations of principal and/or interest when due because of the unavailability of, or restrictions on, foreign
exchange needed by borrowers to repay their obligations.
We place deposits with non-U.S. counterparties that have strong internal State Street risk ratings.
Counterparties are approved and monitored by our Country Risk Committee. This process includes financial
analysis of non-U.S. counterparties and the use of an internal risk-rating system. Each counterparty is reviewed at
least annually and potentially more frequently based on deteriorating credit fundamentals or general market
conditions. We also utilize risk mitigation and other facilities that may reduce our exposure through the use of cash
collateral and/or balance sheet netting. In addition, the Country Risk Committee performs a country-risk analysis
and monitors limits on country exposure.
The following table presents our cross-border outstandings in countries in which we do business, and which
amounted to at least 1% of our consolidated total assets as of the dates indicated. The aggregate of the total cross-
border outstandings presented in the table represented approximately 19%, 22% and 16% of our consolidated total
assets as of December 31, 2013, 2012 and 2011, respectively.
(In millions)
2013
United Kingdom
Australia
Netherlands
Canada
Germany
France
Japan
2012
United Kingdom
Australia
Japan
Germany
Netherlands
Canada
2011
United Kingdom
Australia
Germany
Netherlands
Canada
Investment
Securities and
Other Assets
Derivatives
and Securities
on Loan
Total Cross-
Border
Outstandings
$
15,422
$
1,697
$
17,119
7,309
4,542
3,675
4,062
2,887
2,445
672
277
620
147
735
605
7,981
4,819
4,295
4,209
3,622
3,050
$
18,046
$
1,033
$
19,079
7,585
6,625
7,426
3,130
2,730
328
1,041
220
188
500
7,913
7,666
7,646
3,318
3,230
$
13,336
$
1,510
$
14,846
6,786
6,321
3,626
2,235
263
578
197
496
7,049
6,899
3,823
2,731
As of December 31, 2013, aggregate cross-border outstandings in countries which amounted to between
0.75% and 1% of our consolidated total assets totaled approximately $1.85 billion to China. As of December 31,
2012 and 2011, aggregate cross-border outstandings in countries which amounted to between 0.75% and 1% of our
87
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Continued)
consolidated total assets totaled approximately $1.81 billion and $1.70 billion, to France and Luxembourg,
respectively.
Several European countries, particularly Spain, Italy, Ireland and Portugal, have experienced credit
deterioration associated with weaknesses in their economic and fiscal situations. With respect to this ongoing
uncertainty, we are closely monitoring our exposure to these countries. We had no direct sovereign debt exposure
to these countries in our investment securities portfolio. We had aggregate indirect exposure in the portfolio of
approximately $740 million, including $574 million of mortgage- and asset-backed securities, composed of $271
million in Spain, $105 million in Italy, $120 million in Ireland and $78 million in Portugal, as of December 31, 2013.
The following table presents our cross-border outstandings in each of these countries as of December 31:
(In millions)
2013
Ireland
Italy
Spain
Portugal
2012
Italy
Ireland
Spain
Portugal
2011
Italy
Ireland
Spain
Portugal
Greece
Investment
Securities and
Other Assets
Derivatives and
Securities on
Loan
Total Cross-
Border
Outstandings
$
$
$
$
369
763
271
78
937
342
277
76
304
$
2
11
—
1
$
277
16
—
673
765
282
78
938
619
293
76
$
1,049
$
11
$
1,060
299
434
176
99
267
53
—
—
566
487
176
99
As of December 31, 2013, none of the exposures in these countries was individually greater than 0.75% of our
consolidated total assets. The aggregate exposures consisted primarily of interest-bearing deposits, investment
securities, loans, including short-duration advances, and foreign exchange contracts. We had not recorded any
provisions for loan losses with respect to any of our exposure in these countries as of December 31, 2013.
Risk Management
General
In the normal course of our global business activities, we are exposed to a variety of risks, some inherent in
the financial services industry, others more specific to our business activities. State Street’s risk management
framework focuses on material risks, which include the following:
liquidity risk, funding and liquidity management;
• credit and counterparty risk;
•
• operational risk, including execution, technology, business practice and fiduciary risks;
• market risk, including market risk associated with our trading activities and market risk associated with our
non-trading, or asset-and-liability management, activities, which is primarily composed of interest-rate risk;
• model risk; and
• business risk, including reputational risk.
These material risks, as well as certain of the factors underlying each of these risks that could affect our
businesses, our consolidated results of operations and our consolidated financial condition, are discussed in detail
in “Risk Factors,” included under Item 1A of this Form 10-K.
The scope of our business requires that we balance these risks with a comprehensive and well-integrated risk
management function. The identification, assessment, monitoring, mitigation and reporting of risks are essential to
our financial performance and successful management of our businesses. These risks, if not effectively managed,
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MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Continued)
can result in current losses to State Street as well as erosion of our capital and damage to our reputation. Our
systematic approach allows for an assessment of risks within a framework for evaluating opportunities for the
prudent use of capital that appropriately balances risk and return.
Our operations are subject to significant oversight from regulators domestically and overseas. Our objective is
to optimize our return and to operate at a prudent level of risk. In support of this objective, we have instituted a risk
appetite framework that aligns our business strategy and financial objectives with the level of risk that we are willing
to incur.
Our risk management is based on the following major principles:
A culture of risk awareness that extends across all of our business activities;
The identification, classification and quantification of State Street's material risks;
The establishment of our risk appetite and associated limits and policies, and our compliance with these
limits;
The establishment of a risk management structure at the “top of the house” that enables the control and
coordination of risk-taking across the business lines;
The implementation of stress testing practices and a dynamic risk-assessment capability; and
The overall flexibility to adapt to the ever-changing business and market conditions.
Our Risk Appetite Statement outlines the quantitative limits and qualitative goals that define our risk appetite, as
well as the responsibilities for measuring and monitoring risk against limits, and for reporting, escalating, approving
and addressing exceptions. The Risk Appetite Statement is established by management with the guidance of Enterprise
Risk Management, or ERM, a corporate risk oversight group, in conjunction with the Board of Directors, who formally
reviews and approves our Risk Appetite Statement annually.
The Risk Appetite Statement describes the level and types of risk that we are willing to experience in executing
our business strategy, and also serves as a guide in setting risk limits across our business units. In addition to our
Risk Appetite Statement, we use stress testing as another important tool in our risk management practice.
Additional information with respect to our stress testing process and practices is provided under “Capital” in this
Management’s Discussion and Analysis.
The following table provides a reference to the disclosures about our management of significant risks provided
herein.
Risk Governance and Structure
Credit Risk Management
Liquidity Risk Management
Operational Risk Management
Market Risk Management
Model Risk Management
Business Risk Management
Risk Governance and Structure
Form 10-K
Page Number
89
92
94
100
102
109
109
We have a disciplined approach to risk management that involves all levels of management, from the Board
and the Board’s Risk and Capital Committee, or RCC, and its Examining & Audit, or E&A, Committee, to each
business unit and each employee. We allocate responsibility for risk oversight so that risk/return decisions are made
at an appropriate level, and are subject to robust and effective review and challenge. Risk management is the
responsibility of each employee, and is implemented through three lines of defense: the business units, which own
and manage the risks inherent in their business; ERM, which provides separate oversight, monitoring and control;
and Corporate Audit, which assesses the effectiveness of the first two lines of defense.
The responsibilities for effective review and challenge reside with senior managers, oversight committees,
Corporate Audit, the Board's RCC and, ultimately, the Board. While we believe that our risk management program is
effective in managing the risks in our businesses, external factors may create risks that cannot always be identified
or anticipated.
Corporate-level risk committees provide focused oversight, and establish corporate standards and policies for
specific risks, including credit, sovereign exposure, new business products, regulatory compliance and ethics, as
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MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Continued)
well as operational, market, liquidity and model risks. These committees have been delegated the responsibility to
develop recommendations and remediation strategies to address issues that affect or have the potential to affect
State Street.
We maintain a risk governance committee structure which serves as the formal governance mechanism
through which we seek to undertake the consistent identification, discussion and mitigation of various risks facing
State Street in connection with our business activities. This governance structure is enhanced and integrated
through multi-disciplinary involvement, particularly through ERM. The following chart presents this structure.
RISK GOVERNANCE COMMITTEE STRUCTURE
Board
Oversight
Risk and Capital
Committee of the Board
of Directors
(RCC)
Examining & Audit
Committee of the Board of
Directors
(E&A)
Senior Management
Oversight
Management Risk and
Capital Committee
(MRAC)
Technology and
Operational Risk
Committee
(TORC)
Risk
Committees
Asset,
Liability
and
Capital
Committee
(ALCCO)
Credit Risk
and Policy
Committee
Country
Risk
Committee
Mandate Oversight of
interest rate
risk, liquidity
risk and
capital
adequacy
Oversight of
credit and
counterparty
risk
Oversight of
country risk
and
international
exposure
Trading
and
Markets
Risk
Committee
(TMRC)
Senior risk
committee
governing
all global
markets
trading
activities
Securities
Finance
Risk
Committee
Model
Assessment
Committee
(MAC)
Basel
ICAAP
Oversight
Committee
(BIOC)
CCAR
Steering
Committee(1)
Recovery
and
Resolution
Planning
Committee
Fiduciary
Review
Committee
Operational
Risk
Committee
(ORC)
Technology
Risk
Governance
Committee
Oversight of
Securities
Finance and
collateral
reinvestment
activities
Provides
oversight for
model
deployment
Oversight of
Basel II and
Basel III
program
Oversight of
CCAR
stress
testing
program
Oversight of
process for
development
of recovery
and
resolution
plans
Oversight of
corporate-
wide
fiduciary risk
Oversight of
corporate-
wide
operational
risk
Oversight
of
corporate-
wide
technology
risk
(1)
Oversees the submission of capital plans in connection with the Federal Reserve's Comprehensive Capital Analysis and Review, or CCAR,
process.
ERM provides risk oversight, support and coordination to allow for the consistent identification, measurement
and management of risks across business units separate from the business units' activities, and is responsible for
the formulation and maintenance of enterprise-wide risk management policies and guidelines. In addition, ERM
establishes and reviews approved limits and, in collaboration with business unit management, monitors key risks.
Ultimately, ERM works to validate that risk-taking falls within our risk appetite approved by the Board and conforms
to associated risk policies, limits and guidelines.
The Chief Risk Officer, or CRO, who is responsible for State Street’s risk management globally, leads ERM
and has a dual reporting line to State Street’s Chief Executive Officer and the Board’s RCC. ERM discharges its
responsibilities globally through a three-dimensional organization structure:
“Vertical” business unit-aligned risk groups that assist business managers with risk management,
measurement and monitoring activities;
“Horizontal” risk groups that monitor the risks that cross all of our business units (for example, credit and
operational risk); and
Risk oversight for international activities, which adds important regional and legal entity perspectives to
global vertical and horizontal risk management.
Sitting on top of this three-dimensional organization structure is a centralized group responsible for the
aggregation of risk exposures across the vertical, horizontal and regional dimensions, for consolidated reporting, for
setting the enterprise-level risk appetite framework and associated limits and policies, and for dynamic risk
assessment across State Street.
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MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Continued)
The Board's RCC is responsible for oversight related to our assessment and management of risk, including
credit, liquidity, operational, fiduciary, market, interest-rate and business risks and related policies. In addition, the
RCC provides oversight on strategic capital governance principles and controls, and monitors capital adequacy in
relation to risk. The RCC is also responsible for discharging the duties and obligations of the Board under the
applicable Basel requirements.
The Chief Financial Officer, together with the CRO, attend meetings of the RCC. The RCC receives regular
and comprehensive reports on risk methodologies and our risk profile, including key issues affecting each business
unit.
The E&A Committee oversees the operation of our system of internal controls covering the integrity of our
consolidated financial statements and reports, compliance with laws, regulations and corporate policies, and the
qualifications, performance and independence of our independent registered public accounting firm. The E&A
Committee acts on behalf of the Board in monitoring and overseeing the performance of Corporate Audit and in
reviewing certain communications with banking regulators. The E&A Committee has direct responsibility for the
appointment, compensation, retention, evaluation and oversight of the work of our independent registered public
accounting firm, including sole authority for the establishment of pre-approval policies and procedures for all audit
engagements and any non-audit engagements.
The Management Risk and Capital Committee, or MRAC, is the senior management decision-making body for
risk and capital issues, and is responsible for ensuring that our strategy, budget, risk appetite and capital adequacy
are properly aligned. The main responsibilities of MRAC are as follows:
• The review of our risk appetite framework and top-level risk limits and policies;
• The monitoring and assessment of our capital adequacy based on regulatory requirements and internal
policies; and
• The review of business performance in the context of risk and capital allocation.
The committee is co-chaired by our CRO and Chief Financial Officer. In addition, MRAC regularly presents a
report to the Board’s RCC outlining developments in the risk environment and performance trends in our key
business areas.
The Technology and Operational Risk Committee, or TORC, oversees and assesses the effectiveness of
corporate-wide technology and operational risk management programs, to manage and control technology and
operational risk consistently across the organization. The TORC may meet jointly with the MRAC periodically to
review or approve common areas of interest such as risk frameworks and policies. The TORC is co-chaired by our
CRO and Head of Global Operations, Technology and Product Development.
Risk Committees
Our Asset, Liability and Capital Committee, or ALCCO, is a risk committee that oversees the management of
our consolidated statement of condition, the management of our global liquidity and our interest-rate risk positions,
our regulatory and economic capital, the determination of the framework for capital allocation and strategies for
capital structure, and issuances of debt and equity securities. ALCCO’s roles and responsibilities are designed to
work complementary to, and be coordinated with, the MRAC which approves State Street’s balance sheet strategy
and related activities. ALCCO is chaired by our Treasurer and directly reports into the MRAC.
The following other risk committees have focused responsibilities for oversight of specific areas of risk
management:
• The Credit Risk and Policy Committee is responsible for cross-business unit review and oversight of credit
and counterparty risk;
The Country Risk Committee oversees the identification, assessment, monitoring, reporting and mitigation,
where necessary, of country risks;
The Trading and Markets Risk Committee, or TMRC, reviews the effectiveness of, and approves, the
market risk framework at least annually; it is the most senior oversight and decision making committee for
risk management within State Street Global Markets and the trading-and-clearing business of State Street
Global Exchange;
The Securities Finance Risk Management Committee provides oversight of the risks in our securities
finance business, including collateral and margin policies;
The Model Assessment Committee, or MAC, provides recommendations concerning technical modeling
issues and validates financial models utilized by our business units;
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MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Continued)
The Basel / ICAAP Oversight Committee, or BIOC, reviews and assesses compliance with regulatory
capital rules, and oversees initiatives related to the development and enhancement of relevant reporting
capabilities;
The CCAR Steering Committee provides primary supervision of the stress tests performed in conformity
with CCAR and the Dodd-Frank Wall Street Reform and Consumer Protection Act, or Dodd-Frank Act, and
is responsible for the overall management, review, and approval of all material assumptions,
methodologies, and results of each stress scenario;
The Recovery and Resolution Planning Committee oversees the development of recovery and resolution
plans as required by regulation;
The Fiduciary Review Committee reviews and assesses the risk management programs of those units in
which State Street serves in a fiduciary capacity;
The Operational Risk Committee provides cross-business oversight of operational risk to identify, measure,
manage and control operational risk in an effective and consistent manner across State Street; and
The Technology Risk Governance Committee provides regular reporting to the TORC and escalate
technology risk issues to the TORC, as appropriate.
Credit Risk Management
Core Policies and Principles
Credit and counterparty risk is defined as the risk of financial loss if a counterparty, borrower or obligor,
referred to collectively as counterparties, is either unable or unwilling to repay borrowings or settle a transaction in
accordance with underlying contractual terms. We assume credit and counterparty risk in our traditional non-trading
lending activities (such as loans and contingent commitments), in our investment securities portfolio (where
recourse to a counterparty exists), and in our direct or indemnified agency trading activities (such as securities
lending and foreign exchange). We also assume credit and counterparty risk in our day-to-day treasury and
securities and other settlement operations, in the form of deposit placements and other cash balances with central
banks or private sector institutions.
We distinguish between three kinds of credit and counterparty risk:
Default risk is the risk that a counterparty fails to meet its contractual payment obligations;
Country risk is the risk that we may suffer a loss, in any given country, due to any of the following reasons:
deterioration of economic conditions, political and social upheaval, nationalization and appropriation of
assets, government repudiation of indebtedness, exchange controls, and disruptive currency depreciation
or devaluation; and
Settlement risk is the risk that the settlement of clearance of transactions will fail, and arises whenever the
exchange of cash, securities and/or other assets is not simultaneous.
The extension of credit and the acceptance of counterparty risk are governed by corporate guidelines based
on a counterparty's risk profile, the markets served, counterparty and country concentrations, and regulatory
compliance. These guidelines include reference to a number of core policies and principles:
All credit risks to each counterparty, or group of counterparties, are measured and consolidated in
accordance with a ‘one obligor’ principle that aggregates all risks types across all business areas;
We seek to avoid or minimize undue concentrations of risk; counterparty (or groups of counterparties),
industry, country and product-specific concentrations of risk are subject to frequent review and approval in
accordance with State Street’s prevailing risk appetite;
All extensions of credit, or material changes to extensions of credit (such as its tenor, collateral structure or
covenants), are approved by ERM in conformity with assigned credit-approval authorities;
We assign credit approval authorities to individuals according to their qualifications, experience and training,
and review these authorities periodically; our largest exposures require approval by the Credit Committee;
for certain small and low-risk extensions of credit, for certain counterparty types, approval authority has
been granted to individuals outside of ERM;
The creditworthiness of all counterparties is determined by way of a detailed risk assessment, including the
use of comprehensive internal rating methodologies; all rating methodologies in use at State Street are
authorized for use within the advanced internal-ratings-based approach under applicable Basel
requirements; and
A review of the creditworthiness of all counterparties, as well as all extensions of credit, is undertaken at
least annually; the nature and extent of these reviews is determined by the size, nature and tenor of the
extensions of credit, as well as the creditworthiness of the counterparty.
92
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Continued)
All core policies and principles are subject to annual review, as an integral part of State Street’s periodic
assessment of its risk appetite.
Governance
The Credit Risk Management group is an integral part of ERM and is responsible for assessing, approving and
monitoring all types of credit risk across State Street. It has responsibility for all requisite policies and procedures,
and for State Street’s advanced internal credit-rating systems and methodologies. Additionally, Credit Risk
Management, in conjunction with the appropriate business units, establishes appropriate measurements and limits
to control the amount of credit risk accepted across its various business activities, both at a portfolio level and for
each individual obligor, or group of obligors.
A number of local committees within State Street are responsible for overseeing credit risk. The Credit Risk
and Policy Committee is responsible for approving policies and procedures, determining risk appetite and for routine
monitoring of State Street’s credit-risk portfolio. The Credit Committee has primary responsibility for the largest and
higher-risk extensions of credit to individual obligors, or groups of obligors. Both committees provide periodic
updates to the MRAC and the RCC.
Credit Limits
Central to our philosophy for managing credit risk are the approval and imposition of credit limits, which reflect
our credit risk appetite relative to the borrower or counterparty, its domicile, the nature of the risk and the country of
risk. The extent of our ongoing analysis, approval and monitoring of credit limits and exposure is determined by the
type of borrower or counterparty, its prevailing credit-worthiness and the nature of the risk. These processes are
outlined in formal guidelines.
Credit limits on a singular and aggregated basis are regularly reassessed and periodically revised based on
prevailing and anticipated market conditions, changes in counterparty, industry or country-specific characteristics
and outlook and State Street's risk appetite.
Global Counterparty Review
State Street’s Global Counterparty Review, or GCR, team provides separate oversight of our counterparty
credit risk management practices and provides senior management, as well as our auditors and regulators, with
reporting needed to monitor and assess the effectiveness of prevailing practices. Specific activities include, but are
not limited to:
• Separate and objective assessments of our credit and counterparty exposures to determine the nature and
extent of risk undertaken by the business units;
• Periodic business unit reviews, focusing on the assessment of credit analysis, policy compliance, prudent
transaction structure and underwriting standards, administration and documentation, risk rating integrity,
and relevant trends;
Identification and monitoring of developing trends to minimize risk of loss and protect capital;
•
• Maintenance of risk-rating system integrity and assurance of counterparty risk-rating transparency through
testing of ratings;
• Providing resources for specialized risk assessments (on an as-needed basis);
• Opining on the adequacy of the allowance for loan losses; and
• Serving as liaison with auditors and banking regulators with respect to risk rating, reporting and
measurement.
Ongoing active monitoring and management of credit risk is an integral part of our credit risk management
activities. A robust surveillance and credit review process is followed by both our business units and by ERM.
Credit Risk Mitigation
Techniques used to mitigate counterparty credit risk include collateralizing our exposures, securing our
exposures with a third-party guarantee, exercising our legal right of offset, or buying some form of credit insurance
to offset our risk. We primarily accept cash, equities, and government securities as collateral.
Although we do not provide credit risk protection or trade in credit default swaps, we have purchased a small
number of credit default swaps for hedging purposes. Due to the immaterial notional amount of these swaps, we do
not formally recognize the benefits of these credit derivatives.
93
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Continued)
Reserve for Credit Losses
We maintain an allowance for loan losses to support our on-balance sheet credit exposures. We also maintain
a reserve for unfunded commitments and letters of credit to support our off-balance credit exposure. The two
components together represent the reserve for credit losses. Review and evaluation of the adequacy of the reserve
for credit losses is ongoing throughout the year, but occurs at least quarterly, and is based, among other factors, on
our evaluation of the level of risk in the portfolio, the volume of adversely classified loans, previous loss experience,
current trends, and expected economic conditions and their effect on our counterparties. Additional information
about the allowance for loan losses is provided in note 5 to the consolidated financial statements included under
Item 8 of this Form 10-K.
Liquidity Risk Management
Liquidity risk is defined as the potential that our financial condition or overall viability could be adversely
affected by an actual or perceived inability to meet cash and collateral obligations. The goal of liquidity risk
management is to maintain, even in the event of stress, our ability to meet our cash and collateral obligations.
Liquidity is managed to meet our financial obligations in a timely and cost-effective manner, as well as maintain
sufficient flexibility to fund strategic corporate initiatives as they arise. Our effective management of liquidity
involves the assessment of the potential mismatch between the future cash needs of our clients and our available
sources of cash under both normal and adverse economic and business conditions.
We generally manage our liquidity on a global, consolidated basis. We also manage liquidity on a stand-alone
basis at the parent company, as well as at certain branches and subsidiaries of State Street Bank. State Street
Bank generally has access to markets and funding sources limited to banks, such as the federal funds market and
the Federal Reserve's discount window. Our parent company is managed to a more conservative liquidity profile,
reflecting narrower market access. Our parent company typically holds enough cash, primarily in the form of
interest-bearing deposits with its banking subsidiaries, to meet its current debt maturities and cash needs, as well
as those projected over the next one-year period. As of December 31, 2013, the value of the parent company's net
liquid assets totaled $4.42 billion, compared with $3.80 billion as of December 31, 2012. Our parent company's
liquid assets generally consist of overnight placements with its banking subsidiaries.
Based on our level of consolidated liquid assets and our ability to access the capital markets for additional
funding when necessary, including our ability to issue debt and equity securities under our current universal shelf
registration, management considers State Street's overall liquidity as of December 31, 2013 to be sufficient to meet
its current commitments and business needs, including accommodating the transaction and cash management
needs of its clients.
Governance
Global Treasury is responsible for our management of liquidity. This includes the day-to-day management of
our global liquidity position, the development and monitoring of early warning indicators, key liquidity risk metrics,
the creation and execution of stress tests, the evaluation and implementation of regulatory requirements, the
maintenance and execution of our liquidity guidelines and contingency funding plan, and routine management
reporting to ALCCO and the RCC.
Global Treasury Risk Management, part of ERM, provides separate oversight over the identification,
communication and management of Global Treasury’s risks in support of our business strategy. Global Treasury
Risk Management reports to the CRO. Global Treasury Risk Management’s responsibilities relative to liquidity risk
management include the development and review of policies and guidelines; the monitoring of limits related to
adherence to the liquidity risk guidelines and associated reporting. Specific committees responsible for liquidity risk
oversight and governance include ALCCO and the RCC.
94
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Continued)
Liquidity Framework
Our liquidity framework contemplates areas of potential risk based on our activities, size, and other appropriate
risk-related factors. In managing liquidity risk, we employ limits, maintain established metrics and early warning
indicators and perform routine stress testing to identify potential liquidity needs. This process involves the evaluation
of a combination of internal and external scenarios which assist us in measuring our liquidity position and in
identifying potential increases in cash needs or decreases in available sources of cash, as well as the potential
impairment of our ability to access the global capital markets.
We manage liquidity according to several principles that are equally important to our overall liquidity risk
management framework:
• Structural liquidity management addresses liquidity by monitoring and directing the composition of our
consolidated statement of condition. Structural liquidity is measured by metrics such as the percentage of
total wholesale funds to consolidated total assets, and the percentage of non-government investment
securities to client deposits. In addition, on a regular basis and as described further below, our structural
liquidity is evaluated under various stress scenarios.
• Tactical liquidity management addresses our day-to-day funding requirements and is largely driven by
changes in our primary source of funding, which is client deposits. Fluctuations in client deposits may be
supplemented with short-term borrowings, which generally include commercial paper and certificates of
deposit.
• Stress testing and contingent funding planning are longer-term strategic liquidity risk management
practices. Regular and ad-hoc liquidity stress testing are performed under various unlikely but plausible
scenarios at the parent company and at significant subsidiaries, including State Street Bank. These tests
contemplate severe market and State Street-specific events under various time horizons and severities.
Tests contemplate the impact of material changes in key funding sources, credit ratings, additional collateral
requirements, contingent uses of funding, systemic shocks to the financial markets, and operational failures
based on market and State Street-specific assumptions. The stress tests evaluate the required level of
funding versus available sources in an adverse environment. As stress testing contemplates potential
forward-looking scenarios, results also serve as a trigger to activate specific liquidity stress levels and
contingent funding actions.
Contingency Funding Plans, or “CFPs”, are designed to assist senior management with decision-making
associated with any contingency funding response to a crisis scenario. The CFPs define roles, responsibilities and
management actions to be undertaken in the event of deterioration of our liquidity profile caused by either a State
Street-specific event or a broader disruption in the capital markets. Specific actions are linked to the level of stress
indicated by these measures or by management judgment of market conditions.
Liquidity Risk Metrics
In managing our liquidity, we employ early warning indicators and metrics. Early warning indicators are
intended to detect situations which may result in a liquidity stress, including changes in our common stock price and
the spread on our long-term debt. Additional metrics that are critical to the management of our consolidated
statement of condition and monitored as part of routine liquidity management include measures of our fungible cash
position, purchased wholesale funds, unencumbered liquid assets, deposits, and the total investment securities and
loans as a percentage of total client deposits.
Asset Liquidity
Central to the management of our liquidity is asset liquidity, which generally consists of unencumbered highly liquid
securities, cash and cash equivalents carried in our consolidated statement of condition. We restrict the eligibility of
securities for asset liquidity to U.S. Government and federal agency securities (including mortgage-backed securities) and
selected non-U.S. Government and supranational securities, which generally are more liquid than other types of assets.
The following table presents the components of our asset liquidity balance as of the dates and for the years indicated:
95
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Continued)
(In millions)
Asset Liquidity:
Highly liquid short-term investments(1)
Investment securities
Total
Average Asset Liquidity:
Highly liquid short-term investments(1)
Investment securities
Total
December 31,
2013
December 31,
2012
$
$
$
$
64,257
$
22,321
86,578
$
28,946
$
22,032
50,978
$
50,763
27,429
78,192
26,823
28,031
54,854
(1) Composed of interest-bearing deposits with banks.
Due to the continued elevated level of client deposits as of December 31, 2013, we maintained cash balances
in excess of regulatory requirements of approximately $51.03 billion at the Federal Reserve, the ECB and other
non-U.S. central banks, compared to $41.11 billion as of December 31, 2012.
Liquid securities included in our asset liquidity include securities pledged without corresponding advances from
the Federal Reserve Bank of Boston, or FRB, the Federal Home Loan Bank of Boston, or FHLB, and other non-U.S.
central banks. State Street Bank is a member of the FHLB. This membership allows for advances of liquidity in
varying terms against high-quality collateral, which helps facilitate asset-and-liability management of depository
institutions.
Access to primary, intra-day and contingent liquidity provided by these utilities is an important source of
contingent liquidity with utilization subject to underlying conditions. As of December 31, 2013 and December 31,
2012, State Street Bank had no outstanding primary credit borrowings from the FRB discount window or any other
central bank facility, and as of the same dates, no FHLB advances were outstanding.
In addition to the securities included in our asset liquidity, we have significant amounts of other high-quality
investment securities, corporate securities and loans. The aggregate fair value of those assets was $66.16 billion
as of December 31, 2013, compared to $65.70 billion as of December 31, 2012. These securities are available
sources of liquidity, although not as rapidly deployed as those included in our asset liquidity.
Uses of Liquidity
Significant uses of our liquidity could result from the following: withdrawals of unsecured client deposits; draw-
downs of unfunded commitments to extend credit or to purchase securities, generally provided through lines of
credit; and short-duration advance facilities. Such circumstances would generally arise under stress conditions
including deterioration in credit ratings. We had unfunded commitments to extend credit with gross contractual
amounts totaling $21.30 billion and $17.86 billion as of December 31, 2013 and 2012, respectively. These amounts
do not reflect the value of any collateral. Approximately 75% of our unfunded commitments to extend credit expire
within one year from the date of issuance. Since many of our commitments are expected to expire or renew without
being drawn upon, the gross contractual amounts do not necessarily represent our future cash requirements.
Funding
Deposits:
Our Investment Servicing line of business provides products and services including custody, accounting,
administration, daily pricing, foreign exchange services, cash management, financial asset management, securities
lending and investment advisory services. As a provider of these products and services, we generate client
deposits, which have generally provided a stable, low-cost source of funds. As a global custodian, clients place
deposits with State Street entities in various currencies. These client deposits are invested in a combination of
investment securities and short-duration financial instruments whose mix is determined by the characteristics of the
deposits.
We typically experience higher client deposit inflows toward the end of the quarter or the end of the year. As a
result, average client deposit balances are deemed to be more meaningful than period-end balances. The following
table presents client deposit balances as of the dates and for the years indicated:
96
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Continued)
(In millions)
Client deposits(1)
December 31,
Average Balance
Year Ended December 31,
2013
2012
2013
2012
$
182,268
$
150,617
$
143,043
$
127,658
(1) Balance as of December 31, 2012 excluded term wholesale certificates of deposit, or CDs, of $13.56 billion; average balances for the years
ended December 31, 2013 and December 31, 2012 excluded average CDs of $2.50 billion and $7.25 billion, respectively.
Short-Term Funding:
In managing our liquidity, from time to time we utilize short-term funding, including term wholesale certificates
of deposit, or CDs, corporate commercial paper and other borrowed funds, generally with maturities of one year or
less. As described above, usage is evaluated as part of our liquidity framework. As of December 31, 2013, no CDs
were outstanding, compared to $13.56 billion as of December 31, 2012, as client deposits remained stable. Our
corporate commercial paper program, under which we can issue up to $3 billion of commercial paper with original
maturities of up to 270 days from the date of issuance, had $1.82 billion of commercial paper outstanding as of
December 31, 2013, compared to $2.32 billion as of December 31, 2012.
Our on-balance sheet liquid assets are also an integral component of our liquidity management strategy.
These assets provide liquidity through maturities of the assets, but more importantly, they provide us with the ability
to raise funds by pledging the securities as collateral for borrowings or through outright sales. In addition, our
access to the global capital markets gives us the ability to source incremental funding at reasonable rates of interest
from wholesale investors. As discussed earlier under “Asset Liquidity,” State Street Bank's membership in the
FHLB allows for advances of liquidity in varying terms against high-quality collateral.
Short-term secured funding also comes in the form of securities lent or sold under agreements to repurchase.
These transactions are short-term in nature, generally overnight, and are collateralized by high-quality investment
securities. The balances associated with this activity are generally stable, as they represent a collateralized cash
investment option for our investment servicing clients. These balances were $7.95 billion and $8.01 billion as of
December 31, 2013 and December 31, 2012, respectively.
State Street Bank currently maintains a line of credit with a financial institution of CAD $800 million, or
approximately $753 million as of December 31, 2013, to support its Canadian securities processing operations. The
line of credit has no stated termination date and is cancelable by either party with prior notice. As of December 31,
2013, there was no balance outstanding on this line of credit.
Long-Term Funding:
As of December 31, 2013, State Street Bank had Board authority to issue unsecured senior debt securities
from time to time, provided that the aggregate principal amount of such unsecured senior debt outstanding at any
one time does not exceed $5 billion. As of December 31, 2013, $4.1 billion was available for issuance pursuant to
this authority. As of December 31, 2013, State Street Bank had Board authority to issue up to $1.5 billion of
subordinated debt, incremental to subordinated debt outstanding as of the same date. As of December 31, 2013,
$500 million was available for issuance pursuant to this authority. Additional information about debt securities
issued by State Street Bank is provided in note 10 to the consolidated financial statements included under Item 8 of
this Form 10-K.
We maintain an effective universal shelf registration that allows for the public offering and sale of debt
securities, capital securities, common stock, depositary shares and preferred stock, and warrants to purchase such
securities, including any shares into which the preferred stock and depositary shares may be convertible, or any
combination thereof. We have issued in the past, and we may issue in the future, securities pursuant to our shelf
registration. The issuance of debt or equity securities will depend on future market conditions, funding needs and
other factors. Additional information about debt and equity securities issued pursuant to this shelf registration is
provided in notes 10 and 13 to the consolidated financial statements included under Item 8 of this Form 10-K.
Agency Credit Ratings
Our ability to maintain consistent access to liquidity is fostered by the maintenance of high investment-grade
ratings as measured by the major independent credit rating agencies. Factors essential to maintaining high credit
ratings include diverse and stable core earnings; relative market position, strong risk management; strong capital
ratios; diverse liquidity sources, including the global capital markets and client deposits; strong liquidity monitoring
procedures; and current or future regulatory developments. High ratings minimize borrowing costs and enhance
97
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Continued)
our liquidity by providing assurance for unsecured funding and depositors, increasing the potential market for our
debt and improving our ability to offer products, serve markets, and engage in transactions in which clients value
high credit ratings. A downgrade or reduction of our credit ratings could have a material adverse effect on our
liquidity by restricting our ability to access the capital markets, increasing the related cost of funds, causing the
sudden and large-scale withdrawal of unsecured deposits by our clients, leading to draw-downs of unfunded
commitments to extend credit or triggering requirements under securities purchase commitments, or require
additional collateral or force terminations of certain trading derivative contracts.
A majority of our derivative contracts have been entered into under bilateral agreements with counterparties
who may require us to post collateral or terminate the transactions based on changes in our credit ratings. We
assess the impact of these arrangements by determining the collateral or termination payments that would be
required assuming a downgrade by all rating agencies. The table below presents the additional collateral or
termination payments related to our net derivative liabilities under these arrangements that could have been called
as of the dates indicated by counterparties in the event of a one-notch and two-notch downgrade in our credit
ratings. Other funding sources, such as secured financing transactions and other margin requirements, for which
there are no explicit triggers, could also be adversely affected.
(In millions)
December 31,
2013
December 31,
2012
Additional collateral or termination payments for a one- or two-notch downgrade
$
7
$
13
The following table presents information about State Street's and State Street Bank's credit ratings as of
February 21, 2014:
State Street:
Short-term commercial paper
Senior debt
Subordinated debt
Trust preferred capital securities
Preferred stock
Outlook
State Street Bank:
Short-term deposits
Short-term letters of credit
Long-term deposits
Long-term letters of credit
Senior debt
Long-term counterparty/issuer
Subordinated debt
Financial strength
Outlook
Proposed Liquidity Framework
Standard &
Poor’s
Moody’s
Investors
Service
A-1
A+
A
BBB+
BBB+
Negative
A-1+
-
AA-
-
AA-
AA-
A+
-
P-1
A1
A2
A3
Baa2
Stable
P-1
P-1
Aa3
Aa3
Aa3
Aa3
A1
B-
Fitch
F1+
A+
A
BBB
BBB-
Positive
F1+
-
AA-
-
A+
A+
A
-
Dominion
Bond Rating
Service
R1 (Middle)
AA (Low)
A (High)
A (High)
A (Low)
Stable
R-1 (High)
-
AA
-
AA
-
AA (Low)
-
Stable
Stable
Positive
Stable
In October 2013, U.S. banking regulators issued a Notice of Proposed Rulemaking, or NPR, intended to
implement the Basel Committee's Liquidity Coverage Ratio, or LCR, in the U.S. The LCR is intended to promote the
short-term resilience of the liquidity risk profile of internationally active banking organizations, improve the banking
industry's ability to absorb shocks arising from financial and economic stress, and improve the measurement and
management of liquidity risk. The proposed LCR would require a covered banking organization to maintain an
amount of high-quality liquid assets, or HQLA, equal to or greater than 100% of the banking organization’s total net
cash outflows over a 30-calendar-day period of significant liquidity stress, as defined. The October 2013 NPR
would be phased in beginning on January 1, 2015 at 80% with full implementation by January 1, 2017. As an
internationally active banking organization, we expect to be subject to the LCR standard in the U.S., as well as in
other jurisdictions in which we operate.
98
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Continued)
The NPR is generally consistent with the Basel Committee’s LCR. However, it includes certain more stringent
requirements, including an accelerated implementation time line and modifications to the definition of high-quality
liquid assets and expected outflow assumptions. We continue to analyze the proposed rules and analyze their
impact as well as develop strategies for compliance. The principles of the LCR are consistent with our liquidity
management framework; however, the specific calibrations of various elements within the final LCR rule, such as
the eligibility of assets as HQLA, operational deposit requirements and net outflow requirements could have a
material effect on our liquidity, funding and business activities, including the management and composition of our
investment securities portfolio and our ability to extend committed contingent credit facilities to our clients.
In January 2014, the Basel Committee released a revised proposal with respect to the Net Stable Funding
Ratio, or NSFR, which will establish a one-year liquidity standard representing the proportion of long-term assets
funded by long-term stable funding, scheduled for global implementation in 2018. The revised NSFR has made
some favorable changes regarding the treatment of operationally linked deposits and a reduction in the funding
required for certain securities. However, we continue to review the specifics of the Basel Committee's release and
will be evaluating the U.S. implementation of this standard to analyze the impact and develop strategies for
compliance. U.S. banking regulators have not yet issued a proposal to implement the NSFR.
Contractual Cash Obligations and Other Commitments
The following table presents our long-term contractual cash obligations, in total and by period due as of
December 31, 2013. These obligations were recorded in our consolidated statement of condition as of that date,
except for operating leases and the interest portions of long-term debt and capital leases.
CONTRACTUAL CASH OBLIGATIONS
As of December 31, 2013
(In millions)
Long-term debt(1)
Operating leases
Capital lease obligations
Total contractual cash obligations
PAYMENTS DUE BY PERIOD
Total
Less than 1
year
1-3
years
4-5
years
Over 5
years
$
$
10,630
$
1,015
$
2,979
$
2,260
$
4,376
923
1,051
208
99
286
185
209
169
220
598
12,604
$
1,322
$
3,450
$
2,638
$
5,194
(1) Long-term debt excludes capital lease obligations (presented as a separate line item) and the effect of interest-rate swaps. Interest payments
were calculated at the stated rate with the exception of floating-rate debt, for which payments were calculated using the indexed rate in effect
as of December 31, 2013.
The table above does not include obligations which will be settled in cash, primarily in less than one year, such
as client deposits, federal funds purchased, securities sold under repurchase agreements and other short-term
borrowings. Additional information about deposits, federal funds purchased, securities sold under repurchase
agreements and other short-term borrowings is provided in notes 8 and 9 to the consolidated financial statements
included under Item 8 of this Form 10-K.
The table does not include obligations related to derivative instruments because the derivative-related amounts
recorded in our consolidated statement of condition as of December 31, 2013 did not represent the amounts that
may ultimately be paid under the contracts upon settlement. Additional information about our derivative instruments
is provided in note 16 to the consolidated financial statements included under Item 8 of this Form 10-K. We have
obligations under pension and other post-retirement benefit plans, more fully described in note 19 to the
consolidated financial statements included under Item 8 of this Form 10-K, which are not included in the above
table.
Additional information about contractual cash obligations related to long-term debt and operating and capital
leases is provided in notes 10 and 20 to the consolidated financial statements included under Item 8 of this Form
10-K. Our consolidated statement of cash flows, also included under Item 8 of this Form 10-K, provides additional
liquidity information.
The following table presents our commitments, other than the contractual cash obligations presented above, in
total and by duration as of December 31, 2013. These commitments were not recorded in our consolidated
statement of condition as of that date.
99
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Continued)
OTHER COMMERCIAL COMMITMENTS
As of December 31, 2013
(In millions)
Indemnified securities financing
Unfunded commitments to extend credit
Asset purchase agreements
Standby letters of credit
Purchase obligations(2)
Total commercial commitments
DURATION OF COMMITMENT
Total
amounts
committed(1)
Less than
1 year
1-3
years
4-5
years
Over 5
years
$
320,078
$ 320,078
$
— $
— $
21,296
15,981
4,685
4,512
361
1,892
1,651
82
2,517
2,296
2,006
102
2,449
497
855
44
$
350,932
$ 339,684
$
6,921
$
3,845
$
—
349
—
—
133
482
(1) Total amounts committed reflect participations to independent third parties, if any.
(2) Amounts represent obligations pursuant to legally binding agreements, where we have agreed to purchase products or services with a specific
minimum quantity defined at a fixed, minimum or variable price over a specified period of time.
Additional information about the commitments presented in the table above, except for purchase obligations, is
provided in note 11 to the consolidated financial statements included under Item 8 of this Form 10-K.
Operational Risk Management
We define operational risk as the risk of loss resulting from inadequate or failed internal processes and
systems, human error, or from external events. At State Street, this definition encompasses legal risk and fiduciary
risk. We define legal risk as the risk of loss resulting from failure to comply with laws and contractual obligations as
well as prudent ethical standards, in addition to exposure to litigation from all aspects of our activities. Fiduciary risk
arises if, in acting on behalf of our clients, we fail to properly exercise discretion or we do not properly monitor or
control the exercise of discretion by a third party.
In the conduct of our investment servicing and investment management activities, we assume operational risk.
The products and services we provide to our clients, such as custody; product- and participant-level accounting;
daily pricing and administration; master trust and master custody; record-keeping; cash management; foreign
exchange, and the management of financial assets using passive and active strategies, can result in execution risk,
business practice risk, fiduciary risk and other types of operational risk. Because operational risk is process-
oriented, compared to other risks, for example credit risk and market risk, which are transaction-oriented, our ability
to influence and manage risk-taking rests at the process level, and requires a broad set of process controls.
Whereas operational risk represents the potential, an operational risk event is the actual occurrence of the risk.
An operational risk event that gives rise to a direct financial impact is referred to as an operational risk loss or gain.
If there is no financial impact, the event is termed a “near-miss.”
Framework
We have developed a comprehensive approach to operational risk management that is consistently applied
across State Street. This approach, referred to as our operational risk framework, takes a holistic view and
integrates the different methods and tools used to manage operational risk. The framework, which was developed
by our Operational Risk Management group and utilizes aspects of the framework of the Committee of Sponsoring
Organizations of the Treadway Commission, or the COSO framework, and industry/peer leading practices, is
designed to comply with Basel requirements. Our operational risk framework seeks to provide a number of
important benefits, including:
The alignment of business priorities with risk management objectives;
The active management of risk and the avoidance of surprises;
The clarification of responsibilities for the management of operational risk;
A common understanding of operational risk management and its supporting processes; and
The consistent application of policies and collection of data for risk management and measurement.
The framework is composed of two mutually reinforcing areas, foundational elements and framework
components. The three foundational elements used to consistently implement the framework across the diverse
groups within State Street are governance, documentation, and communication/awareness. The framework also
contains five components that provide overarching structure that integrates distinct risk programs into a continuous
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MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Continued)
process focused on managing and measuring operational risk in a coordinated and consistent manner. The
individual components and the objectives of each component are:
Identify, assess and measure risk - understand business unit strategy, risk profile and potential exposure;
Monitor risk - proactively monitor the business environment and associated operational risk exposure;
Evaluate and test controls - verify that internal controls are designed appropriately, are consistent with
corporate and regulatory standards, and are operating effectively;
Provide integrated management reporting - facilitate management's ability to maintain control, provide
oversight and escalate issues in a timely manner; and
Support risk-based decision making - make conscious risk-based decisions and understand the trade-off
between risk and return.
We maintain an operational risk policy, under which we endeavor to effectively manage operational risk in
order to support the achievement of our corporate objectives and fully comply with any related regulatory
requirements. We achieve these policy objectives through the implementation of our operational risk framework,
which describes the integrated set of processes and tools that assist us in managing and measuring operational
risk.
Our operational risk policy is approved annually by the RCC. The purpose of the policy is to set forth our
approach to the management of operational risk, to identify the responsibilities of individuals and committees
charged with overseeing the management of operational risk, and to provide a broad mandate that supports
implementation of the operational risk framework.
Guidelines
As part of our operational risk framework, we have also developed operational risk guidelines which document
in greater detail our practices and describe the key elements that should be present in a business unit's operational
risk management program. The purpose of the guidelines is to set forth and define key operational risk terms,
provide further detail on State Street's operational risk programs, and detail business unit responsibilities for the
identification, assessment, measurement, monitoring and reporting of operational risk. The guidelines support the
operational risk policy and document our practices used to manage and measure operational risk in an effective and
consistent manner across State Street.
We have a number of operational risk tools and processes in use that are corporate-wide in application or
coverage. These tools include a series of risk assessments and diagnostics, at the business unit level, across the
risk spectrum aimed at the identification of risks that occur routinely through normal operations, strategic risks that
may arise over a longer-term horizon and risks that occur very infrequently but which could materially affect State
Street. Further, these assessments allow management to define risk mitigation strategies and set action plans for
implementation.
State Street monitors the level and trend of its operational risk profile through a series of management reports,
risk assessment outcomes, risk mitigation initiative process and risk metrics. Together, this data allows us to
understand our risk profile, our progress on managing risk and changes in the environment both internal and
external which may affect our risk profile. In addition, we use scenario analysis to provide a forward-looking
assessment of large operational risk events that we may not have experienced yet.
In order for these tools and programs to meet framework objectives, we have implemented comprehensive
data collection practices and consistent risk classification standards that facilitate the analysis of risks across the
company. In addition, we have established standards for operational risk data for the purpose of maintaining data
repositories and systems that are controlled, accurate and available on a timely basis to support operational risk
management.
Governance
The roles and responsibilities with respect to the management of operational risk at State Street reflect the
following four key principles:
Board oversight of our operational risk framework is primarily the responsibility of the RCC, which annually
reviews and approves our operational risk policy and delegates day-to-day oversight to ERM;
Senior business unit managers are responsible for the management of operational risk;
ERM and other corporate groups provide separate oversight, validation and verification of the management
and measurement of operational risk; and
Executive management provides oversight through participation on risk-management committees and direct
management of risk in business activities.
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MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Continued)
The key responsibilities of these groups with respect to operational risk are described below:
The RCC approves our operational risk policy, delegates the implementation and monitoring of the
operational risk guidelines, framework and related programs to ERM, and reviews periodic reporting of
management information related to operational risk.
Senior business unit management is responsible for the direct management of operational risk arising from
our business activities, as well as operational risk oversight through representation on the MRAC, the
TORC and the local Operational Risk and Fiduciary Review Committees.
A number of corporate groups have responsibility for developing, implementing, and assessing various aspects
of State Street's operational risk framework:
ERM’s Corporate Operational Risk Management group is responsible for the development and
implementation of State Street's operational risk guidelines, framework and supporting tools. It also reviews
and analyzes operational key risk information, metrics and indicators at the business line and corporate
level for purposes of reporting and escalating operational risk events.
ERM’s Corporate Risk Analytics group develops and maintains operational risk capital estimation models
and regularly calculates State Street's operational risk regulatory capital requirements;
ERM’s Model Governance group separately validates the quantitative models used to measure operational
risk; and
Corporate Audit performs separate reviews of the application of operational risk management practices and
methodologies utilized across State Street.
Operational risk management at State Street includes both the corporate Operational Risk Management group,
led by the global head of Operational Risk, who is a member of the CRO’s executive management team, and a
distributed risk management infrastructure that is aligned with our business units. The risk management groups
aligned with the business units report directly to the CRO, and have operational risk managers who are responsible
for the implementation of the operational risk framework at the business unit level.
Market Risk Management
Market risk is defined by U.S. banking regulators as the risk of loss that could result from broad market
movements, such as changes in the general level of interest rates, credit spreads, foreign exchange rates or
commodity prices. State Street is exposed to market risk in both its trading and certain of its non-trading, or asset-
and-liability management, activities. The market risk management processes related to these activities, discussed
in further detail below, apply to both on- and off-balance sheet exposures.
In the conduct of our trading and investment activities, we assume market risk. The level of market risk that
we assume is a function of our overall risk appetite, business objectives and liquidity needs, our clients'
requirements and market volatility, and our execution against those factors. Market risk associated with our trading
activities is discussed below under “Trading Activities.” In addition, supplemental qualitative and quantitative
information with respect to market risk associated with our trading activities is provided on the “Investor Relations”
section of our website.
Market risk associated with our non-trading activities, which consists primarily of interest-rate risk, is discussed
under “Asset-and-Liability Management Activities.”
Trading Activities
We engage in trading activities primarily to support our clients' needs and to contribute to our overall corporate
earnings and liquidity. In connection with certain of these trading activities, we enter into a variety of derivative
financial instruments to support our clients' needs and to manage our interest-rate and currency risk. These
activities are generally intended to generate trading services revenue and to manage potential earnings volatility. In
addition, we provide services related to derivatives in our role as both a manager and a servicer of financial assets.
Our clients use derivatives to manage the financial risks associated with their investment goals and business
activities. With the growth of cross-border investing, our clients often enter into foreign exchange forward contracts
to convert currency for international investments and to manage the currency risk in their international investment
portfolios. As an active participant in the foreign exchange markets, we provide foreign exchange forward and
option contracts in support of these client needs, and also act as a dealer in the currency markets.
As part of our trading activities, we assume positions in the foreign exchange and interest-rate markets by
buying and selling cash instruments and entering into derivative instruments, including foreign exchange forward
contracts, foreign exchange and interest-rate options and interest-rate swaps, interest-rate forward contracts, and
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MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Continued)
interest-rate futures. As of December 31, 2013, the aggregate notional amount of these derivative contracts was
$1.13 trillion, of which $1.12 trillion was composed of foreign exchange forward, swap and spot contracts. In the
aggregate, we seek to match positions closely with the objective of minimizing related currency and interest-rate
risk. All foreign exchange contracts are valued daily at current market rates. Additional information about derivative
instruments entered into in connection with our trading activities is provided in note 16 to the consolidated financial
statements under Item 8 of this Form 10-K.
Governance
Our assumption of market risk in our trading activities is an integral part of our corporate risk appetite. The
Board reviews and oversees our management of market risk, including the approval of key market risk policies and
the receipt and review of regular market risk reporting, as well as periodic updates on selected market risk topics.
The Trading and Markets Risk Committee, or TMRC, oversees all market risk-taking activities across State
Street associated with trading. The TMRC is composed of members of ERM, our Global Markets business, our
Global Treasury group, our senior executives who manage our trading businesses, and other members of
management who possess specialized knowledge and expertise. Under authority delegated by the MRAC, the
TMRC is responsible for the formulation of guidelines, strategies and work flows with respect to the measurement,
monitoring and control of our trading market risk, and also approves market risk tolerance limits and dealing
authorities. The TMRC meets regularly to monitor the management of our trading market risk activities.
Our business units identify, actively manage and are responsible for the market risks inherent in their
businesses. A dedicated market risk management group within ERM, and other groups within ERM, work with
those business units to assist them in the identification, assessment, monitoring, management and control of market
risk, and assist business unit managers with their market risk management and measurement activities. ERM
provides an additional line of oversight, support and coordination designed to promote the consistent identification,
measurement and management of market risk across business units, separate from those business units' discrete
activities.
The ERM market risk management group is responsible for the management of corporate-wide market risk,
the monitoring of key market risks and the development and maintenance of market risk management policies,
guidelines, and standards aligned with our corporate risk appetite. This market risk management group also
establishes and approves market risk tolerance limits and dealing authorities based on, but not limited to, notional
amount measures, sensitivity measures, Value-at-Risk, or VaR, measures and stress measures. Such limits and
authorities are specified in our trading and market risk guidelines which govern our management of trading market
risk.
Our management of market risk associated with trading activities and our calculation of required regulatory
capital are based primarily on our internal VaR models and stress-testing analysis. As discussed in the “Value-at-
Risk” section below, VaR is measured daily by ERM.
Market risk exposure is established in relation to limits established within our risk appetite framework. These
limits define threshold levels for VaR- and stressed VaR-based measures and are applicable to all trading positions
subject to regulatory capital requirements.
Covered Positions
Our trading positions are subject to regulatory market risk capital requirements if they meet the regulatory
definition of a “covered position.” The identification of covered positions for inclusion in our market risk capital
framework is governed by our covered positions policy. This policy outlines the standards we use to determine
whether a trading position is a covered position.
Our covered positions consist primarily of those arising from the trading portfolios held by our Global Markets
business. These trading portfolios include products such as spot foreign exchange, foreign exchange forwards,
non-deliverable forwards, foreign exchange options, foreign exchange funding swaps, currency futures, financial
futures, and interest rate futures. Covered positions also arise from certain portfolios held by our Global Treasury
group. Any new activities are analyzed to determine if the positions arising from such new activities meet the
definition of a covered position and conform to our covered positions policy. This documented analysis, including
any decisions with respect to market risk treatments, must receive approval from the TMRC.
Value-at-Risk, Stress Testing and Stressed VaR
As noted above, we use a variety of risk measurement tools and methodologies, including VaR, which is an
estimate of potential loss for a given period within a stated statistical confidence interval. We use a risk
measurement methodology to measure trading-related VaR daily. We have adopted standards for measuring
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MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Continued)
trading-related VaR, and we maintain regulatory capital for market risk associated with our trading activities in
conformity with currently applicable bank regulatory market risk guidelines.
We utilize an internal VaR model to calculate our regulatory market risk capital requirements. We use a
historical simulation model to calculate daily VaR- and stressed VaR-based measures for our covered positions in
conformity with regulatory requirements that became effective beginning on January 1, 2013. Our VaR model seeks
to capture identified material risk factors associated with our covered positions, including risks arising from market
movements such as changes in foreign exchange rates, interest rates and option-implied volatilities.
We have adopted standards and guidelines to value our covered positions which govern our VaR- and stressed
VaR-based measures. Our regulatory VaR-based measure is calculated based on a one-tail, 99% confidence
interval and a ten-business-day holding period, using a historical observation period of two years. We also use the
same platform to calculate a one-tail, 99% confidence interval, one-business-day VaR for internal risk management
purposes. A 99% one-tail confidence interval implies that daily trading losses are not expected to exceed the
estimated VaR more than 1% of the time, or less than three business days out of a year.
Our market risk models, including our VaR model, are subject to change in connection with the governance,
validation and back-testing processes described below. These models can change as a result of changes in our
business activities, our historical experiences, market forces and events, regulations and regulatory interpretations
and other factors. In addition, the models are subject to continuing regulatory review and approval.
Value-at-Risk:
VaR measures are based on two years of historical price movements for instruments and related risk factors to
which we have exposure. The instruments in question are limited to foreign exchange spot, forward and options
contracts and interest-rate contracts, including futures and interest-rate swaps.
Our VaR methodology uses a historical simulation approach based on market-observed changes in foreign
exchange rates, U.S. and non-U.S. interest rates and implied volatilities, and incorporates the resulting
diversification benefits provided from the mix of our trading positions. Our VaR model incorporates around 5,000
risk factors and captures correlations among currency, interest rates, and other market rates.
Stress Testing and Stressed VaR:
We have a corporate-wide stress-testing program in place that incorporates an array of techniques to measure
the potential loss we could suffer in a hypothetical scenario of adverse economic and financial conditions. We also
monitor concentrations of risk such as concentration by branch, risk component, and currency pairs. We conduct
stress testing on a daily basis based on selected historical stress events that are relevant to our positions in order to
estimate the potential impact to our current portfolio should similar market conditions recur, and we also perform
stress testing as part of the Federal Reserve's CCAR process. Stress testing is conducted, analyzed and reported
at the corporate, trading desk, division and risk-factor level (for example, exchange risk, interest-rate risk and
volatility risk).
We calculate a stressed VaR-based measure using the same model we use to calculate VaR, but with model
inputs calibrated to historical data from a range of continuous twelve-month periods that reflect significant financial
stress. The sixty-day moving average of our stressed VaR-based measure was approximately $28 million for the
twelve months ended December 31, 2013, compared to a sixty-day moving average of approximately $27 million for
the twelve months ended September 30, 2013, approximately $19 million for the twelve months ended June 30,
2013, and approximately $16 million for the twelve months ended March 31, 2013. The increase in the sixty-day
moving average for the twelve months ended December 31, 2013 and September 30, 2013 compared to the twelve
months ended June 30, 2013 was associated with the model changes described below following the VaR and
stressed-VaR tables.
Stress-testing results and limits are actively monitored on a daily basis by ERM and reported to the TMRC.
Limit breaches are addressed by ERM risk managers in conjunction with the business units, escalated as
appropriate, and reviewed by the TMRC if material. In addition, we have established several action triggers that
prompt immediate review by management and the implementation of a remediation plan.
Validation and Back-Testing
We perform daily back-testing to assess the accuracy of our VaR-based model in estimating loss at the stated
confidence level. This back-testing involves the comparison of estimated VaR model outputs to actual profit-and-
loss, or P&L, outcomes observed from daily market movements. We back-test our VaR model using “clean” P&L,
which excludes non-trading revenue such as fees, commissions and net interest revenue, as well as estimated
revenue from intra-day trading. We experienced one back-testing exception on September 18, 2013. The trading
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MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Continued)
P&L that day exceeded the VaR based on the prior day’s closing positions, following larger-than-usual moves in
several emerging market currencies and U.S. interest rates. The moves occurred in reaction to the Federal
Reserve’s announcement that they would postpone the start of their withdrawal of monetary stimulus (tapering of
quantitative easing).
Our market risk models are governed by our model risk governance guidelines, in accordance with our model
risk governance policy, which outline the standards we use to assess the conceptual soundness and effectiveness
of our models. Our market risk models are subject to regular review and validation by our Model Validation group
within ERM and overseen by the MAC. The MAC, chaired by a senior executive in ERM, was established for the
purpose of providing recommendations on technical modeling issues to the corporate oversight committees. The
MAC includes members with expertise in modeling methodologies and has representation from the various
business units throughout State Street. Additional information is provided below under “Model Risk Management.”
Our model validation process also evaluates the integrity of our VaR models through the use of regular
outcome analysis. Such outcome analysis includes back-testing, which compares the VaR model's predictions to
actual outcomes using out-of-sample information. The Model Validation Group examined back-testing results for
the market risk regulatory capital model used for 2012. Consistent with regulatory guidance, the back-testing
compared “clean” P&L, defined above, with the one-day VaR produced by the model. The back-testing was
performed for a time period not used for model development. The number of occurrences where “clean” trading-
book P&L exceeded the one-day VaR was within our expected VaR tolerance level.
The following tables present VaR associated with our trading activities for covered positions held during the
year ended December 31, 2013, and as of December 31, 2013, September 30, 2013, June 30, 2013 and March 31,
2013, as measured by our VaR methodology. Comparative information for 2012 is not presented, as we did not
measure VaR for those periods under the regulatory requirements which were effective beginning on January 1,
2013.
VaR - COVERED PORTFOLIOS
(TEN-DAY VaR)
Year Ended December 31, 2013
As of
December 31,
2013
As of
September 30,
2013
(In thousands)
Foreign exchange
Average
Maximum
Minimum
VaR
VaR
$
6,386
$
22,835
$
1,626
$
5,463
$
11,549
Money market/Global Treasury
97
559
24
58
102
Total VaR
$
6,361
$
22,834
$
1,641
$
5,441
$
11,496
As of
June 30,
2013
VaR
As of
March 31,
2013
VaR
$
$
5,696
$
9,283
53
365
5,657
$
9,017
STRESSED VaR - COVERED
PORTFOLIOS
(TEN-DAY VaR)
(In thousands)
Foreign exchange
Year Ended December 31, 2013
As of
December 31,
2013
As of
September 30,
2013
Average
Maximum
Minimum
VaR
VaR
As of
June 30,
2013
VaR
As of
March 31,
2013
VaR
$ 22,907
$
47,531
$
4,933
$
30,338
$
32,905
$ 15,275
$
26,141
Money market/Global Treasury
291
1,075
56
280
290
186
900
Total Stressed VaR
$ 22,815
$
47,514
$
4,889
$
30,403
$
32,521
$ 15,157
$
25,673
The VaR-based measures presented above are primarily a reflection of the overall level of market volatility and
our appetite for trading market risk. Overall levels of volatility have been low both on an absolute basis and relative
to the historical information observed at the beginning of the period used for the calculations. Both the ten-day VaR-
based measures and the stressed VaR-based measures are based on historical changes observed during rolling
ten-day periods for the portfolios as of the close of business each day over the past one-year period.
The decrease in the VaR measure for foreign exchange as of December 31, 2013 compared to September 30,
2013 was the result of the advancing two-year window for historical price movements and related risk factors, which
as of December 31, 2013 no longer included the third and fourth quarters of 2011, when the financial markets
reacted to the Eurozone crisis and to the downgrade of the U.S. government’s credit rating by Standard & Poor’s.
The increase in the VaR and stressed-VaR measures for foreign exchange as of September 30, 2013
compared to June 30, 2013 resulted from the model changes described below, and not from any changes in the
overall composition of exposure within our portfolio of covered positions.
Beginning on July 1, 2013, we implemented two significant changes to our regulatory VaR and stressed-VaR
models. The net effect of the two changes resulted in an increase in our daily VaR-based measure and a more
significant increase in our stressed VaR-based measure, both calculated based on a 99% confidence interval. The
changes involved the introduction of off-shore yield curves for non-deliverable forward contracts in our portfolios of
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MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Continued)
covered positions and the use of absolute changes in place of relative or percentage changes for interest-rate risk
factors (both base curves and spread curves). We may in the future further modify and adjust our models and
methodologies used to calculate VaR, subject to regulatory review and approval, and these modifications and
adjustments may result in changes in in our VaR measures, some of which may be significant.
The following table presents VaR associated with our trading activities attributable to foreign exchange rates,
interest rates and volatility as of December 31, 2013, September 30, 2013, June 30, 2013 and March 31, 2013. The
totals of the VaR amounts attributable to foreign exchange rates, interest rates and volatility for each VaR
component exceeded the component VaR measures presented in the foregoing table as of each period-end,
primarily due to the benefits of diversification across risk types. Comparative information for 2012 is not presented,
as we did not measure VaR under the regulatory requirements which were effective beginning on January 1, 2013.
VaR - COVERED
PORTFOLIOS
(TEN-DAY VaR)
(In thousands)
By component:
Foreign
exchange/Global
Markets
Money market/
Global Treasury
As of December 31, 2013
As of September 30, 2013
As of June 30, 2013
As of March 31, 2013
Foreign
Exchange
Interest
Rate
Volatility
Foreign
Exchange
Interest
Rate
Volatility
Foreign
Exchange
Interest
Rate
Volatility
Foreign
Exchange
Interest
Rate
Volatility
$
3,492
$ 4,561
$
306
$
9,704
$ 3,194
$
454
$
5,531
$ 1,808
$
650
$
9,543
$ 2,265
$
492
Total VaR
$
3,457
$ 4,577
$
306
$
9,648
$ 3,175
$
454
$
5,483
$ 1,808
$
650
$
9,288
$ 2,263
$
46
52
—
49
72
—
50
33
—
376
33
—
492
Asset-and-Liability Management Activities
The primary objective of asset-and-liability management is to provide sustainable and growing net interest
revenue, or NIR, under varying economic environments, while protecting the economic value of the assets and
liabilities carried in our consolidated statement of condition from the adverse effects of changes in interest rates.
While many market factors affect the level of NIR and the economic value of our assets and liabilities, one of the
most significant factors is our exposure to movements in interest rates. Most of our NIR is earned from the
investment of client deposits generated by our businesses. We invest these client deposits in assets that conform
generally to the characteristics of our balance sheet liabilities, including the currency composition of our significant
non-U.S. dollar denominated client liabilities, but we manage our overall interest-rate risk position in the context of
current and anticipated market conditions and within internally-approved risk guidelines.
Our overall interest-rate risk position is maintained within a series of policies approved by the Board and
guidelines established and monitored by ALCCO. Our Global Treasury group has responsibility for managing our
day-to-day interest-rate risk. To effectively manage our consolidated statement of condition and related NIR, Global
Treasury has the authority to assume a limited amount of interest-rate risk based on market conditions and its views
about the direction of global interest rates over both short-term and long-term time horizons. Global Treasury
manages our exposure to changes in interest rates on a consolidated basis organized into three regional treasury
units, North America, Europe and Asia/Pacific, to reflect the growing, global nature of our exposures and to capture
the impact of changes in regional market environments on our total risk position.
The economic value of our consolidated statement of condition is a metric designed to estimate the fair value
of assets and liabilities which could be garnered if those assets and liabilities were sold today. The economic
values represent discounted cash flows from all financial instruments; therefore, changes in the yield curves, which
are used to discount the cash flows, affect the values of these instruments.
Our investment activities and our use of derivative financial instruments are the primary tools used in
managing interest-rate risk. We invest in financial instruments with currency, repricing, and maturity characteristics
we consider appropriate to manage our overall interest-rate risk position. In addition, we use certain derivative
instruments, primarily interest-rate swaps, to alter the interest-rate characteristics of specific balance sheet assets
or liabilities.
Additional information about our measurement of fair value and our use of derivatives is provided in notes 3
and 16, respectively, to the consolidated financial statements included under Item 8 of this Form 10-K.
Because no one individual measure can accurately assess all of our exposures to changes in interest rates,
we use several quantitative measures in our assessment of current and potential future exposures to changes in
interest rates and their impact on NIR and balance sheet values. NIR simulation is the primary tool used in our
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MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Continued)
evaluation of the potential range of possible NIR results that could occur under a variety of interest-rate
environments. We also use market valuation and duration analysis to assess changes in the economic value of
balance sheet assets and liabilities caused by assumed changes in interest rates.
To measure, monitor, and report on our interest-rate risk position, we use NIR simulation, or NIR-at-risk, and
economic value of equity, or EVE, sensitivity. NIR-at-risk measures the impact on NIR over the next twelve months
to immediate, or “rate shock,” and gradual, or “rate ramp,” changes in market interest rates. EVE sensitivity is a
total return view of interest-rate risk, which measures the impact on the present value of all NIR-related principal
and interest cash flows of an immediate change in interest rates, and is generally used in the context of economic
capital discussed under “Economic Capital” in “Financial Condition - Capital” in this Management's Discussion and
Analysis. Although NIR-at-risk and EVE sensitivity measure interest-rate risk over different time horizons, both
utilize consistent assumptions when modeling the positions currently held by State Street; however, NIR-at-risk also
incorporates future actions planned by management over the time horizons being modeled.
In calculating our NIR-at-risk, we start with a base amount of NIR that is projected over the next twelve
months, assuming our forecast yield curve over the period. Our existing balance sheet assets and liabilities are
adjusted by the amount and timing of transactions that are forecast to occur over the next twelve months. That yield
curve is then “shocked,” or moved immediately, +/-100 basis points in a parallel fashion, or at all points along the
yield curve. Two new twelve-month NIR projections are then developed using the same balance sheet and forecast
transactions, but with the new yield curves, and compared to the base scenario. We also perform the calculations
using interest-rate ramps, which are +/-100-basis-point changes in interest rates that are assumed to occur
gradually over the next twelve months, rather than immediately as we do with interest-rate shocks.
EVE is based on the change in the present value of all NIR-related principal and interest cash flows for
changes in market rates of interest. The present value of existing cash flows with a then-current yield curve serves
as the base case. We then apply an immediate parallel shock to that yield curve of ±200 basis points and
recalculate the cash flows and related present values. A large shock is used to better capture the embedded option
risk in our mortgage-backed securities that results from borrowers' prepayment opportunities.
Key assumptions used in the models, described in more detail below, along with changes in market conditions,
are inherently uncertain. Actual results necessarily differ from model results as market conditions differ from
assumptions. As such, management performs back-testing, stress testing, and model integrity analyses to validate
that the modeled results produce predictive NIR-at-risk and EVE sensitivity estimates which can be used in our
management of interest-rate risk. Primary factors affecting the actual results are changes in our balance sheet size
and mix; the timing, magnitude and frequency of changes in interest rates, including the slope and the relationship
between the interest-rate level of U.S. dollar and non-U.S. dollar yield curves; changes in market conditions; and
management actions taken in response to the preceding conditions.
Both NIR-at-risk and EVE sensitivity results are managed against ALCCO-approved limits and guidelines and
are monitored regularly, along with other relevant simulations, scenario analyses and stress tests, by both Global
Treasury and ALCCO. Our ALCCO-approved guidelines are, we believe, in line with industry standards and are
periodically examined by the Federal Reserve.
Based on our current balance sheet composition where fixed-rate assets exceed fixed-rate liabilities, reported
results of NIR-at-risk could depict an increase in NIR from a rate increase while EVE presents a loss. A change in
this balance sheet profile may result in different outcomes under both NIR-at-risk and EVE. NIR-at-risk depicts the
change in the nominal (undiscounted) dollar net interest flows which are generated from the forecast statement of
condition over the next twelve months. As interest rates increase, the interest expense associated with our client
deposit liabilities is assumed to increase at a slower pace than the investment returns derived from our current
balance sheet or the associated reinvestment of our interest-earning assets, resulting in an overall increase to NIR.
EVE, on the other hand, measures the present value change of both principal and interest cash flows based on the
current period-end balance sheet. As a result, EVE does not contemplate reinvestment of our assets associated
with a change in the interest-rate environment.
Although NIR in both NIR-at-risk and EVE sensitivity is higher in response to increased interest rates, the
future principal flows from fixed-rate investments are discounted at higher rates for EVE, which results in lower
asset values and a corresponding reduction or loss in EVE. As noted above, NIR-at-risk does not analyze changes
in the value of principal cash flows and therefore does not experience the same reduction experienced by EVE
sensitivity associated with discounting principal cash flows at higher rates.
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MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Continued)
Net Interest Revenue at Risk
NIR-at-risk is designed to measure the potential impact of changes in global market interest rates on NIR in the
short term. The impact of changes in market rates on NIR is measured against a baseline NIR which encompasses
management's expectations regarding the evolving balance sheet volumes and interest rates in the near-term. The
goal is to achieve an acceptable level of NIR under various interest-rate environments. Assumptions regarding
levels of client deposits and our ability to price these deposits under various rate environments have a significant
impact on the results of the NIR simulations. Similarly, the timing of cash flows from our investment portfolio,
especially option-embedded financial instruments like mortgage-backed securities, and our ability to replace these
cash flows in line with management's expectations, can affect the results of NIR simulations.
The following table presents the estimated exposure of NIR for the next twelve months, calculated as of the
dates indicated, due to an immediate +/-100-basis-point shift to our internal forecast of global interest rates. We
manage NIR sensitivity not to decline more than 15% from the baseline NIR +/-100 basis point shocks. Estimated
incremental exposures presented below are dependent on management's assumptions, and do not reflect any
additional actions management may undertake in order to mitigate some of the adverse effects of changes in
interest rates on our financial performance.
(Dollars in millions)
Rate change:
+100 bps shock
–100 bps shock
+100 bps ramp
–100 bps ramp
Estimated Exposure to
Net Interest Revenue
December 31,
2013
December 31,
2012
Exposure
% of Base
NIR
Exposure
% of Base
NIR
$
334
(261)
126
(124)
14.0% $
(10.9)
5.3
(5.2)
156
(200)
39
(96)
6.5%
(8.3)
1.6
(4.0)
As of December 31, 2013, NIR sensitivity to an upward-100-basis-point shock in global market rates was
higher compared to December 31, 2012, due to a higher level of forecast client deposits. The benefit to NIR for an
upward-100-basis-point ramp is less significant than a shock, since market rates are assumed to increase gradually.
A downward-100-basis-point shock in global market rates places pressure on NIR, as deposit rates reach their
implicit floors due to the exceptionally low global interest-rate environment, and provide little funding relief on the
liability side, while assets reset into the lower-rate environment. NIR sensitivity to a downward-100-basis-point
shock in market rates as of December 31, 2013 was similar to December 31, 2012, as higher levels of forecast
noninterest-bearing deposits, which improve base NIR, provide no relief as rates fall.
Other important factors which affect the levels of NIR are the size and mix of assets carried in our consolidated
statement of condition; interest-rate spreads; the slope and interest-rate level of U.S. and non-U.S. dollar yield
curves and the relationship between them; the pace of change in global market interest rates; and management
actions taken in response to the preceding conditions.
Economic Value of Equity
EVE sensitivity measures changes in the market value of equity to quantify potential losses to shareholders
due to an immediate +/-200-basis-point rate shock compared to current interest-rate levels if the balance sheet
were liquidated immediately. Management compares the change in EVE sensitivity against State Street's
aggregate tier 1 and tier 2 risk-based capital, to evaluate whether the magnitude of the exposure to interest rates is
acceptable. Generally, a change resulting from a +/-200-basis-point rate shock that is less than 20% of aggregate
tier 1 and tier 2 capital is an exposure that management deems acceptable. To the extent that we manage changes
in EVE sensitivity within the 20% threshold, we would seek to take action to remain below the threshold if the
magnitude of our exposure to interest rates approached that limit.
Similar to NIR-at-risk measures, the timing of cash flows affects EVE sensitivity, as changes in asset and
liability values under different rate scenarios are dependent on when interest and principal payments are received.
In contrast to NIR simulations, however, EVE sensitivity does not incorporate assumptions regarding reinvestment
of these cash flows. In addition, our ability to price client deposits has a much smaller impact on EVE sensitivity, as
EVE sensitivity does not consider the ongoing benefit of investing client deposits.
108
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Continued)
The following table presents estimated EVE exposures, calculated as of the dates indicated, assuming an
immediate and prolonged shift in global interest rates, the impact of which would be spread over a number of years.
(Dollars in millions)
Rate change:
+200 bps shock
–200 bps shock
Estimated Sensitivity of
Economic Value of Equity
December 31,
2013
December 31,
2012
Exposure
$
2,359
1,149
% of Tier
1/Tier 2
Capital
Exposure
% of Tier
1/Tier 2
Capital
(14.9)% $
(2,542)
(17.0)%
7.2
41
0.3
Exposure to upward- and downward-200-basis-point shocks as of December 31, 2013 improved compared to
December 31, 2012. A lower concentration of fixed-rate securities in the investment portfolio and hedging activity in
2013 reduced EVE sensitivity to changes in market rates.
Model Risk Management
The use of financial models is widespread throughout the banking and financial services industry, with larger
and more complex organizations employing dozens of sophisticated models on a daily basis to measure risk
exposures, determine economic and regulatory capital levels, and guide investment decisions, among other things.
However, even as models represent a significant advancement in financial management, the models themselves
represent a new source of risk, i.e., the potential for adverse consequences or financial loss from decisions based
on incorrect, misused or misinterpreted model outputs and reports.
In large banking organizations like State Street, where financial models and their outputs exert significant
influence on business decisions, and where model failure could have a particularly harmful effect on our financial
strength and performance, model risk is managed within an extensive and rigorous risk management framework.
This framework is documented in our Model Risk Governance Policy Statement and accompanying Model Risk
Governance Guidelines.
Our model risk management program has three principal components:
A model risk governance program supports risk management by defining roles and responsibilities, by
providing policies and guidance that define relevant model risk management activities, and by describing
procedures that implement those policies;
A model development process facilitates the appropriate design and accuracy of models; the development
process also includes ongoing model integrity activities designed to test for robustness and stability and to
evaluate a model's limitations and assumptions; and
A set of model validation processes and activities is designed to validate that models are theoretically
sound, are performing as expected, and are in line with their design objectives; model validation also
checks that a model's key assumptions and limitations are identified and clearly communicated to the
model's end users and to senior management.
The MAC, chaired by the head of the Model Validation Group, was established to provide recommendations on
technical modeling issues to the corporate oversight committees. The MAC includes members with expertise in
modeling methodologies, and has representation from the various business units throughout State Street.
Business Risk Management
We define business risk as the risk of adverse changes in our earnings related to business factors, including
changes in the competitive environment, changes in the operational economics of our business activities and the
potential effect of strategic and reputation risks, not already captured as trading market, interest-rate, credit,
operational or liquidity risks. We incorporate business risk into our assessment of our strategic plans and economic
capital needs. Active management of business risk is an integral component of all aspects of our business, and
responsibility for the management of business risk lies with every employee at State Street.
Separating the effects of a potential material adverse event into operational and business risk is sometimes
difficult. For instance, the direct financial impact of an unfavorable event in the form of fines or penalties would be
classified as an operational risk loss, while the impact on our reputation and consequently the potential loss of
clients and corresponding decline in revenue would be classified as a business risk loss. An additional example of
109
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Continued)
business risk is the integration of a major acquisition. Failure to successfully integrate the operations of an acquired
business, and the resultant inability to retain clients and the associated revenue, would be classified as a loss due
to business risk.
Business risk is managed with a long-term focus. Techniques for its assessment and management include the
development of business plans and appropriate management oversight. The potential impact of the various
elements of business risk is difficult to quantify with any degree of precision. We use a combination of historical
earnings volatility, scenario analysis, stress-testing and management judgment to help assess the potential effect on
State Street attributable to business risk. Management and control of business risks are generally the responsibility
of the business units as part of their overall strategic planning and internal risk management processes.
Capital
The management of both our regulatory and economic capital involves key metrics evaluated by management
to assess whether our actual level of capital is commensurate with our risk profile, is in compliance with all
applicable regulatory requirements, and is sufficient to provide us with the financial flexibility to undertake future
strategic business initiatives. We assess capital based on relevant regulatory capital adequacy requirements, as
well as our own internal capital targets.
Framework
Our objective with respect to management of capital is to maintain a strong capital base in order to provide
financial flexibility for our business needs, including funding corporate growth and supporting clients’ cash
management needs, and to provide protection against loss to depositors and creditors. We strive to maintain an
appropriate level of capital, commensurate with our risk profile, on which an attractive return to shareholders is
expected to be realized over both the short and long term, while protecting our obligations to depositors and
creditors and complying with regulatory capital adequacy requirements. Our capital management process focuses
on our risk exposures, the regulatory requirements applicable to us with respect to capital adequacy, the evaluations
and resulting credit ratings of the major independent credit rating agencies, our return on capital at both the
consolidated and line-of-business level, and our capital position relative to our peers.
Our evaluation of capital includes the comparison of capital sources with capital uses, as well as the
consideration of the quality and quantity of the various components of capital, as two of several inputs in our overall
assessment of our capital adequacy. The goals of the capital evaluation process are to determine the optimal level
of capital and composition of capital instruments to satisfy all constituents of capital, with the lowest overall cost to
shareholders. Other factors considered in our capital evaluation process are strategic and contingency planning,
stress testing and planned capital actions.
Internal Capital Adequacy Assessment
Our primary banking regulator is the Federal Reserve. Both State Street and State Street Bank are subject to
the minimum regulatory capital requirements established by the Federal Reserve and defined in the Federal
Deposit Insurance Corporation, or FDIC, Improvement Act of 1991. State Street Bank must exceed the regulatory
capital thresholds for “well capitalized” in order for our parent company to maintain its status as a financial holding
company. Accordingly, our primary goal with respect to capital adequacy is to exceed all applicable minimum
regulatory capital requirements and to be “well-capitalized” under the Prompt Corrective Action guidelines
established by the FDIC. Our capital adequacy program includes our Internal Capital Adequacy Assessment
Process, or ICAAP, and associated capital policies.
We consider capital adequacy to be a key element of our financial well-being, which affects our ability to attract
and maintain client relationships; operate effectively in the global capital markets; and satisfy regulatory, security
holder and shareholder needs. Capital is one of several elements that affect State Street’s debt ratings and the
ratings of our principal subsidiaries.
In conformity with our capital policies, we strive to maintain adequate capital, not just at a point in time, but
over time and during periods of stress, to account for changes in our strategic direction, evolving economic
conditions, and financial and market volatility. We have developed and implemented a corporate-wide ICAAP to
assess our overall capital and liquidity in relation to our risk profile and to provide a comprehensive strategy for
maintaining appropriate capital and liquidity levels. The ICAAP considers material risks under multiple scenarios,
with an emphasis on stress scenarios. The ICAAP builds on and leverages existing processes and systems used to
measure our capital adequacy. Our ICAAP policy is reviewed and approved by the Board’s RCC.
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MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Continued)
Capital Contingency Planning
Contingency planning is an integral component of our capital management program. The objective of our
contingency planning process is to monitor current and forecast levels of select measures that serve as preemptive
indicators of a potentially adverse capital or liquidity adequacy situation. These measures are one of the inputs used
to set our capital adequacy level. We review these measures annually for appropriateness and relevance in relation
to our financial budget and capital plan.
Stress Testing
We have a robust State Street-wide stress-testing program that executes multiple stress tests each year. Our
stress testing program is structured around what we determine to be the top material risks incurred by State Street,
which are the end product of the corporate-wide material risk identification program. These top material risks serve
as an organizing principle for much of our risk management framework, as well as reporting, including the “risk
dashboard” provided to the Board. Over the past few years, stress scenarios have included a deep recession in the
U.S., a break-up of the Eurozone, and an oil shock precipitated by turmoil in the Middle East/North Africa region.
In connection with the focus on our top risks, each stress test incorporates idiosyncratic loss events tailored to
State Street‘s unique risk profile. Due to the nature of our business model and our consolidated statement of
condition, our risks differ from those of a traditional commercial bank.
The Federal Reserve requires bank holding companies with total consolidated total assets of $50 billion or
more, which includes State Street, to submit a capital plan on an annual basis. The Federal Reserve uses their
CCAR process, which incorporates hypothetical financial and economic stress scenarios, to assess whether
banking organizations have capital planning processes that account for idiosyncratic risks and provide for sufficient
capital to continue operations throughout times of economic and financial stress. As part of the CCAR process, the
Federal Reserve assesses each organization’s capital adequacy, capital planning process, and plans to distribute
capital, such as dividend payments or stock purchase programs. Management and Board risk committees review
and approve CCAR results and assumptions before submission to the Federal Reserve.
Information about the Federal Reserve’s review of our capital plan for 2013, submitted in January 2013 in
connection with the CCAR process, is provided under “Capital Actions” in this “Capital” section. The Federal
Reserve is currently conducting a review of capital plans for 2014 submitted by us and other large bank holding
companies in January 2014. The levels at which we will be able to declare dividends and purchase shares of our
common stock after March 2014 will depend on the Federal Reserve's assessment of our capital plan and our
projected performance under the stress scenarios. While we anticipate that the Federal Reserve will not object to
the continued return of capital to our shareholders through dividends and/or common stock purchases in 2014, we
cannot provide assurance with respect to the Federal Reserve's assessment of our capital plan, or that we will be
able to continue to return capital to our shareholders at any specific level.
Governance
In order to support integrated decision making, we have identified three management elements to aid in the
compatibility and coordination of our capital adequacy strategies and processes:
• Risk Management - identification, measurement, monitoring and forecasting of different types of risk and
their combined impact on capital adequacy;
• Capital Management - determination of optimal capital and liquidity levels; and
• Business Management - strategic planning, budgeting, forecasting, and performance management.
We have a hierarchical structure supporting appropriate committee review of relevant risk and capital
information. The ongoing responsibility for capital management rests with our Treasurer. The Capital Planning
group within Global Treasury is responsible for capital policies, development of the capital plan, the management of
global capital, capital optimization, and business unit capital management.
ALCCO has oversight of our management of regulatory capital, capital adequacy with respect to regulatory
requirements, internal targets and the expectations of the major independent credit rating agencies. ALCCO’s roles
and responsibilities are designed to work complementary to and coordinated with the MRAC, which approves State
Street’s balance sheet strategy and related activities. The Board’s RCC assists the Board in fulfilling its oversight
responsibilities related to the assessment and management of risk and capital.
Regulatory Capital
The following table presents regulatory capital ratios for State Street and State Street Bank as of December 31:
111
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Continued)
Currently Applicable
Regulatory Guidelines
Minimum
Well
Capitalized
State Street
State Street Bank
2013
2012
2013
2012
Tier 1 risk-based capital ratio
Total risk-based capital ratio
Tier 1 leverage ratio(1)
4%
8
4
6%
10
5
17.3%
19.1%
16.4%
17.3%
19.7
6.9
20.6
7.1
19.0
6.4
19.1
6.3
(1) Regulatory guideline for “well capitalized” applies only to State Street Bank.
The following table presents the components of tier 1, tier 2 and total capital, and the components of total risk-
weighted assets, for State Street and State Street Bank as of December 31; additional information about our
regulatory capital is provided in note 15 to the consolidated financial statements included under Item 8 of this Form
10-K.
(Dollars in millions)
Tier 1 capital:
State Street
State Street Bank
2013
2012
2013
2012
Total common shareholders' equity
$
19,887
$
20,380
$
19,755
$
19,681
Preferred stock
Trust preferred capital securities
Goodwill
Other intangible assets
Deferred tax liability associated with acquisitions
Other
Tier 1 capital
Tier 2 capital:
491
950
(6,036)
(2,360)
653
310
489
950
(5,977)
(2,539)
699
(242)
—
—
(5,740)
(2,239)
638
304
—
—
(5,679)
(2,392)
680
(246)
13,895
13,760
12,718
12,044
Qualifying subordinated debt
Allowances for on- and off-balance sheet credit exposures and
other
Tier 2 capital
Deduction for investments in finance subsidiaries
1,918
1,219
48
1,966
(74)
41
1,260
(191)
1,936
45
1,981
—
1,223
39
1,262
—
Total capital
$
15,787
$
14,829
$
14,699
$
13,306
Adjusted total risk-weighted assets and market risk equivalent
assets:
On-balance sheet assets:
Cash and interest-bearing assets
Investment securities
Loans and leases
Interest, fees and other receivables
Other assets
Total on-balance sheet assets
Off-balance sheet equivalent assets:
Guarantees and unfunded commitments to extend credit
Foreign exchange derivative contracts
Standby letters of credit and asset purchase agreements
Other
Total off-balance sheet equivalent assets
Market risk equivalent assets
Total risk-weighted assets
Adjusted quarterly average assets
$
$
112
$
2,175
$
1,429
$
1,979
$
34,000
13,201
2,951
7,950
60,277
10,125
5,282
2,995
185
18,587
1,262
80,126
202,801
36,094
12,118
2,355
6,242
58,238
4,602
5,353
3,096
104
13,155
519
$
$
71,912
192,817
$
$
33,514
13,257
2,332
6,517
57,599
10,125
5,302
2,995
176
18,598
1,262
77,459
199,301
1,287
35,495
12,187
2,068
4,912
55,949
4,602
5,353
3,096
93
13,144
445
$
$
69,538
189,780
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Continued)
As of December 31, 2013, State Street's regulatory capital ratios declined compared to December 31, 2012,
primarily the result of increases in total risk-weighted assets. State Street's tier 1 capital in the same comparison
increased slightly, as the positive effect of net income and other comprehensive income was mostly offset by
declarations of common stock dividends and purchases by us of our common stock. The increase in total capital
was primarily the result of the May 2013 issuance of $1 billion of subordinated debt, which qualifies as tier 2 capital
under current federal regulatory capital guidelines.
The increase in total risk-weighted assets was primarily associated with higher off-balance sheet equivalent
assets, mainly associated with an increase in exposure associated with our participation in principal securities
finance transactions, as well as an increase in on-balance sheet assets, primarily due to higher levels of loans and
other assets. The decrease in the tier 1 leverage ratio mainly resulted from an increase in adjusted quarterly
average assets associated with balance sheet growth during the year.
As of December 31, 2013, State Street Bank's tier 1 risk-based and total risk-based capital ratios declined
compared to December 31, 2012, primarily the result of increases in total risk-weighted assets. State Street Bank's
tier 1 capital in the same comparison increased, as the positive effect of net income and other comprehensive
income was partially offset by the payment of dividends to our parent company. The increase in total capital was
primarily the result of the above-mentioned subordinated debt issuance. The increase in total risk-weighted assets
were the result of the above-mentioned changes in on- and off-balance sheet equivalent assets. The slight increase
in the tier 1 leverage ratio mainly resulted from an increase in tier 1 capital almost entirely offset by an increase in
adjusted quarterly average assets associated with balance sheet growth during the year.
Capital Actions
Preferred Stock
In 2013, we declared aggregate dividends on our non-cumulative perpetual preferred stock, Series C
(represented by depositary shares, each representing a 1/4,000th ownership interest in a share of State Street’s
non-cumulative perpetual preferred stock, Series C) of $5,250 per share, or approximately $1.31 per depositary
share, totaling approximately $26 million. In 2012, dividends on our perpetual preferred stock, Series C, totaled
approximately $8 million. In 2012, we declared dividends on our non-cumulative perpetual preferred stock, Series
A, totaling approximately $21 million. We redeemed our Series A perpetual preferred stock in 2012.
Common Stock
In March 2013, we received the results of the Federal Reserve's review of our 2013 capital plan in connection
with its CCAR process. The Federal Reserve did not object to the capital actions we proposed, and, in March 2013,
our Board approved a new common stock purchase program authorizing the purchase of up to $2.10 billion of our
common stock through March 31, 2014. From April 1 through December 31, 2013, we purchased approximately
24.7 million shares of our common stock, all under this program, at an aggregate cost of $1.68 billion. As of
December 31, 2013, approximately $420 million remained available for purchases of our common stock under the
program. Shares acquired in connection with this program which remained unissued as of year-end were recorded
as treasury stock in our consolidated statement of condition as of December 31, 2013.
In March 2013, we completed a $1.8 billion common stock purchase program, authorized by our Board in
March 2012. In the first quarter of 2013, we purchased 6.5 million shares at an average per-share and aggregate
cost of $54.95 and approximately $360 million, respectively.
In 2013, under both programs combined, we purchased approximately 31.2 million shares of our common
stock at an average price of $65.30 per share and an aggregate cost of approximately $2.04 billion. In 2012, we
purchased approximately 33.4 million shares of our common stock, all under the March 2012 program, at an
aggregate cost of $1.44 billion.
In 2013, we declared aggregate quarterly common stock dividends of $1.04 per share, totaling approximately
$463 million, on our common stock. In 2012, we declared aggregate quarterly common stock dividends of $0.96
per share, totaling approximately $456 million.
Federal and state banking regulations place certain restrictions on dividends paid by subsidiary banks to the
parent holding company. In addition, banking regulators have the authority to prohibit bank holding companies from
paying dividends. Information concerning limitations on dividends from our subsidiary banks is provided in “Related
Stockholder Matters” included under Item 5, and in note 15 to the consolidated financial statements included under
Item 8, of this Form 10-K.
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MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Continued)
Basel Capital Framework and Developments
The currently applicable minimum regulatory capital requirements enforced by U.S. banking regulators are
based on a 1988 international accord, commonly referred to as Basel I, which was developed by the Basel
Committee on Banking Supervision, or Basel Committee.
Basel II Framework
In 2004, the Basel Committee released an enhanced capital adequacy framework, referred to as Basel II.
Basel II requires large and internationally active banking organizations, such as State Street, which generally rely
on sophisticated risk management and measurement systems, to better align the use of those systems with their
determination of regulatory capital requirements. Basel II adopted a three-pillar framework for addressing capital
adequacy and minimum capital requirements, which incorporates Pillar 1, the measurement of credit risk, market
risk and operational risk; Pillar 2, supervisory review, which addresses the need for a banking organization to
assess its capital adequacy relative to the risks underlying its business activities, rather than only with respect to its
minimum regulatory capital requirements; and Pillar 3, market discipline, which imposes public disclosure
requirements on a banking organization intended to allow the assessment of key information about the
organization's risk profile and its associated level of regulatory capital.
In 2007, U.S. banking regulators jointly issued final rules to implement the Basel II framework in the U.S. The
framework does not supersede or change the existing prompt corrective action and leverage capital requirements
applicable to banking organizations in the U.S., and explicitly reserves the regulators' authority to require
organizations to hold additional capital where appropriate.
Basel III Framework
In 2010, in response to the financial crisis and ongoing global financial market dynamics, the Basel Committee
proposed two significant reforms to the Basel II capital framework. The first reform was composed of changes to
the market risk capital framework associated with Basel I, and was referred to as Basel 2.5; the second reform was
composed of comprehensive revisions and enhancements to Basel II, which became known as Basel III.
Market Risk Capital Rule
The Basel Committee introduced significant changes to the then-existing market risk capital framework, aimed
at addressing certain issues in that framework highlighted by the 2008 financial crisis. U.S. banking regulators
introduced their version of this so-called Basel 2.5, in the form of a proposed new market risk capital rule, in 2011,
which included the concept of an incremental risk capital requirement to capture default and credit-quality migration
risk for non-securitization credit products. Other revisions placed additional prudential requirements on banking
organizations’ internal models for measuring market risk and required enhanced qualitative and quantitative
disclosures, particularly with respect to banking organizations’ securitization activities.
In August 2012, U.S. banking regulators jointly issued a final market risk capital rule to implement the new
market risk capital framework in the U.S. The new market risk capital rule, which was effective beginning on
January 1, 2013, supplements Basel I and Basel II, and replaces the prior market risk capital framework under
Basel I and Basel II in place since 1998, by requiring banking organizations with significant trading activities, as
defined in the rule, to adjust their regulatory risk-based capital ratios to reflect the market risk inherent in their
trading activities. Among other things, the final rule requires the use of internal models to calculate daily measures
of Value-at-Risk, or VaR, that reflect general market risk for certain trading positions defined as “covered positions,”
as well as stressed VaR-based measures to supplement the VaR-based measures.
Our adoption of the new market risk capital rule on January 1, 2013 did not significantly affect our or State
Street Bank's risk-based capital ratios, although it did modestly increase our market risk equivalent assets. Market
risk equivalent assets are disclosed in the foregoing “Regulatory Capital” portion of this “Capital” section.
Basel III
Basel III proposed to establish more stringent regulatory capital and liquidity requirements, including higher
minimum regulatory capital ratios, new capital buffers, higher risk-weighted asset calibrations, more restrictive
definitions of qualifying capital, a liquidity coverage ratio, and a net stable funding ratio.
In June 2012, U.S. banking regulators introduced Basel III by issuing proposed revisions to the existing Basel II
framework. These proposals were intended to incorporate the above-described revisions and enhancements
proposed by the Basel Committee, and implement relevant provisions of the Dodd-Frank Act, in order to restructure
the U.S. capital rules into a harmonized, codified regulatory capital framework.
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MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Continued)
In July 2013, U.S. banking regulators jointly issued a final rule implementing the Basel III framework in the U.S.
Among other things, the final rule raises the minimum tier 1 risk-based capital ratio from 4% to 6%; adds
requirements for a minimum common equity tier 1 capital ratio of 4.5% and a minimum supplementary tier 1
leverage ratio of 3% for so-called “advanced approaches” banking organizations (described below); and implements
a capital conservation buffer and a countercyclical capital buffer, both described below. The Basel III final rule also
incorporates the new market risk capital rule to create a single and comprehensive capital adequacy framework.
Under the Basel III final rule, a banking organization would be able to make capital distributions, subject to
other regulatory constraints, such as the review of capital plans, and discretionary bonus payments without
specified limitations as long as it maintains the required capital conservation buffer of 2.5% over each of the
minimum tier 1 and total risk-based capital ratios and the common equity tier 1 capital ratio (plus any potentially
applicable countercyclical capital buffer). Banking regulators would establish the minimum countercyclical capital
buffer, which is initially set by banking regulators at zero, up to a maximum of 2.5% above the minimum ratios
inclusive of the capital conservation buffer, under certain economic conditions. As of January 1, 2019, the date that
full implementation is required, and assuming no countercyclical buffer, the minimum Basel III capital ratios,
including the capital conservation buffer, will be 8.5% for tier 1 risk-based capital, 10.5% for total risk-based capital,
and 7% for common equity tier 1 capital, in order for us to make capital distributions and discretionary bonus
payments without limitation. Each of these Basel III ratios is calculated differently under the Basel III final rule than
those similar ratios calculated under Basel I, and therefore these Basel III ratios are not comparable with the Basel I
ratios presented earlier in the “Regulatory Capital” section.
The Basel III final rule provides for two frameworks: the “standardized” approach, intended to replace Basel I,
and the “advanced” approach, applicable to advanced approaches banking organizations, like State Street, as
originally defined under Basel II. Once phased in, the Basel III final rule will change the manner in which our
regulatory capital ratios are calculated, will reduce our calculated regulatory capital, and, as noted above, will
increase the minimum regulatory capital that we will be required to maintain. Under the Basel III final rule, we will be
subject to the more stringent of our regulatory capital ratios calculated under the standardized approach and those
calculated under the advanced approach in the assessment of our capital adequacy under the prompt corrective
action framework.
Provisions of the Basel III final rule will become effective under a transition timetable which began on January
1, 2014. These provisions will supersede or modify corresponding elements of the Basel I and Basel II risk-based
and leverage capital requirements and prompt corrective action framework. The requirement for the capital
conservation buffer will be phased in beginning on January 1, 2016, with full implementation by January 1, 2019.
The timing of application of the provisions of the Basel III final rule related to the calculation of risk-weighted
assets under the advanced approach will depend on State Street's completion of a required qualification, or parallel
run, period. During its qualification period, State Street must demonstrate that it complies with the related Basel III
requirements to the satisfaction of the Federal Reserve. The calculation of risk-weighted assets under the Basel III
standardized approach will become effective on January 1, 2015.
On February 21, 2014, we were notified by the Federal Reserve that we have completed our parallel run
period and will be required to begin using the advanced approaches framework as provided in the Federal
Reserve's July 2013 Basel III final rule in the determination of our risk-based capital requirements. Pursuant to this
notification, we will use the advanced approaches framework to calculate and publicly disclose our risk-based
capital ratios beginning with the second quarter of 2014. Under the July 2013 Basel III final rule, we must meet the
minimum risk-based capital ratios under both the advanced approaches and generally applicable risk-based capital
frameworks in Basel III and Basel I, respectively.
Estimated Basel III Tier 1 Common Ratio
As described above, the Basel III final rule adds a requirement for a minimum common equity tier 1 capital
ratio, or tier 1 common ratio. The tier 1 common ratio is a measurement of capital representing tier 1 capital,
reduced by the deduction of “non-common elements,” such as trust preferred capital securities and preferred stock,
divided by total risk-weighted assets. The Basel I tier 1 common ratio is used by regulators and by management to
monitor and assess State Street's capital position, both individually and relative to other financial institutions, and
management believes it may be of interest to investors.
The following table presents our tier 1 common ratio as of December 31, 2013, calculated using Basel I
standards, and our estimated tier 1 common ratios as of December 31, 2013, calculated in conformity with the
Basel III final rule under both the standardized approach and the advanced approach. These estimated Basel III tier
1 common ratios are preliminary, reflect tier 1 common equity calculated under the Basel III final rule as applicable
on its January 1, 2014 effective date, and are based on our present understanding of the final rule's impact. As
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MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Continued)
indicated above, under the Basel III final rule, the more stringent of the Basel III tier 1 common ratios calculated by
us under the standardized and advanced approaches will apply in the assessment of our capital adequacy under
the prompt corrective action framework.
December 31, 2013
(Dollars in millions)
Tier 1 capital
Less:
Trust preferred capital securities
Preferred stock
Plus:
Other
Tier 1 common capital
Total risk-weighted assets
Tier 1 common ratio
Minimum tier 1 common ratio requirement, assuming full
implementation on January 1, 2019
Capital conservation buffer, assuming full implementation on
January 1, 2019
Minimum tier 1 common ratio requirement, including capital
conservation buffer, assuming full implementation on January 1,
2019(3)
Currently
Applicable
Regulatory
Requirements(1)
13,895
$
950
491
—
12,454
80,126
15.5%
$
$
Basel III Final Rule
Standardized
Approach
(Estimated)(2)
Basel III Final Rule
Advanced
Approach
(Estimated)(2)
$
$
$
13,216
$
13,216
475
491
87
475
491
87
12,337
121,562
$
$
10.1%
12,337
104,919
11.8%
4.5
2.5
7.0
4.5
2.5
7.0
(1) Using Basel I standards, the tier 1 common ratio was calculated by dividing (a) tier 1 risk-based capital, calculated in conformity with Basel I, less non-
common elements including qualifying trust preferred capital securities and qualifying perpetual preferred stock, or tier 1 common capital, by (b) total
risk-weighted assets, calculated in conformity with Basel I.
(2) As of December 31, 2013, for purposes of the calculations in conformity with the Basel III final rule, capital and total risk-weighted assets under both the
standardized approach and the advanced approach were calculated using our estimates, based on the provisions of the final rule expected to affect
capital in 2014. The tier 1 common ratio was calculated by dividing (a) tier 1 common capital, as described in footnote (1), but with tier 1 risk-based
capital calculated in conformity with the final rule, by (b) total risk-weighted assets, calculated in conformity with the Basel III final rule. These estimated
Basel III tier 1 common ratios are preliminary, reflect tier 1 common equity calculated under the Basel III final rule as applicable on its January 1, 2014
effective date, and are based on our present understanding of the final rule's impact.
• Under both the standardized and advanced approaches, tier 1 risk-based capital decreased by $679 million, as a result of applying the estimated
effect of the Basel III final rule to Basel I tier 1 risk-based capital of $13.90 billion as of December 31, 2013.
• Under both the standardized and advanced approaches, estimated tier 1 common capital used in the calculation of the tier 1 common ratio was
$12.34 billion, reflecting the adjustments to Basel I tier 1 risk-based capital described in the first bullet above. Tier 1 common capital used in the
calculation was therefore calculated as adjusted tier 1 risk-based capital of $13.22 billion less non-common elements of capital, composed of trust
preferred capital securities of $475 million, preferred stock of $491 million, and other adjustments of $87 million as of December 31, 2013,
resulting in estimated tier 1 common capital of $12.34 billion. As of December 31, 2013, there was no qualifying minority interest in subsidiaries.
• Under the standardized approach, total risk-weighted assets used in the calculation of the estimated tier 1 common ratio increased by $41.44
billion as a result of applying the provisions of the Basel III final rule to Basel I total risk-weighted assets of $80.13 billion as of December 31, 2013.
Under the advanced approach, total risk-weighted assets used in the calculation of the estimated tier 1 common ratio increased by $24.79 billion
as a result of applying the provisions of the final rule to Basel I total risk-weighted assets of $80.13 billion as of December 31, 2013.
The primary differences between total risk-weighted assets under Basel I and total risk-weighted assets under the Basel III final rule include the
following: under Basel I, credit risk is quantified using pre-determined risk weights and asset classes, and in part, uses external credit ratings, while the
Basel III final rule, specifically the standardized and advanced approaches, introduces a broader range of pre-determined risk weights and asset
classes, uses certain alternatives to external credit ratings, includes additional adjustments for operational risk (under the advanced approach) and
counterparty credit risk, and revises the treatment of equity exposures. In particular, asset securitization exposures receive higher risk weights under
both the standardized and advanced approaches in the Basel III final rule compared to Basel I.
(3) The minimum tier 1 common ratio requirement does not reflect the countercyclical capital buffer under the Basel III final rule, or the capital buffer for
global systemically important banks prescribed by the Basel Committee (refer to “Systemically Important Banks” below); such countercyclical capital
buffer, which is initially set at zero, would be established by banking regulators under certain economic conditions, and U.S. banking regulators have not
yet issued a proposal to implement the prescribed capital buffer for systemically important financial institutions.
The estimated Basel III tier 1 common ratio as of December 31, 2013 presented above, calculated under the
advanced approach in conformity with the Basel III final rule, reflects calculations and determinations with respect to
our capital and related matters as of December 31, 2013, based on State Street and external data, quantitative
formulae, statistical models, historical correlations and assumptions, collectively referred to as “advanced systems,”
in effect and used by State Street for those purposes as of the time we filed this Form 10-K. Significant components
of these advanced systems involve the exercise of judgment by us and our regulators, and our advanced systems
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MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Continued)
may not accurately represent or calculate the scenarios, circumstances, outputs or other results for which they are
designed or intended.
Due to the influence of changes in these advanced systems, whether resulting from changes in data inputs,
regulation or regulatory supervision or interpretation, State Street-specific or market activities or experiences or
other updates or factors, we expect that our advanced systems and our capital ratios calculated in conformity with
the Basel III final rule will change and may be volatile over time, and that those latter changes or volatility could be
material as calculated and measured from period to period.
Impact of Basel III Final Rule
Our current assessment of the implications of the Basel III final rule indicates a potential impact which could be
material to our businesses and our profitability, as well as to our regulatory capital ratios. One significant provision
in the final rule would require us to apply the “Simplified Supervisory Formula Approach,” referred to as the SSFA, in
the risk-weighting of asset securitization exposures, such as asset-backed securities, carried in our investment
securities portfolio. The approach required by Basel II utilizes the ratings-based approach, under which external
credit ratings are used to risk-weight such exposures. The Dodd-Frank Act prohibits the use of external credit
ratings in the risk-weighting of asset securitization exposures. Currently, our investment portfolio contains
significant holdings of mortgage- and asset-backed securities that are highly rated by credit rating agencies, but for
which the SSFA would apply higher regulatory risk weights compared to the approach required by Basel I and Basel
II. In contrast, certain of our securities with lower credit ratings would receive lower regulatory risk weights if the
SSFA were applied.
Based on the composition of our investment portfolio with respect to the types of securities and related
external credit ratings as of December 31, 2013, our application of the SSFA would materially increase our total
regulatory risk-weighted assets relative to those calculated in conformity with Basel I, and correspondingly decrease
our regulatory risk-based capital ratios relative to those calculated in conformity with Basel I; as a result, we are re-
evaluating the composition of our investment portfolio in order to maintain an investment strategy appropriately
aligned with our maintenance of an appropriate level of regulatory capital. Depending on future market conditions,
this re-evaluation could result in the reinvestment of our portfolio securities into different types of investments, which
could materially affect our consolidated results of operations by reducing our net interest revenue.
Certain of the provisions in the Basel III final rule, including the requirement to apply the SSFA, became
effective beginning on January 1, 2014 under the advanced approach, although certain provisions will be
implemented, in whole or in part, in later periods. As such, a significant number of the securities currently held in
our investment portfolio that are highly rated by credit agencies are expected to mature or pay down over time, and
we would currently anticipate replacing those securities pursuant to our reinvestment program in a manner that
would seek to manage our risk appetite, our return objectives and our levels of regulatory capital. As a result of our
balance sheet management efforts, all else being equal, we would anticipate being able to significantly offset the
impact of application of the SSFA on our total regulatory risk-weighted assets and our regulatory risk-based capital
ratios.
In addition, the qualification of trust preferred capital securities as tier 1 capital will be phased out over a two-
year period which began on January 1, 2014 and will end on January 1, 2016, and subsequently, the qualification of
these securities as tier 2 capital will be phased out over a multi-year transition period beginning on January 1, 2016.
We had trust preferred capital securities of $950 million outstanding as of December 31, 2013.
There remains considerable uncertainty with respect to multiple provisions of the Basel III final rule, and the
timing and manner in which they will be applied to us. Models implemented under the Basel III final rule, particularly
those implementing the advanced approach, remain subject to regulatory review and approval. The full effects of
the Basel III final rule on State Street and State Street Bank are therefore subject to further evaluation and also to
further regulatory guidance, action or rule-making. In general, we expect to be held to the most stringent of the
various provisions in the Basel III final rule; however, we anticipate that we will be able to comply with the relevant
Basel III regulatory capital and liquidity requirements when and as applied to us.
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AND RESULTS OF OPERATIONS (Continued)
Supplementary Leverage Ratio Framework
In July 2013, U.S. banking regulators jointly issued a Notice of Proposed Rulemaking, or NPR, which proposes
to enhance leverage ratio standards for the largest, most systemically significant U.S. banking organizations. The
July 2013 NPR applies to any U.S. top-tier bank holding company with at least $700 billion in consolidated total
assets or at least $10 trillion in total assets under custody, referred to as a covered bank holding company, and any
insured depository institution subsidiary of such bank holding company. We expect the standards to apply to State
Street and State Street Bank based on our total assets under custody.
Under Basel I, the tier 1 leverage ratio is calculated by dividing tier 1 capital by adjusted quarterly average
assets. While Basel II did not incorporate a leverage ratio, the Basel III final rule provides for a leverage ratio
similar to Basel I, as well as a supplementary leverage ratio for advanced approaches banking organizations. This
supplementary leverage ratio adds certain off-balance sheet exposures, such as those related to derivative
contracts and unfunded lending commitments, to the denominator of the ratio calculation.
Under the July 2013 NPR, covered bank holding companies would be required to maintain a supplementary
tier 1 leverage ratio of at least 5%, which is 2% above the similar minimum Basel III supplementary tier 1 leverage
ratio of 3% described earlier in this section. Failure to exceed the 5% supplementary tier 1 leverage ratio would
subject covered bank holding companies to restrictions on capital distributions and discretionary bonus payments.
In addition to the leverage buffer for covered bank holding companies, the July 2013 NPR would require insured
depository institution subsidiaries of covered bank holding companies, like State Street Bank, to maintain a 6%
supplementary tier 1 leverage ratio to be considered “well capitalized.” State Street is one of eight large U.S.
banking organizations to which the July 2013 NPR would apply, if finalized as currently proposed. The July 2013
NPR would not apply to all banking organizations with which we compete. If finalized as currently proposed, the
new supplementary tier 1 leverage ratio requirements will be effective beginning on January 1, 2018. The July 2013
NPR is a proposed rule, and remains subject to interpretation, regulatory guidance, industry and other comment
and issuance in the form of a final rule.
In January 2014, the Basel Committee finalized its revisions to the denominator of the Basel III supplementary
tier 1 leverage ratio. The revised denominator differs from the denominator of the supplementary leverage ratio in
the July 2013 NPR and the Basel III final rule in several important respects that could adversely affect the
calculation of our supplementary tier 1 leverage ratio, including the treatment of derivative contracts, securities
financing transactions and certain off-balance sheet exposures. U.S. banking regulators may issue rules to
implement these revisions.
Systemically Important Banks
We meet the criteria of a large bank holding company subject to enhanced supervision and prudential
standards, commonly referred to as a “systemically important financial institution,” or SIFI, and we are one among a
group of 29 institutions worldwide that have been identified by the Financial Stability Board, or FSB, and the Basel
Committee as “global systemically important banks,” or G-SIBs. Our designation as a G-SIB will require us to
maintain an additional capital buffer, ranging between 1% and 2.5%, above the Basel III minimum common equity
tier 1 capital ratio of 4.5%, based on a number of factors, as evaluated by banking regulators. Factors in this
evaluation will include our size, interconnectedness, substitutability, complexity and cross-jurisdictional activities. In
November 2013, the FSB maintained their designation of us as a category-1 organization, with a capital surcharge
of 1%, although this designation and the associated additional capital buffer are subject to change. U.S. banking
regulators have not yet issued a proposal to implement the G-SIB capital surcharge.
We expect these additional capital requirements for G-SIBs to be phased in beginning on January 1, 2016,
with full implementation by January 1, 2019. Assuming completion of the phase-in period for the capital
conservation buffer, and no countercyclical buffer, the minimum capital ratios as of January 1, 2019, including the
capital conservation buffer and G-SIB capital surcharge, would be 9.5% for tier 1 risk-based capital, 11.5% for total
risk-based capital, and 8% for common equity tier 1 capital, in order for State Street to make capital distributions
and discretionary bonus payments without limitation. Not all of our competitors have similarly been designated as
systemically important, and therefore some of our competitors may not be subject to the same additional capital
requirements.
Economic Capital
We define economic capital as the capital required to protect holders of our senior debt, and obligations higher
in priority, against unexpected economic losses over a one-year period. Economic capital usage is one of several
measures used by management and our Board to assess the adequacy of our capital levels in relation to State
Street's risk profile. Due to the evolving nature of quantification techniques, we expect to periodically refine the
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MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Continued)
methodologies, assumptions, and information used to estimate our economic capital requirements, which could
result in a different amount of capital needed to support our business activities.
We quantify economic capital requirements for the risks inherent in our business activities and group them into
categories that we broadly define for these purposes as follows:
• Market risk: the risk of adverse financial impact due to fluctuations in market prices, primarily as they relate
to our trading activities;
•
Interest-rate risk: the risk of loss in non-trading asset-and-liability management positions, primarily the
impact of adverse movements in interest rates on the repricing mismatches that exist between the assets
and liabilities carried in our consolidated statement of condition;
• Credit risk: the risk of loss that may result from the default or downgrade of a borrower or counterparty;
• Operational risk: the risk of loss from inadequate or failed internal processes and systems, human error, or
from external events, which is generally consistent with the Basel II definition; and
• Business risk: the risk of negative earnings resulting from adverse changes in business factors, including
changes in the competitive environment, changes in the operational economics of our business activities,
and the effect of strategic and reputational risks.
OFF-BALANCE SHEET ARRANGEMENTS
In the normal course of our business, we hold assets under custody and administration and assets under
management in a custodial or fiduciary capacity for our clients, and, in conformity with GAAP, we do not record
these assets in our consolidated statement of condition. Similarly, collateral funds associated with our securities
finance activities are held by us as agent; therefore, we do not record these assets in our consolidated statement of
condition.
On behalf of clients enrolled in our securities lending program, we lend securities to banks, broker/dealers and
other institutions. In most circumstances, we indemnify our clients for the fair market value of those securities
against a failure of the borrower to return such securities. Though these transactions are collateralized, the
substantial volume of these activities necessitates detailed credit-based underwriting and monitoring processes.
The aggregate amount of indemnified securities on loan totaled $320.08 billion as of December 31, 2013, compared
to $302.34 billion as of December 31, 2012. We require the borrower to provide collateral in an amount equal to or
in excess of 100% of the fair market value of the securities borrowed. We hold the collateral received in connection
with these securities lending services as agent, and the collateral is not recorded in our consolidated statement of
condition. We revalue the securities on loan and the collateral daily to determine if additional collateral is necessary
or if excess collateral is required to be returned to the borrower. We held, as agent, cash and securities totaling
$331.73 billion and $312.22 billion as collateral for indemnified securities on loan as of December 31, 2013 and
December 31, 2012, respectively.
The cash collateral held by us as agent is invested on behalf of our clients. In certain cases, the cash collateral
is invested in third-party repurchase agreements, for which we indemnify the client against loss of the principal
invested. We require the counterparty to the indemnified repurchase agreement to provide collateral in an amount
equal to or in excess of 100% of the amount of the repurchase agreement. In our role as agent, the indemnified
repurchase agreements and the related collateral held by us are not recorded in our consolidated statement of
condition. Of the collateral of $331.73 billion as of December 31, 2013 and $312.22 billion as of December 31, 2012
referenced above, $85.37 billion as of December 31, 2013 and $80.22 billion as of December 31, 2012 was
invested in indemnified repurchase agreements. We or our agents held $91.10 billion and $85.41 billion as collateral
for indemnified investments in repurchase agreements as of December 31, 2013 and December 31, 2012,
respectively.
Additional information about our securities finance activities and other off-balance sheet arrangements is
provided in notes 11 and 16 to the consolidated financial statements included under Item 8 of this Form 10-K.
SIGNIFICANT ACCOUNTING ESTIMATES
Our consolidated financial statements are prepared in conformity with GAAP, and we apply accounting policies
that affect the determination of amounts reported in these consolidated financial statements. Our significant
accounting policies are described in note 1 to the consolidated financial statements included under Item 8 of this
Form 10-K.
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MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Continued)
The majority of the accounting policies described in note 1 do not involve difficult, subjective or complex
judgments or estimates in their application, or the variability of the estimates is not material to our consolidated
financial statements. However, certain of these accounting policies, by their nature, require management to make
judgments, involving significant estimates and assumptions, about the effects of matters that are inherently
uncertain. These estimates and assumptions are based on information available as of the date of the consolidated
financial statements, and changes in this information over time could materially affect the amounts of assets,
liabilities, equity, revenue and expenses reported in subsequent consolidated financial statements.
Based on the sensitivity of reported financial statement amounts to the underlying estimates and assumptions,
the relatively more significant accounting policies applied by State Street have been identified by management as
those associated with recurring fair-value measurements, other-than-temporary impairment of investment securities
and impairment of goodwill and other intangible assets. These accounting policies require the most subjective or
complex judgments, and underlying estimates and assumptions could be most subject to revision as new
information becomes available. An understanding of the judgments, estimates and assumptions underlying these
accounting policies is essential in order to understand our reported consolidated results of operations and financial
condition.
The following is a brief discussion of the above-mentioned significant accounting estimates. Management of
State Street has discussed these significant accounting estimates with the E&A Committee of the Board.
Fair-Value Measurements
We carry certain of our financial assets and liabilities at fair value in our consolidated financial statements on a
recurring basis, including trading account assets, investment securities available for sale and derivative instruments.
As discussed in further detail below, changes in the fair value of these financial assets and liabilities are
recorded either as components of our consolidated statement of income, or as components of other comprehensive
income within shareholders' equity in our consolidated statement of condition. In addition to those financial assets
and liabilities that we carry at fair value in our consolidated financial statements on a recurring basis, we estimate
the fair values of other financial assets and liabilities that we carry at amortized cost in our consolidated statement
of condition, and we disclose these fair value estimates in the notes to our consolidated financial statements. We
estimate the fair values of these financial assets and liabilities using the definition of fair value described below.
As of December 31, 2013, approximately $105.59 billion of our financial assets and approximately $6.36 billion
of our financial liabilities were carried at fair value on a recurring basis, compared to $114.94 billion and $5.43
billion, respectively, as of December 31, 2012. The amounts as of December 31, 2013 represented approximately
43% of our consolidated total assets and approximately 3% of our consolidated total liabilities, compared to 52%
and 3%, respectively, as of December 31, 2012. The decrease in the relative percentage of consolidated total
assets as of December 31, 2013 compared to 2012 mainly reflected a decline in the investment securities portfolio,
generally associated with a lower level of purchases in 2013 compared to 2012, and an increase in interest-bearing
deposits with banks, the result of the continued elevated level of client deposits. Additional information with respect
to the assets and liabilities carried by us at fair value on a recurring basis is provided in note 3 to the consolidated
financial statements included under Item 8 of this Form 10-K.
GAAP defines fair value as the price that would be received to sell an asset or paid to transfer a liability in the
principal or most advantageous market for an asset or liability in an orderly transaction between market participants
on the measurement date. When we measure fair value for our financial assets and liabilities, we consider the
principal or the most advantageous market in which we would transact; we also consider assumptions that market
participants would use when pricing the asset or liability. When possible, we look to active and observable markets
to measure the fair value of identical, or similar, financial assets and liabilities. When identical financial assets and
liabilities are not traded in active markets, we look to market-observable data for similar assets and liabilities. In
some instances, certain assets and liabilities are not actively traded in observable markets; as a result, we use
alternate valuation techniques to measure their fair value.
We categorize the financial assets and liabilities that we carry at fair value in our consolidated statement of
condition on a recurring basis based on a prescribed three-level valuation hierarchy. The hierarchy gives the highest
priority to quoted prices in active markets for identical assets or liabilities (level 1) and the lowest priority to valuation
methods using significant unobservable inputs (level 3). As of December 31, 2013, including the effect of netting, we
categorized less than 1% of our financial assets carried at fair value in level 1, approximately 92% of our financial
assets carried at fair value in level 2, and approximately 7% of our financial assets carried at fair value in level 3 of
the fair value hierarchy. As of December 31, 2013, on the same basis, we categorized approximately 1% of our
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AND RESULTS OF OPERATIONS (Continued)
financial liabilities carried at fair value in level 1, approximately 98% of our financial liabilities carried at fair value in
level 2, and approximately 1% of our financial liabilities carried at fair value in level 3 of the fair value hierarchy.
The assets categorized in level 1 were substantially composed of trading account assets. Fair value for these
securities was measured by management using unadjusted quoted prices in active markets for identical securities.
The assets categorized in level 2 were composed of investment securities available for sale and derivative
instruments. Fair value for the investment securities was measured by management primarily using information
obtained from independent third parties. Information obtained from third parties is subject to review by management
as part of a validation process. Management utilizes a process to verify the information provided, including an
understanding of underlying assumptions and the level of market-participant information used to support those
assumptions. In addition, management compares significant assumptions used by third parties to available market
information. Such information may include known trades or, to the extent that trading activity is limited, comparisons
to market research information pertaining to credit expectations, execution prices and the timing of cash flows, and
where information is available, back-testing.
The derivative instruments categorized in level 2 predominantly represented foreign exchange and interest-
rate contracts used in our trading activities, for which fair value was measured by management using discounted
cash flow techniques, with inputs consisting of observable spot and forward points, as well as observable interest
rate curves.
The substantial majority of our financial assets categorized in level 3 were composed of asset-backed and
mortgage-backed securities available for sale. Level-3 assets also included foreign exchange derivative contracts.
The aggregate fair value of our financial assets and liabilities categorized in level 3 as of December 31, 2013
compared to December 31, 2012 increased approximately 7%, primarily the result of new purchases of asset-
backed and non-U.S. debt securities.
With respect to derivative instruments, we evaluated the impact on valuation of the credit risk of our
counterparties and of our own credit. We considered such factors as the market-based probability of default by us
and our counterparties, and our current and expected potential future net exposures by remaining maturities, in
determining the appropriate measurements of fair value. Valuation adjustments associated with derivative
instruments were not significant to our consolidated financial condition in 2013, 2012 or 2011.
Other-Than-Temporary Impairment of Investment Securities
Our portfolio of fixed-income investment securities constitutes a significant portion of the assets carried in our
consolidated statement of condition. GAAP requires the use of expected future cash flows to evaluate other-than-
temporary impairment of these investment securities. The amount and timing of these expected future cash flows
are significant estimates used in our assessment of other-than-temporary impairment. Additional information with
respect to management's assessment of other-than-temporary impairment is provided in note 4 to the consolidated
financial statements included under Item 8 of this Form 10-K.
Expectations of defaults and prepayments are the most significant assumptions underlying our estimates of
future cash flows. In determining these estimates, management relies on relevant and reliable information, including
but not limited to deal structure, including optional and mandatory calls, market interest-rate curves, industry
standard asset-class-specific prepayment models, recent prepayment history, independent credit ratings, and recent
actual and projected credit losses. Management considers this information based on its relevance and uses its best
judgment in order to determine its assumptions for underlying cash-flow expectations and resulting estimates.
Management reviews its underlying assumptions and develops expected future cash-flow estimates at least
quarterly. Additional detail with respect to the sensitivity of these default and prepayment assumptions is provided
under “Financial Condition - Investment Securities” in this Management's Discussion and Analysis.
Impairment of Goodwill and Other Intangible Assets
Goodwill represents the excess of the cost of an acquisition over the fair value of the net tangible and other
intangible assets acquired. Other intangible assets represent purchased assets that can be distinguished from
goodwill because of contractual rights or because the asset can be exchanged on its own or in combination with a
related contract, asset or liability. Goodwill is not amortized, while other intangible assets are amortized over their
estimated useful lives. Substantially all of the goodwill and other intangible assets recorded in our consolidated
statement of condition have resulted from business acquisitions by our Investment Servicing line of business, with
the remainder associated with our Investment Management line of business.
Goodwill is ultimately supported by revenue from our Investment Servicing and Investment Management lines
of business. A decline in earnings as a result of a lack of growth, or our inability to deliver cost-effective services
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AND RESULTS OF OPERATIONS (Continued)
over sustained periods, could lead to a perceived impairment of goodwill, which would be evaluated and, if
necessary, be recorded as a write-down of the reported amount of goodwill through a charge to other expenses in
our consolidated statement of income.
On an annual basis, or more frequently if circumstances arise, management reviews goodwill and evaluates
events or other developments that may indicate impairment of the carrying amount. We perform this evaluation at
the reporting unit level, which is one level below our two major lines of business. The evaluation methodology for
potential impairment is inherently complex and involves significant management judgment in the use of estimates
and assumptions.
We evaluate goodwill for impairment using a two-step process. First, we compare the aggregate fair value of
the reporting unit to its carrying amount, including goodwill. If the fair value exceeds the carrying amount, no
impairment exists. If the carrying amount of the reporting unit exceeds the fair value, then we compare the “implied”
fair value of the reporting unit's goodwill to its carrying amount. If the carrying amount of the goodwill exceeds the
implied fair value, then goodwill impairment is recognized by writing the goodwill down to the implied fair value. The
implied fair value of the goodwill is determined by allocating the fair value of the reporting unit to all of the assets
and liabilities of that unit, as if the unit had been acquired in a business combination and the overall fair value of the
unit was the purchase price.
To determine the aggregate fair value of the reporting unit being evaluated for goodwill impairment, we use one
of two principal methodologies: a market approach, based on a comparison of the reporting unit to publicly-traded
companies in similar lines of business; or an income approach, based on the value of the cash flows that the
business can be expected to generate in the future.
Events that may indicate impairment include significant or adverse changes in the business, economic or
political climate; an adverse action or assessment by a regulator; unanticipated competition; and a more-likely-than-
not expectation that we will sell or otherwise dispose of a business to which the goodwill or other intangible assets
relate. Additional information about goodwill and other intangible assets, including information by line of business, is
provided in note 6 to the consolidated financial statements included under Item 8 of this Form 10-K.
Our evaluation of goodwill and other intangible assets indicated that no significant impairment occurred in
2013, 2012 or 2011. Goodwill and other intangible assets recorded in our consolidated statement of condition as of
December 31, 2013 totaled approximately $6.04 billion and $2.36 billion, respectively, compared to $5.98 billion and
$2.54 billion, respectively, as of December 31, 2012.
RECENT ACCOUNTING DEVELOPMENTS
Information with respect to recent accounting developments is provided in note 1 to the consolidated financial
statements included under Item 8 of this Form 10-K.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The information provided under “Financial Condition - Risk Management - Market Risk” in Management’s
Discussion and Analysis, included under Item 7 of this Form 10-K, is incorporated by reference herein.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Additional information about restrictions on the transfer of funds from State Street Bank to the parent company
is provided under Item 5, and in “Financial Condition - Capital” in Management’s Discussion and Analysis included
under Item 7, of this Form 10-K.
122
Report of Independent Registered Public Accounting Firm
THE SHAREHOLDERS AND BOARD OF DIRECTORS OF
STATE STREET CORPORATION
We have audited the accompanying consolidated statement of condition of State Street Corporation (the
“Corporation”) as of December 31, 2013 and 2012, and the related consolidated statements of income,
comprehensive income, changes in shareholders' equity, and cash flows for each of the three years in the period
ended December 31, 2013. These financial statements are the responsibility of the Corporation's management. Our
responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight
Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance
about whether the financial statements are free of material misstatement. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by management, as well as evaluating the
overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the
consolidated financial position of State Street Corporation at December 31, 2013 and 2012, and the consolidated
results of its operations and its cash flows for each of the three years in the period ended December 31, 2013, in
conformity with U.S. generally accepted accounting principles.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board
(United States), State Street Corporation's internal control over financial reporting as of December 31, 2013, based
on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission (1992 framework) and our report dated February 21, 2014 expressed
an unqualified opinion thereon.
/s/ Ernst & Young LLP
Boston, Massachusetts
February 21, 2014
123
STATE STREET CORPORATION
CONSOLIDATED FINANCIAL STATEMENTS
Consolidated Statement of Income
Years Ended December 31,
(Dollars in millions, except per share amounts)
Fee revenue:
Servicing fees
Management fees
Trading services
Securities finance
Processing fees and other
Total fee revenue
Net interest revenue:
Interest revenue
Interest expense
Net interest revenue
Gains (losses) related to investment securities, net:
Net gains (losses) from sales of available-for-sale securities
Losses from other-than-temporary impairment
Losses reclassified (from) to other comprehensive income
Gains (losses) related to investment securities, net
Total revenue
Provision for loan losses
Expenses:
Compensation and employee benefits
Information systems and communications
Transaction processing services
Occupancy
Claims resolution
Acquisition and restructuring costs
Professional services
Amortization of other intangible assets
Other
Total expenses
Income before income tax expense
Income tax expense
Net income
Net income available to common shareholders
Earnings per common share:
Basic
Diluted
Average common shares outstanding (in thousands):
Basic
Diluted
Cash dividends declared per common share
2013
2012
2011
$
4,819
$
4,414
$
4,382
1,106
1,061
359
245
993
1,010
405
266
917
1,220
378
297
7,590
7,088
7,194
2,714
411
2,303
3,014
476
2,538
14
(21)
(2)
(9)
55
(53)
21
23
9,884
9,649
6
(3)
2,946
613
2,333
140
(123)
50
67
9,594
—
3,800
3,837
3,820
935
733
467
—
104
392
214
547
7,192
2,686
550
2,136
2,102
4.71
4.62
$
$
$
$
844
702
470
(362)
225
381
198
591
6,886
2,766
705
2,061
2,019
4.25
4.20
$
$
$
$
776
732
455
—
269
347
200
459
7,058
2,536
616
1,920
1,882
3.82
3.79
$
$
$
$
446,245
474,458
492,598
455,155
481,129
496,072
$
1.04
$
.96
$
.72
The accompanying notes are an integral part of these consolidated financial statements.
124
Consolidated Statement of Comprehensive Income
Years Ended December 31,
(In millions)
Net income
Other comprehensive income (loss), net of related taxes:
Foreign currency translation, net of related taxes of $(20), $45 and $68, respectively
Change in net unrealized losses on available-for-sale securities, net of reclassification
adjustment and net of related taxes of $(521), $469 and $242, respectively
Change in net unrealized gains (losses) on available-for-sale securities designated in fair
value hedges, net of related taxes of $56, $17 and $(49), respectively
Other-than-temporary impairment on held-to-maturity securities related to factors other
than credit, net of related taxes of $11, $13 and $15, respectively
Change in net unrealized losses on cash flow hedges, net of related taxes of $62, $52 and
$3, respectively
Change in net unrealized losses on retirement plans, net of related taxes of $71, $(36) and
$(15), respectively
Other comprehensive income (loss)
Total comprehensive income
2013
2012
2011
$
2,136
$
2,061
$
1,920
95
(826)
86
18
92
80
134
798
27
21
74
(35)
(455)
1,019
(216)
328
(75)
25
6
(38)
30
$
1,681
$
3,080
$
1,950
The accompanying notes are an integral part of these consolidated financial statements.
125
Consolidated Statement of Condition
As of December 31,
(Dollars in millions, except per share amounts)
Assets:
Cash and due from banks
Interest-bearing deposits with banks
Securities purchased under resale agreements
Trading account assets
Investment securities available for sale
Investment securities held to maturity (fair value of $17,560 and $11,661)
Loans and leases (less allowance for losses of $28 and $22)
Premises and equipment (net of accumulated depreciation of $4,417 and $4,037)
Accrued interest and fees receivable
Goodwill
Other intangible assets
Other assets
Total assets
Liabilities:
Deposits:
Noninterest-bearing
Interest-bearing—U.S.
Interest-bearing—non-U.S.
Total deposits
Securities sold under repurchase agreements
Federal funds purchased
Other short-term borrowings
Accrued expenses and other liabilities
Long-term debt
Total liabilities
Commitments, guarantees and contingencies (note 11)
Shareholders’ equity:
Preferred stock, no par, 3,500,000 shares authorized:
Series C, 5,000 shares issued and outstanding
Common stock, $1 par, 750,000,000 shares authorized:
503,882,841 and 503,900,268 shares issued
Surplus
Retained earnings
Accumulated other comprehensive income (loss)
Treasury stock, at cost (69,754,255 and 45,238,208 shares)
Total shareholders’ equity
Total liabilities and shareholders’ equity
2013
2012
$
3,220
$
64,257
6,230
843
99,174
17,740
13,458
1,860
2,123
6,036
2,360
2,590
50,763
5,016
637
109,682
11,379
12,285
1,728
1,970
5,977
2,539
25,990
18,016
$
243,291
$
222,582
$
65,614
$
13,392
103,262
182,268
7,953
19
3,780
19,194
9,699
44,445
19,201
100,535
164,181
8,006
399
4,502
17,196
7,429
222,913
201,713
491
489
504
9,776
13,395
(95)
(3,693)
20,378
504
9,667
11,751
360
(1,902)
20,869
$
243,291
$
222,582
The accompanying notes are an integral part of these consolidated financial statements.
126
Consolidated Statement of Changes in Shareholders' Equity
(Dollars in millions, except per share
amounts, shares in thousands)
PREFERRED
STOCK
COMMON STOCK
Shares
Amount
Surplus
Retained
Earnings
Accumulated
Other
Comprehensive
Income (Loss)
TREASURY
STOCK
Shares
Amount
Total
Balance as of December 31, 2010
$
— 502,064
$
502
$ 9,356
$
8,634
$
(689)
420
$
(16) $17,787
500
Net income
Other comprehensive income
Preferred stock issued
Cash dividends declared:
Common stock - $.72 per share
Preferred stock
Common stock acquired
Common stock awards and options
exercised, including related taxes of $(14)
Other
30
1,920
(358)
(20)
1,902
2
223
(22)
16,313
(675)
(177)
(14)
10
1
1,920
30
500
(358)
(20)
(675)
235
(21)
Balance as of December 31, 2011
500
503,966
504
9,557
10,176
(659)
16,542
(680)
19,398
(500)
488
1
Net income
Other comprehensive income
Redemption of preferred stock
Preferred stock issued
Accretion of issuance costs
Cash dividends declared:
Common stock - $.96 per share
Preferred stock
Common stock acquired
Common stock awards and options
exercised, including related taxes of $(6)
Other
1,019
2,061
(1)
(456)
(29)
2,061
1,019
(500)
488
—
(456)
(29)
(66)
110
33,408
(1,440)
(1,440)
(4,693)
(19)
217
1
327
1
Balance at December 31, 2012
489
503,900
504
9,667
11,751
360
45,238
(1,902)
20,869
2
Net income
Other comprehensive loss
Accretion of issuance costs
Cash dividends declared:
Common stock - $1.04 per share
Preferred stock
Common stock acquired
Common stock awards and options
exercised, including income tax benefit of
$51
Other
(455)
2,136
(2)
(463)
(26)
2,136
(455)
—
(463)
(26)
31,237
(2,040)
(2,040)
(17)
113
(4)
(1)
(12)
(6,709)
249
362
(5)
Balance as of December 31, 2013
$
491
503,883
$
504
$ 9,776
$ 13,395
$
(95)
69,754
$(3,693) $20,378
The accompanying notes are an integral part of these consolidated financial statements.
127
Consolidated Statement of Cash Flows
Years Ended December 31,
(In millions)
Operating Activities:
Net income
Adjustments to reconcile net income to net cash (used in) provided by operating activities:
Deferred income tax expense
Amortization of other intangible assets
Other non-cash adjustments for depreciation, amortization and accretion, net
Losses (gains) related to investment securities, net
Change in trading account assets, net
Change in accrued interest and fees receivable, net
Change in collateral deposits, net
Change in unrealized (gains) losses on foreign exchange derivatives, net
Change in other assets, net
Change in trading liabilities, net
Change in accrued expenses and other liabilities, net
Other, net
Net cash (used in) provided by operating activities
Investing Activities:
Net (increase) decrease in interest-bearing deposits with banks
Net (increase) decrease in securities purchased under resale agreements
Proceeds from sales of available-for-sale securities
Proceeds from maturities of available-for-sale securities
Purchases of available-for-sale securities
Proceeds from maturities of held-to-maturity securities
Purchases of held-to-maturity securities
Net (increase) decrease in loans
Business acquisitions, net of cash acquired
Purchases of equity investments and other long-term assets
Divestitures
Purchases of premises and equipment
Other, net
Net cash used in investing activities
Financing Activities:
Net (decrease) increase in time deposits
Net increase (decrease) in all other deposits
Net decrease in short-term borrowings
Proceeds from issuance of long-term debt, net of issuance costs
Payments for long-term debt and obligations under capital leases
Proceeds from issuance of preferred stock
Proceeds from exercises of common stock options
Purchases of common stock
Repurchases of common stock for employee tax withholding
Payments for cash dividends
Net cash provided by financing activities
Net increase (decrease)
Cash and due from banks at beginning of period
Cash and due from banks at end of period
Supplemental disclosure:
Interest paid
Income taxes (refunded) paid, net
2013
2012
2011
$
2,136
$
2,061
$
1,920
112
214
461
9
(206)
(153)
(4,046)
(128)
(819)
—
113
333
225
198
291
(23)
70
(148)
(1,443)
982
(360)
—
(250)
324
(1,974)
1,927
(13,494)
(1,214)
10,261
37,529
(39,097)
2,080
(8,415)
(1,214)
—
(272)
18
(388)
121
8,123
2,029
5,399
44,375
(60,812)
3,176
(3,577)
(2,303)
(511)
(251)
—
(355)
116
218
200
218
(67)
(183)
(89)
817
(622)
1,269
(441)
(147)
281
3,374
(36,652)
(4,117)
16,272
44,810
(78,748)
3,653
(457)
1,638
(214)
(69)
—
(298)
287
(14,085)
(4,591)
(53,895)
(14,507)
32,594
(1,155)
2,485
(134)
—
121
(2,040)
(189)
(486)
16,689
630
2,590
7,627
(733)
(1,587)
998
(1,781)
488
53
(1,440)
(101)
(463)
3,061
397
2,193
3,220
$
2,590
$
(124)
59,066
(8,555)
1,986
(2,486)
500
49
(675)
(63)
(295)
49,403
(1,118)
3,311
2,193
$
416
406
516
$
(186)
611
305
$
$
The accompanying notes are an integral part of these consolidated financial statements.
128
STATE STREET CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Table of Contents
Note 1. Summary of Significant Accounting Policies
Note 2. Acquisitions
Note 3. Fair Value
Note 4. Investment Securities
Note 5. Loans and Leases
Note 6. Goodwill and Other Intangible Assets
Note 7. Other Assets
Note 8. Deposits
Note 9. Short-Term Borrowings
Note 10. Long-Term Debt
Note 11. Commitments, Guarantees and Contingencies
Note 12. Variable Interest Entities
Note 13. Shareholders’ Equity
Note 14. Equity-Based Compensation
Note 15. Regulatory Matters
Note 16. Derivative Financial Instruments
Note 17. Offsetting Arrangements
Note 18. Net Interest Revenue
Note 19. Employee Benefits
Note 20. Occupancy Expense and Information Systems and Commitment Expense
Note 21. Acquisition and Restructuring Costs
Note 22. Other Expenses
Note 23. Income Taxes
Note 24. Earnings Per Common Share
Note 25. Line of Business Information
Note 26. Non-U.S. Activities
Note 27. Parent Company Financial Statements
130
137
137
150
158
161
163
163
163
165
167
171
172
174
177
179
184
188
188
197
198
199
200
203
203
205
205
129
STATE STREET CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1. Summary of Significant Accounting Policies
The accounting and financial reporting policies of State Street Corporation conform to U.S. generally accepted
accounting principles, referred to as GAAP. State Street Corporation, the parent company, is a financial holding
company headquartered in Boston, Massachusetts. Unless otherwise indicated or unless the context requires
otherwise, all references in these notes to consolidated financial statements to “State Street,” “we,” “us,” “our” or
similar references mean State Street Corporation and its subsidiaries on a consolidated basis. Our principal banking
subsidiary is State Street Bank and Trust Company, or State Street Bank.
We have two lines of business:
Investment Servicing provides services for mutual funds, collective investment funds and other investment
pools, corporate and public retirement plans, insurance companies, foundations and endowments worldwide.
Products include custody; product- and participant-level accounting; daily pricing and administration; master trust
and master custody; record-keeping; cash management; foreign exchange, brokerage and other trading services;
securities finance; deposit and short-term investment facilities; loans and lease financing; investment manager and
alternative investment manager operations outsourcing; and performance, risk and compliance analytics to support
institutional investors.
Investment Management, through State Street Global Advisors, or SSgA, provides a broad array of investment
management, investment research and investment advisory services to corporations, public funds and other
sophisticated investors. SSgA offers strategies for managing financial assets, including passive and active, such as
enhanced indexing, using quantitative and fundamental methods for both U.S. and global equities and fixed-income
securities. SSgA also offers exchange-traded funds, or ETFs, such as the SPDR® ETF brand.
The preparation of consolidated financial statements in conformity with GAAP requires management to make
estimates and assumptions in the application of certain of our significant accounting policies that may materially
affect the reported amounts of assets, liabilities, equity, revenue and expenses. As a result of unanticipated events
or circumstances, actual results could differ from those estimates. Amounts dependent on subjective or complex
judgments in the application of accounting policies considered by management to be relatively more significant in
this regard are those associated with our accounting for recurring fair-value measurements; other-than-temporary
impairment of investment securities; and impairment of goodwill and other intangible assets. Among other effects,
unanticipated events or circumstances could result in future impairment of investment securities, goodwill or other
intangible assets.
Basis of Presentation:
Our consolidated financial statements include the accounts of the parent company and its majority- and wholly-
owned subsidiaries, including State Street Bank. All material inter-company transactions and balances have been
eliminated. Certain previously reported amounts have been reclassified to conform to current-year presentation.
We consolidate subsidiaries in which we exercise control. Investments in unconsolidated subsidiaries,
recorded in other assets, generally are accounted for under the equity method of accounting if we have the ability to
exercise significant influence over the operations of the investee. For investments accounted for under the equity
method, our share of income or loss is recorded in processing fees and other revenue in our consolidated statement
of income. Investments not meeting the criteria for equity-method treatment are accounted for under the cost
method of accounting.
Fair-Value Measurements:
We carry certain of our financial assets and liabilities at fair value on a recurring basis. These financial assets
and liabilities are composed of trading account assets, investment securities available for sale and various types of
derivative financial instruments. In addition, we measure certain assets, such as goodwill, investment securities held
to maturity and other long-lived assets, at fair value on a non-recurring basis to evaluate those assets for potential
impairment. Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in
an orderly transaction between market participants as of the measurement date.
We categorize our financial assets and liabilities into the following fair value hierarchy:
Level 1 – Financial assets and liabilities with values based on unadjusted quoted prices for identical assets or
liabilities in an active market. Examples of level-1 financial instruments include active exchange-traded equity
securities and certain U.S. government securities.
130
STATE STREET CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Level 2 – Financial assets and liabilities with values based on quoted prices for similar assets and liabilities in
active markets, and inputs that are observable for the asset or liability, either directly or indirectly, for substantially
the full term of the asset or liability. Examples of level-2 financial instruments include various types of fixed-income
investment securities and foreign exchange and interest-rate derivative instruments. Pricing models are utilized to
measure fair value for certain financial assets and liabilities categorized in level 2.
Level 3 – Financial assets and liabilities with values based on prices or valuation techniques that require inputs
that are both unobservable in the market and significant to the overall fair-value measurement. These inputs reflect
management’s judgment about the assumptions that a market participant would use in pricing the asset or liability,
and are based on the best available information, some of which is internally developed. Examples of level-3
financial instruments include certain asset- and mortgage-backed securities and certain derivative instruments with
little or no market activity and a resulting lack of price transparency.
When measuring fair value for financial assets and liabilities carried at fair value on a recurring basis, we
consider the principal or most advantageous market in which we would transact and consider assumptions that
market participants would use when pricing the asset or liability. When possible, we look to active and observable
markets to price identical assets or liabilities. When identical assets and liabilities are not traded in active markets,
we look to market observable data for similar assets and liabilities. Nevertheless, certain assets and liabilities are
not actively traded in observable markets; in those instances, we use alternative valuation techniques to measure
their fair value.
Foreign Currency Translation:
The assets and liabilities of our operations with functional currencies other than the U.S. dollar are translated
at month-end exchange rates, and revenue and expenses are translated at rates that approximate average monthly
exchange rates. Gains or losses from the translation of the net assets of subsidiaries with functional currencies
other than the U.S. dollar, net of related taxes, are recorded in accumulated other comprehensive income, or AOCI,
a component of shareholders’ equity.
Cash and Cash Equivalents:
For purposes of the consolidated statement of cash flows, cash and cash equivalents are defined as cash and
due from banks.
Interest-Bearing Deposits with Banks:
Interest-bearing deposits with banks generally consist of highly liquid, short-term investments maintained at the
Federal Reserve Bank and other non-U.S. central banks with original maturities at the time of purchase of one
month or less.
Securities Purchased Under Resale Agreements and Securities Sold Under Repurchase Agreements:
Securities purchased under resale agreements and sold under repurchase agreements are treated as
collateralized financing transactions, and are recorded in our consolidated statement of condition at the amounts at
which the securities will be subsequently resold or repurchased, plus accrued interest. Our policy is to take
possession or control of securities underlying resale agreements either directly or through agent banks, allowing
borrowers the right of collateral substitution and/or short-notice termination. We revalue these securities daily to
determine if additional collateral is necessary from the borrower to protect us against credit exposure. We can use
these securities as collateral for repurchase agreements. For securities sold under repurchase agreements
collateralized by our investment securities portfolio, the dollar value of the securities remains in investment
securities in our consolidated statement of condition. Where a master netting agreement exists or both parties are
members of a common clearing organization, resale and repurchase agreements with the same counterparty or
clearing house and maturity date are recorded on a net basis.
Investment Securities:
Investment securities held by us are classified as either trading account assets, investment securities available
for sale or investment securities held to maturity at the time of purchase, based on management’s intent.
Generally, trading account assets are debt and equity securities purchased in connection with our trading
activities and, as such, are expected to be sold in the near term. Our trading activities typically involve active and
frequent buying and selling with the objective of generating profits on short-term movements. Securities available
for sale are those securities that we intend to hold for an indefinite period of time. Available-for-sale securities
include securities utilized as part of our asset-and-liability management activities that may be sold in response to
131
STATE STREET CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
changes in interest rates, prepayment risk, liquidity needs or other factors. Securities held to maturity are debt
securities that management has the intent and the ability to hold to maturity.
Trading account assets are carried at fair value. Both realized and unrealized gains and losses on trading
account assets are recorded in trading services revenue in our consolidated statement of income. Debt and
marketable equity securities classified as available for sale are carried at fair value, and after-tax net unrealized
gains and losses are recorded in AOCI. Gains or losses realized on sales of available-for-sale securities are
computed using the specific identification method and are recorded in gains (losses) related to investment
securities, net, in our consolidated statement of income. Securities held to maturity are carried at cost, adjusted for
amortization of premiums and accretion of discounts.
We review the fair values of debt securities, and evaluate individual available-for-sale and held-to-maturity
securities for impairment that may be deemed to be other than temporary, at least quarterly. For impaired securities
that we plan to sell, or when it is more likely than not that we will be forced to sell the security, the impairment is
deemed to be other than temporary and the security is written down to its fair value. Otherwise, we determine
whether or not we expect to recover the entire amortized cost basis of the security, primarily by comparing the
present value of expected future principal, interest and other contractual cash flows to the security’s amortized cost.
Our evaluation of impairment of mortgage- and asset-backed securities incorporates detailed information with
respect to underlying loan-level performance. Accordingly, the range of estimates pertaining to each collateral type
reflects the unique characteristics of the underlying loans, such as payment options and collateral geography,
among other factors.
When we conclude that other-than-temporary impairment exists and we have no intention to sell, or will not be
forced to sell, the security, the impairment is separated into the amount associated with expected credit losses and
the amount related to factors other than credit. The amount associated with expected credit losses is recognized in
our consolidated statement of income in gains (losses) related to investment securities, net, and the amortized cost
basis of the security is written down by this amount. The portion of impairment related to all other factors is
recognized in other comprehensive income.
Interest revenue related to debt securities is recognized in our consolidated statement of income using the
interest method, or on a basis approximating a level rate of return over the contractual or estimated life of the
security. The level rate of return considers any nonrefundable fees or costs, as well as purchase premiums or
discounts, resulting in amortization or accretion, accordingly.
With respect to debt securities acquired, for those which we consider it probable as of the date of acquisition
that we will be unable to collect all contractually required principal, interest and other payments, the excess of our
estimate of undiscounted future cash flows from these securities over their initial recorded investment is accreted
into interest revenue on a level-yield basis over the securities’ estimated remaining terms. Subsequent decreases in
these securities’ expected future cash flows are either recognized prospectively through an adjustment of the yields
on the securities over their remaining terms, or are evaluated for other-than-temporary impairment as described
above. Increases in expected future cash flows are recognized prospectively over the securities’ estimated
remaining terms through the recalculation of their yields.
With respect to certain debt securities acquired which are considered to be beneficial interests in securitized
financial assets, the excess of our estimate of undiscounted future cash flows from these securities over their initial
recorded investment is accreted into interest revenue on a level-yield basis over the securities’ estimated remaining
terms. Subsequent decreases in these securities’ expected future cash flows are either recognized prospectively
through an adjustment of the yields on the securities over their remaining terms, or are evaluated for other-than-
temporary impairment as described above. Increases in expected future cash flows are recognized prospectively
over the securities’ estimated remaining terms through the recalculation of their yields.
Loans and Leases:
Loans are generally recorded at their principal amount outstanding, net of the allowance for loan losses,
unearned income, and any net unamortized deferred loan origination fees. Acquired loans are initially recorded at
fair value on the date of acquisition, based on management’s expectation with respect to future principal and
interest collection as of the date of acquisition. Acquired loans are held for investment, and as such their initial fair
value is not adjusted subsequent to acquisition.
Loans acquired with evidence of deterioration in credit quality subsequent to origination, and for which our
inability to collect all contractually required payments is probable on the date of acquisition, are recorded at fair
value. The excess of expected future cash flows from these loans over their initial recorded investment, which
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represents the initial allowance, is accreted into interest revenue on a level-yield basis over the remaining term of
the loans. The carrying amount of acquired loans is assessed on an ongoing basis using a discounted cash-flow
model, which incorporates management expectations of prepayments. Subsequent decreases in expected cash
flows result in an addition to the initial allowance to allow the loan to maintain its level yield. Increases in expected
cash flows are recognized, first, as a reduction of any remaining allowance, and then are recognized prospectively
over the remaining term of the loan through a recalculation of the loan’s level yield.
Interest revenue related to loans is recognized in our consolidated statement of income using the interest
method or on a basis approximating a level rate of return over the term of the loan. Fees received for providing loan
commitments and letters of credit that we anticipate will result in loans typically are deferred and amortized to
interest revenue over the term of the related loan, beginning with the initial borrowing. Fees on commitments and
letters of credit are amortized to processing fees and other revenue over the commitment period when funding is
not known or expected.
For all loan classes, other than loans acquired with evidence of deterioration in credit quality, loans are placed
on non-accrual status when they become 60 days past due as to either principal or interest, or earlier when full
collection of principal or interest is not considered probable. Loans 60 days past due, but considered both well-
secured and in the process of collection, are treated as exceptions and may be excluded from non-accrual status.
When we place a loan on non-accrual status, the accrual of interest is discontinued and previously recorded but
unpaid interest is reversed and generally charged against interest revenue. For loans on non-accrual status,
revenue is recognized on a cash basis after recovery of principal, if and when interest payments are received.
Loans may be removed from non-accrual status when repayment is reasonably assured and performance under the
terms of the loan has been demonstrated.
In certain circumstances, we restructure troubled loans by granting concessions to borrowers experiencing
financial difficulty. Once restructured, the loans are generally considered impaired until their maturity, regardless of
whether the borrowers perform under the modified terms of the loans.
Leveraged-lease investments are reported at the aggregate of lease payments receivable and estimated
residual values, net of non-recourse debt and unearned income. Lease residual values are reviewed regularly for
other-than-temporary impairment, with valuation adjustments recorded currently against processing fees and other
revenue. Unearned income is recognized to yield a level rate of return on the net investment in the leases. Gains
and losses on residual values of leased equipment sold are recorded in processing fees and other revenue.
Allowance for Loan Losses:
The allowance for loan losses, recorded as a reduction of loans and leases in our consolidated statement of
condition, represents management’s estimate of incurred credit losses in our loan-and-lease portfolio as of the
balance sheet date. The allowance is evaluated on a regular basis by management. Factors considered in
evaluating the appropriate level of the allowance for both the institutional and commercial real estate segments of
our loan-and-lease portfolio include loss experience, the probability of default reflected in our internal risk rating of
the counterparty's creditworthiness, current economic conditions and adverse situations that may affect the
borrower’s ability to repay, the estimated value of the underlying collateral, if any, the performance of individual
credits in relation to contract terms, and other relevant factors. Provisions for loan losses reflect our estimate of the
amount necessary to maintain the allowance at a level considered by us to be appropriate to absorb estimated
incurred credit losses in the loan-and-lease portfolio.
Loans are charged off to the allowance for loan losses in the reporting period in which either an event occurs
that confirms the existence of a loss on a loan or a portion of a loan is determined to be uncollectible. In addition,
any impaired loan that is determined to be collateral-dependent is reduced to an amount equal to the fair value of
the collateral less costs to sell. A loan is identified as collateral-dependent when management determines that it is
probable that the underlying collateral will be the sole source of repayment. Recoveries are recorded on a cash
basis as adjustments to the allowance.
The reserve for off-balance sheet credit exposures, recorded in accrued expenses and other liabilities in our
consolidated statement of condition, represents management’s estimate of probable credit losses in outstanding
letters and lines of credit and other credit-enhancement facilities provided to our clients and outstanding as of the
balance sheet date. The reserve is evaluated on a regular basis by management. Factors considered in evaluating
the appropriate level of this reserve are similar to those considered with respect to the allowance for loan losses.
Provisions to maintain the reserve at a level considered by us to be appropriate to absorb estimated incurred credit
losses in outstanding facilities are recorded in other expenses in our consolidated statement of income.
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Premises and Equipment:
Buildings, leasehold improvements, computer hardware and software and other equipment are carried at cost
less accumulated depreciation and amortization. Depreciation and amortization, recorded in occupancy expense
and information systems and communications expense in our consolidated statement of income, are computed
using the straight-line method over the estimated useful lives of the related assets or the remaining terms of the
leases, generally three to forty years. Maintenance and repairs are charged to expense as incurred, while major
leasehold improvements are capitalized and expensed over their estimated useful lives or the remaining terms of
the lease, whichever is shorter.
For premises held under leases for which we have an obligation to restore the facilities to their original
condition upon expiration of the lease, we expense the anticipated related costs over the term of the lease.
Costs related to internal-use software development projects that provide significant new functionality are
capitalized. We consider projects for capitalization that are expected to yield long-term operational benefits, such as
applications that result in operational efficiencies and/or incremental revenue streams.
Goodwill and Other Intangible Assets:
Goodwill represents the excess of the cost of an acquisition over the fair value of the net tangible and other
intangible assets acquired. Other intangible assets represent purchased assets that can be distinguished from
goodwill because of contractual rights or because the asset can be exchanged on its own or in combination with a
related contract, asset or liability. Goodwill is not amortized, but is subject to annual evaluation for impairment. Other
intangible assets, which are also subject to annual evaluation for impairment, are mainly related to client
relationships, which are amortized on a straight-line basis over periods ranging from five to twenty years, and core
deposit intangible assets, which are amortized over periods ranging from sixteen to twenty-two years, with such
amortization recorded in other expenses in our consolidated statement of income.
Impairment of goodwill is deemed to exist if the carrying value of a reporting unit, including its allocation of
goodwill and other intangible assets, exceeds its estimated fair value. Impairment of other intangible assets is
deemed to exist if the balance of the other intangible asset exceeds the cumulative expected net cash inflows
related to the asset over its remaining estimated useful life. If these reviews determine that goodwill or other
intangible assets are impaired, the value of the goodwill or the other intangible asset is written down through a
charge to other expenses in our consolidated statement of income.
Fee and Net Interest Revenue:
Fees from investment servicing, investment management, securities finance, trading services and certain
types of processing fees and other revenue are recorded in our consolidated statement of income based on
estimates or specific contractual terms as transactions occur or services are rendered, provided that persuasive
evidence exists, the price to the client is fixed or determinable and collectability is reasonably assured. Amounts
accrued at period-end are recorded in accrued interest and fees receivable in our consolidated statement of
condition. Performance fees generated by our investment management activities are recorded when earned, based
on predetermined benchmarks associated with the applicable fund’s performance.
Interest revenue on interest-earning assets and interest expense on interest-bearing liabilities are recorded in
our consolidated statement of income as components of net interest revenue, and are generally based on the
effective yield of the related financial asset or liability.
Employee Benefits Expense:
Employee benefits expense, recorded in our consolidated statement of income, includes costs of certain
pension and other post-retirement benefit plans related to prior and current service, which are accrued on a current
basis, as well as contributions associated with defined contribution savings plans, costs of unrestricted cash and
common stock awards under other employee incentive compensation plans, and the amortization of restricted
common stock awards.
Equity-Based Compensation:
We record compensation expense for equity-based awards. Accordingly, we measure compensation expense
at fair value on a straight-line basis over the service or performance period, net of estimated forfeitures.
The fair values of equity-based awards, such as restricted stock, deferred stock and performance awards, are
based on the closing price of our common stock on the date of grant, adjusted if appropriate based on the award’s
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eligibility to receive dividends. The fair value of stock options and stock appreciation rights is determined using the
Black-Scholes valuation model.
Compensation expense related to equity-based awards with service-only conditions and terms that provide for
a graded vesting schedule is recognized on a straight-line basis over the required service period for the entire
award. Compensation expense related to equity-based awards with performance conditions and terms that provide
for a graded vesting schedule is recognized over the requisite service period for each separately vesting tranche of
the award, and is based on the probable outcome of the performance conditions at each reporting date.
Compensation expense is adjusted for assumptions with respect to the estimated amount of awards that will be
forfeited prior to vesting, and for employees who have met certain retirement eligibility criteria.
Dividend equivalents for certain equity-based awards are paid on stock units on a current basis prior to vesting
and distribution. Compensation expense for common stock and cash awards granted to employees meeting early
retirement eligibility criteria is fully expensed and accrued on the grant date.
Income Taxes:
We use an asset-and-liability approach to account for income taxes. Our objective is to recognize the amount
of taxes payable or refundable for the current year through charges or credits to the current tax provision, and to
recognize deferred tax assets and deferred tax liabilities for the future tax consequences resulting from temporary
differences between the amounts reported in our consolidated financial statements and their respective tax bases.
The measurement of tax assets and liabilities is based on enacted tax laws and applicable tax rates. The effects of
a tax position on our consolidated financial statements are recognized when we believe it is more likely than not that
the position will be sustained. A deferred-tax-asset valuation allowance is established if it is considered more likely
than not that all or a portion of the deferred tax assets will not be realized. Deferred tax assets and deferred tax
liabilities recorded in our consolidated statement of condition are netted within the same tax jurisdiction.
Earnings Per Share:
Basic earnings per share, or EPS, is calculated pursuant to the “two-class” method, by dividing net income
available to common shareholders by the weighted-average number of common shares outstanding during the
period. Diluted EPS is calculated pursuant to the two-class method, by dividing net income available to common
shareholders by the total of weighted-average number of common shares outstanding for the period plus the shares
representing the dilutive effect of common stock options and other equity-based awards. The effect of common
stock options and other equity-based awards is excluded from the calculation of diluted EPS in periods in which
their effect would be anti-dilutive.
The two-class method requires the allocation of undistributed net income between common and participating
shareholders. Net income available to common shareholders, presented separately in our consolidated statement of
income, is the basis for the calculation of both basic and diluted EPS. Participating securities are composed of
unvested restricted stock and director stock awards, which are equity-based awards that contain non-forfeitable
rights to dividends, and are considered to participate with common shareholders in undistributed earnings.
Variable Interest Entities:
We are involved in the normal course of our business with various types of special purpose entities, some of
which meet the definition of variable interest entities, or VIEs, as defined by GAAP. We are required by GAAP to
consolidate a VIE when we are deemed to be the primary beneficiary. This determination is evaluated periodically
as facts and circumstances change.
We also invest in various forms of asset-backed securities, which we carry in our investment securities
portfolio. These asset-backed securities meet the GAAP definition of asset securitization entities, which are
considered to be VIEs. We are not considered to be the primary beneficiary of these VIEs, as defined by GAAP,
since we do not have control over their activities.
We use special purpose entities to structure and sell certificated interests in pools of tax-exempt investment-
grade assets, principally to our mutual fund clients. These trusts are recorded in our consolidated financial
statements. We transfer assets to these trusts, which are legally isolated from us, from our investment securities
portfolio at adjusted book value. The trusts finance the acquisition of these assets by selling certificated interests
issued by the trusts to third-party investors and to State Street as residual holder. The investment securities of the
trusts are carried in investment securities available for sale at their fair value on a recurring basis. The certificated
interests are carried in other short-term borrowings at the amount owed to the third-party investors. The interest
revenue and interest expense generated by the investments and certificated interests, respectively, are recorded
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as components of net interest revenue when earned or incurred.
We manage various types of sponsored investment funds through SSgA. The services we provide to these
sponsored investment funds generate management fee revenue. From time to time, we may invest cash in the
funds, referred to as seed capital, in order for the funds to establish a performance history for newly-launched
strategies. With respect to our interests in sponsored investment funds that meet the definition of a VIE, a primary
beneficiary assessment is performed to determine if our variable interest (or combination of variable interests,
including those of related parties) absorbs the majority of the entity’s expected losses, receives a majority of the
entity’s expected residual returns, or both. As part of our assessment, we consider all the facts and circumstances
regarding the terms and characteristics of the variable interest(s), the design and characteristics of the fund and the
other involvements of the enterprise with the fund. Upon consolidation of certain sponsored investment funds, we
retain the specialized investment company accounting rules followed by the underlying funds.
All of the underlying investments held by such consolidated sponsored investment funds are carried at fair
value, with corresponding changes in the investments’ fair values reflected in trading services revenue in our
consolidated statement of income. When we no longer control these funds due to a reduced ownership interest or
other reasons, the funds are de-consolidated and accounted for under another accounting method if we continue to
maintain an investment in the fund.
Derivative Financial Instruments:
A derivative financial instrument is a financial instrument or other contract which has one or more referenced
indices and one or more notional amounts, either no initial net investment or a smaller initial net investment than
would be expected for similar types of contracts, and which requires or permits net settlement. Derivatives that we
enter into include forwards, futures, swaps, options and other instruments with similar characteristics.
We record derivatives in our consolidated statement of condition at their fair value on a recurring basis. On the
date a derivative contract is entered into, we designate the derivative as: (1) a hedge of the fair value of a
recognized fixed-rate asset or liability or of an unrecognized firm commitment (a “fair-value” hedge); (2) a hedge of
a forecast transaction or of the variability of cash flows to be received or paid related to a recognized variable-rate
asset or liability (a “cash-flow” hedge); (3) a foreign currency fair value or cash flow hedge (a “foreign currency”
hedge); (4) a hedge of a net investment in a non-U.S. operation; or (5) a derivative utilized in either our trading
activities or in our asset-and-liability management activities that is not designated as a hedge of an asset or liability.
Changes in the fair value of a derivative that is highly effective, and that is designated and qualifies as a fair-
value hedge, are recorded currently in processing fees and other revenue, along with the changes in fair value of
the hedged asset or liability attributable to the hedged risk. Changes in the fair value of a derivative that is highly
effective, and that is designated and qualifies as a cash-flow hedge, are recorded, net of taxes, in other
comprehensive income, until earnings are affected by the hedged cash flows (e.g., when periodic settlements on a
variable-rate asset or liability are recorded in earnings). Ineffectiveness of cash-flow hedges, defined as the extent
to which the changes in fair value of the derivative exceed the variability of cash flows of the forecast transaction, is
recorded in processing fees and other revenue.
Changes in the fair value of a derivative that is highly effective, and that is designated and qualifies as a
foreign currency hedge, are recorded currently either in processing fees and other revenue or in other
comprehensive income, net of taxes, depending on whether the hedge transaction meets the criteria for a fair-value
or a cash-flow hedge. If, however, a derivative is used as a hedge of a net investment in a non-U.S. operation,
its changes in fair value, to the extent effective as a hedge, are recorded, net of taxes, in the foreign currency
translation component of other comprehensive income. Lastly, entire changes in the fair value of derivatives utilized
in our trading activities are recorded in trading services revenue, and entire changes in the fair value of derivatives
utilized in our asset-and-liability management activities are recorded in processing fees and other revenue.
At both the inception of the hedge and on an ongoing basis, we formally assess and document the
effectiveness of a derivative designated as a hedge in offsetting changes in the fair value of hedged items and the
likelihood that the derivative will be an effective hedge in future periods. We discontinue hedge accounting
prospectively when we determine that the derivative is no longer highly effective in offsetting changes in fair value or
cash flows of the underlying risk being hedged, the derivative expires, terminates or is sold, or management
discontinues the hedge designation.
Unrealized gains and losses on foreign exchange and interest-rate contracts are reported at fair value in our
consolidated statement of condition as a component of other assets and accrued expenses and other liabilities,
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respectively, on a gross basis, except where such gains and losses arise from contracts covered by qualifying
master netting agreements.
Recent Accounting Developments:
In January 2014, the FASB issued an amendment to GAAP that allows an investor in an affordable housing
project, if the project meets certain conditions, to amortize the cost of their investment in proportion to the tax credits
and other tax benefits they receive, and reflect it as part of income tax expense rather than revenue from
operations. The amendment is effective, for State Street, for interim and annual periods beginning after December
15, 2014, and must be applied retrospectively. Early adoption is permitted. Our adoption of the amendment is not
expected to have a material effect on our consolidated financial statements.
In July 2013, the FASB issued an amendment to GAAP that requires a liability associated with an
unrecognized tax benefit, or a portion of that unrecognized tax benefit, to be presented in the financial statements
as a reduction of a deferred tax asset for a net operating loss carryforward, a similar tax loss, or a tax credit
carryforward. The amendment is effective, for State Street, for interim and annual periods beginning on January 1,
2014, and is required to be applied on a prospective basis. Our adoption of the amendment will not have a material
effect on our consolidated financial statements.
In June 2013, the FASB issued an amendment to GAAP that prescribes certain criteria for an entity to qualify
as an investment company. The amendment does not significantly change which entities qualify to use specialized
accounting for investment companies, but introduces new disclosure requirements that apply to all investment
companies, and revises the criteria used to measure certain interests in investment companies. We are not an
investment company, but we are affiliated with investment companies in our role as an asset manager, and we
provide accounting and reporting services to investment companies in our role as an asset servicer. The
amendment is effective, for State Street, for interim and annual periods beginning on January 1, 2014. Our
adoption of the amendment will not have a material effect on our consolidated financial statements.
In March 2013, the FASB issued an amendment to GAAP that specifies that cumulative foreign currency
translation recorded in other comprehensive income should be reclassified to earnings when an entity ceases to
have a controlling financial interest in a subsidiary, or group of assets within a consolidated non-U.S. entity, and the
sale or transfer results in the complete or substantially complete liquidation of the non-U.S. entity. The amendment
is effective, for State Street, for interim and annual periods beginning after December 31, 2013, and must be applied
prospectively. Our adoption of the amendment will not have a material effect on our consolidated financial
statements.
Note 2. Acquisitions
In October 2012, we completed our acquisition of Goldman Sachs Administration Services, or GSAS, for a total
purchase price of approximately $550 million, subject to certain adjustments. We acquired GSAS, a global hedge-
fund service provider with approximately $200 billion of single manager hedge-fund assets under administration in
locations worldwide, to expand our hedge-fund servicing and administration capabilities and our overall presence in
non-U.S. markets. In connection with the acquisition, we recorded goodwill of approximately $290 million,
approximately half of which we do not expect to be tax deductible, and other intangible assets of approximately
$257 million, in our consolidated statement of condition. We did not record the hedge-fund assets in our
consolidated financial statements. Results of operations of the acquired GSAS business are included in our
consolidated financial statements beginning on the acquisition date.
Note 3. Fair Value
Fair-Value Measurements:
We carry trading account assets, investment securities available for sale and various types of derivative
financial instruments at fair value in our consolidated statement of condition on a recurring basis. Changes in the
fair values of these financial assets and liabilities are recorded either as components of our consolidated statement
of income or as components of AOCI within shareholders' equity in our consolidated statement of condition.
We measure fair value for the above-described financial assets and liabilities in conformity with GAAP that
governs the measurement of the fair value of financial instruments. Management believes that its valuation
techniques and underlying assumptions used to measure fair value conform to the provisions of GAAP. We
categorize the financial assets and liabilities that we carry at fair value based on a prescribed three-level valuation
hierarchy. The hierarchy gives the highest priority to quoted prices in active markets for identical assets or liabilities
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(level 1) and the lowest priority to valuation methods using significant unobservable inputs (level 3). If the inputs
used to measure a financial asset or liability cross different levels of the hierarchy, categorization is based on the
lowest-level input that is most significant to the fair-value measurement. Management's assessment of the
significance of a particular input to the overall fair-value measurement of a financial asset or liability requires
judgment, and considers factors specific to that asset or liability. The three valuation levels are described below.
Level 1. Financial assets and liabilities with values based on unadjusted quoted prices for identical assets or
liabilities in an active market. Fair value is measured using unadjusted quoted prices in active markets for identical
securities. Our level-1 financial assets and liabilities primarily include positions in U.S. government securities and
highly liquid U.S. and non-U.S. government fixed-income securities. We may carry U.S. government securities in
our available-for-sale portfolio in connection with our asset-and-liability management activities. Our level-1 financial
assets also include active exchange-traded equity securities.
Level 2. Financial assets and liabilities with values based on quoted prices for similar assets and liabilities in
active markets, and inputs that are observable for the asset or liability, either directly or indirectly, for substantially
the full term of the asset or liability. Level-2 inputs include the following:
• Quoted prices for similar assets or liabilities in active markets;
• Quoted prices for identical or similar assets or liabilities in non-active markets;
• Pricing models whose inputs are observable for substantially the full term of the asset or liability; and
• Pricing models whose inputs are derived principally from, or corroborated by, observable market information
through correlation or other means for substantially the full term of the asset or liability.
Our level-2 financial assets and liabilities primarily include trading account assets and fixed-income investment
securities available for sale, as well as various types of foreign exchange and interest-rate derivative instruments.
Fair value for our investment securities available for sale categorized in level 2 is measured primarily using
information obtained from independent third parties. This third-party information is subject to review by
management as part of a validation process, which includes obtaining an understanding of the underlying
assumptions and the level of market participant information used to support those assumptions. In addition,
management compares significant assumptions used by third parties to available market information. Such
information may include known trades or, to the extent that trading activity is limited, comparisons to market
research information pertaining to credit expectations, execution prices and the timing of cash flows, and where
information is available, back-testing.
Derivative instruments categorized in level 2 predominantly represent foreign exchange contracts used in our
trading activities, for which fair value is measured using discounted cash-flow techniques, with inputs consisting of
observable spot and forward points, as well as observable interest-rate curves. With respect to derivative
instruments, we evaluate the impact on valuation of the credit risk of our counterparties and our own credit risk. We
consider factors such as the likelihood of default by us and our counterparties, our current and potential future net
exposures and remaining maturities in determining the fair value. Valuation adjustments associated with derivative
instruments were not material to those instruments for the years ended December 31, 2013, 2012 or 2011.
Level 3. Financial assets and liabilities with values based on prices or valuation techniques that require inputs
that are both unobservable in the market and significant to the overall measurement of fair value. These inputs
reflect management's judgment about the assumptions that a market participant would use in pricing the financial
asset or liability, and are based on the best available information, some of which is internally developed. The
following provides a more detailed discussion of our financial assets and liabilities that we may categorize in level 3
and the related valuation methodology.
• The fair value of our investment securities categorized in level 3 is measured using information obtained
from third-party sources, typically non-binding broker or dealer quotes, or through the use of internally-
developed pricing models. Management has evaluated its methodologies used to measure fair value, but
has considered the level of observable market information to be insufficient to categorize the securities in
level 2.
• The fair value of foreign exchange contracts, primarily options, is measured using an option-pricing model.
Because of a limited number of observable transactions, certain model inputs are not observable, such as
implied volatility surface, but are derived from observable market information.
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• The fair value of certain interest-rate caps with long-dated maturities, is measured using a matrix-pricing
approach. Observable market prices are not available for these derivatives, so extrapolation is necessary to
value these instruments, since they have a strike and/or maturity outside of the matrix.
Our level-3 financial assets and liabilities are similar in structure and profile to our level-1 and level-2 financial
instruments, but they trade in less-liquid markets, and the measurement of their fair value is inherently more difficult.
As of December 31, 2013, on a gross basis, we categorized in level 3 approximately 7% of our financial assets
carried at fair value on a recurring basis. As of the same date and on the same basis, the percentage of our
financial liabilities categorized in level 3 to our financial liabilities carried at fair value on a recurring basis was not
significant. We generally determine the fair value of our level-3 financial assets and liabilities using pricing
information obtained from third-party sources, typically non-binding broker and dealer quotes, and, to a lesser
extent, using internally-developed pricing models. The fair value of investment securities categorized in level 3 that
was measured using non-binding quotes and internally-developed pricing-model inputs composed approximately
98% and 2%, respectively, of the total fair value of the investment securities categorized in level 3 as of
December 31, 2013.
The process used to measure the fair value of our level-3 financial assets and liabilities is overseen by a
valuation group within Corporate Finance, separate from the business units that carry the assets and liabilities. This
function, which develops and manages the valuation process, reports to State Street's Valuation Committee. The
Valuation Committee, composed of senior management from separate business units, Enterprise Risk Management
and Corporate Finance, oversees adherence to State Street's valuation policies.
The valuation group performs validation of the pricing information obtained from third-party sources in order to
evaluate reasonableness and consistency with market experience in similar asset classes. Monthly analyses
include a review of price changes relative to overall trends, credit analysis and other relevant procedures (discussed
below). In addition, prices for level-3 securities carried in our investment portfolio are tested on a sample basis
based on unexpected pricing movements. These sample prices are then corroborated through price recalculations,
when applicable, using available market information, which is obtained separately from the third-party pricing
source. The recalculated prices are compared to market-research information pertaining to credit expectations,
execution prices and the timing of cash flows, and where information is available, back-testing. If a difference is
identified and it is determined that there is a significant impact requiring an adjustment, the adjustment is presented
to the Valuation Committee for review and consideration.
Validation is also performed on fair-value measurements determined using internally-developed pricing
models. The pricing models are subject to validation through our Model Assessment Committee, a corporate risk
oversight committee that provides technical support and input to the Valuation Committee. This validation process
incorporates a review of a diverse set of model and trade parameters across a broad range of values in order to
evaluate the model's suitability for valuation of a particular financial instrument type, as well as the model's accuracy
in reflecting the characteristics of the related financial asset or liability and its significant risks. Inputs and
assumptions, including any price-valuation adjustments, are developed by the business units and separately
reviewed by the valuation group. Model valuations are compared to available market information including
appropriate proxy instruments and other benchmarks to highlight abnormalities for further investigation.
Measuring fair value requires the exercise of management judgment. The level of subjectivity and the degree
of management judgment required is more significant for financial instruments whose fair value is measured using
inputs that are not observable. The areas requiring significant judgment are identified, documented and reported to
the Valuation Committee as part of the valuation control framework. We believe that our valuation methods are
appropriate; however, the use of different methodologies or assumptions, particularly as they apply to level-3
financial assets and liabilities, could materially affect fair-value measurements as of the reporting date.
The following tables present information with respect to our financial assets and liabilities carried at fair value
in our consolidated statement of condition on a recurring basis as of the dates indicated. No transfers of financial
assets or liabilities between levels 1 and 2 occurred during 2013 or 2012.
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(In millions)
Assets:
Trading account assets:
U.S. government securities
Non-U.S. government securities
Other
Total trading account assets
Investment securities available for sale:
U.S. Treasury and federal agencies:
Direct obligations
Mortgage-backed securities
Asset-backed securities:
Student loans
Credit cards
Sub-prime
Other
Total asset-backed securities
Non-U.S. debt securities:
Mortgage-backed securities
Asset-backed securities
Government securities
Other
Total non-U.S. debt securities
State and political subdivisions
Collateralized mortgage obligations
Other U.S. debt securities
U.S. equity securities
Non-U.S. equity securities
U.S. money-market mutual funds
Non-U.S. money-market mutual funds
Total investment securities available for sale
Other assets:
Derivative instruments:
Foreign exchange contracts
Interest-rate contracts
Other
Total derivative instruments
Other
Fair-Value Measurements on a Recurring Basis
as of December 31, 2013
Quoted Market
Prices in Active
Markets
(Level 1)
Pricing Methods
with Significant
Observable
Market Inputs
(Level 2)
Pricing Methods
with Significant
Unobservable
Market Inputs
(Level 3)
Impact of
Netting(1)
Total Net
Carrying Value
in Consolidated
Statement of
Condition
$
20
399
67
$
486
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
97
$
357
357
709
22,847
$
14,119
8,186
1,203
532
24,040
10,654
4,592
3,761
4,263
23,270
10,220
5,107
4,972
34
1
422
7
716
423
24
—
4,532
4,979
375
798
—
464
1,637
43
162
8
—
—
—
—
91,629
7,545
11,892
65
1
11,958
—
19
—
—
19
—
$
(6,442)
(59)
—
(6,501)
—
20
399
424
843
709
23,563
14,542
8,210
1,203
5,064
29,019
11,029
5,390
3,761
4,727
24,907
10,263
5,269
4,980
34
1
422
7
99,174
5,469
6
1
5,476
97
Total assets carried at fair value
$
583
$
103,944
$
7,564
$
(6,501) $
105,590
Liabilities:
Accrued expenses and other liabilities:
Derivative instruments:
Foreign exchange contracts
Interest-rate contracts
Other
Total derivative instruments
Other
Total liabilities carried at fair value
$
$
11,454
$
331
—
11,785
—
11,785
$
17
—
9
26
—
26
$
(5,458) $
(94)
—
(5,552)
—
$
(5,552) $
6,013
237
9
6,259
97
6,356
$
$
97
97
(1) Represents counterparty netting against level-2 financial assets and liabilities, where a legally enforceable master netting agreement exists between
State Street and the counterparty. Netting also reflects asset and liability reductions of $1.93 billion and $979 million, respectively, for cash collateral
received from and provided to derivative counterparties.
140
STATE STREET CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(In millions)
Assets:
Trading account assets:
U.S. government securities
Non-U.S. government securities
Other
Total trading account assets
Investment securities available for sale:
U.S. Treasury and federal agencies:
Direct obligations
Mortgage-backed securities
Asset-backed securities:
Student loans
Credit cards
Sub-prime
Other
Total asset-backed securities
Non-U.S. debt securities:
Mortgage-backed securities
Asset-backed securities
Government securities
Other
Total non-U.S. debt securities
State and political subdivisions
Collateralized mortgage obligations
Other U.S. debt securities
U.S. equity securities
Non-U.S. equity securities
U.S. money-market mutual funds
Non-U.S. money-market mutual funds
Total investment securities available for sale
Other assets:
Derivatives instruments:
Foreign exchange contracts
Interest-rate contracts
Total derivative instruments
Other
Fair-Value Measurements on a Recurring Basis
as of December 31, 2012
Quoted Market
Prices in Active
Markets
(Level 1)
Pricing Methods
with Significant
Observable
Market Inputs
(Level 2)
Pricing Methods
with Significant
Unobservable
Market Inputs
(Level 3)
Total Net
Carrying Value
in Consolidated
Statement of
Condition
Impact of
Netting(1)
$
20
391
71
482
$
3
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
3
—
—
—
66
155
155
838
31,387
$
15,833
9,919
1,399
683
27,834
10,850
5,694
3,199
4,166
23,909
7,503
4,837
5,289
31
1
1,062
121
825
588
67
—
3,994
4,649
555
524
—
140
1,219
48
117
9
—
—
—
—
$
20
391
226
637
841
32,212
16,421
9,986
1,399
4,677
32,483
11,405
6,218
3,199
4,306
25,128
7,551
4,954
5,298
31
1
1,062
121
102,812
6,867
109,682
9,265
223
9,488
2
113
$
(4,981)
—
113
—
(64)
(5,045)
—
4,397
159
4,556
68
Total assets carried at fair value
$
551
$
112,457
$
6,980
$
(5,045) $
114,943
Liabilities:
Accrued expenses and other liabilities:
Derivative instruments:
Foreign exchange contracts
Interest-rate contracts
Other
Total derivative instruments
Other
Total liabilities carried at fair value
$
$
8,978
$
106
$
(4,052) $
345
—
9,323
—
9,323
$
—
9
115
—
115
(19)
—
(4,071)
—
(4,071) $
$
5,032
326
9
5,367
66
5,433
$
$
66
66
(1) Represents counterparty netting against level-2 financial assets and liabilities, where a legally enforceable master netting agreement exists between
State Street and the counterparty. Netting also reflects asset and liability reductions of $1.45 billion and $478 million, respectively, for cash collateral
received from and provided to derivative counterparties.
141
STATE STREET CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The following tables present activity related to our level-3 financial assets and liabilities during the years ended
December 31, 2013 and 2012, respectively. Transfers into and out of level 3 are reported as of the beginning of the
period. During the years ended December 31, 2013 and 2012, transfers out of level 3 were mainly related to certain
asset-backed securities and non-U.S. debt securities, for which fair value was measured using prices for which
observable market information became available.
Fair-Value Measurements Using Significant Unobservable Inputs
Year Ended December 31, 2013
Total Realized and
Unrealized Gains (Losses)
Fair
Value as of
December 31,
2012
Recorded
in
Revenue
Recorded
in Other
Comprehensive
Income
Purchases
Issuances
Sales
Settlements
Transfers
into
Level 3
Transfers
out of
Level 3
Fair
Value as of
December 31,
2013
Change in
Unrealized
Gains
(Losses)
Related to
Financial
Instruments
Held as of
December 31,
2013
(In millions)
Assets:
Investment
securities available
for sale:
U.S. Treasury
and federal
agencies,
mortgage-
backed
securities
Asset-backed
securities:
Student
loans
Credit cards
Other
Total asset-
backed
securities
Non-U.S. debt
securities:
Mortgage-
backed
securities
Asset-backed
securities
Other
Total non-U.S. debt
securities
State and political
subdivisions
Collateralized
mortgage
obligations
Other U.S. debt
securities
Total investment
securities
available for sale
Other assets:
Derivative
instruments:
Derivative
instruments,
Foreign
exchange
contracts
Total
derivative
instruments
$
825
$
92
$
(109)
$
(92)
$
716
588
$
2
$
67
3,994
4,649
555
524
140
1,219
48
117
9
6,867
—
53
55
—
5
—
5
1
1
—
62
12
—
9
21
(1)
3
1
3
(2)
(5)
(1)
79
—
1,721
1,800
33
531
397
961
—
218
—
$ (26)
—
(34)
(31)
(43)
(1,188)
(201)
—
(23)
423
24
4,532
(60)
(1,262)
(224)
4,979
—
—
—
—
—
—
—
(4)
(142)
$
20
(126)
(4)
(39)
—
160
—
160
—
14
—
(208)
(283)
(94)
(585)
—
(144)
—
375
798
464
1,637
43
162
8
16
3,071
(60)
(1,540)
174
(1,045)
7,545
113
103
113
103
—
—
20
20
—
—
(217)
—
(217)
—
—
19
$
19
(2)
(2)
(2)
Total assets carried
at fair value
$
6,980
$
165
$
16
$
3,091
— $ (60)
$
(1,757)
$
174
$
(1,045)
$
7,564
$
142
STATE STREET CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Fair-Value Measurements Using Significant Unobservable Inputs
Year Ended December 31, 2013
Total Realized and
Unrealized (Gains) Losses
Fair
Value as of
December 31,
2012
Recorded
in
Revenue
Recorded
in Other
Comprehensive
Income
Purchases
Issuances
Sales
Settlements
Transfers
into
Level 3
Transfers
out of
Level 3
Fair
Value as of
December 31,
2013
Change in
Unrealized
(Gains)
Losses
Related to
Financial
Instruments
Held as of
December 31,
2013
$
106
$
9
115
40
—
40
$
18
—
18
$
(147)
$
17
$
—
(147)
9
26
$
115
$
40
—
— $
18
— $
(147)
—
— $
26
$
(1)
—
(1)
(1)
(In millions)
Liabilities:
Accrued
expenses and
other liabilities:
Derivative
instruments:
Foreign
exchange
contracts
Other
Total
derivative
instruments
Total liabilities
carried at fair
value
143
STATE STREET CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Fair-Value Measurements Using Significant Unobservable Inputs
Year Ended December 31, 2012
Total Realized and
Unrealized Gains (Losses)
Fair
Value as of
December 31,
2011
Recorded
in
Revenue
Recorded
in Other
Comprehensive
Income
Purchases
Issuances
Sales
Settlements
Transfers
into
Level 3
Transfers
out of
Level 3
Fair
Value as of
December 31,
2012
Change in
Unrealized
Gains
(Losses)
Related to
Financial
Instruments
Held as of
December 31,
2012
$
1,189
$
2
$
(115) $
50
$
(301) $
825
860
$
91
2,798
3,749
1,457
1,768
71
3,296
50
227
2
2
6
41
49
—
2
—
2
—
369
—
15
$
100
(6)
69
239
1,920
(48)
(86)
(788)
$ (62)
(12)
78
2,259
(74)
(922)
—
21
12
33
(341)
(136)
(46)
588
67
3,994
(523)
4,649
5
8
(2)
11
(1)
3
—
799
1,317
539
2,655
—
283
—
9
—
(1,715)
—
—
—
—
(78)
1
(68)
(1)
(45)
(451)
—
(2)
555
524
140
(2,493)
(469)
(4,677)
1,219
—
(314)
—
48
117
9
—
—
—
—
45
9
8,513
420
93
5,197
(119)
(1,559)
137
(5,815)
6,867
168
(85)
10
(10)
178
(95)
—
—
—
137
—
137
—
—
—
(107)
—
(107)
—
—
—
—
—
—
113
$
(24)
—
113
—
(24)
$
8,691
$
325
$
93
$
5,334
— $(119) $
(1,666) $
137
$ (5,815) $
6,980
$
(24)
144
(In millions)
Assets:
Investment
securities
available for
sale:
U.S. Treasury
and federal
agencies:
Mortgage-
backed
securities
Asset-backed
securities:
Student
loans
Credit
cards
Other
Total asset-
backed
securities
Non-U.S. debt
securities:
Mortgage-
backed
securities
Asset-
backed
securities
Other
Total non-U.S.
debt securities
State and
political
subdivisions
Collateralized
mortgage
obligations
Other U.S.
debt securities
Total
investment
securities
available for
sale
Other assets:
Derivative
instruments:
Foreign
exchange
contracts
Interest-
rate
contracts
Total
derivative
instruments
Total assets
carried at fair
value
STATE STREET CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Fair-Value Measurements Using Significant Unobservable Inputs
Year Ended December 31, 2012
Total Realized and
Unrealized (Gains) Losses
Fair
Value as of
December 31,
2011
Recorded
in
Revenue
Recorded
in Other
Comprehensive
Income
Purchases
Issuances
Sales
Settlements
Transfers
into
Level 3
Transfers
out of
Level 3
Fair
Value as of
December 31,
2012
Change in
Unrealized
(Gains)
Losses
Related to
Financial
Instruments
Held as of
December 31,
2012
$
161
$
(93)
$
133
$
(95)
$
106
$
(27)
11
9
181
20
(11)
—
(104)
—
—
—
133
—
—
—
(95)
(20)
—
9
115
—
—
—
(27)
$
201
$
(104)
—
— $
133
— $
(115)
—
— $
115
$
(27)
(In millions)
Liabilities:
Accrued
expenses and
other liabilities:
Derivative
instruments:
Foreign
exchange
contracts
Interest-
rate
contracts
Other
Total
derivative
instruments
Other
Total liabilities
carried at fair
value
The following table presents total realized and unrealized gains and losses for the years indicated that were
recorded in revenue for our level-3 financial assets and liabilities:
(In millions)
Fee revenue:
Trading services
Total fee revenue
Net interest revenue
Total revenue
Years Ended December 31,
Total Realized and
Unrealized Gains
(Losses) Recorded
in Revenue
Change in
Unrealized Gains
(Losses) Related to
Financial
Instruments Held
as of December 31,
2013
2012
2011
2013
2012
2011
9
9
420
429
$
$
(13) $
(1) $
(13)
561
548
(1)
—
$
(1) $
3
3
—
3
$
$
(9)
(9)
—
(9)
$
$
63
63
62
$
125
$
145
STATE STREET CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The following table presents quantitative information, as of the dates indicated, about the valuation techniques
and significant unobservable inputs used in the valuation of our level-3 financial assets and liabilities measured at
fair value on a recurring basis for which we use internally-developed pricing models. The significant unobservable
inputs for our level-3 financial assets and liabilities whose fair value is measured using pricing information from non-
binding broker or dealer quotes are not included in the table, as the specific inputs applied are not provided by the
broker/dealer.
Quantitative Information about Level-3 Fair-Value Measurements
Fair Value
Weighted-Average
As of
December 31,
2013
As of
December 31,
2012
Valuation
Technique
Significant
Unobservable
Input
As of
December 31,
2013
As of
December 31,
2012
(Dollars in millions)
Significant unobservable inputs readily
available to State Street:
Assets:
Credit spread
3.5%
6.7%
Asset-backed securities, student loans
$
13
$
Asset-backed securities, credit cards
Asset-backed securities, other
State and political subdivisions
Derivative instruments, foreign exchange contracts
24
92
43
19
12
67
103
48
Discounted
cash flows
Discounted
cash flows
Discounted
cash flows
Discounted
cash flows
Credit spread
Credit spread
Credit spread
113 Option model
Volatility
Total
Liabilities:
$
191
$
343
Derivative instruments, foreign exchange contracts
$
17
$
106 Option model
Volatility
Derivative instruments, other(1)
Total
9
$
26
$
9
115
Discounted
cash flows
Participant
redemptions
2.0
1.5
1.7
11.4
11.2
7.5
7.1
1.5
1.9
9.8
9.8
6.7
(1) Relates to stable value wrap contracts; refer to the sensitivity discussion following the tables presented below, and to note 11.
The following tables present information with respect to the composition of our level-3 financial assets and
liabilities, by availability of significant unobservable inputs, as of the dates indicated:
December 31, 2013
(In millions)
Assets:
Significant Unobservable
Inputs Readily Available to
State Street(1)
Significant Unobservable
Inputs Not Developed by
State Street and Not
Readily Available(2)
Total Assets and Liabilities
with Significant
Unobservable Inputs
U.S. Treasury and federal agencies, mortgage-backed securities
$
— $
Asset-backed securities, student loans
Asset-backed securities, credit cards
Asset-backed securities, other
Non-U.S. debt securities, mortgage-backed securities
Non-U.S. debt securities, asset-backed securities
Non-U.S. debt securities, other
State and political subdivisions
Collateralized mortgage obligations
Other U.S.debt securities
Derivative instruments, foreign exchange contracts
Total
Liabilities:
Derivative instruments, foreign exchange contracts
Derivative instruments, other
Total
13
24
92
—
—
—
43
—
—
19
$
716
410
—
4,440
375
798
464
—
162
8
—
716
423
24
4,532
375
798
464
43
162
8
19
191
$
7,373
$
7,564
17
9
26
— $
—
— $
17
9
26
$
$
$
146
STATE STREET CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 31, 2012
(In millions)
Assets:
Significant
Unobservable Inputs
Readily Available to
State Street(1)
Significant Unobservable
Inputs Not Developed by
State Street and Not
Readily Available(2)
Total Assets and Liabilities
with Significant
Unobservable Inputs
U.S. Treasury and federal agencies, mortgage-backed securities
$
— $
Asset-backed securities, student loans
Asset-backed securities, credit cards
Asset-backed securities, other
Non-U.S. debt securities, mortgage-backed securities
Non-U.S. debt securities, asset-backed securities
Non-U.S. debt securities, other
State and political subdivisions
Collateralized mortgage obligations
Other U.S.debt securities
Derivative instruments, foreign exchange contracts
Total
Liabilities:
Derivative instruments, foreign exchange contracts
Derivative instruments, other
Total
$
$
$
12
67
103
—
—
—
48
—
—
113
343
$
106
9
115
$
825
576
—
3,891
555
524
140
—
117
9
—
825
588
67
3,994
555
524
140
48
117
9
113
6,637
$
6,980
— $
—
— $
106
9
115
(1) Information with respect to these model-priced financial assets and liabilities is provided above in a separate table.
(2) Fair value for these financial assets is measured using non-binding broker or dealer quotes.
Internally-developed pricing models used to measure the fair value of our level-3 financial assets and liabilities
incorporate discounted cash flow and option modeling techniques. Use of these techniques requires the
determination of relevant inputs and assumptions, some of which represent significant unobservable inputs as
indicated in the preceding table. Accordingly, changes in these unobservable inputs may have a significant impact
on fair value.
Certain of these unobservable inputs will, in isolation, have a directionally consistent impact on the fair value of
the instrument for a given change in that input. Alternatively, the fair value of the instrument may move in an
opposite direction for a given change in another input. Where multiple inputs are used within the valuation
technique of an asset or liability, a change in one input in a certain direction may be offset by an opposite change in
another input, resulting in a potentially muted impact on the overall fair value of that particular instrument.
Additionally, a change in one unobservable input may result in a change to another unobservable input (that is,
changes in certain inputs are interrelated to one another), which may counteract or magnify the fair-value impact.
For recurring level-3 fair-value measurements for which significant unobservable inputs are readily available to
State Street as of December 31, 2013, the sensitivity of the fair-value measurement to changes in significant
unobservable inputs, and a description of any interrelationships between those unobservable inputs, is described
below; however, we rarely experience a situation in which those unobservable inputs change in isolation:
• The significant unobservable input used in the measurement of the fair value of our asset-backed securities
and municipal securities (state and political subdivisions) is the credit spread. Significant increases
(decreases) in the credit spread would result in measurements of significantly lower (higher) fair value.
• The significant unobservable input used in the measurement of the fair value of our foreign exchange option
contracts is the implied volatility surface. A significant increase (decrease) in the implied volatility surface
would result in measurements of significantly higher (lower) fair value.
• The significant unobservable input used in the measurement of the fair value of our other derivative
instruments, specifically stable value wrap contracts, is participant redemptions. Increased volatility of
redemptions may result in changes to the measurement of fair value. Generally, significant increases
(decreases) in participant redemptions may result in measurements of significantly higher (lower) fair value
of this liability.
147
STATE STREET CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Fair Values of Financial Instruments:
Estimates of fair value for financial instruments not carried at fair value on a recurring basis in our consolidated
statement of condition, as defined by GAAP, are generally subjective in nature, and are determined as of a specific
point in time based on the characteristics of the financial instruments and relevant market information. Disclosure of
fair-value estimates is not required by GAAP for certain items, such as lease financing, equity-method investments,
obligations for pension and other post-retirement plans, premises and equipment, other intangible assets and
income-tax assets and liabilities. Accordingly, aggregate fair-value estimates presented do not purport to represent,
and should not be considered representative of, our underlying “market” or franchise value. In addition, because of
potential differences in methodologies and assumptions used to estimate fair values, our estimates of fair value
should not be compared to those of other financial institutions.
We use the following methods to estimate the fair values of our financial instruments:
• For financial instruments that have quoted market prices, those quoted prices are used to estimate fair
value.
• For financial instruments that have no defined maturity, have a remaining maturity of 180 days or less, or
reprice frequently to a market rate, we assume that the fair value of these instruments approximates their
reported value, after taking into consideration any applicable credit risk.
• For financial instruments for which no quoted market prices are available, fair value is estimated using
information obtained from independent third parties, or by discounting the expected cash flows using an
estimated current market interest rate for the financial instrument.
The generally short duration of certain of our assets and liabilities results in a significant number of financial
instruments for which fair value equals or closely approximates the amount recorded in our consolidated statement
of condition. These financial instruments are reported in the following captions in our consolidated statement of
condition: cash and due from banks; interest-bearing deposits with banks; securities purchased under resale
agreements; accrued interest and fees receivable; deposits; securities sold under repurchase agreements; federal
funds purchased; and other short-term borrowings.
In addition, due to the relatively short duration of certain of our net loans (excluding leases), we consider fair
value for these loans to approximate their reported value. The fair value of other types of loans, such as senior
secured bank loans, purchased receivables and commercial real estate loans, is estimated using information
obtained from independent third parties or by discounting expected future cash flows using current rates at which
similar loans would be made to borrowers with similar credit ratings for the same remaining maturities.
Commitments to lend have no reported value because their terms are at prevailing market rates.
The following tables present the reported amounts and estimated fair values of the financial instruments
defined by GAAP, excluding financial assets and liabilities carried at fair value on a recurring basis, as they would
be categorized within the fair-value hierarchy, as of the dates indicated.
148
STATE STREET CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Fair-Value Hierarchy
Quoted Market
Prices in Active
Markets
(Level 1)
Pricing Methods
with Significant
Observable Market
Inputs
(Level 2)
Pricing
Methods with
Significant
Unobservable
Market Inputs
(Level 3)
Reported
Amount
Estimated
Fair Value
December 31, 2013
(In millions)
Financial Assets:
Cash and due from banks
$
3,220
$
3,220
$
3,220
$
— $
Interest-bearing deposits with banks
Securities purchased under resale agreements
Investment securities held to maturity
Net loans (excluding leases)
64,257
6,230
17,740
12,363
64,257
6,230
17,560
12,355
—
—
—
—
64,257
6,230
17,560
11,908
Financial Liabilities:
Deposits:
Noninterest-bearing
Interest-bearing - U.S.
Interest-bearing - non-U.S.
Securities sold under repurchase agreements
Federal funds purchased
Other short-term borrowings
Long-term debt
$
65,614
$
65,614
$
— $
65,614
$
13,392
13,392
103,262
103,262
7,953
19
3,780
9,699
7,953
19
3,780
10,023
—
—
—
—
—
—
13,392
103,262
7,953
19
3,780
9,056
—
—
—
—
447
—
—
—
—
—
—
967
December 31, 2012
(In millions)
Financial Assets:
Cash and due from banks
Interest-bearing deposits with banks
Securities purchased under resale agreements
Investment securities held to maturity
Net loans (excluding leases)
Financial Liabilities:
Deposits:
Noninterest-bearing
Interest-bearing - U.S.
Interest-bearing - non-U.S.
Securities sold under repurchase agreements
Federal funds purchased
Other short-term borrowings
Long-term debt
Fair-Value Hierarchy
Quoted Market
Prices in Active
Markets
(Level 1)
Pricing Methods
with Significant
Observable Market
Inputs
(Level 2)
Pricing
Methods with
Significant
Unobservable
Market Inputs
(Level 3)
Reported
Amount
Estimated
Fair Value
$
2,590
$
2,590
$
2,590
$
— $
50,763
5,016
11,379
11,121
50,763
5,016
11,661
11,166
—
—
—
—
50,763
5,016
11,661
10,316
$
44,445
$
44,445
$
— $
44,445
$
19,201
19,201
100,535
100,535
8,006
399
4,502
7,429
8,006
399
4,502
7,780
149
—
—
—
—
—
—
19,201
100,535
8,006
399
4,502
6,871
—
—
—
—
850
—
—
—
—
—
—
909
STATE STREET CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Note 4. Investment Securities
The following table presents the amortized cost and fair value, and associated unrealized gains and losses, of
investment securities as of December 31:
2013
Gross
Unrealized
Gains
Losses
Amortized
Cost
Fair
Value
Amortized
Cost
2012
Gross
Unrealized
Gains
Losses
Fair
Value
(In millions)
Available for sale:
U.S. Treasury and federal agencies:
Direct obligations
$
702
$
9
$
2
$
709
$
823
$
19
$
1
$
841
Mortgage-backed securities
23,744
211
392
23,563
31,640
598
26
32,212
Asset-backed securities:
Student loans(1)
Credit cards
Sub-prime
Other
Total asset-backed securities
Non-U.S. debt securities:
14,718
8,230
1,291
4,949
29,188
92
21
3
138
254
Mortgage-backed securities
10,808
230
268
41
91
23
423
9
2
—
11
22
198
76
34
—
—
—
—
14,542
16,829
8,210
1,203
5,064
9,928
1,557
4,583
29,019
32,897
11,029
11,119
5,390
3,761
4,727
24,907
10,263
5,269
4,980
34
1
422
7
6,180
3,197
4,221
24,717
7,384
4,818
5,072
28
1
1,062
121
100
61
4
155
320
313
42
2
86
443
234
151
233
3
—
—
—
508
3
162
61
734
27
4
—
1
32
67
15
7
—
—
—
—
16,421
9,986
1,399
4,677
32,483
11,405
6,218
3,199
4,306
25,128
7,551
4,954
5,298
31
1
1,062
121
5,369
3,759
4,679
24,615
10,301
5,275
4,876
28
1
422
7
23
2
59
314
160
70
138
6
—
—
—
$
99,159
$ 1,162
$ 1,147
$
99,174
$ 108,563
$ 2,001
$
882
$ 109,682
$
5,041
$
— $
448
$
4,593
$
5,000
$
— $
91
1,627
762
782
3,171
4,211
2,202
2
192
6,607
24
2,806
6
—
1
1
2
150
19
—
—
169
1
176
354
—
10
—
2
12
48
—
—
—
48
—
26
97
153
1,617
763
781
3,161
4,313
2,221
2
192
6,728
25
2,956
—
—
16
16
3,122
434
3
167
3,726
74
2,410
$
534
$
17,560
$
11,379
$
11
—
—
—
—
85
16
—
—
101
2
259
373
$
8
—
—
—
—
—
68
1
—
2
71
—
12
91
$
4,992
164
—
—
16
16
3,139
449
3
165
3,756
76
2,657
$
11,661
Asset-backed securities
Government securities
Other
Total non-U.S. debt securities
State and political subdivisions
Collateralized mortgage obligations
Other U.S. debt securities
U.S. equity securities
Non-U.S. equity securities
U.S. money-market mutual funds
Non-U.S. money-market mutual funds
Total
Held to maturity:
U.S. Treasury and federal agencies:
Direct obligations
Mortgage-backed securities
Asset-backed securities:
Student loans(1)
Credit cards
Other
Total asset-backed securities
Non-U.S. debt securities:
Mortgage-backed securities
Asset-backed securities
Government securities
Other
Total non-U.S. debt securities
State and political subdivisions
Collateralized mortgage obligations
Total
$
17,740
$
(1) Substantially composed of securities guaranteed by the federal government with respect to at least 97% of defaulted principal and
accrued interest on the underlying loans.
150
STATE STREET CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Aggregate investment securities carried at $46.99 billion and $46.66 billion as of December 31, 2013 and
December 31, 2012, respectively, were designated as pledged for public and trust deposits, short-term borrowings
and for other purposes as provided by law.
The following tables present the aggregate fair values of investment securities that have been in a continuous
unrealized loss position for less than 12 months, and those that have been in a continuous unrealized loss position
for 12 months or longer, as of the dates indicated:
December 31, 2013
(In millions)
Available for sale:
U.S. Treasury and federal agencies:
Direct obligations
Mortgage-backed securities
Asset-backed securities:
Student loans
Credit cards
Sub-prime
Other
Total asset-backed securities
Non-U.S. debt securities:
Mortgage-backed securities
Asset-backed securities
Other
Total non-U.S. debt securities
State and political subdivisions
Collateralized mortgage obligations
Other U.S. debt securities
Total
Held to maturity:
U.S. Treasury and federal agencies:
Direct obligations
Asset-backed securities:
Student loans
Other
Total asset-backed securities
Non-U.S. mortgage-backed securities
Collateralized mortgage obligations
Total
Less than 12 months
12 months or longer
Total
Fair
Value
Gross
Unrealized
Losses
Fair
Value
Gross
Unrealized
Losses
Fair
Value
Gross
Unrealized
Losses
$
182
$
1
$
113
$
1
$
295
$
10,562
316
2,389
76
12,951
1,930
3,714
—
1,896
7,540
868
551
1,655
3,074
3,242
1,581
1,039
16
30
—
12
58
2
1
9
12
113
55
25
7,252
161
1,150
439
9,002
258
16
150
424
1,268
510
58
252
11
91
11
9,182
3,875
1,150
2,335
365
16,542
7
1
2
10
85
21
9
1,126
567
1,805
3,498
4,510
2,091
1,097
2
392
268
41
91
23
423
9
2
11
22
198
76
34
$ 27,220
$
580
$ 13,764
$
567
$ 40,984
$
1,147
$
4,571
$
448
$
— $
— $
4,571
$
448
1,352
297
1,649
834
759
10
1
11
3
18
—
29
29
878
161
—
1
1
45
8
1,352
326
1,678
1,712
920
10
2
12
48
26
$
7,813
$
480
$
1,068
$
54
$
8,881
$
534
151
STATE STREET CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 31, 2012
(In millions)
Available for sale:
U.S. Treasury and federal agencies:
Direct obligations
Mortgage-backed securities
Asset-backed securities:
Student loans
Credit cards
Sub-prime
Other
Total asset-backed securities
Non-U.S. debt securities:
Mortgage-backed securities
Asset-backed securities
Other
Total non-U.S. debt securities
State and political subdivisions
Collateralized mortgage obligations
Other U.S. debt securities
Total
Held to maturity:
U.S. Treasury and federal agencies:
Direct obligations
Non-U.S. debt securities:
Mortgage-backed securities
Asset-backed securities
Other
Total non-U.S. debt securities
Collateralized mortgage obligations
Total
Less than 12 months
12 months or longer
Total
Fair
Value
Gross
Unrealized
Losses
Fair
Value
Gross
Unrealized
Losses
Fair
Value
Gross
Unrealized
Losses
$
— $
— $
132
$
3,486
625
888
—
639
2,152
670
973
509
2,152
685
347
302
18
6
3
—
13
22
3
1
1
5
9
1
1
865
10,241
—
1,346
989
12,576
453
53
—
506
1,152
621
33
1
8
502
—
162
48
712
24
3
—
27
58
14
6
$
132
$
4,351
10,866
888
1,346
1,628
14,728
1,123
1,026
509
2,658
1,837
968
335
1
26
508
3
162
61
734
27
4
1
32
67
15
7
$
9,124
$
56
$ 15,885
$
826
$ 25,009
$
882
$
3,792
$
8
$
— $
— $
3,792
$
56
—
—
56
120
1
—
—
1
1
956
73
156
1,185
153
$
3,968
$
10
$
1,338
$
67
1
2
70
11
81
1,012
73
156
1,241
273
$
5,306
$
8
68
1
2
71
12
91
152
STATE STREET CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The following table presents contractual maturities of debt investment securities as of December 31, 2013:
(In millions)
Available for sale:
U.S. Treasury and federal agencies:
Direct obligations
Mortgage-backed securities
Asset-backed securities:
Student loans
Credit cards
Sub-prime
Other
Total asset-backed securities
Non-U.S. debt securities:
Mortgage-backed securities
Asset-backed securities
Government securities
Other
Total non-U.S. debt securities
State and political subdivisions
Collateralized mortgage obligations
Other U.S. debt securities
Total
Held to maturity:
U.S. Treasury and federal agencies:
Direct obligations
Mortgage-backed securities
Asset-backed securities
Student loans
Credit cards
Other
Total asset-backed securities
Non-U.S. debt securities:
Mortgage-backed securities
Asset-backed securities
Government securities
Other
Total non-U.S. debt securities
State and political subdivisions
Collateralized mortgage obligations
Total
Under 1
Year
1 to 5
Years
6 to 10
Years
Over 10
Years
$
1
$
36
$
46
$
272
2,267
5,331
626
15,693
927
2,629
33
304
3,893
883
432
2,727
1,201
5,243
690
421
299
6,400
3,366
20
1,603
11,389
5,791
4,235
1,034
2,871
13,931
3,152
1,633
3,919
4,546
2,215
2
1,438
8,201
150
592
—
655
1,397
3,884
1,240
729
2,669
—
1,148
1,719
5,536
4,205
131
—
—
4,336
2,537
1,975
33
10,819
$
36,327
$
20,828
$
30,736
— $
— $
5,000
$
—
18
—
—
18
—
140
2
165
307
15
187
527
22
152
278
493
923
1,141
1,828
—
25
2,994
9
1,065
18
221
484
284
989
179
234
—
—
413
—
495
$
5,013
$
6,915
$
41
51
1,236
—
5
1,241
2,891
—
—
2
2,893
—
1,059
5,285
$
$
$
The maturities of asset-backed securities, mortgage-backed securities and collateralized mortgage obligations
are based on expected principal payments.
153
STATE STREET CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The following table presents gross realized gains and gross realized losses from sales of available-for-sale
securities and the components of net impairment losses, included in net gains and losses related to investment
securities, for the years ended December 31:
(In millions)
Gross realized gains from sales of available-for-sale securities
Gross realized losses from sales of available-for-sale securities(1)
Gross losses from other-than-temporary impairment
Losses reclassified (from) to other comprehensive income
Net impairment losses recognized in consolidated statement of income
Gains (losses) related to investment securities, net
Impairment associated with expected credit losses
2013
2012
2011
$
104
$
101
$
152
(90)
(46)
(12)
(21)
(2)
(23)
(53)
21
(32)
(9) $
23
$
(123)
50
(73)
67
(11) $
(16) $
(42)
$
$
Impairment associated with management's intent to sell impaired securities prior to recovery
in value
Impairment associated with adverse changes in timing of expected future cash flows
(6)
(6)
—
(16)
Net impairment losses recognized in consolidated statement of income
$
(23) $
(32) $
(8)
(23)
(73)
(1) Amount for the year ended December 31, 2012 represented a pre-tax loss from the sale of all of our Greek investment securities, which had an
aggregate carrying value of approximately $91 million.
The following table presents activity with respect to net impairment losses for the years ended December 31:
(In millions)
Beginning balance
Plus losses for which other-than-temporary impairment was not previously recognized
Plus losses for which other-than-temporary impairment was previously recognized
Less previously recognized losses related to securities sold or matured
Less losses related to securities intended or required to be sold
Ending balance
Impairment:
2013
2012
2011
$
124
$
113
$
14
9
(25)
—
4
28
(21)
—
63
10
63
(13)
(10)
$
122
$
124
$ 113
We conduct periodic reviews of individual securities to assess whether other-than-temporary impairment
exists. Impairment exists when the current fair value of an individual security is below its amortized cost basis.
When the decline in the security's fair value is deemed to be other than temporary, the loss is recorded in our
consolidated statement of income. In addition, for debt securities available for sale and held to maturity, impairment
is recorded in our consolidated statement of income when management intends to sell (or may be required to sell)
the securities before they recover in value, or when management expects the present value of cash flows expected
to be collected from the securities to be less than the amortized cost of the impaired security (a credit loss).
Our review of impaired securities generally includes:
•
•
•
the identification and evaluation of securities that have indications of potential other-than-temporary
impairment, such as issuer-specific concerns, including deteriorating financial condition or bankruptcy;
the analysis of expected future cash flows of securities, based on quantitative and qualitative factors;
the analysis of the collectability of those future cash flows, including information about past events, current
conditions and reasonable and supportable forecasts;
•
the analysis of the underlying collateral for mortgage- and asset-backed securities;
154
STATE STREET CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
•
the analysis of individual impaired securities, including consideration of the length of time the security has
been in an unrealized loss position, the anticipated recovery period, and the magnitude of the overall price
decline;
• discussion and evaluation of factors or triggers that could cause individual securities to be deemed other-
than- temporarily impaired and those that would not support other-than-temporary impairment; and
• documentation of the results of these analyses.
Factors considered in determining whether impairment is other than temporary include:
• certain macroeconomic drivers;
• certain industry-specific drivers;
•
•
•
the length of time the security has been impaired;
the severity of the impairment;
the cause of the impairment and the financial condition and near-term prospects of the issuer;
• activity in the market with respect to the issuer's securities, which may indicate adverse credit conditions;
and
• our intention not to sell, and the likelihood that we will not be required to sell, the security for a period of
time sufficient to allow for its recovery in value.
Substantially all of our investment securities portfolio is composed of debt securities. A critical component of
our assessment of other-than-temporary impairment of these debt securities is the identification of credit-impaired
securities for which management does not expect to receive cash flows sufficient to recover the entire amortized
cost basis of the security.
Debt securities that are not deemed to be credit-impaired are subject to additional management analysis to
assess whether management intends to sell, or, more likely than not, would be required to sell, the security before
the expected recovery to its amortized cost basis.
The following describes our process for the identification and assessment of other-than-temporary impairment
in security types with the most significant gross unrealized losses as of December 31, 2013.
U.S. Agency Residential Mortgage-Backed Securities
Our portfolio of U.S. agency residential mortgage-backed securities receives the implicit or explicit backing of
the U.S. government in conjunction with specified financial support of the U.S. Treasury. We recorded no other-
than-temporary impairment on these securities in the years ended December 31, 2013 or 2012. The unrealized
losses on these securities as of December 31, 2013 were primarily attributable to fluctuations in interest rates in
2013.
Asset-Backed Securities - Student Loans
Asset-backed securities collateralized by student loans are primarily composed of securities collateralized by
Federal Family Education Loan Program, or FFELP, loans. FFELP loans benefit from a federal government
guarantee of at least 97% of defaulted principal and accrued interest, with additional credit support provided in the
form of over-collateralization, subordination and excess spread, which collectively total in excess of 100%.
Accordingly, the vast majority of FFELP loan-backed securities are protected from traditional consumer credit risk.
We recorded no other-than-temporary impairment on these securities in the years ended December 31, 2013
or 2012. The gross unrealized losses in our FFELP loan-backed securities portfolio as of December 31, 2013 were
primarily attributable to lower liquidity and the lower spreads on these securities relative to those associated with
more current issuances. Our assessment of other-than-temporary impairment of these securities considers, among
many other factors, the strength of the U.S. government guarantee, the performance of the underlying collateral,
and the remaining average term of the FFELP loan-backed securities portfolio, which was approximately 4.9 years
as of December 31, 2013.
Our total exposure to private student loan-backed securities was less than $900 million as of December 31,
2013. Our assessment of other-than-temporary impairment of private student loan-backed securities considers,
among other factors, the impact of high unemployment rates on the collateral performance of private student loans.
155
STATE STREET CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
We recorded no other-than-temporary impairment on these securities in the years ended December 31, 2013 or
2012.
Non-U.S. Mortgage- and Asset-Backed Securities
Non-U.S. mortgage- and asset-backed securities are primarily composed of U.K., Australian and Dutch
securities collateralized by residential mortgages and German securities collateralized by automobile loans. Our
assessment of impairment with respect to these securities considers the location of the underlying collateral,
collateral enhancement and structural features, expected credit losses under base-case and stressed conditions
and the macroeconomic outlook for the country in which the collateral is located, including housing prices and
unemployment. Where appropriate, any potential loss after consideration of the above-referenced factors is further
evaluated to determine whether any other-than-temporary impairment exists.
In the year ended December 31, 2013, we recorded other-than-temporary impairment of $12 million on certain
of our non-U.S. mortgage-backed securities in our consolidated statement of income, of which $6 million was
associated with management's intent to sell an impaired security prior to its recovery in value, and $6 million
resulted from adverse changes in the timing of expected future cash flows from certain securities.
In the year ended December 31, 2012, we recorded other-than-temporary impairment of $22 million,
substantially related to non-U.S. mortgage-backed securities, of which $6 million was associated with expected
credit losses, and $16 million resulted from adverse changes in the timing of expected future cash flows from the
securities.
Our aggregate exposure to Spain, Italy, Ireland and Portugal with respect to mortgage- and asset-backed
securities totaled approximately $574 million as of December 31, 2013, composed of $271 million in Spain, $105
million in Italy, $120 million in Ireland and $78 million in Portugal. We had no direct sovereign debt exposure to any
of these countries as of that date. As of December 31, 2013, these mortgage- and asset-backed securities had an
aggregate pre-tax net unrealized gain of approximately $69 million, composed of gross unrealized gains of $84
million and gross unrealized losses of $15 million.
Our assessment of other-than-temporary impairment of these securities takes into account government
intervention in the corresponding mortgage markets and assumes a negative baseline macroeconomic environment
for this region, due to a combination of slower economic growth and continued government austerity measures.
Our baseline view assumes a recessionary period characterized by high unemployment and by additional housing
price declines of between 12% and 19% across these four countries. Our evaluation of other-than-temporary
impairment in our base case does not assume a disorderly sovereign-debt restructuring or a break-up of the
Eurozone. In addition, stress testing and sensitivity analysis is performed in order to understand the impact of more
severe assumptions on potential other-than-temporary impairment.
State and Political Subdivisions and Other U.S. Debt Securities
Our municipal securities portfolio primarily includes securities issued by U.S. states and their municipalities. A
portion of this portfolio is held in connection with our tax-exempt investment program, more fully described in note
12. Our portfolio of other U.S. debt securities is primarily composed of securities issued by U.S. corporations. The
gross unrealized losses in each portfolio as of December 31, 2013 were primarily attributable to fluctuations in
interest rates in 2013.
Our assessment of other-than-temporary impairment of these portfolios considers, among other factors,
adverse conditions specifically related to the industry, geographic area or financial condition of the issuer; the
structure of the security, including collateral, if any, and payment schedule; rating agency changes to the security's
credit rating; the volatility of the fair value changes; and our intent and ability to hold the security until its recovery in
value. If the impairment of the security is credit-related, we estimate the future cash flows from the security, tailored
to the security and considering the above-described factors, and any resulting impairment deemed to be other than
temporary is recorded in our consolidated statement of income. We recorded no other-than-temporary impairment
on these securities in the years ended December 31, 2013 or 2012.
U.S. Non-Agency Residential Mortgage-Backed Securities
For U.S. non-agency residential mortgage-backed securities, we assess other-than-temporary impairment
using cash-flow models, tailored for each security, that estimate the future cash flows from the underlying
mortgages, using the security-specific collateral and transaction structure. Estimates of future cash flows are
subject to management judgment. The future cash flows and performance of our portfolio of U.S. non-agency
156
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
residential mortgage-backed securities are a function of a number of factors, including, but not limited to, the
condition of the U.S. economy, the condition of the U.S. residential mortgage markets, and the level of loan defaults,
prepayments and loss severities. Management's estimates of future losses for each security also consider the
underwriting and historical performance of each specific security, the underlying collateral type, vintage, borrower
profile, third-party guarantees, current levels of subordination, geography and other factors.
We recorded no other-than-temporary impairment on these securities in the year ended December 31, 2013.
We recorded other-than-temporary impairment of $10 million on these securities in our consolidated statement of
income in the year ended December 31, 2012, all associated with expected credit losses.
U.S. Non-Agency Commercial Mortgage-Backed Securities
With respect to our portfolio of U.S. non-agency commercial mortgage-backed securities, other-than-
temporary impairment is assessed by considering a number of factors, including, but not limited to, the condition of
the U.S. economy and the condition of the U.S. commercial real estate market, as well as capitalization rates.
Management estimates of future losses for each security also consider the underlying collateral type, property
location, vintage, debt-service coverage ratios, expected property income, servicer advances and estimated
property values, as well as current levels of subordination. We recorded $11 million of other-than-temporary
impairment on these securities in our consolidated statement of income in the year ended December 31, 2013, all
associated with expected credit losses. We recorded no other-than-temporary impairment on these securities in the
year ended December 31, 2012.
*****
The estimates, assumptions and other risk factors utilized in our assessment of impairment as described
above are used by management to identify securities which are subject to further analysis of potential credit losses.
Additional analyses are performed using more stressful assumptions to further evaluate the sensitivity of losses
relative to the above-described factors. However, since the assumptions are based on the unique characteristics of
each security, management uses a range of estimates for prepayment speeds, default, and loss severity forecasts
that reflect the collateral profile of the securities within each asset class. In addition, in measuring expected credit
losses, the individual characteristics of each security are examined to determine whether any additional factors
would increase or mitigate the expected loss. Once losses are determined, the timing of the loss will also affect the
ultimate other-than-temporary impairment, since the loss is ultimately subject to a discount commensurate with the
purchase yield of the security.
In the aggregate, we recorded other-than-temporary impairment of $23 million and $32 million in the years
ended December 31, 2013 and 2012, respectively, as summarized below:
Year ended December 31, 2013:
• $11 million (U.S. non-agency commercial mortgage-backed securities) was associated with expected credit
losses;
• $6 million (non-U.S. mortgage-backed securities) resulted from management's intent to sell an impaired
security prior to its recovery in value; and
• $6 million (non-U.S. mortgage-backed securities) resulted from adverse changes in the timing of expected
future cash flows from certain of the securities.
Year ended December 31, 2012:
• $16 million ($10 million on U.S. non-agency residential mortgage-backed securities and $6 million on non-
U.S. mortgage-backed securities) was associated with expected credit losses; and
• $16 million (non-U.S. mortgage-backed securities) resulted from adverse changes in the timing of expected
future cash flows from certain of the securities.
After a review of the investment portfolio, taking into consideration current economic conditions, adverse
situations that might affect our ability to fully collect principal and interest, the timing of future payments, the credit
quality and performance of the collateral underlying mortgage- and asset-backed securities and other relevant
factors, and excluding other-than-temporary impairment recorded in the year ended December 31, 2013,
management considers the aggregate decline in fair value of the investment securities portfolio and the resulting
gross pre-tax unrealized losses of $1.68 billion as of December 31, 2013, related to 2,555 securities, to be
temporary, and not the result of any material changes in the credit characteristics of the securities.
157
STATE STREET CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Note 5. Loans and Leases
The following table presents our recorded investment in loans and leases, by segment and class, as of December
31:
(In millions)
Institutional:
Investment funds:
U.S.
Non-U.S.
Commercial and financial:
U.S.
Non-U.S.
Purchased receivables:
U.S.
Non-U.S.
Lease financing:
U.S.
Non-U.S.
Total institutional
Commercial real estate:
U.S.
Total loans and leases
Allowance for loan losses
2013
2012
$
8,695
$
1,718
1,372
154
217
26
339
756
8,376
829
613
520
276
118
380
784
13,277
11,896
209
13,486
(28)
411
12,307
(22)
Loans and leases, net of allowance for loan losses
$
13,458
$
12,285
The components of our net investment in leveraged lease financing, included in the institutional segment in the
preceding table, were as follows as of December 31:
(In millions)
Net rental income receivable
Estimated residual values
Unearned income
Investment in leveraged lease financing
Less related deferred income tax liabilities
Net investment in leveraged lease financing
2013
2012
$
1,404
$
110
(419)
1,095
(359)
$
736
$
1,519
110
(465)
1,164
(370)
794
We segregate our loans and leases into two segments: institutional and commercial real estate, or CRE.
Within these two segments, we further segregate the receivables into classes based on their risk characteristics,
their initial measurement attributes and the methods we use to monitor and assess credit risk.
The institutional segment is composed of the following classes: investment funds, commercial and financial,
purchased receivables and lease financing. The investment funds class includes lending to mutual and other
collective investment funds and short-duration advances to these clients in order to provide liquidity in support of
their transaction flows associated with securities settlement activities. The commercial-and-financial class includes
lending to corporate borrowers, including broker/dealers, as well as purchased loans composed of senior secured
bank loans. These senior secured bank loans, which are more fully described below, resulted from our participation
in loan syndications in the non-investment-grade lending market beginning in 2013. The purchased receivables
class represents undivided interests in securitized pools of underlying third-party receivables added in connection
with the commercial paper conduit consolidation in 2009. The lease financing class includes our investment in
leveraged lease financing.
158
STATE STREET CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Aggregate short-duration advances to our clients included in the institutional segment were $2.45 billion and
$3.30 billion as of December 31, 2013 and December 31, 2012, respectively.
The commercial-and-financial class in the institutional segment presented in the table above included
approximately $724 million of senior secured bank loans as of December 31, 2013. We had no investment in senior
secured bank loans as of December 31, 2012. These commercial-and-financial loans are included in the
“speculative” category as of December 31, 2013 in the credit-quality-indicator table presented below.
Senior secured bank loans present more significant exposure to potential credit losses. However, we seek to
mitigate such exposure, in part through the limitation of our investment to larger, more liquid credits underwritten by
major global financial institutions, the application of our internal credit analysis process to each potential investment,
and diversification by counterparty and industry segment. As of December 31, 2013, our allowance for loan losses
included approximately $6 million related to these commercial-and-financial loans.
The CRE segment is composed of the loans acquired in 2008 pursuant to indemnified repurchase agreements
with an affiliate of Lehman as a result of the Lehman Brothers bankruptcy. These loans, which are primarily
collateralized by direct and indirect interests in commercial real estate, were recorded at their then-current fair
value, based on management’s expectations with respect to future cash flows from the loans using appropriate
market discount rates as of the date of acquisition. These cash flow estimates are updated quarterly to reflect
changes in management’s expectations, which consider market conditions and other factors.
The following tables present our recorded investment in each class of loans and leases by credit quality
indicator as of the dates indicated:
December 31, 2013
(In millions)
Investment grade(1)
Speculative(2)
Special mention(3)
Total
December 31, 2012
(In millions)
Investment grade(1)
Speculative(2)
Total
Institutional
Commercial Real Estate
Investment
Funds
Commercial
and
Financial
$
10,282
$
131
—
740
770
16
Purchased
Receivables
Lease
Financing
Property
Development
Other
$
243
$
1,068
$
— $
—
—
27
—
180
—
$
10,413
$
1,526
$
243
$
1,095
$
180
$
Total
Loans and
Leases
$
12,362
1,108
16
$
13,486
29
—
—
29
Institutional
Commercial Real Estate
Investment
Funds
Commercial
and
Financial
Purchased
Receivables
Lease
Financing
Property
Development
Other
$
$
8,937
268
9,205
$
$
1,041
92
1,133
$
$
394
—
394
$
$
1,137
27
1,164
$
$
— $
377
377
$
Total
Loans and
Leases
29
5
34
$
$
11,538
769
12,307
(1) Investment-grade loans and leases consist of counterparties with strong credit quality and low expected credit risk and probability of default.
Ratings apply to counterparties with a strong capacity to support the timely repayment of any financial commitment.
(2) Speculative loans and leases consist of counterparties that face ongoing uncertainties or exposure to business, financial, or economic
downturns. However, these counterparties may have financial flexibility or access to financial alternatives, which allow for financial
commitments to be met.
(3) Special mention loans and leases consist of counterparties with potential weaknesses that, if uncorrected, may result in deterioration of
repayment prospects.
Loans and leases are categorized in the rating categories presented in the table above that align with our
internal risk-rating framework. Management considers the ratings to be current as of December 31, 2013. We use
an internal risk-rating system to assess our risk of credit loss for each loan or lease. This risk-rating process
incorporates the use of risk-rating tools in conjunction with management judgment. Qualitative and quantitative
inputs are captured in a systematic manner, and following a formal review and approval process, an internal credit
rating based on our credit scale is assigned.
In assessing the risk rating assigned to each individual loan or lease, among the factors considered are the
borrower's debt capacity, collateral coverage, payment history and delinquency experience, financial flexibility and
earnings strength, the expected amounts and sources of repayment, the level and nature of contingencies, if any,
and the industry and geography in which the borrower operates. These factors are based on an evaluation of
159
STATE STREET CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
historical and current information, and involve subjective assessment and interpretation. Credit counterparties are
evaluated and risk-rated on an individual basis at least annually.
The following table presents our recorded investment in loans and leases, disaggregated based on our
impairment methodology, as of December 31:
(In millions)
Loans and leases:
2013
2012
Institutional
Commercial
Real Estate
Total Loans
and Leases
Institutional
Commercial
Real Estate
Total Loans
and Leases
Individually evaluated for impairment
Collectively evaluated for impairment(1)
Total
$
$
26
13,251
13,277
$
$
180
29
209
$
$
206
13,280
13,486
$
$
11
11,885
11,896
$
$
411
—
411
$
$
422
11,885
12,307
(1) As of December 31, 2013 and 2012, all of the allowance for loan losses of $28 million and $22 million, respectively, related to institutional
loans collectively evaluated for impairment.
The following tables present information related to our recorded investment in impaired loans and leases as of
and for the years ended December 31:
(In millions)
With no related allowance recorded:
CRE—property development
CRE—property development—acquired credit-impaired
CRE—other—acquired credit-impaired
Total CRE
2013
Unpaid
Principal
Balance
Recorded
Investment
Related
Allowance(1)
Recorded
Investment
2012
Unpaid
Principal
Balance
Related
Allowance(1)
$
$
130
$
143
$
— $
197
$
224
$
—
—
130
$
34
21
198
—
—
$
— $
—
—
197
$
34
64
322
$
—
—
—
—
(1) As of December 31, 2013 and 2012, all of the allowance for loan losses of $28 million and $22 million, respectively, related to loans that were
not impaired.
Years Ended December 31,
(In millions)
With no related allowance recorded:
CRE—property development
CRE—other—acquired credit-impaired
Total CRE
Average Recorded
Investment
Interest Revenue
Recognized
2013
2012
2013
2012
$
$
148
—
148
$
$
198
13
211
$
$
19
—
19
$
$
16
—
16
As of December 31, 2013 and December 31, 2012, we held an aggregate of approximately $130 million and
$197 million, respectively, of CRE loans, presented in the foregoing impaired loans and leases table, which were
modified in troubled debt restructurings. We recognized no impairment loss as a result of restructuring the loans, as
the discounted cash flows of the modified loans exceeded the carrying amount of the original loans as of the
modification date. In the years ended December 31, 2013 and 2012, no loans were modified in troubled debt
restructurings.
As of December 31, 2013 and 2012, no institutional loans or leases and no CRE loans were 90 days or more
contractually past due.
We generally place loans on non-accrual status once principal or interest payments are 60 days contractually
past due, or earlier if management determines that full collection is not probable. Loans 60 days past due, but
considered both well-secured and in the process of collection, may be excluded from non-accrual status. For loans
placed on non-accrual status, revenue recognition is discontinued. As of December 31, 2013 and 2012, none of the
aforementioned CRE loans was on non-accrual status.
160
STATE STREET CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The following table presents activity in the allowance for loan losses for the periods indicated:
(In millions)
Allowance for loan losses:
Beginning balance
Charge-offs
Provisions
Recoveries
Ending balance
Years Ended December 31,
2013
2012
2011
Institutional
Commercial
Real Estate
Total Loans
and Leases
Total Loans
and Leases
Total Loans
and Leases
$
$
22
—
6
—
28
$
$
— $
—
—
—
— $
22
—
6
—
28
$
$
22
—
(3)
3
22
$
$
100
(78)
—
—
22
The provision recorded in 2013, which was related to the institutional loans segment, resulted from our
exposure to non-investment-grade borrowers composed of senior secured bank loans, more fully described above,
which were purchased in connection with our participation in loan syndications in the non-investment-grade lending
market beginning in 2013.
Loans and leases are reviewed on a regular basis, and any provisions for loan losses that are recorded reflect
management's estimate of the amount necessary to maintain the allowance for loan losses at a level considered
appropriate to absorb estimated incurred losses in the loan-and-lease portfolio.
Note 6. Goodwill and Other Intangible Assets
The following table presents changes in the carrying amount of goodwill during the years ended December 31:
(In millions)
Beginning balance
Acquisitions(1)
Divestitures and other reductions
Foreign currency translation, net
Ending balance
2013
2012
Investment
Servicing
Investment
Management
Total
Investment
Servicing
Investment
Management
$
5,941
$
—
(10)
68
36
—
—
1
$ 5,977
$
5,610
$
—
(10)
69
290
—
41
35
—
—
1
Total
$ 5,645
290
—
42
$
5,999
$
37
$ 6,036
$
5,941
$
36
$ 5,977
(1) Amount for 2012 represented the acquisition of GSAS; refer to note 2.
161
STATE STREET CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The following table presents changes in the net carrying amount of other intangible assets during the years
ended December 31:
(In millions)
Beginning balance
Acquisitions(1)
Divestitures
Amortization
Foreign currency translation, net
Ending balance
2013
Investment
Servicing
$
2,492
Investment
Management
47
$
Total
Investment
Servicing
$ 2,539
$
2,408
2012
Investment
Management
51
$
—
(5)
(205)
39
—
—
(9)
1
—
(5)
(214)
40
257
—
(193)
20
—
—
(5)
1
Total
$ 2,459
257
—
(198)
21
$
2,321
$
39
$ 2,360
$
2,492
$
47
$ 2,539
(1) Amount for 2012 represented the acquisition of GSAS; refer to note 2.
The following table presents the gross carrying amount, accumulated amortization and net carrying amount of
other intangible assets by type as of December 31:
(In millions)
Client relationships
Core deposits
Other
Total
Gross
Carrying
Amount
2013
Accumulated
Amortization
Net
Carrying
Amount
Gross
Carrying
Amount
2012
Accumulated
Amortization
Net
Carrying
Amount
$
$
2,706
$
(975) $
1,731
$
2,653
$
(755) $
1,898
717
234
(191)
(131)
526
103
706
244
(192)
(117)
514
127
3,657
$
(1,297) $
2,360
$
3,603
$
(1,064) $
2,539
Amortization expense related to other intangible assets was $214 million, $198 million and $200 million for the
years ended December 31, 2013, 2012 and 2011, respectively. Expected future amortization expense for other
intangible assets recorded as of December 31, 2013 is $218 million for 2014, $213 million for 2015, $208 million for
2016, $201 million for 2017 and $174 million for 2018.
162
STATE STREET CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Note 7. Other Assets
The following table presents the components of other assets as of December 31:
(In millions)
Collateral deposits, net
Unrealized gains on derivative financial instruments, net
Bank-owned life insurance(1)
Investments in joint ventures and other unconsolidated entities
Accounts receivable
Income taxes receivable
Prepaid expenses
Deferred tax assets, net of valuation allowance(2)
Receivable for securities settlement
Deposits with clearing organizations
Other(3)
Total
2013
2012
$
13,706
$
5,476
2,343
1,644
950
337
286
263
195
177
613
7,649
4,556
2,000
1,405
511
252
267
353
33
174
816
$
25,990
$
18,016
(1) Represented the cash surrender values of a bankruptcy-remote, separate-account policy, and a general-account policy, both composed of
aggregate life insurance coverage purchased by State Street Bank on certain of its employees, where State Street Bank is the sole
beneficiary. The separate account mainly included cash and highly-rated investment securities carried at fair value.
(2) Deferred tax assets and liabilities recorded in our consolidated statement of condition are netted within the same tax jurisdiction. Gross
deferred tax assets and liabilities are presented in note 23.
(3) Included other real estate owned of approximately $59 million and $65 million as of December 31, 2013 and December 31, 2012, respectively.
Note 8. Deposits
As of December 31, 2013, we had $2.02 billion of time deposits outstanding, all of which were non-U.S. and all
of which are scheduled to mature in 2014. As of December 31, 2012, we had $16.53 billion of time deposits
outstanding, of which $2.82 billion were non-U.S. As of December 31, 2013 and December 31, 2012, substantially
all U.S. and non-U.S. time deposits were in amounts of $100,000 or more.
Note 9. Short-Term Borrowings
Our short-term borrowings include securities sold under repurchase agreements, federal funds purchased and
other short-term borrowings; other short-term borrowings include borrowings associated with our tax-exempt
investment program, more fully described in note 12, and commercial paper issued in connection with our corporate
program, under which we can issue up to $3 billion of commercial paper with original maturities of up to 270 days
from the date of issuance. Collectively, short-term borrowings had weighted-average interest rates of 0.48% and
0.55% for the years ended December 31, 2013 and 2012, respectively.
163
STATE STREET CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The following tables present information with respect to the amounts outstanding and weighted-average
interest rates of the primary components of our short-term borrowings as of and for the years ended December 31:
Securities Sold Under
Repurchase Agreements
Federal Funds Purchased
(Dollars in millions)
2013
2012
2011
2013
2012
2011
Balance as of December 31
$
7,953
$
8,006
$
8,572
$
Maximum outstanding as of any month-end
Average outstanding during the year
Weighted-average interest rate as of year-end
Weighted-average interest rate for the year
11,538
8,436
.003%
.01
9,306
7,697
.06%
.01
9,853
9,040
.04%
.11
19
570
297
.13%
.02
$
399
$
656
1,145
784
.13%
.09
8,259
845
.05%
.05
Tax-Exempt
Investment Program
Corporate Commercial Paper
Program
(Dollars in millions)
2013
2012
2011
2013
2012
2011
Balance as of December 31
$
1,948
$
2,148
$
2,294
$
1,819
$
2,318
$
2,384
Maximum outstanding as of any month-end
Average outstanding during the year
Weighted-average interest rate as of year-end
Weighted-average interest rate for the year
2,135
2,030
.09%
.13
2,274
2,214
.17%
.21
2,473
2,404
.18%
.26
2,535
1,632
.14%
.18
2,503
2,382
.22%
.23
2,825
2,449
.22%
.23
The following table presents the components of securities sold under repurchase agreements by underlying
collateral as of December 31, 2013:
(In millions)
Collateralized by securities purchased under resale agreements
Collateralized by investment securities
Total
$
$
1,454
6,499
7,953
Obligations to repurchase securities sold are recorded as a liability in our consolidated statement of condition.
U.S. government securities with a fair value of $6.68 billion underlying the repurchase agreements remained in our
investment securities portfolio as of December 31, 2013. The following table presents information about these U.S.
government securities and the related repurchase agreements, including accrued interest, as of December 31,
2013. The table excludes repurchase agreements collateralized by securities purchased under resale agreements.
(Dollars in millions)
Overnight maturity
U.S. Government
Securities Sold
Repurchase
Agreements
Amortized
Cost
Fair Value
Amortized
Cost
Rate
$
7,097
$
6,677
$
6,499
.004%
We have entered into an agreement with a clearing organization that enables us to net all securities
purchased under resale agreements and sold under repurchase agreements with counterparties that are also
members of this organization. As a result of this netting, the average balances of securities purchased under resale
agreements and securities sold under repurchase agreements were each reduced by $28.25 billion for 2013 and by
$21.29 billion for 2012.
State Street Bank currently maintains a line of credit of CAD $800 million, or approximately $753 million as of
December 31, 2013, to support its Canadian securities processing operations. The line of credit has no stated
termination date and is cancelable by either party with prior notice. As of December 31, 2013, there was no balance
outstanding on this line of credit.
164
STATE STREET CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Note 10. Long-Term Debt
As of December 31,
(In millions)
Statutory business trusts:
Floating-rate subordinated notes due to State Street Capital Trust IV in 2037
$
Floating-rate subordinated notes due to State Street Capital Trust I in 2028
Parent company and non-banking subsidiary issuances:
2.875% notes due 2016
3.70% notes due in 2023(1)
3.10% subordinated notes due 2023(1)
Long-term capital leases
4.375% notes due 2021
4.956% junior subordinated debentures due 2018
4.30% notes due 2014
1.35% notes due 2018(1)
5.375% notes due 2017
Floating-rate notes due 2014
7.35% notes due 2026
State Street Bank issuances:
Floating-rate extendible notes due 2016
5.25% subordinated notes due 2018
5.30% subordinated notes due 2016
Floating-rate subordinated notes due 2015
Total long-term debt
2013
2012
$
800
155
800
155
1,010
1,014
974
918
788
727
537
502
487
450
250
150
900
442
409
200
—
—
706
780
550
507
—
450
250
150
1,000
453
414
200
$
9,699
$
7,429
(1) We have entered into interest-rate swap agreements, recorded as fair value hedges, to modify our interest expense on these senior
and subordinated notes from a fixed rate to a floating rate. As of December 31, 2013, we recorded a decrease of $35 million in the
carrying value of long-term debt associated with these fair value hedges. As of December 31, 2012, we recorded an increase of $174
million in the carrying value of long-term debt associated with fair value hedges. Refer to note 16 for additional information about fair
value hedges.
We maintain an effective universal shelf registration that allows for the offering and sale of debt securities,
capital securities, common stock, depositary shares and preferred stock, and warrants to purchase such securities,
including any shares into which the preferred stock and depositary shares may be convertible, or any combination
thereof.
As of December 31, 2013, State Street Bank had Board authority to issue unsecured senior debt securities
from time to time, provided that the aggregate principal amount of such unsecured senior debt outstanding at any
one time does not exceed $5 billion. As of December 31, 2013, $4.1 billion was available for issuance pursuant to
this authority. As of December 31, 2013, State Street Bank had Board authority to issue up to $1.5 billion of
subordinated debt, incremental to subordinated debt outstanding as of the same date. As of December 31, 2013,
$500 million was available for issuance pursuant to this authority.
Statutory Business Trusts:
As of December 31, 2013, we had 2 statutory business trusts, State Street Capital Trusts I and IV, which as of
December 31, 2013 had collectively issued $955 million of trust preferred capital securities. Proceeds received by
each of the trusts from their capitalization and from their capital securities issuances are invested in junior
subordinated debentures issued by the parent company. The junior subordinated debentures are the sole assets of
Capital Trusts I and IV. Each of the trusts is wholly-owned by us; however, in conformity with GAAP, we do not
record the trusts in our consolidated financial statements.
Payments made by the trusts to holders of the capital securities are dependent on our payments made to the
trusts on the junior subordinated debentures. Our fulfillment of these commitments has the effect of providing a full,
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irrevocable and unconditional guarantee of the trusts’ obligations under the capital securities. While the capital
securities issued by the trusts are not recorded in our consolidated statement of condition, the junior subordinated
debentures qualify for inclusion in tier 1 regulatory capital under current federal regulatory capital guidelines.
Information about restrictions on our ability to obtain funds from our subsidiary banks is provided in note 15.
Interest paid by the parent company on the debentures is recorded in interest expense. Distributions to holders
of the capital securities by the trusts are payable from interest payments received on the debentures and are due
quarterly by State Street Capital Trusts I and IV, subject to deferral for up to five years under certain conditions. The
capital securities are subject to mandatory redemption in whole at the stated maturity upon repayment of the
debentures, with an option by us to redeem the debentures at any time. Such optional redemption is subject to
federal regulatory approval.
Parent Company and Non-Banking Subsidiary Issuances:
Interest on the 2.875% senior notes and the 4.375% senior notes is payable semi-annually in arrears on
March 7 and September 7 of each year.
As of December 31, 2013 and 2012, long-term capital leases included $363 million and $387 million,
respectively, related to our One Lincoln Street headquarters building and related underground parking garage; $267
million and $269 million, respectively, related to an office building in the U.K.; and $158 million and $50 million,
respectively, related to obligations associated with construction of a new building and other premises and
equipment. Refer to note 20 for additional information.
In November 2013, we issued $1.0 billion of 3.70% senior notes due November 20, 2023. Interest on the
senior notes is payable semi-annually in arrears on May 20 and November 20 of each year, beginning on May 20,
2014.
In May 2013, we issued $1.50 billion of senior and subordinated debt, composed of $500 million of 1.35%
senior notes due May 15, 2018 and $1.0 billion of 3.10% subordinated notes due May 15, 2023. Interest on both
the 1.35% senior notes and the 3.10% subordinated notes is payable semi-annually in arrears on May 15 and
November 15 of each year, beginning on November 15, 2013. The 3.10% subordinated notes qualify for inclusion
in tier 2 regulatory capital under current federal regulatory capital guidelines.
Interest on the 4.956% junior subordinated debentures is payable semi-annually in arrears on March 15 and
September 15 of each year. The debentures mature on March 15, 2018, and we do not have the right to redeem
the debentures prior to maturity other than upon the occurrence of specified events. Such redemption is subject to
federal regulatory approval. The junior subordinated debentures qualify for inclusion in tier 2 regulatory capital
under current federal regulatory capital guidelines.
The 4.30% senior notes mature on May 30, 2014, with interest payable semi-annually in arrears on May 30
and November 30 of each year. We cannot redeem the notes prior to maturity. We completed the issuance primarily
in connection with our intention to redeem the U.S. Treasury's preferred equity investment received in October 2008
under the TARP Capital Purchase Program.
The 5.375% senior notes mature on April 30, 2017, with interest payable semi-annually in arrears on April 30
and October 30 of each year.
The floating-rate notes mature on March 7, 2014, with interest payable quarterly in arrears on March 7, June 7,
September 7, and December 7 of each year.
The 7.35% senior notes mature on June 15, 2026, with interest payable semi-annually in arrears on June 15
and December 15 of each year. We may not redeem the notes prior to their maturity.
State Street Bank Issuances:
Each of the extendible notes, issued in 2012, had an initial maturity date of January 13, 2014; on the 18th day
of each month, holders are entitled to extend the maturity date of their notes for successive one-month periods in
accordance with defined procedures. Pursuant to these procedures, the maturity of these notes has been extended
to March 18, 2014. In no event may the maturity of any note be extended beyond January 15, 2016, the final
maturity date. Beginning on January 15, 2015, State Street Bank may redeem some or all of the notes at 100% of
the principal amount of the notes to be redeemed, plus accrued interest to the redemption date. State Street Bank
is required to pay interest on the notes on March 18, June 18, September 18 and December 18 of each year, at a
rate for each interest period equal to three-month LIBOR plus the applicable margin for that interest period.
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With respect to the 5.25% subordinated bank notes due 2018, State Street Bank is required to make semi-
annual interest payments on the outstanding principal balance of the notes on April 15 and October 15 of each year,
and the notes qualify for inclusion in tier 2 regulatory capital under current federal regulatory capital guidelines. With
respect to the 5.30% subordinated notes due 2016 and the floating-rate subordinated notes due 2015, State Street
Bank is required to make semi-annual interest payments on the outstanding principal balance of the 5.30%
subordinated notes on January 15 and July 15 of each year, and quarterly interest payments on the outstanding
principal balance of the floating-rate notes on March 8, June 8, September 8 and December 8 of each year. Each of
the subordinated notes qualifies for inclusion in tier 2 regulatory capital under current federal regulatory capital
guidelines.
Note 11. Commitments, Guarantees and Contingencies
Commitments:
We had unfunded off-balance sheet commitments to extend credit totaling $21.30 billion and $17.86 billion as
of December 31, 2013 and 2012, respectively. The potential losses associated with these commitments equal the
gross contractual amounts, and do not consider the value of any collateral. Approximately 75% of our unfunded
commitments to extend credit expire within one year from the date of issue. Since many of these commitments are
expected to expire or renew without being drawn upon, the gross contractual amounts do not necessarily represent
our future cash requirements.
Guarantees:
Off-balance sheet guarantees are composed of indemnified securities financing, stable value protection,
unfunded commitments to purchase assets, and standby letters of credit. The potential losses associated with
these guarantees equal the gross contractual amounts, and do not consider the value of any collateral. The
following table presents the aggregate gross contractual amounts of our off-balance sheet guarantees as of
December 31, 2013 and 2012. Amounts presented do not reflect participations to independent third parties.
(In millions)
Indemnified securities financing
Stable value protection
Asset purchase agreements
Standby letters of credit
Indemnified Securities Financing
2013
2012
$
320,078
$
302,341
24,906
4,685
4,612
33,512
5,063
4,552
On behalf of our clients, we lend their securities, as agent, to brokers and other institutions. In most
circumstances, we indemnify our clients for the fair market value of those securities against a failure of the borrower
to return such securities. We require the borrowers to maintain collateral in an amount equal to or in excess of
100% of the fair market value of the securities borrowed. Securities on loan and the collateral are revalued daily to
determine if additional collateral is necessary or if excess collateral is required to be returned to the borrower.
Collateral received in connection with our securities lending services is held by us as agent and is not recorded in
our consolidated statement of condition.
The cash collateral held by us as agent is invested on behalf of our clients. In certain cases, the cash
collateral is invested in third-party repurchase agreements, for which we indemnify the client against loss of the
principal invested. We require the counterparty to the indemnified repurchase agreement to provide collateral in an
amount equal to or in excess of 100% of the amount of the repurchase agreement. In our role as agent, the
indemnified repurchase agreements and the related collateral held by us are not recorded in our consolidated
statement of condition.
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The following table summarizes the fair values of indemnified securities financing and related collateral, as
well as collateral invested in indemnified repurchase agreements, as of December 31:
(In millions)
Aggregate fair value of indemnified securities financing
Aggregate fair value of cash and securities held by us, as agent, as collateral for indemnified
securities financing
Aggregate fair value of collateral for indemnified securities financing invested in indemnified
repurchase agreements
2013
2012
$
320,078
$ 302,341
331,732
312,223
85,374
80,224
Aggregate fair value of cash and securities held by us or our agents as collateral for investments in
indemnified repurchase agreements
91,097
85,411
In certain cases, we participate in securities finance transactions as a principal. As a principal, we borrow
securities from the lending client and then lend such securities to the subsequent borrower, either a State Street
client or a broker/dealer. Collateral provided and received in connection with such transactions is recorded in other
assets and accrued expenses and other liabilities, respectively, in our consolidated statement of condition. As of
December 31, 2013 and December 31, 2012, we had approximately $11.29 billion and $6.83 billion, respectively, of
collateral provided and approximately $6.62 billion and $4.99 billion, respectively, of collateral received from clients
in connection with our participation in principal securities finance transactions.
Stable Value Protection
In the normal course of our business, we offer products that provide book-value protection, primarily to plan
participants in stable value funds managed by non-affiliated investment managers of post-retirement defined
contribution benefit plans, particularly 401(k) plans. The book-value protection is provided on portfolios of
intermediate, investment grade fixed-income securities, and is intended to provide safety and stable growth of
principal invested. The protection is intended to cover any shortfall in the event that a significant number of plan
participants withdraw funds when book value exceeds market value and the liquidation of the assets is not sufficient
to redeem the participants. The investment parameters of the underlying portfolios, combined with structural
protections, are designed to provide cushion and guard against payments even under extreme stress scenarios.
These contingencies are individually accounted for as derivative financial instruments. The notional amounts
of the stable value contracts are presented as “derivatives not designated as hedging instruments” in the table of
aggregate notional amounts of derivative financial instruments provided in note 16. As of December 31, 2013, we
have not made a payment under these contingencies that we consider material to our consolidated financial
condition, and management believes that the probability of payment under these contingencies in the future, that we
would consider material to our consolidated financial condition, is remote.
Contingencies:
Legal and Regulatory Matters
In the ordinary course of business, we and our subsidiaries are involved in disputes, litigation and regulatory
inquiries and investigations, both pending and threatened. These matters, if resolved adversely against us or
settled, may result in monetary damages, fines and penalties or require changes in our business practices. The
resolution or settlement of these matters is inherently difficult to predict. Based on our assessment of these pending
matters, we do not believe that the amount of any judgment, settlement or other action arising from any pending
matter is likely to have a material adverse effect on our consolidated financial condition. However, an adverse
outcome in certain of the matters described below could have a material adverse effect on our consolidated results
of operations for the period in which such matter is resolved or an accrual is determined to be required, on our
consolidated financial condition or on our reputation.
We evaluate our needs for accruals of loss contingencies related to legal proceedings on a case-by-case
basis. When we have a liability that we deem probable and can be reasonably estimated as of the date of our
consolidated financial statements, we accrue for our estimate of the loss. We consider a loss probable and
establish an accrual when we make or intend to make an offer of settlement. Once established, an accrual is
subject to subsequent adjustment as a result of additional information. The resolution of proceedings and the
reasonably estimable loss (or range thereof) are inherently difficult to predict, especially in the early stages of
proceedings. Even if a loss is probable, due to many complex factors, such as speed of discovery and the timing of
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
court decisions or rulings, a loss or range of loss might not be reasonably estimated until the later stages of the
proceeding.
As of December 31, 2013, our aggregate accruals for legal loss contingencies and regulatory matters totaled
approximately $119 million. To the extent that we have established accruals in our consolidated statement of
condition for probable loss contingencies, such accruals may not be sufficient to cover our ultimate financial
exposure associated with any settlements or judgments. We may be subject to proceedings in the future that, if
adversely resolved, would have a material adverse effect on our businesses or on our future consolidated financial
statements. Except where otherwise noted below, we have not established accruals with respect to the claims
discussed and do not believe that potential exposure is probable and can be reasonably estimated.
The following discussion provides information with respect to significant legal and regulatory matters.
SSgA
We have previously reported on two related ERISA class actions by investors in unregistered SSgA-managed
collective trust funds and common trust funds which challenge the division of our securities lending-related revenue
between those funds and State Street in its role as lending agent. In January 2014, we filed a motion to approve a
$10 million class settlement of the collective trust fund litigation. A final fairness hearing has been scheduled for
May 2014. The common trust fund class action remains pending. We have accrued $15 million in connection with
these matters, including the proposed class settlement.
Securities Finance
Two related participants in our agency securities lending program have brought suit against us challenging
actions taken by us in response to their withdrawal from the program. We believe that certain withdrawals by these
participants were inconsistent with the redemption policy applicable to the agency lending collateral pools and,
consequently, redeemed their remaining interests through an in-kind distribution that reflected the assets these
participants would have received had they acted in accordance with the collateral pools' redemption policy. In
taking these actions, we believe that we acted in the best interests of all participants in the collateral pools. The two
participants have asserted damages of $120 million, an amount that plaintiffs have stated was the difference
between the amortized cost and market value of the assets that State Street proposed to distribute to the plans in-
kind on or about August 2009. While management does not believe that such difference is an appropriate measure
of damages, we have been informed that the participants liquidated these securities in June 2013, and we estimate
the loss on those sales to be approximately $11 million. We have accrued $10 million in connection with this matter.
Foreign Exchange
We offer our custody clients and their investment managers the option to route foreign exchange transactions
to our foreign exchange desk through our asset servicing operation. We record as revenue an amount
approximately equal to the difference between the rates we set for those trades and indicative interbank market
rates at the time of settlement of the trade. As discussed more fully below, claims have been asserted on behalf of
certain current and former custody clients, and future claims may be asserted, alleging that our indirect foreign
exchange rates (including the differences between those rates and indicative interbank market rates at the time we
executed the trades) were not adequately disclosed or were otherwise improper, and seeking to recover, among
other things, the full amount of the revenue we obtained from our indirect foreign exchange trading with them.
In October 2009, the Attorney General of the State of California commenced an action under the California
False Claims Act and California Business and Professional Code related to services State Street provides to
California state pension plans. The California Attorney General asserts that the pricing of certain foreign exchange
transactions for these pension plans was governed by the custody contracts for these plans and that our pricing
was not consistent with the terms of those contracts and related disclosures to the plans, and that, as a result, State
Street made false claims and engaged in unfair competition. The Attorney General asserts actual damages of
approximately $100 million for periods from 2001 to 2009 and seeks additional penalties, including treble damages.
This action is in the discovery phase.
We provide custody and principal foreign exchange services to government pension plans in other
jurisdictions. Since the commencement of the litigation in California, attorneys general and other governmental
authorities from a number of jurisdictions, as well as U.S. Attorney's offices, the U.S. Department of Labor and the
SEC, have requested information or issued subpoenas in connection with inquiries into the pricing of our foreign
exchange services. We continue to respond to such inquiries and subpoenas.
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STATE STREET CORPORATION
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We offer indirect foreign exchange services such as those we offer to the California state pension plans to a
broad range of custody clients in the U.S. and internationally. We have responded and are responding to
information requests from a number of clients concerning our indirect foreign exchange rates. In February 2011, a
putative class action was filed in federal court in Boston seeking unspecified damages, including treble damages,
on behalf of all custodial clients that executed certain foreign exchange transactions with State Street from 1998 to
2009. The putative class action alleges, among other things, that the rates at which State Street executed foreign
currency trades constituted an unfair and deceptive practice under Massachusetts law and a breach of the duty of
loyalty.
Two other putative class actions are currently pending in federal court in Boston alleging various violations of
ERISA on behalf of all ERISA plans custodied with us that executed indirect foreign exchange transactions with
State Street from 1998 onward. The complaints allege that State Street caused class members to pay unfair and
unreasonable rates for indirect foreign exchange transactions with State Street. The complaints seek unspecified
damages, disgorgement of profits, and other equitable relief.
We have not established an accrual with respect to any of the pending legal proceedings related to our indirect
foreign exchange services. We cannot provide any assurance as to the outcome of the pending proceedings, or
whether other proceedings might be commenced against us by clients or government authorities. We expect that
plaintiffs will seek to recover their share of all or a portion of the revenue that we have recorded from providing
indirect foreign exchange services.
The following table summarizes our estimated total revenue worldwide from indirect foreign exchange trading
services for the years ended December 31:
(In millions)
Revenue from indirect foreign exchange
trading
2013
2012
2011
2010
2009
2008
$
285
$
248
$
331
$
336
$
369
$
462
We believe that the amount of our revenue from such services has been of a similar or lesser order of
magnitude for many years prior to 2008. Our revenue calculations related to indirect foreign exchange trading
services reflect a judgment concerning the relationship between the rates we charge for indirect foreign exchange
execution and indicative interbank market rates near in time to execution. Our revenue from foreign exchange
trading generally depends on the difference between the rates we set for indirect trades and indicative interbank
market rates on the date trades settle.
We cannot predict the outcome of any pending matters or whether a court, in the event of an adverse
resolution, would consider our revenue to be the appropriate measure of damages.
Shareholder Litigation
Three shareholder-related complaints are currently pending in federal court in Boston. One complaint purports
to be a class action on behalf of State Street shareholders. The two other complaints purport to be class actions on
behalf of participants and beneficiaries in the State Street Salary Savings Program who invested in the program's
State Street common stock investment option. The complaints allege various violations of the federal securities
laws, common law and ERISA in connection with our public disclosures concerning our investment securities
portfolio, our asset-backed commercial paper conduit program, and our foreign exchange trading business. A fourth
complaint, a purported shareholder derivative action on behalf of State Street, was dismissed in September 2013.
We have accrued $12.5 million in connection with these matters.
Transition Management
In January 2014, we entered into a settlement with the U.K. Financial Conduct Authority as a result of our
having charged six clients of our U.K. transition management business during 2010 and 2011 amounts in excess of
the contractual terms. We agreed to and have paid a fine of £22.9 million, or approximately $37.8 million, which we
had fully accrued as of December 31, 2013. The SEC and the U.S. Attorney are conducting separate investigations
into this matter. As of December 31, 2013, in addition to the above-described settlement, we had remaining
accruals of approximately $13 million for other costs associated with the reimbursement of the affected clients and
indemnification costs.
Investment Servicing
State Street is named as a defendant in a series of related complaints by investment management clients of
TAG Virgin Islands, Inc., or TAG, who hold or held custodial accounts with State Street. The complaints,
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
collectively, allege various claims in connection with certain assets managed by TAG and custodied with State
Street. In 2013, we entered into settlements with certain of the TAG account holders. As of December 31, 2013, we
had accrued $4.6 million with respect to claims that have not been settled.
Income Taxes
In determining our provision for income taxes, we make certain judgments and interpretations with respect to
tax laws in jurisdictions in which we have business operations. Because of the complex nature of these laws, in the
normal course of our business, we are subject to challenges from U.S. and non-U.S. income tax authorities
regarding the amount of income taxes due. These challenges may result in adjustments to the timing or amount of
taxable income or deductions or the allocation of taxable income among tax jurisdictions. We recognize a tax
benefit when it is more likely than not that our position will result in a tax deduction or credit. Additional information
with respect to our provisions for income taxes and tax benefits, including unrecognized tax benefits, is provided in
note 23.
The Internal Revenue Service, or IRS, is currently reviewing our U.S. income tax returns for the tax years 2010
and 2011. Management believes that we have sufficiently accrued liabilities as of December 31, 2013 for tax
exposures, including, but not limited to, exposures related to the review by the IRS of the tax years 2010 and 2011.
Note 12. Variable Interest Entities
Asset-Backed Investment Securities:
We invest in various forms of asset-backed securities, which we carry in our investment securities portfolio.
These asset-backed securities meet the GAAP definition of asset securitization entities, which are considered to be
VIEs as defined by GAAP. We are not considered to be the primary beneficiary of these VIEs, as defined by GAAP,
since we do not have control over their activities. Additional information about our asset-backed securities is
provided in note 4.
Tax-Exempt Investment Program:
In the normal course of our business, we structure and sell certificated interests in pools of tax-exempt
investment-grade assets, principally to our mutual fund clients. We structure these pools as partnership trusts, and
the assets and liabilities of the trusts are recorded in our consolidated statement of condition as investment
securities available for sale and other short-term borrowings. We may also provide liquidity and re-marketing
services to the trusts. As of December 31, 2013 and December 31, 2012, we carried investment securities
available for sale, composed of securities related to state and political subdivisions, with a fair value of $2.33 billion
and $2.68 billion, respectively, and other short-term borrowings (refer to note 9) of $1.95 billion and $2.15 billion,
respectively, in our consolidated statement of condition in connection with these trusts.
We transfer assets to the trusts from our investment securities portfolio at adjusted book value, and the trusts
finance the acquisition of these assets by selling certificated interests issued by the trusts to third-party investors
and to State Street as residual holder. These transfers do not meet the de-recognition criteria defined by GAAP,
and therefore, are recorded in our consolidated financial statements. The trusts had a weighted-average life of
approximately 6.5 years as of December 31, 2013, compared to approximately 6.9 years as of December 31, 2012.
Under separate legal agreements, we provide standby bond-purchase agreements to these trusts and, with
respect to certain securities, letters of credit. Our commitments to the trusts under these standby bond-purchase
agreements and letters of credit totaled $1.99 billion and $684 million, respectively, as of December 31, 2013, none
of which was utilized at period-end. In the event that our obligations under these agreements are triggered, no
material impact to our consolidated results of operations or financial condition is expected to occur, because the
securities are already recorded at fair value in our consolidated statement of condition.
Interests in Sponsored Investment Funds:
In the normal course of business, we manage various types of sponsored investment funds through SSgA.
The services we provide to these sponsored investment funds generate management fee revenue. From time to
time, we may invest cash in the funds, which we refer to as seed capital, in order for the funds to establish a
performance history for newly-launched strategies. These funds may be considered VIEs.
On December 31, 2013, we invested in a newly-launched sponsored investment fund. Given the extent of our
exposure to the variability of the net assets of the fund, we were deemed to be the fund’s primary beneficiary, and
as a result have included the fund in our consolidated financial statements. As of December 31, 2013, the fund’s
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
assets consisted solely of $50 million in cash. In 2014, the cash will be invested in various securities and
investment vehicles as the fund executes its investment strategy. As of December 31, 2012, we were not deemed
to be the primary beneficiary of any sponsored investment funds, and as a result did not include the funds in our
consolidated financial statements as of that date.
As of December 31, 2013, our potential maximum total exposure associated with the consolidated sponsored
investment fund totaled $50 million and represented the value of our economic ownership interest in the fund. In
the aggregate, we expect any financial losses that we realize over time from these seed investments to be limited to
the actual fair value of the amount invested in the consolidated fund, which is based on the fair value of the
underlying investment securities held by the funds. However, in the event of a fund wind-down, gross gains and
losses of the fund may be recognized for financial accounting purposes in different periods during the time the fund
is consolidated but not wholly owned. Although we expect the actual economic loss to be limited to the amount
invested, our losses in any period could exceed the value of our economic interests in the fund and could exceed
the value of our initial seed capital investment.
Our conclusion to consolidate a sponsored investment fund may vary from period to period, most commonly as
a result of fluctuation in our ownership interest as a result of changes in the number of fund shares held by either us
or by third parties. Given that the funds follow specialized investment company accounting rules which prescribe fair
value, a de-consolidation generally would not result in gains or losses for us.
The net assets of any consolidated fund are solely available to settle the liabilities of the fund and to settle any
investors’ ownership redemption requests, including any seed capital invested in the fund by State Street. We are
not contractually required to provide financial or any other support to any of our sponsored investment funds. In
addition, neither creditors nor equity investors in the sponsored investment funds have any recourse to State
Street’s general credit.
As of December 31, 2013 and December 31, 2012, we managed certain sponsored investment funds,
considered to be VIEs, in which we held a variable interest but for which we were not deemed to be the primary
beneficiary. Our potential maximum loss exposure related to these unconsolidated funds totaled $18 million and $28
million as of December 31, 2013 and December 31, 2012, respectively, and represented the carrying value of our
seed capital investment, which is recorded in either investment securities available for sale or other assets in our
consolidated statement of condition. The amount of loss we may recognize during any period is limited to the
carrying amount of our seed capital investment in the unconsolidated fund.
Note 13. Shareholders’ Equity
Preferred Stock:
In 2013, we declared aggregate dividends on our non-cumulative perpetual preferred stock, Series C
(represented by depositary shares, each representing a 1/4,000th ownership interest in a share of State Street's
non-cumulative perpetual preferred stock, Series C) of $5,250 per share, or approximately $1.31 per depositary
share, totaling approximately $26 million. In 2012, dividends declared on our perpetual preferred stock, Series C,
totaled approximately $8 million. In 2012, we declared dividends on our non-cumulative perpetual preferred stock,
Series A, totaling approximately $21 million. We redeemed our Series A perpetual preferred stock in 2012.
Dividends on shares of our Series C preferred stock are not mandatory and are not cumulative. If declared,
dividends will be payable on the liquidation preference of $100,000 per share quarterly in arrears on March 15, June
15, September 15 or December 15 of each year at an annual rate of 5.25%. If we issue additional shares of our
Series C preferred stock after the original issue date, dividend rights with respect to such shares will commence
from the original issue date of such additional shares. Dividends on our Series C preferred stock will not be
declared to the extent that such declaration would cause us to fail to comply with applicable laws and regulations,
including federal regulatory capital guidelines.
On September 15, 2017, or any dividend payment date thereafter, the Series C preferred stock and
corresponding depositary shares may be redeemed by us, in whole or in part, at a redemption price equal to
$100,000 per share (equivalent to $25 per depositary share) plus any declared and unpaid dividends, without
accumulation of any undeclared dividends. The Series C preferred stock and corresponding depositary shares may
be redeemed at our option, in whole or in part, prior to September 15, 2017, upon the occurrence of a regulatory
capital treatment event, as defined in the certificate of designation with respect to the Series C preferred stock, at a
redemption price equal to $100,000 per share (equivalent to $25 per depositary share) plus any declared and
unpaid dividends, without accumulation of any undeclared dividends.
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STATE STREET CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Common Stock:
In March 2013, our Board of Directors approved a program authorizing the purchase by us of up to $2.10
billion of our common stock through March 31, 2014. In connection with this and a prior Board-approved program,
we undertook the following activities in 2013:
• From April 1, 2013 through December 31, 2013, we purchased approximately 24.7 million shares of our
common stock under this program at an average per-share and aggregate cost of $68.05 and $1.68 billion,
respectively. As of December 31, 2013, approximately $420 million remained available for purchases of our
common stock under the March 2013 program.
• From January 1, 2013 through March 31, 2013, we purchased approximately 6.5 million shares of our
common stock at an average cost of $54.95 per share and an aggregate cost of approximately $360 million,
under a previous Board-approved program which ended on March 31, 2013.
•
In 2013, in the aggregate under both programs, we purchased approximately 31.2 million shares of our
common stock at an average per-share cost of $65.30 and an aggregate cost of approximately $2.04 billion.
Shares acquired in connection with our common stock purchase programs which remained unissued as of
December 31, 2013 were recorded as treasury stock in our consolidated statement of condition as of December 31,
2013.
In 2013, we declared aggregate common stock dividends of $1.04 per share, totaling approximately $463
million, compared to aggregate common stock dividends of $0.96 per share, totaling approximately $456 million,
declared in 2012.
Our common shares may be acquired for certain deferred compensation plans, held by an external trustee,
that are not part of our common stock purchase program. As of December 31, 2013 and 2012, approximately
375,000 shares and 387,000 shares, respectively, had been purchased and were held in trust, and were recorded
as treasury stock in our consolidated statement of condition as of those dates.
Accumulated Other Comprehensive Income (Loss):
The following table presents the after-tax components of AOCI as of December 31:
(In millions)
2013
2012
2011
Net unrealized gains (losses) on cash flow hedges
$
161
$
69
$
Net unrealized gains (losses) on available-for-sale securities portfolio
Net unrealized losses related to reclassified available-for-sale securities
Net unrealized gains (losses) on available-for-sale securities
Net unrealized losses on available-for-sale securities designated in fair
value hedges
Other-than-temporary impairment on available-for-sale securities related to
factors other than credit
Net unrealized losses on hedges of net investments in non-U.S.
subsidiaries
Other-than-temporary impairment on held-to-maturity securities related to
factors other than credit
Net unrealized losses on retirement plans
Foreign currency translation
Total
(56)
(72)
(128)
(97)
4
(14)
(47)
(203)
229
$
(95) $
815
(110)
705
(183)
(3)
(14)
(65)
(283)
134
360
$
(5)
110
(189)
(79)
(210)
(17)
(14)
(86)
(248)
—
(659)
In the year ended December 31, 2013, we realized net gains of $14 million, or $9 million net of related taxes as
presented in the table above, from sales of available-for-sale securities. Unrealized pre-tax gains of $25 million
were included in AOCI as of December 31, 2012, net of deferred taxes of $10 million, related to these sales. In the
year ended December 31, 2012, we realized net gains of $55 million from sales of available-for-sale securities.
Unrealized pre-tax gains of $67 million were included in AOCI as of December 31, 2011, net of deferred taxes of
$27 million, related to these sales. In the year ended December 31, 2011, we realized net gains of $140 million
from sales of available-for-sale securities. Unrealized pre-tax gains of $76 million were included in other
comprehensive income as of December 31, 2010, net of deferred taxes of $30 million, related to these sales.
173
STATE STREET CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The following table presents changes in AOCI by component, net of related taxes, for the year ended
December 31:
Year Ended December 31, 2013
Net
Unrealized
Gains
(Losses)
on Cash
Flow
Hedges
Net
Unrealized
Gains
(Losses)
on
Available-
for-Sale
Securities
Net
Unrealized
Losses on
Hedges of
Net
Investments
in Non-U.S.
Subsidiaries
Other-Than-
Temporary
Impairment
on Held-to-
Maturity
Securities
Net
Unrealized
Losses on
Retirement
Plans
Foreign
Currency
Translation
Total
$
69
$
519
$
(14) $
(65) $
(283) $
134
$
360
89
3
92
(735)
(5)
(740)
—
—
—
15
3
18
60
20
80
96
(1)
95
(475)
20
(455)
(In millions)
Beginning balance
Other comprehensive income (loss)
before reclassifications
Amounts reclassified out of AOCI
Other comprehensive income (loss)
Ending balance
$
161
$
(221) $
(14) $
(47) $
(203) $
229
$
(95)
The following table presents reclassifications out of AOCI for the year ended December 31, 2013:
(In millions)
Cash flow hedges:
Interest-rate contracts, net of related tax benefit of $2
$
3 Net interest revenue
Available-for-sale securities:
Amount
Reclassified out
of AOCI
Affected Line Item in
Consolidated Statement of
Income
Net realized gains from sales of available-for-sale securities, net of related
taxes of ($5)
Other-than-temporary impairment on available-for-sale securities related to
factors other than credit, net of related tax benefit of $2
Held-to-maturity securities:
Other-than-temporary impairment on held-to-maturity securities related to
factors other than credit, net of related tax benefit of $3
Retirement plans:
Amortization of actuarial losses, net of related tax benefit of $13
Foreign currency translation:
Net gains (losses) from sales
of available-for-sale
securities
(9)
Losses reclassified (from) to
other comprehensive income
Losses reclassified (from) to
other comprehensive income
4
3
Compensation and employee
benefits expense
20
Sales of non-U.S. entities, net of related taxes of ($1)
Total reclassifications out of AOCI
$
(1)
20
Processing fees and other
revenue
Note 14. Equity-Based Compensation
In May 2012, our shareholders amended the 2006 Equity Incentive Plan to increase the number of shares of
our common stock that may be delivered in satisfaction of stock and stock-based awards, including stock options,
stock appreciation rights, restricted stock, deferred stock and performance awards, from 37 million shares to 52.5
million shares. In addition, up to 8 million shares from our 1997 Equity Incentive Plan were approved for issuance
under the 2006 Plan. This included shares that were available for issuance when the plan expired on December 18,
2006, and any shares that subsequently become available due to cancellations and forfeitures. A total of 60.5
million shares is available for issuance under the 2006 Plan.
As of December 31, 2013, a cumulative total of 52.4 million shares had been awarded under the 2006 Plan,
compared with cumulative totals of 45.3 million shares and 32.8 million shares as of December 31, 2012 and 2011,
174
STATE STREET CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
respectively. The 2006 Plan allows for shares withheld in payment of the exercise price of an award or in
satisfaction of tax withholding requirements, shares forfeited due to employee termination, shares expired under
options awards, or shares not delivered when performance conditions have not been met, to be added back to the
pool of shares available for awards. As of December 31, 2013, 14 million shares had been awarded under the 2006
Plan but not delivered, and have become available for reissue.
The exercise price of non-qualified and incentive stock options and stock appreciation rights may not be less
than the fair value of such shares on the date of grant. Stock options and stock appreciation rights granted under
the 1997 and 2006 plans generally vest over four years and expire no later than ten years from the date of grant.
For restricted stock awards granted under the plans, common stock is issued at the time of grant and recipients
have dividend and voting rights. In general, these grants vest over three to four years. No restricted stock awards
have been granted since 2010.
For deferred stock awards granted under the plans, no common stock is issued at the time of grant and the
stock does not have dividend and voting rights. Generally, these grants vest over two to four years. Performance
awards granted are earned over a performance period based on the achievement of defined goals, generally over
one to four years. Payment for performance awards is made in shares of our common stock equal to its fair market
value per share, based on certain financial ratios, after the conclusion of each performance period. No common
stock options or stock appreciation rights have been granted since 2009.
In December 2012, malus-based forfeiture provisions were included in deferred stock awards granted to
employees identified as “material risk-takers.” These malus-based forfeiture provisions provide for the reduction or
cancellation of unvested deferred compensation, such as deferred stock awards, if it is determined that a material
risk-taker made risk-based decisions that exposed State Street to inappropriate risks that resulted in a material
unexpected loss at the business-unit, line-of-business or corporate level.
Compensation expense related to stock options, stock appreciation rights, restricted stock awards, deferred
stock awards and performance awards, which we record as a component of compensation and employee benefits
expense in our consolidated statement of income, was $355 million, $353 million and $261 million for the years
ended December 31, 2013, 2012 and 2011, respectively. Such expense for 2013 and 2012 excluded $3 million and
$26 million, respectively, associated with acceleration of expense in connection with the staff reductions discussed
in note 21. This expense was included in the severance-related portion of the associated restructuring charges
recorded in each respective year. The aggregate income tax benefit recorded in our consolidated statement of
income related to compensation expense recorded as a component of compensation and employee benefits
expense was $140 million, $139 million and $103 million for the years ended December 31, 2013, 2012 and 2011,
respectively.
The following table presents information about the 2006 Plan and 1997 Plan as of December 31, 2013, and
related activity during the years indicated:
Shares
(in thousands)
Weighted-
Average
Exercise
Price
Weighted-
Average
Remaining
Contractual
Term
(in years)
Total
Intrinsic
Value
(in millions)
Stock Options and Stock Appreciation Rights:
Outstanding as of December 31, 2011
Exercised
Forfeited or expired
Outstanding as of December 31, 2012
Exercised
Forfeited or expired
Outstanding as of December 31, 2013
Exercisable as of December 31, 2013
7,709
$
(1,459)
(612)
5,638
(2,725)
(249)
2,664
2,664
$
$
53.37
38.09
51.03
57.58
45.93
68.80
68.45
68.45
2.3
2.3
$
$
20
20
The total intrinsic value of options exercised during the years ended December 31, 2013, 2012 and 2011 was
$42 million, $8 million and $6 million, respectively. As of December 31, 2013, there was no unrecognized
compensation cost related to stock options and stock appreciation rights.
175
STATE STREET CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The following tables present activity related to other common stock awards during the years indicated:
Restricted Stock Awards:
Outstanding as of December 31, 2011
Vested
Forfeited
Outstanding as of December 31, 2012
Vested
Forfeited
Outstanding as of December 31, 2013
Shares
(in thousands)
Weighted-Average
Grant Date Fair
Value
4,165
$
(1,497)
(66)
2,602
(1,339)
(18)
1,245
$
43.25
42.87
44.64
43.44
42.47
43.98
44.47
The total fair value of restricted stock awards vested was $57 million, $64 million, and $66 million for the
years ended December 31, 2013, 2012 and 2011, respectively. As of December 31, 2013, total unrecognized
compensation cost related to restricted stock, net of estimated forfeitures, was $8 million, which is expected to be
recognized over a weighted-average period of six months.
Deferred Stock Awards:
Outstanding as of December 31, 2011
Granted
Vested
Forfeited
Outstanding as of December 31, 2012
Granted
Vested
Forfeited
Outstanding as of December 31, 2013
Shares
(in thousands)
Weighted-Average
Grant Date Fair
Value
8,953
$
11,405
(5,123)
(421)
14,814
6,906
(6,332)
(294)
15,094
$
42.34
38.48
43.46
39.27
39.08
54.16
40.97
44.48
45.07
The weighted-average grant date fair value of deferred stock awards granted in 2011 was $41.92 per share.
The total fair value of deferred stock awards vested was $259 million, $223 million and $107 million for the years
ended December 31, 2013, December 31, 2012 and 2011, respectively. As of December 31, 2013, total
unrecognized compensation cost related to deferred stock awards, net of estimated forfeitures, was $400 million,
which is expected to be recognized over a weighted-average period of 2.4 years.
Performance Awards:
Outstanding as of December 31, 2011
Granted
Forfeited
Paid out
Outstanding as of December 31, 2012
Granted
Forfeited
Paid out
Outstanding as of December 31, 2013
176
Shares
(in thousands)
Weighted-Average
Grant Date Fair
Value
2,629
$
764
(200)
(646)
2,547
494
(4)
(813)
2,224
$
42.52
37.78
42.59
44.07
40.70
53.60
41.62
41.62
43.24
STATE STREET CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The weighted-average grant date fair value of performance awards granted in 2011 was $42.28 per share. The
total fair value of performance awards paid out was $34 million, $28 million and $10 million for the years ended
December 31, 2013, 2012 and 2011, respectively. As of December 31, 2013, total unrecognized compensation cost
related to performance awards, net of estimated forfeitures, was $6 million, which is expected to be recognized over
a weighted-average period of 1.7 years.
We utilize either treasury shares or authorized but unissued shares to satisfy the issuance of common stock
under our equity incentive plans. We do not have a specific policy concerning purchases of our common stock to
satisfy stock issuances, including exercises of stock options. We have a general policy concerning purchases of our
common stock to meet issuances under our employee benefit plans, including option exercises and other corporate
purposes. Various factors determine the amount and timing of our purchases of our common stock, including
regulatory reviews, our regulatory capital requirements, the number of shares we expect to issue under employee
benefit plans, market conditions (including the trading price of our common stock), and legal considerations. These
factors can change at any time, and the number of shares of common stock we will purchase or when we will
purchase them cannot be assured.
Note 15. Regulatory Matters
Regulatory Capital:
We are subject to various regulatory capital requirements administered by federal banking agencies. Failure
to meet minimum regulatory capital requirements can initiate certain mandatory and discretionary actions by
regulators that, if undertaken, could have a direct material effect on our consolidated financial condition. Under
current regulatory capital adequacy guidelines, we must meet specified capital requirements that involve
quantitative measures of our consolidated assets, liabilities and off-balance sheet exposures calculated in
conformity with regulatory accounting practices. Our capital components and their classifications are subject to
qualitative judgments by regulators about components, risk weightings and other factors.
Quantitative measures established by regulation with respect to capital adequacy require State Street and
State Street Bank to maintain minimum risk-based capital and leverage ratios as set forth in the following table. The
risk-based capital ratios are tier 1 capital and total capital, each divided by adjusted total risk-weighted assets and
market risk equivalent assets, and the tier 1 leverage ratio is tier 1 capital divided by adjusted quarterly average
assets. As of December 31, 2013 and 2012, State Street and State Street Bank exceeded all regulatory capital
adequacy requirements to which they were subject.
As of December 31, 2013, State Street Bank was categorized as “well capitalized” under the regulatory
capital adequacy framework. To be categorized as “well capitalized,” State Street Bank must meet or exceed the
minimum ratios for “well capitalized,” as set forth in the following table, and meet certain other requirements. As of
December 31, 2013 and 2012, State Street Bank exceeded all “well capitalized” ratio guidelines to which it was
subject. Management believes that no conditions or events have occurred since December 31, 2013 that have
changed the capital categorization of State Street Bank.
177
STATE STREET CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The following table presents regulatory capital ratios and related components as of December 31:
(Dollars in millions)
Risk-based ratios:
Tier 1 capital
Total capital
Tier 1 leverage ratio
Total shareholders’ equity
Trust preferred capital securities
Net unrealized (gains) losses on available-for-
sale securities and cash flow hedges
Net unrealized losses on retirement plans
Goodwill
Other intangible assets
Deferred tax liabilities associated with
acquisitions
Tier 1 capital
Qualifying subordinated debt
Allowances for on- and off-balance sheet credit
exposures
Unrealized gains on available-for-sale equity
securities
Tier 2 capital
Deduction for investments in finance subsidiaries
Total capital
Adjusted total risk-weighted assets and market
risk equivalent assets:
On-balance sheet assets
Off-balance sheet equivalent assets
Market risk equivalent assets
Total
Regulatory Guidelines(1)
Minimum
Well
Capitalized
State Street
State Street Bank
2013
2012
2013
2012
4%
8
4
6%
17.3%
19.1%
16.4%
17.3%
10
5
19.7
6.9
20.6
7.1
19.0
6.4
19.1
6.3
$
20,378
$
20,869
$
19,755
$
19,681
950
107
203
(6,036)
(2,360)
653
13,895
1,918
45
3
1,966
(74)
950
(525)
283
(5,977)
(2,539)
699
13,760
1,219
39
2
1,260
(191)
—
112
192
(5,740)
(2,239)
638
12,718
1,936
45
—
1,981
—
—
(523)
277
(5,679)
(2,392)
680
12,044
1,223
39
—
1,262
—
$
15,787
$
14,829
$
14,699
$
13,306
$
60,277
$
58,238
$
57,599
$
55,949
18,587
1,262
13,155
519
18,598
1,262
13,144
445
$
80,126
$
71,912
$
77,459
$
69,538
Adjusted quarterly average assets
________________________________
(1) State Street Bank must comply with the regulatory guideline for “well capitalized” in order for the parent company to maintain
its status as a financial holding company, including maintaining a minimum tier 1 risk-based capital ratio of 6%, a minimum
total risk-based capital ratio of 10%, and a minimum tier 1 leverage ratio of 5%. The “well capitalized” guideline requires us to
maintain a minimum tier 1 risk-based capital ratio of 6% and a minimum total risk-based capital ratio of 10%.
$ 192,817
$ 189,780
$ 202,801
$ 199,301
Cash, Dividend, Loan and Other Restrictions:
In 2013, our banking subsidiaries were required by the Federal Reserve to maintain average aggregate cash
balances of approximately $4.39 billion to satisfy reserve requirements. Federal and state banking regulations place
certain restrictions on dividends paid by banking subsidiaries to a parent company. For 2014, aggregate dividend
payments by State Street Bank to the parent company without prior regulatory approval are limited to approximately
$401 million of its undistributed earnings as of December 31, 2013, plus an additional amount equal to its net
profits, as defined by the aforementioned banking regulations, for 2014 up to the date of any dividend payment.
Currently, the payment of future common stock dividends by the parent company to its shareholders is subject to
the review of our capital plan by the Federal Reserve in connection with its Comprehensive Capital Analysis and
Review process.
The Federal Reserve Act requires that extensions of credit by State Street Bank to certain affiliates, including
the parent company, be secured by specific collateral, that the extension of credit to any one affiliate be limited to
10% of State Street Bank’s capital and surplus, as defined, and that extensions of credit to all such affiliates be
limited to 20% of State Street Bank’s capital and surplus.
As of December 31, 2013, our consolidated retained earnings included $474 million representing undistributed
earnings of unconsolidated entities that are accounted for under the equity method of accounting.
178
STATE STREET CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Note 16. Derivative Financial Instruments
We use derivative financial instruments to support our clients' needs and to manage our interest-rate and
currency risk. In undertaking these activities, we assume positions in both the foreign exchange and interest-rate
markets by buying and selling cash instruments and using derivative financial instruments, including foreign
exchange forward contracts, foreign exchange and interest-rate options and interest-rate swaps, interest-rate
forward contracts and interest-rate futures.
Interest-rate contracts involve an agreement with a counterparty to exchange cash flows based on the
movement of an underlying interest-rate index. An interest-rate swap agreement involves the exchange of a series
of interest payments, at either a fixed or variable rate, based on the notional amount without the exchange of the
underlying principal amount. An interest-rate option contract provides the purchaser, for a premium, the right, but
not the obligation, to receive an interest rate based upon a predetermined notional amount during a specified
period. An interest-rate futures contract is a commitment to buy or sell, at a future date, a financial instrument at a
contracted price; it may be settled in cash or through the delivery of the contracted instrument.
Foreign exchange contracts involve an agreement to exchange one currency for another currency at an
agreed-upon rate and settlement date. Foreign exchange contracts generally consist of foreign exchange forward
and spot contracts, option contracts and cross-currency swaps. Future cash requirements, if any, related to foreign
exchange contracts are represented by the gross amount of currencies to be exchanged under each contract
unless we and the counterparty have agreed to pay or to receive the net contractual settlement amount on the
settlement date.
Derivative financial instruments involve the management of interest-rate and foreign currency risk, and involve,
to varying degrees, market risk and credit and counterparty risk (risk related to repayment). Market risk is defined
by U.S. banking regulators as the risk of loss that could result from broad market movements, such as changes in
the general level of interest rates, credit spreads, foreign exchange rates or commodity prices. We use a variety of
risk management tools and methodologies to measure, monitor and manage the market risk associated with our
trading activities, which trading activities include our use of derivative financial instruments. One such risk-
management measure is Value-at-Risk, or VaR. VaR is an estimate of potential loss for a given period within a
stated statistical confidence interval. We use a risk-measurement system to measure VaR daily. We have adopted
standards for measuring VaR, and we maintain regulatory capital for market risk in accordance with currently
applicable regulatory market risk capital guidelines.
Derivative financial instruments are also subject to credit and counterparty risk, which is defined as the risk of
financial loss if a borrower or counterparty is either unable or unwilling to repay borrowings or settle a transaction in
accordance with the underlying contractual terms. We manage credit and counterparty risk by performing credit
reviews, maintaining individual counterparty limits, entering into netting arrangements and requiring the receipt of
collateral. Collateral requirements are determined after a review of the creditworthiness of each counterparty, and
these requirements are monitored and adjusted daily. Collateral is generally held in the form of cash or highly liquid
U.S. government securities. We may be required to provide collateral to the counterparty in connection with our
entry into derivative financial instruments. Cash collateral received from and provided to counterparties in
connection with derivative financial instruments is recorded in accrued expenses and other liabilities and other
assets, respectively, in our consolidated statement of condition. As of December 31, 2013 and December 31, 2012,
we had recorded approximately $2.58 billion and $1.68 billion, respectively, of cash collateral received from
counterparties and approximately $3.36 billion and $1.30 billion, respectively, of cash collateral provided to
counterparties in connection with derivative financial instruments in our consolidated statement of condition.
We enter into master netting agreements with many of our derivative counterparties, and we have elected to
net derivative assets and liabilities, including cash collateral received or deposited, which are subject to those
agreements. Certain of these agreements contain credit risk-related contingent features in which the counterparty
has the option to declare State Street in default and accelerate cash settlement of our net derivative liabilities with
the counterparty in the event that our credit rating falls below specified levels. The aggregate fair value of all
derivative instruments with credit risk-related contingent features that were in a net liability position as of
December 31, 2013 totaled approximately $565 million, against which we had posted aggregate collateral of
approximately $11 million. If State Street’s credit rating were downgraded below levels specified in the agreements,
the maximum additional amount of payments related to termination events that could have been required pursuant
to these contingent features as of December 31, 2013 was approximately $554 million. Such accelerated settlement
would not affect our consolidated results of operations.
179
STATE STREET CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Derivatives Not Designated as Hedging Instruments:
In connection with our trading activities, we use derivative financial instruments in our role as a financial
intermediary and as both a manager and servicer of financial assets, in order to accommodate our clients'
investment and risk management needs. In addition, we use derivative financial instruments for risk management
purposes as economic hedges, which are not formally designated as accounting hedges, in order to contribute to
our overall corporate earnings and liquidity. These activities are designed to generate trading services revenue and
to manage volatility in our net interest revenue. The level of market risk that we assume is a function of our overall
objectives and liquidity needs, our clients' requirements and market volatility.
With respect to cross-border investing, our clients often enter into foreign exchange forward contracts to
convert currency for international investments and to manage the currency risk in their international investment
portfolios. As an active participant in the foreign exchange markets, we provide foreign exchange forward contracts
and options in support of these client needs, and also act as a dealer in the currency markets. As part of our trading
activities, we assume positions in both the foreign exchange and interest-rate markets by buying and selling cash
instruments and using derivative financial instruments, including foreign exchange forward contracts, foreign
exchange and interest-rate options and interest-rate swaps, interest-rate forward contracts, and interest-rate
futures. In the aggregate, we seek to match positions closely with the objective of minimizing related currency and
interest-rate risk.
We offer products that provide book-value protection primarily to plan participants in stable value funds
managed by non-affiliated investment managers of post-retirement defined contribution benefit plans, particularly
401(k) plans. We account for the associated contingencies, more fully described in note 11, individually as
derivative financial instruments. These contracts are valued quarterly and unrealized losses, if any, are recorded in
other expenses in our consolidated statement of income.
Derivatives Designated as Hedging Instruments:
In connection with our asset-and-liability management activities, we use derivative financial instruments to
manage our interest-rate risk. Interest-rate risk, defined as the sensitivity of income or financial condition to
variations in interest rates, is a significant non-trading market risk to which our assets and liabilities are exposed.
These hedging relationships are formally designated, and qualify for hedge accounting, as fair value or cash flow
hedges. We manage interest-rate risk by identifying, quantifying and hedging our exposures, using fixed-rate
portfolio securities and a variety of derivative financial instruments, most frequently interest-rate swaps and options
(for example, interest-rate caps and floors). Interest-rate swap agreements alter the interest-rate characteristics of
specific balance sheet assets or liabilities. When appropriate, forward-rate agreements, options on swaps, and
exchange-traded futures and options are also used.
Fair value hedges
Derivatives designated as fair value hedges are utilized to mitigate the risk of changes in the fair values of
recognized assets and liabilities. Differences between the gains and losses on fair value hedges and the gains and
losses on the asset or liability attributable to the hedged risk represent hedge ineffectiveness. We use interest-rate
or foreign exchange contracts in this manner to manage our exposure to changes in the fair value of hedged items
caused by changes in interest rates or foreign exchange rates.
We have entered into interest-rate swap agreements to modify our interest revenue from certain available-for-
sale investment securities from a fixed rate to a floating rate. The hedged securities had a weighted-average life of
approximately 6.5 years as of December 31, 2013, compared to 6.9 years as of December 31, 2012. These
securities are hedged with interest-rate swap contracts of similar maturity, repricing and fixed-rate coupons. The
interest-rate swap contracts convert the interest revenue from a fixed rate to a floating rate indexed to LIBOR,
thereby mitigating our exposure to fluctuations in the fair value of the securities attributable to changes in the
benchmark interest rate.
We have entered into interest-rate swap agreements to modify our interest expense on two senior notes and
one subordinated note from fixed rates to floating rates. The senior notes mature in 2018 and 2023 and pay fixed
interest at annual rates of 1.35% and 3.70%, respectively. The subordinated note matures in 2023 and pays fixed
interest at a 3.10% annual rate. The senior and subordinated notes are hedged with interest-rate swap contracts
with notional amounts, maturities and fixed-rate coupon terms that align with the hedged notes. The interest-rate
swap contracts convert the fixed-rate coupons to floating rates indexed to LIBOR, thereby mitigating our exposure
180
STATE STREET CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
to fluctuations in the fair values of the senior and subordinated notes stemming from changes in the benchmark
interest rates.
We have entered into forward foreign exchange contracts to hedge the change in fair value attributable to
foreign exchange movements in the funding of non-functional currency-denominated investment securities. These
forward contracts convert the foreign currency risk to U.S. dollars, thereby mitigating our exposure to fluctuations in
the fair value of the securities attributable to changes in foreign exchange rates. Generally, no ineffectiveness is
recorded in earnings, since the notional amount of the hedging instruments is aligned with the carrying value of the
hedged securities. The forward points on the hedging instruments are considered to be a hedging cost, and
accordingly are excluded from the evaluation of hedge effectiveness and recorded in net interest revenue.
Cash flow hedges
Derivatives categorized as cash flow hedges are utilized to offset the variability of cash flows to be received
from or paid on a floating-rate asset or liability. Ineffectiveness of cash flow hedges is defined as the extent to which
the changes in fair value of the derivative exceed the variability of cash flows of the forecast transaction.
We have entered into an interest-rate swap agreement to modify our interest revenue from an available-for-
sale debt security from a floating rate to a fixed rate. The hedged security had a remaining life of approximately 10
months as of December 31, 2013, compared to 1.8 years as of December 31, 2012. The security is hedged with an
interest-rate swap contract of similar maturity, repricing and other characteristics. The interest-rate swap contract
converts the interest revenue from a floating rate to a fixed rate, thereby mitigating our exposure to fluctuations in
the cash flows of the security attributable to changes in the benchmark interest rate.
We have entered into foreign exchange contracts to hedge the change in cash flows attributable to foreign
exchange movements in the funding of non-functional currency-denominated investment securities. These foreign
exchange contracts convert the foreign currency risk to U.S. dollars, thereby mitigating our exposure to fluctuations
in the cash flows of the securities attributable to changes in foreign exchange rates. Generally, no ineffectiveness is
recorded in earnings, since the critical terms of the hedging instruments and the hedged securities are aligned.
For cash flow hedges, any changes in the fair value of the derivative financial instruments remain in AOCI, and
are generally recorded in our consolidated statement of income in future periods when earnings are affected by the
variability of the hedged cash flow.
181
STATE STREET CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The following table presents the aggregate contractual, or notional, amounts of derivative financial instruments
entered into in connection with our trading and asset-and-liability management activities as of the dates indicated:
(In millions)
Derivatives not designated as hedging instruments:
Interest-rate contracts:
Swap agreements and forwards
Options and caps purchased
Options and caps written
Futures
Foreign exchange contracts:
Forward, swap and spot
Options purchased
Options written
Credit derivative contracts:
Credit swap agreements
Other:
Stable value contracts
Futures
Derivatives designated as hedging instruments:
Interest-rate contracts:
Swap agreements
Foreign exchange contracts:
Forward and swap
December 31,
2013
December 31,
2012
$
1,023
$
1,578
27
27
3,282
68
68
1,910
1,124,355
897,354
1,666
1,423
141
24,906
3
5,221
2,783
9,454
8,734
27
33,512
—
3,153
3,477
In connection with our asset-and-liability management activities, we have entered into interest-rate contracts
designated as fair value and cash flow hedges to manage our interest-rate risk. The following table presents the
aggregate notional amounts of these interest-rate contracts and the related assets or liabilities being hedged as of
the dates indicated:
(In millions)
Investment securities available for sale
Long-term debt(1)
Total
December 31, 2013
December 31, 2012
Fair
Value
Hedges
Cash
Flow
Hedges
Total
Fair
Value
Hedges
Cash
Flow
Hedges
Total
$
$
2,589
$
132
$ 2,721
$
1,573
$
130
$ 1,703
2,500
—
2,500
1,450
—
1,450
5,089
$
132
$ 5,221
$
3,023
$
130
$ 3,153
(1) As of December 31, 2013, fair value hedges of long-term debt decreased the carrying value of long-term debt presented in our
consolidated statement of condition by $35 million. As of December 31, 2012, fair value hedges of long-term debt increased
the carrying value of long-term debt presented in our consolidated statement of condition by $174 million.
The following table presents the contractual and weighted-average interest rates for long-term debt, which
include the effects of the fair value hedges presented in the table above, for the periods indicated:
Years Ended December 31,
2013
2012
Contractual
Rates
Rate Including
Impact of Hedges
Contractual
Rates
Rate Including
Impact of Hedges
Long-term debt
3.46%
2.75%
4.01%
3.17%
The following tables present the fair value of derivative financial instruments, excluding the impact of master
netting agreements, recorded in our consolidated statement of condition as of the dates indicated. The impact of
master netting agreements is disclosed in note 3.
182
STATE STREET CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(In millions)
Derivatives not designated as hedging instruments:
Foreign exchange contracts
Interest-rate contracts
Credit derivative contracts
Total
Derivatives designated as hedging instruments:
Foreign exchange contracts
Interest-rate contracts
Total
(In millions)
Derivatives not designated as hedging instruments:
Foreign exchange contracts
Interest-rate contracts
Other derivative contracts
Total
Derivatives designated as hedging instruments:
Interest-rate contracts
Foreign exchange contracts
Total
Balance Sheet
Location
Asset Derivatives
Fair Value
December 31,
2013
December 31,
2012
Other assets
$
11,552
$
9,243
Other assets
Other assets
29
1
61
—
$
11,582
$
9,304
Other assets
$
Other assets
$
359
$
36
395
$
135
162
297
Balance Sheet
Location
Liability Derivatives
Fair Value
December 31,
2013
December 31,
2012
Other liabilities
$
11,428
$
9,067
Other liabilities
Other liabilities
29
9
61
9
$
11,466
$
9,137
Other liabilities
$
Other liabilities
$
302
$
43
345
$
284
17
301
183
STATE STREET CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The following tables present the impact of our use of derivative financial instruments on our consolidated
statement of income for the years indicated:
(In millions)
Derivatives not designated as hedging instruments:
Location of Gain (Loss) on
Derivative in Consolidated
Statement of Income
Amount of Gain (Loss) on
Derivative Recognized in
Consolidated Statement
of Income
Years Ended December 31,
2013
2012
2011
Foreign exchange contracts
Foreign exchange contracts
Interest-rate contracts
Interest-rate contracts
Credit derivative contracts
Total
Trading services revenue
$
586
$
576
$
641
Processing fees and other revenue
Trading services revenue
Processing fees and other revenue
Processing fees and other revenue
—
2
—
1
(2)
(86)
6
—
7
21
—
—
$
589
$
494
$
669
Location of
Gain (Loss) on
Derivative in
Consolidated
Statement of
Income
Amount of Gain
(Loss) on Derivative
Recognized in
Consolidated
Statement of Income
Hedged Item in
Fair Value
Hedging
Relationship
Location of Gain
(Loss) on
Hedged Item in
Consolidated
Statement of
Income
Amount of Gain
(Loss) on Hedged
Item Recognized in
Consolidated
Statement of Income
Years Ended December 31,
Years Ended December 31,
Processing fees and
other revenue
Processing fees and
other revenue
Processing fees and
other revenue
2013
2012
2011
2013
2012
2011
$ (183) $
34
$ (161)
Investment
securities
Processing fees and
other revenue
$
183
$
(34) $ 161
32
(192)
$ (343) $
11
50
95
(165)
Available-for-sale
securities
Processing fees and
other revenue
75
Long-term debt
Processing fees and
other revenue
$ (251)
(30)
(17)
153
175
(45)
(70)
$
328
$
(96) $ 244
(In millions)
Derivatives designated as
fair value hedges:
Foreign exchange contracts
Interest-rate contracts
Interest-rate contracts
Total
Differences between the gains (losses) on the derivative and the gains (losses) on the hedged item, excluding
any amounts recorded in net interest revenue, represent hedge ineffectiveness.
Amount of Gain
(Loss) on Derivative
Recognized in Other
Comprehensive
Income
Years Ended December 31,
Location of
Gain (Loss)
Reclassified
from OCI to
Consolidated
Statement of
Income
(In millions)
2013
2012
2011
Amount of Gain
(Loss) Reclassified
from OCI to
Consolidated
Statement of Income
Years Ended December 31,
2013
2012
2011
Location of
Gain (Loss) on
Derivative
Recognized in
Consolidated
Statement of
Income
Amount of Gain
(Loss) on Derivative
Recognized in
Consolidated
Statement of Income
Years Ended December 31,
2013
2012
2011
Derivatives
designated as
cash flow
hedges:
Interest-rate
contracts
Foreign
exchange
contracts
Total
$
$
9
$
4
$
9
153
162
$
122
126
$
—
9
Net interest
revenue
Net interest
revenue
$
$
(4) $
(5) $
(7)
—
—
(4) $
(5) $
—
(7)
Net interest
revenue
Net interest
revenue
$
$
3
$
3
$
3
6
9
$
6
9
$
—
3
Note 17. Offsetting Arrangements
We manage credit and counterparty risk by entering into enforceable netting agreements and other collateral
arrangements with counterparties to derivative financial instruments and secured financing transactions, including
resale and repurchase agreements, and principal securities borrowing and lending agreements. These netting
agreements mitigate our counterparty credit risk by providing for a single net settlement with a counterparty of all
financial transactions covered by the agreement in an event of default as defined under such agreement. In limited
184
STATE STREET CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
cases, a netting agreement may also provide for the periodic netting of settlement payments with respect to multiple
different transaction types in the normal course of business.
Certain of our derivative contracts are executed under either standardized netting agreements or, for
exchange-traded derivatives, the relevant contracts for a particular exchange which contain enforceable netting
provisions. In certain cases, we may have cross-product netting arrangements which allow for netting and set-off of
a variety of types of derivatives with a single counterparty. A derivative netting arrangement creates an enforceable
right of set-off that becomes effective, and effects the realization or settlement of individual financial assets and
liabilities, only following a specified event of default. Collateral requirements associated with our derivative
contracts are determined after a review of the creditworthiness of each counterparty, and the requirements are
monitored and adjusted daily, typically based on net exposure by counterparty. Collateral is generally in the form of
cash or highly liquid U.S. government securities.
In connection with our secured financing activities, we enter into netting agreements and other collateral
arrangements with counterparties, which provide for the right to liquidate collateral upon an event of default.
Collateral is generally required in the form of cash, equity securities or fixed-income securities. Default events may
include the failure to make payments or deliver securities timely, material adverse changes in financial condition or
insolvency, the breach of minimum regulatory capital requirements, or loss of license, charter or other legal
authorization necessary to perform under the contract.
In order for an arrangement to be eligible for netting, we must have a basis to conclude that such netting
arrangements are legally enforceable. The analysis of the legal enforceability of an arrangement differs by
jurisdiction, depending on the laws of that jurisdiction. In many jurisdictions, specific legislation exists that provides
for the enforceability in bankruptcy of close-out netting under a netting agreement, typically by way of specific
exception from more general prohibitions on the exercise of creditor rights.
When we have a basis to conclude that a legally enforceable netting arrangement exists between us and the
derivative counterparty and the relevant transaction is the type of transaction that is recorded in our consolidated
statement of condition, we offset derivative assets and liabilities, and the related collateral received and provided, in
our consolidated statement of condition. We also offset assets and liabilities related to secured financing activities
with the same counterparty or clearinghouse which have the same maturity date and are settled in the normal
course of business on a net basis.
185
STATE STREET CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The following tables present information about the offsetting of assets related to derivative financial
instruments and secured financing transactions, as of the dates indicated:
Assets:
December 31, 2013
December 31, 2012
Gross
Amounts of
Recognized
Assets(1)
Gross Amounts
Offset in
Statement of
Condition(2)
Net Amounts
of Assets
Presented in
Statement of
Condition
Gross
Amounts of
Recognized
Assets(1)
Gross Amounts
Offset in
Statement of
Condition(2)
Net Amounts
of Assets
Presented in
Statement of
Condition
(In millions)
Derivatives:
Interest-rate contracts
$
65
$
(59) $
6
$
223
$
(19) $
204
Foreign exchange
contracts
Credit derivative contracts
Cash collateral netting
Total derivatives
Other financial instruments:
Resale agreements and
securities borrowing(3)
Total derivatives and
other financial
instruments
$
$
$
11,911
1
—
(4,514)
—
7,397
1
(1,928)
(1,928)
9,378
—
—
(3,575)
—
5,803
—
(1,451)
(1,451)
11,977
$
(6,501) $
5,476
$
9,601
$
(5,045) $
4,556
48,221
$
(30,700) $
17,521
$
35,658
$
(23,809) $
11,849
60,198
$
(37,201) $
22,997
$
45,259
$
(28,854) $
16,405
(1) Amounts include all transactions regardless of whether or not they are subject to an enforceable netting arrangement.
(2) Amounts subject to netting arrangements which have been determined to be legally enforceable.
(3) Included in the $17,521 million as of December 31, 2013 was $6,230 million of resale agreements and $11,291 million of
collateral related to securities borrowing. Included in the $11,849 million as of December 31, 2012 was $5,016 million of
resale agreements and $6,833 million of collateral related to securities borrowing. Resale agreements and collateral related to
securities borrowing were recorded in securities purchased under resale agreements and other assets, respectively, in our
consolidated statement of condition. Refer to note 11 for additional information with respect to principal securities finance
transactions.
December 31, 2013
Gross Amounts Not Offset in
Statement of Condition(1)
December 31, 2012
Gross Amounts Not Offset
in Statement of Condition(1)
Net Amount
of Assets
Presented in
Statement of
Condition
(In millions)
Counterparty
Netting
Collateral
Received
Net
Amount(2)
Net Amount
of Assets
Presented in
Statement of
Condition
Counterparty
Netting
Collateral
Received
Net
Amount(2)
Derivatives
$
5,476
$
— $
(181) $
5,295
$
4,556
$
— $
(105) $
4,451
Resale
agreements
and
securities
borrowing
Total
17,521
22,997 $
$
(14,983)
(131)
(131) $ (15,164) $ 7,702 $
2,407
11,849
16,405 $
(126)
(11,626)
97
(126) $ (11,731) $ 4,548
(1) Amounts subject to netting arrangements which have been determined to be legally enforceable.
(2) Includes amounts secured by collateral not determined to be subject to enforceable netting arrangements.
186
STATE STREET CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The following tables present information about the offsetting of liabilities related to derivative financial
instruments and secured financing transactions, as of the dates indicated:
Liabilities:
December 31, 2013
December 31, 2012
Gross
Amounts of
Recognized
Liabilities(1)
Gross Amounts
Offset in
Statement of
Condition(2)
Net Amounts
of Liabilities
Presented in
Statement of
Condition
Gross
Amounts of
Recognized
Liabilities(1)
Gross Amounts
Offset in
Statement of
Condition(2)
Net Amounts
of Liabilities
Presented in
Statement of
Condition
(In millions)
Derivatives:
Interest-rate contracts
$
331
$
(59) $
272
$
345
$
(19) $
326
Foreign exchange
contracts
Other derivative contracts
Cash collateral netting
Total derivatives
Other financial instruments:
Repurchase agreements
and securities lending(3)
Total derivatives and
other financial
instruments
$
$
$
11,471
9
—
(4,514)
—
(979)
6,957
9
(979)
9,084
9
—
(3,574)
—
(478)
5,510
9
(478)
11,811
$
(5,552) $
6,259
$
9,438
$
(4,071) $
5,367
45,273
$
(30,700) $
14,573
$
36,801
$
(23,809) $
12,992
57,084
$
(36,252) $
20,832
$
46,239
$
(27,880) $
18,359
(1) Amounts include all transactions regardless of whether or not they are subject to an enforceable netting arrangement.
(2) Amounts subject to netting arrangements which have been determined to be legally enforceable.
(3) Included in the $14,573 million as of December 31, 2013 was $7,953 million of repurchase agreements and $6,620 million of
collateral related to securities lending. Included in the $12,992 million as of December 31, 2012 was $8,006 million of
repurchase agreements and $4,986 million of collateral related to securities lending. Repurchase agreements and collateral
related to securities lending were recorded in securities sold under repurchase agreements and accrued expenses and other
liabilities, respectively, in our consolidated statement of condition. Refer to note 11 for additional information with respect to
principal securities finance transactions.
December 31, 2013
Gross Amounts Not Offset
in Statement of Condition(1)
December 31, 2012
Gross Amounts Not Offset
in Statement of Condition(1)
Net Amount
of Liabilities
Presented in
Statement of
Condition
(In millions)
Counterparty
Netting
Collateral
Provided
Net
Amount(2)
Net Amount
of Liabilities
Presented in
Statement of
Condition
Counterparty
Netting
Collateral
Provided
Net
Amount(2)
Derivatives
$
6,259
$
— $
(6) $
6,253
$
5,367
$
— $
— $
5,367
Repurchase
agreements
and securities
lending
14,573
(131)
(13,036)
1,406
12,992
(126)
(12,067)
799
Total
$
20,832
$
(131) $ (13,042) $
7,659
$
18,359
$
(126) $ (12,067) $
6,166
(1) Amounts subject to netting arrangements which have been determined to be legally enforceable.
(2) Includes amounts secured by collateral not determined to be subject to enforceable netting arrangements.
187
STATE STREET CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Note 18. Net Interest Revenue
The following table presents the components of interest revenue and interest expense, and related net interest
revenue, for the years ended December 31:
Years Ended December 31,
2013
2012
2011
(In millions)
Interest revenue:
Deposits with banks
Investment securities:
U.S. Treasury and federal agencies
State and political subdivisions
Other investments
Securities purchased under resale agreements
Loans and leases
Other interest-earning assets
Total interest revenue
Interest expense:
Deposits
Short-term borrowings
Long-term debt
Other interest-bearing liabilities
Total interest expense
Net interest revenue
Note 19. Employee Benefits
$
125
$
141
$
149
706
250
1,332
45
252
4
799
215
1,552
51
253
3
775
221
1,493
28
278
2
2,714
3,014
2,946
93
60
232
26
411
166
73
222
15
476
220
96
289
8
613
$
2,303
$
2,538
$
2,333
State Street Bank and certain of its U.S. subsidiaries participate in a non-contributory, tax-qualified defined
benefit pension plan. Since January 1, 2008, when the plan was amended, we no longer make employer
contribution credits to the plan; employee account balances earn annual interest credits until the employee’s
retirement. In addition to the defined benefit pension plan, we have non-qualified unfunded supplemental retirement
plans, referred to as SERPs, that provide certain officers with defined pension benefits in excess of allowable
qualified plan limits. Non-U.S. employees participate in local defined benefit plans. State Street Bank and certain of
its U.S. subsidiaries participate in a post-retirement plan that provides health care and insurance benefits for certain
retired employees.
188
STATE STREET CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The following tables present combined information for the U.S. and non-U.S. defined benefit plans, and
information for the post-retirement plan, as of the December 31 measurement date:
(In millions)
Benefit obligations:
Beginning of year
Service cost
Interest cost
Employee contributions
Plan amendments
Acquisitions and transfers
Actuarial losses (gains)
Benefits paid
Expenses paid
Premiums paid
Curtailments
Settlements
Special termination benefits
Foreign currency translation
End of year
Plan assets at fair value:
Beginning of year
Actual return on plan assets
Employer contributions
Employee contributions
Acquisitions and transfers
Benefits paid
Expenses paid
Premiums paid
Settlements
Foreign currency translation
End of year
Accrued benefit expense:
Funded status (plan assets less benefit obligations)
Net accrued benefit expense
Primary U.S.
and Non-U.S.
Defined
Benefit Plans
Post-Retirement
Plan
2013
2012
2013
2012
$
1,129
$
1,017
$
132
$
112
11
43
1
—
1
(83)
(28)
—
(1)
(1)
(2)
—
6
11
45
1
(2)
—
85
(36)
(1)
—
—
(1)
—
10
8
5
—
—
—
(31)
(6)
—
—
—
—
—
—
6
5
—
—
—
14
(6)
—
—
—
—
1
—
1,076
$
1,129
$
108
$
132
1,075
$
928
$
— $
58
8
1
1
(28)
—
(1)
(2)
4
69
104
1
—
(36)
(1)
—
(1)
11
—
6
—
—
(6)
—
—
—
—
1,116
$
1,075
$
— $
—
—
6
—
—
(6)
—
—
—
—
—
40
40
$
$
(54) $
(54) $
(108) $
(108) $
(132)
(132)
$
$
$
$
$
189
STATE STREET CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(In millions)
2013
2012
2013
2012
Primary U.S.
and Non-U.S.
Defined
Benefit Plans
Post-
Retirement
Plan
Amounts recognized in consolidated statement of
condition as of December 31:
Non-current assets
Current liabilities
Non-current liabilities
Net accrued amount recognized in statement of condition
$
Amounts recognized in accumulated other comprehensive
income:
$
124
$
(1)
(83)
40
$
40
(1)
(93)
(54)
$
$
— $
(7)
(101)
(108)
$
Prior service credit
Net loss
Accumulated other comprehensive loss
Cumulative employer contributions in excess of net
periodic benefit cost
Net obligation recognized in consolidated statement of
condition
Accumulated benefit obligation
Actuarial assumptions (U.S. plans):
Used to determine benefit obligations as of December 31:
$
$
$
(1)
$
— $
2
$
(263)
(264)
304
(365)
(365)
311
(16)
(14)
(94)
40
1,051
$
$
(54)
1,105
$
$
(108)
$
— $
—
(8)
(124)
(132)
3
(49)
(46)
(86)
(132)
—
Discount rate
4.75%
3.75%
4.75%
3.75%
Used to determine periodic benefit cost for the years
ended December 31:
Discount rate
Expected long-term rate of return on plan assets
Assumed health care cost trend rates as of December 31:
Cost trend rate assumed for next year
Rate to which the cost trend rate is assumed to
decline
Year that the rate reaches the ultimate trend rate
3.75%
6.75
4.50%
6.75
3.75%
—
4.50%
—
—
—
—
—
—
—
7.95%
8.08%
4.50
2029
4.50
2029
The following table presents expected benefit payments for the next ten years:
(In millions)
2014
2015
2016
2017
2018
2019-2023
Primary U.S.
and Non-U.S.
Defined
Benefit Plans
Non-
Qualified
SERPs
Post-
Retirement
Plan
$
$
37
37
39
38
30
189
$
27
29
11
15
12
57
7
7
7
7
7
39
The accumulated benefit obligation for all of our U.S. defined benefit pension plans was $841 million and $947
million as of December 31, 2013 and 2012, respectively.
To develop the assumption of the expected long-term rate of return on plan assets, we considered the
historical returns and the future expectations for returns for each asset class, as well as the target asset allocation
of the pension portfolio. This analysis resulted in the determination of the expected long-term rate of return on plan
assets of 6.75% for the year ended December 31, 2013.
190
STATE STREET CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Plan Assets:
The primary purpose of the investment policy and strategy is to invest plan assets in a manner that provides
for sufficient resources to be available to meet the plans’ benefit and expense obligations when due. The asset
portfolio, together with contributions, is intended to provide adequate liquidity to make benefit payments when due
while preserving principal and maximizing returns, given appropriate risk constraints. A secondary objective is to
enhance the plans’ long-term viability through the generation of competitive returns that will limit the financial burden
on State Street and contribute to our ability to maintain our retirement plans.
Plan assets are managed solely in the interests of the participants and consistent with generally recognized
fiduciary standards, including all applicable provisions of the Employee Retirement Income Security Act, or ERISA,
and other applicable laws and regulations. Management believes that its investment policy satisfies the standards of
prudence and diversification prescribed by ERISA. Plan assets are diversified across asset classes to achieve a
balance between risk and return and between income and growth of assets through capital appreciation, to produce
a prudently well-diversified portfolio.
With respect to our U.S. pension plan, plan assets are primarily invested in pooled investment funds of State
Street Bank. The measurement of the fair value of the participation units owned by the plans is based on the
redemption value on the last business day of the plan year, where values are based on the fair value of the
underlying assets in each fund. The net asset value of units of participation in other funds is based on the fair value
of the underlying securities in each fund.
Alternative investments are composed of investments in limited liability corporations and limited liability
partnerships. The fair value of these investments is measured by the fund managers, and represent the plans’
proportionate share of the estimated fair value of the underlying net assets of the limited liability corporations.
The methods described above may produce a fair-value calculation that may not be indicative of net realizable
value or be reflective of future fair values. Furthermore, while management believes that its valuation methods are
appropriate and consistent with other market participants, the use of different methodologies or assumptions to
measure the fair value of certain financial instruments could result in a different fair-value measurement as of the
reporting date.
With respect to our U.K. pension plan, plan assets are invested in sub-funds of Managed Pension Funds
Limited, a U.K.-incorporated insurance vehicle of which the ultimate parent company is State Street. The fair value
of these investments is measured based on the mid-market price of the underlying investments held by Managed
Pension Funds Limited. This valuation method may produce a calculation that is not indicative of net realizable
value or reflective of future fair values.
191
STATE STREET CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The following tables present, by level within the fair value hierarchy prescribed by GAAP, the plans’ assets
measured at fair value on a recurring basis, and activity related to assets categorized in level 3, as of the dates and
for the years indicated:
(In millions)
Assets:
U.S. Pension Plan
Investments in pooled investment funds:
Domestic large cap equity
Domestic small cap equity
Developed international equities
Emerging markets equity
Investment grade fixed-income
High-yield debt
Real estate investment trusts
Alternative investments (commingled fund)
Alternative investments (fund of funds)
Private equity
Total U.S. Pension Plan
U.K. Pension Plan
Investments in pooled investment funds:
Developed international equity
U.K. fixed-income
Emerging market index
Alternative investments
Total U.K. Pension Plan
Other Non-U.S. Pension Plans (excluding U.K.)
Insurance group annuity contracts
Total Other Non-U.S. Pension Plans (Excluding
U.K.)
Fair-Value Measurements on a Recurring Basis
as of December 31, 2013
Quoted Market
Prices in
Active Markets
(Level 1)
Pricing Methods with
Significant Observable
Market Inputs
(Level 2)
Pricing
Methods
with
Significant
Unobservable
Market Inputs
(Level 3)
Total Net
Carrying Value
$
— $
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
64
15
80
23
498
39
23
—
—
—
742
33
181
9
—
223
—
—
$
— $
—
—
—
—
—
—
5
27
2
34
—
—
—
43
43
70
70
64
15
80
23
498
39
23
5
27
2
776
33
181
9
43
266
70
70
Total assets carried at fair value
$
— $
965
$
147
$
1,112
192
STATE STREET CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(In millions)
Assets:
Fair value as of December 31, 2012
Purchases
Sales
Unrealized gains
Fair value as of December 31, 2013
(In millions)
Assets:
U.S. Pension Plan
Investments in pooled investment funds:
Domestic large cap equity
Domestic small cap equity
Developed international equities
Emerging markets equity
Investment grade fixed-income
High-yield debt
Real estate investment trusts
Alternative investments (commingled fund)
Alternative investments (fund of funds)
Private equity
U.S. money-market mutual funds
Total U.S. Pension Plan
U.K. Pension Plan
Investments in insurance vehicles:
Developed international equity
U.K. fixed-income
Emerging market index
Alternative investments
Total U.K. Pension Plan
Other Non-U.S. Pension Plans (excluding U.K.)
Insurance group annuity contracts
Total Other Non-U.S. Pension Plans (Excluding
U.K.)
Fair-Value Measurements Using Significant Unobservable Inputs
Year Ended December 31, 2013
U.S. Pension Plan
U.K. Pension Plan
Alternative
Investments
Private
Equity
Alternative
Investments
Non-
U.S. Pension Plans
(Excluding U.K.)
Insurance group
annuity contract
$
$
$
19
12
—
1
32
$
2
—
—
—
2
$
$
$
39
3
—
1
43
$
61
13
(5)
1
70
Fair-Value Measurements on a Recurring Basis
as of December 31, 2012
Quoted Market
Prices in
Active Markets
(Level 1)
Pricing Methods with
Significant Observable
Market Inputs
(Level 2)
Pricing Methods
with Significant
Unobservable
Market Inputs
(Level 3)
Total Net
Carrying Value
$
— $
144
$
— $
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
16
80
42
390
32
24
—
—
—
7
735
30
177
9
—
216
—
—
—
—
—
—
—
—
5
14
2
—
21
—
—
—
39
39
61
61
144
16
80
42
390
32
24
5
14
2
7
756
30
177
9
39
255
61
61
Total assets carried at fair value
$
— $
951
$
121
$
1,072
193
STATE STREET CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(In millions)
Assets:
Fair value as of December 31, 2011
Purchases and sales, net
Unrealized gains
Fair value as of December 31, 2012
Fair-Value Measurements Using Significant Unobservable Inputs
Year Ended December 31, 2012
U.S. Pension Plan
U.K. Pension Plan
Non-
U.S. Pension Plans
(Excluding U.K.)
Alternative
Investments
Private
Equity
Alternative
Investments
Insurance group
annuity contract
$
$
19
—
—
19
$
$
2
—
—
2
$
$
32
$
3
4
39
$
57
4
—
61
The plans’ investment strategies are intended to reduce the concentration risk of an adverse influence on
investment values from the poor performance of a small number of individual investments through diversification of
the plans' assets. The significant holdings of the plans are reviewed quarterly so that the plans do not exceed the
allowable maximum amount per issuer. The plans are re-balanced monthly so that actual weights of the plan assets
are within the allowable ranges set forth in the investment policy. The plans’ operating cash flows (benefit payments,
expenses, contributions) are used to bring the weights back into line on a monthly basis. If these cash flows do not
provide sufficient benefit, additional re-balancing is effected.
Expected employer contributions to the tax-qualified U.S. and non-U.S. defined benefit pension plans, SERPs,
and post-retirement plan for 2014 are $7 million, $27 million and $7 million, respectively.
State Street has unfunded SERPs that provide certain officers with defined pension benefits in excess of
qualified plan limits imposed by U.S. federal tax law.
194
STATE STREET CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The following table presents information for the SERPs for the years ended December 31:
(In millions)
Benefit obligations:
Beginning of year
Service cost
Interest cost
Actuarial gain (loss)
Benefits paid
Settlements
End of year
Accrued benefit expense:
Funded status (plan assets less benefit obligations)
Net accrued benefit expense
Amounts recognized in consolidated statement of condition as of December 31:
Current liabilities
Non-current liabilities
Net accrued amount recognized in consolidated statement of condition
Amounts recognized in accumulated other comprehensive income:
Net loss
Accumulated other comprehensive loss
Cumulative employer contributions in excess of net periodic benefit cost
Net obligation recognized in consolidated statement of condition
Accumulated benefit obligation
Actuarial assumptions:
Non-Qualified SERPs
2013
2012
$
172
$
173
1
6
(15)
(2)
(8)
154
(154)
(154)
(27)
(127)
(154)
(36)
(36)
(118)
(154)
154
$
$
$
$
$
$
$
$
1
7
13
(2)
(20)
172
(172)
(172)
(15)
(157)
(172)
(59)
(59)
(113)
(172)
172
$
$
$
$
$
$
$
$
Assumptions used to determine benefit obligations and periodic benefit costs are consistent
with those described for the post-retirement plan, with the following exceptions:
Rate of increase in future compensation—SERPs
Rate of increase in future compensation—executive SERPs
—%
—
—%
10.00%
For those defined benefit plans that have accumulated benefit obligations in excess of plan assets as of
December 31, 2013 and 2012, the accumulated benefit obligations were $259 million and $1.05 billion, respectively,
and the plan assets were $45 million and $810 million, respectively. For those defined benefit plans that have
projected benefit obligations in excess of plan assets as of December 31, 2013 and 2012, the projected benefit
obligations were $300 million and $1.08 billion, respectively, and the plan assets were $62 million and $814 million,
respectively.
If trend rates for health care costs were increased by 1%, the post-retirement benefit obligation as of
December 31, 2013 would have increased 7%, and the aggregate expense for service and interest costs for 2013
would have increased 11%. Conversely, if trend rates for health care costs were decreased by 1%, the post-
retirement benefit obligation as of December 31, 2013 would have decreased 6%, and the aggregate expense for
service and interest costs for 2013 would have decreased 9%. In addition, as part of recent corporate actions, a
special termination benefit was provided to affected participants who were eligible for optional post-retirement
medical coverage.
The following table presents the actuarially determined expense for our U.S. and non-U.S. defined benefit
plans, post-retirement plan and SERPs for the years ended December 31:
195
STATE STREET CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Years Ended December 31,
2013
2012
2011
2013
2012
2011
Primary U.S. and Non-U.S.
Defined Benefit Plans
Post-Retirement
Plan
(In millions)
Components of net periodic benefit cost:
Service cost
Interest cost
Assumed return on plan assets
Amortization of prior service cost
Amortization of net loss
Net periodic benefit cost
Settlements
Curtailments
Special termination benefits
Total expense
Estimated amounts that will be amortized from
accumulated other comprehensive income
over the next year:
Net loss
Estimated amortization
$
$
$
$
Years Ended December 31,
(In millions)
Components of net periodic benefit cost:
Service cost
Interest cost
Amortization of net loss
Net periodic benefit cost
Settlements
Total expense
11
43
(63)
—
24
15
(1)
(1)
—
13
$
$
11
45
(59)
(2)
17
12
—
—
—
12
$
9
$
47
(58)
—
12
10
—
—
—
10
$
$
8
5
—
—
1
14
—
—
—
14
$
$
6
5
—
—
1
12
—
—
1
$
13
$
6
6
—
—
1
13
—
—
—
13
(13) $
(13) $
(24) $
(24) $
(17) $
(17) $
— $
— $
(2) $
(2) $
(1)
(1)
Non-Qualified SERPs
2013
2012
2011
$
$
$
$
$
1
6
6
13
2
$
1
7
5
13
6
15
$
19
$
(4) $
(4) $
(6) $
(6) $
1
8
3
12
7
19
(5)
(5)
Estimated amounts that will be amortized from accumulated other
comprehensive income over the next year:
Net loss
Estimated amortization
Certain of our U.S. employees are eligible to contribute a portion of their pre-tax salary to a 401(k) savings
plan, or post-tax Roth contributions, or both, up to the annual IRS limit. Our matching portion of these contributions
is paid in cash, and we recorded related compensation and employee benefits expense in our consolidated
statement of income of $61 million, $70 million, and $77 million in the years ended December 31, 2013, 2012 and
2011, respectively, in matching contributions. Effective April 1, 2012, our matching contribution in the U.S. was
changed from 6% to 5% of employee contributions. In addition, employees in certain non-U.S. offices participate in
other local plans. We recorded related compensation and employee benefits expense related to these local plans of
$66 million, $65 million, and $65 million in the years ended December 31, 2013, 2012 and 2011.
We have a defined contribution supplemental executive retirement plan, referred to as a DC SERP, which
provides for a discretionary contribution of cash and/or equity to certain executive officers. The amount is subject to
certain vesting requirements as provided in the plan. We recorded compensation and employee benefits expense of
$7 million, $11 million, and $10 million in the years ended December 31, 2013, 2012, and 2011, respectively, in our
consolidated statement of income related to this DC SERP.
Shares of common stock and interest in the savings plan may be acquired by eligible employees through the
Employee Stock Ownership Plan, referred to as an ESOP. The ESOP is a non-leveraged plan. Employee benefits
196
STATE STREET CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
expense is equal to the contribution specified by the plan formula and is composed of the cash contributed for the
purchase of common stock on the open market or the fair value of the shares contributed from treasury stock.
Dividends on shares held by the ESOP are charged to retained earnings, and shares are treated as outstanding for
the calculation of earnings per common share.
Note 20. Occupancy Expense and Information Systems and Communications Expense
Occupancy expense and information systems and communications expense include expense for depreciation
of buildings, leasehold improvements, computer hardware and software, equipment, and furniture and fixtures.
Total depreciation expense for the years ended December 31, 2013, 2012 and 2011 was $401 million, $407 million
and $408 million, respectively.
We lease 1,025,000 square feet at One Lincoln Street, our headquarters building located in Boston,
Massachusetts, and a related underground parking garage, under 20-year, non-cancelable capital leases expiring in
September 2023. A portion of the lease payments is offset by subleases for approximately 129,000 square feet of
the building. In addition, we lease approximately 362,000 square feet at 20 Churchill Place, an office building
located in the U.K., under a 20-year capital lease expiring in December 2028. As of December 31, 2013 and 2012,
an aggregate net book value of $646 million and $576 million, respectively, related to the above-described capital
leases was recorded in premises and equipment, with the related liability recorded in long-term debt, in our
consolidated statement of condition.
Capital lease asset amortization is recorded in occupancy expense in our consolidated statement of income
over the respective lease term. Lease payments are recorded as a reduction of the liability, with a portion recorded
as imputed interest expense. For the years ended December 31, 2013, 2012 and 2011, interest expense related to
these capital lease obligations, reflected in net interest revenue, was $40 million, $42 million and $43 million,
respectively. As of December 31, 2013 and 2012, accumulated amortization of capital lease assets was $369
million and $313 million, respectively.
We have entered into non-cancelable operating leases for premises and equipment. Nearly all of these leases
include renewal options. Costs related to operating leases for office space are recorded in occupancy expense.
Costs related to operating leases for equipment are recorded in information systems and communications expense.
Total rental expense, net of sublease revenue, amounted to $224 million, $227 million and $232 million for the
years ended December 31, 2013, 2012 and 2011, respectively. Total rental expense was reduced by sublease
revenue of $6 million for the year ended December 31, 2013, $4 million for the year ended December 31, 2012 and
$5 million for the year ended December 31, 2011.
The following table presents a summary of future minimum lease payments under non-cancelable capital and
operating leases as of December 31, 2013. Aggregate future minimum rental commitments have been reduced by
aggregate sublease rental commitments of $59 million for capital leases and $14 million for operating leases.
(In millions)
2014
2015
2016
2017
2018
Thereafter
Total minimum lease payments
Less amount representing interest payments
Present value of minimum lease payments
Capital
Leases
Operating
Leases
Total
$
99
$
208
$
101
84
84
85
598
161
125
108
101
220
307
262
209
192
186
818
1,051
$
923
$
1,974
(322)
729
$
197
STATE STREET CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Note 21. Acquisition and Restructuring Costs
The following table presents net acquisition and restructuring costs recorded in the years ended December 31:
Years Ended December 31,
(In millions)
Acquisition costs
Restructuring charges, net
Total acquisition and restructuring costs
Acquisition Costs:
$
$
2013
2012
2011
76
28
104
$
$
26
$
199
225
$
16
253
269
Acquisition costs incurred in 2013 were related to previously disclosed acquisitions, mainly the 2012 GSAS
and 2010 Intesa acquisitions. Acquisition costs incurred in 2012 of $66 million were mainly related to integration
costs incurred in connection with the 2012 GSAS and 2010 Intesa acquisitions, and were partly offset by an
indemnification benefit of $40 million for the assumption of an income tax liability related to the 2010 Intesa
acquisition. Acquisition costs incurred in 2011 totaled $71 million, and were mainly composed of integration costs
associated with the 2011 Bank of Ireland Asset Management and 2010 Intesa and Mourant International Finance
Administration acquisitions. These acquisition costs were partially offset by an indemnification benefit of $55 million
for the assumption of an income tax liability related to the 2010 Intesa acquisition. The indemnification benefits of
$40 million in 2012 and $55 million in 2011 were offset by corresponding income tax expense of $40 million in 2012
and $55 million in 2011 in our consolidated statement of income.
Restructuring Charges:
Information with respect to our Business Operations and Information Technology Transformation program and
our 2011 and 2012 expense control measures, including charges, employee reductions and aggregate activity in the
related accruals, is provided in the two sections that follow.
Business Operations and Information Technology Transformation Program
In November 2010, we announced a global multi-year Business Operations and Information Technology
Transformation program. The program includes operational, information technology and targeted cost initiatives,
including plans related to reductions in both staff and occupancy costs. To date, we have recorded aggregate
restructuring charges of $381 million in our consolidated statement of income, composed of $156 million in 2010,
$133 million in 2011, $67 million in 2012 and $25 million in 2013.
The charges related to the program included costs related to severance, benefits and outplacement services,
as well as costs which resulted from actions taken to reduce our occupancy costs through the consolidation of
leases and properties. The charges also included costs related to information technology, including transition fees
associated with the expansion of our use of third-party service providers associated with components of our
information technology infrastructure and application maintenance and support.
In 2010, in connection with the program, we initiated the involuntary termination of 1,400 employees, or
approximately 5% of our global workforce, which we completed by the end of 2011. In addition, in connection with
our announcement in 2011 of the expansion of our use of third-party service providers associated with our
information technology infrastructure and application maintenance and support, as well as the continued execution
of the business operations transformation component of the program, we identified 1,340 additional involuntary
terminations and role eliminations, including 376 in 2013. As of December 31, 2013, we eliminated 1,278 of these
positions.
Expense Control Measures
In December 2011, in connection with expense control measures designed to calibrate our expenses to our
outlook for our capital markets-facing businesses in 2012, we took two actions. First, we withdrew from our fixed-
income trading initiative, in which we traded in fixed-income securities and derivatives as principal with our custody
clients and other third-parties that trade in these securities and derivatives. Second, we undertook other targeted
staff reductions. As a result of these actions, we recorded aggregate pre-tax restructuring charges of $120 million in
2011 and net pre-tax credit adjustments of $(1) million in 2012 in our consolidated statement of income.
198
STATE STREET CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The charges recorded in 2011 included costs related to severance, benefits and outplacement services with
respect to both our withdrawal from our fixed-income initiative and the other targeted staff reductions; costs
associated with fair-value adjustments to the initiative's trading portfolio resulting from our decision to withdraw from
the initiative; and costs for asset and other write-offs related to asset write-downs and contract terminations. In
2011, in connection with the above-described employee-related actions, we identified 442 employees to be
involuntarily terminated as their roles were eliminated. As of December 31, 2013, we completed these reductions.
In December 2012, in connection with expense control measures designed to better align our expenses to our
business strategy and related outlook for 2013, we identified additional targeted staff reductions. As a result of
these actions, we have recorded aggregate pre-tax restructuring charges of $133 million in 2012 and $3 million in
2013 in our consolidated statement of income. Employee-related costs included severance, benefits and
outplacement services. Costs for asset and other write-offs were primarily related to contract terminations. We
originally identified involuntary terminations and role eliminations of 960 employees (630 positions after
replacements). As of December 31, 2013, 782 positions were eliminated through voluntary and involuntary
terminations.
Aggregate Restructuring-Related Accrual Activity
The following table presents aggregate activity associated with accruals that resulted from the charges
associated with the Business Operations and Information Technology Transformation program and the 2011 and
2012 expense control measures:
(In millions)
Balance as of December 31, 2012
Additional accruals for Business Operations and Information
Technology Transformation program
Additional accruals for 2012 expense control measures
Payments and adjustments
Balance as of December 31, 2013
Note 22. Other Expenses
Employee-
Related
Costs
Real Estate
Consolidation
Information
Technology
Costs
Asset and
Other
Write-Offs
Total
$
195
$
49
$
5
$
13
$
262
13
(4)
(154)
13
—
(13)
(1)
—
(4)
—
7
25
3
(13)
(184)
$
50
$
49
$
— $
7
$
106
As a result of the 2008 Lehman Brothers bankruptcy, we had various claims against Lehman Brothers entities
in bankruptcy proceedings in the U.S. and the U.K. We also had amounts asserted as owed, or return obligations, to
Lehman Brothers entities. The various claims and amounts owed arose from transactions that existed at the time
Lehman Brothers entered bankruptcy, including prime brokerage arrangements, foreign exchange transactions,
securities lending arrangements and repurchase agreements. In 2011, we reached an agreement with certain
Lehman Brothers estates in the U.S. to resolve the value of deficiency claims arising out of indemnified repurchase
transactions in the U.S., and the bankruptcy court allowed those claims in the amount of $400 million.
In 2012, we reached an agreement to settle the claims against the Lehman Brothers estate in the U.K. related
to the close-out of securities lending and repurchase arrangements. This settlement resulted in a return obligation
for us and a certified claim against the Lehman Brothers estate, and resolved the contingent nature of our rights and
obligations with the Lehman Brothers estate.
In connection with our resolution of the indemnified repurchase and securities lending claims in the U.S. and
the U.K., we recognized a credit of approximately $362 million in our consolidated statement of income in 2012.
Both certified claims retained as part of the settlement agreements were subsequently sold at their respective fair
values, resulting in an additional gain of approximately $10 million, which was also recorded in our consolidated
statement of income in 2012.
In 2013, we received aggregate distributions totaling approximately $186 million from the Lehman Brothers
estates. Of the aggregate distributions received, $101 million was applied to reduce remaining Lehman Brothers-
related assets, primarily prime brokerage claim-related receivables, recorded in our consolidated statement of
condition; the remaining $85 million was recorded as an aggregate credit to other expenses in our consolidated
statement of income.
199
STATE STREET CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Note 23. Income Taxes
The following table presents the components of income tax expense for the years ended December 31:
(In millions)
Current:
Federal
State
Non-U.S.
Total current expense
Deferred:
Federal
State
Non-U.S.
Total deferred expense
Total income tax expense
2013
2012
2011
$
151
$
153
$
39
248
438
70
25
17
112
550
$
65
262
480
262
26
(63)
225
705
$
$
49
54
295
398
134
8
76
218
616
In the fourth quarter of 2013, we completed a multi-year tax data enhancement process, the final stages of
which identified a reconciliation difference in our deferred tax accounts, and we determined that our deferred tax
liabilities were overstated by $50 million and our deferred tax assets were understated by $21 million. We
evaluated the qualitative and quantitative effects of the resulting overstatement of income tax expense, and
concluded that such overstatement did not have a material effect on any prior annual or quarterly consolidated
financial statements. Accordingly, in the fourth quarter of 2013, we recorded an adjustment in our consolidated
statement of income to correct this difference, which resulted in an out-of-period income tax benefit of $71 million.
This income tax benefit is reflected in the table above as a reduction of total deferred expense for 2013.
The amounts for 2012 and 2011 presented in the table included income tax expense of $40 million and $55
million, respectively, associated with indemnification benefits, recorded as offsets to acquisition costs, for the
assumption of income tax liabilities related to the 2010 Intesa acquisition.
Amounts of income tax expense (benefit) related to net gains (losses) from sales of investment securities were
$6 million, $22 million and $55 million for 2013, 2012 and 2011, respectively. Pre-tax income attributable to our
operations located outside the U.S. was approximately $1.25 billion, $1.11 billion and $1.23 billion for 2013, 2012
and 2011, respectively.
Pre-tax earnings of our non-U.S. subsidiaries are subject to U.S. income tax when effectively repatriated. As
of December 31, 2013, we have chosen to indefinitely reinvest approximately $3.5 billion of earnings of certain of
our non-U.S. subsidiaries. No provision has been recorded for U.S. income taxes that could be incurred upon
repatriation. As of December 31, 2013, if such earnings had been repatriated to the U.S., we would have provided
for approximately $690 million of additional income tax expense.
200
STATE STREET CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The following table presents significant components of our gross deferred tax assets and gross deferred tax
liabilities as of December 31. Deferred tax assets and deferred tax liabilities recorded in our consolidated statement
of condition are netted within the same tax jurisdiction.
(In millions)
Deferred tax assets:
Unrealized losses on investment securities, net
Deferred compensation(1)
Defined benefit pension plan
Restructuring charges and other reserves
Real estate
General business credits
Other
Total deferred tax assets
Valuation allowance for deferred tax assets
Deferred tax assets, net of valuation allowance
Deferred tax liabilities:
Leveraged lease financing
Fixed and intangible assets
Non-U.S. earnings
Foreign currency translation
Other(2)
Total deferred tax liabilities
$
$
$
2013
2012
$
421
209
97
126
18
3
54
928
(33)
895
$
359
$
1,073
105
35
44
131
175
155
172
20
76
63
792
(28)
764
370
1,099
118
56
81
$
1,616
$
1,724
(1) Amount as of December 31, 2013 reflected an increase of $21 million associated with an out-of-period income tax benefit
recorded in 2013.
(2) Amount as of December 31, 2013 reflected a decrease of $50 million associated with an out-of-period income tax benefit
recorded in 2013.
Management considers the valuation allowance adequate to reduce the total deferred tax assets to an
aggregate amount that will more likely than not be realized. Management has determined that a valuation allowance
is not required for the remaining deferred tax assets because it is more likely than not that there is sufficient taxable
income of the appropriate nature within the carryback and carryforward periods to realize these assets.
As of December 31, 2013 and 2012, we had deferred tax assets associated with tax credit carryforwards of $3
million and $76 million, respectively, which are presented in the table above. The tax credit carryforwards expire in
2033. As of December 31, 2013 and 2012, we had deferred tax assets associated with non-U.S. and state loss
carryforwards of $50 million and $45 million, respectively, included in “other” in the table above. Of the total loss
carryforwards of $50 million as of December 31, 2013, $33 million do not expire, and the remaining $17 million
expire through 2031.
201
STATE STREET CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The following table presents a reconciliation of the U.S. statutory income tax rate to our effective tax rate
based on income before income tax expense for the years ended December 31:
U.S. federal income tax rate
Changes from statutory rate:
State taxes, net of federal benefit
Tax-exempt income
Tax credits
Foreign tax differential
Transactions related to investment securities(1)
Out-of-period income tax benefit(2)
Other, net
Effective tax rate
2013
2012
2011
35.0%
35.0%
35.0%
1.6
(3.7)
(3.6)
(5.9)
—
(2.7)
(.2)
1.8
(2.6)
(2.8)
(5.5)
—
—
(.4)
2.0
(2.9)
(1.5)
(4.3)
(4.1)
—
.1
20.5%
25.5%
24.3%
(1) Amounts for 2011 represented the effect of discrete tax benefits attributable to costs incurred in terminating former conduit
asset structures.
(2) Excluding the impact of the out-of-period income tax benefit of $71 million described earlier in this note, our effective tax rate
would have been 23.2%.
The following table presents activity related to unrecognized tax benefits as of December 31:
(In millions)
Beginning balance
Decrease related to agreements with tax authorities
Increase related to tax positions taken during current year
Increase related to tax positions taken during prior year
Ending balance
2013
2012
$
$
95
(4)
10
57
158
$
$
125
(45)
2
13
95
The amount of unrecognized tax benefits that, if recognized, would reduce income tax expense and our
effective tax rate was $98 million as of December 31, 2013. Unrecognized tax benefits do not include accrued
interest of approximately $7 million and $2 million as of December 31, 2013 and 2012, respectively. It is reasonably
possible that the unrecognized tax benefits will decrease by $5 million to $6 million within the next 12 months due to
potential agreements covering outstanding refund claims.
We recorded interest and penalties related to income taxes as a component of income tax expense. Income
tax expense for the year ended December 31, 2013 included related interest and penalties of approximately $3
million. Income tax expense for the year ended December 31, 2012 included a refund, net of related interest and
penalties of approximately $12 million. Income tax expense for the year ended December 31, 2011 included related
interest and penalties of approximately $10 million.
We are presently under audit by a number of tax authorities. The earliest tax year open to examination in
jurisdictions where we have material operations is 2009. Management believes that we have sufficient accrued
liabilities as of December 31, 2013 for tax exposures and related interest expense.
202
STATE STREET CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Note 24. Earnings Per Common Share
The following table presents the computation of basic and diluted earnings per common share for the years
ended December 31:
(Dollars in millions, except per share amounts)
Net income
Less:
2013
2012
2011
$
2,136
$
2,061
$
1,920
Preferred stock dividends(1)
Dividends and undistributed earnings allocated to participating securities(2)
(26)
(8)
(29)
(13)
(20)
(18)
Net income available to common shareholders
$
2,102
$
2,019
$
1,882
Average common shares outstanding (in thousands):
Basic average common shares
446,245
474,458
492,598
Effect of dilutive securities: common stock options and common stock awards
8,910
6,671
3,474
Diluted average common shares
Anti-dilutive securities(3)
Earnings per Common Share:
Basic
Diluted(4)
455,155
481,129
496,072
1,855
5,619
2,382
$
$
4.71
4.62
$
4.25
4.20
3.82
3.79
(1) Amount for 2012 included $8 million related to Series C preferred stock issued in August 2012. Remaining amount for 2012 and amount for
2011 were related to Series A preferred stock, which was redeemed in October 2012.
(2) Represented the portion of net income available to common equity allocated to participating securities; participating securities, composed of
unvested restricted stock and director stock awards, contain non-forfeitable rights to dividends during the vesting period on a basis equivalent
to dividends paid to common shareholders.
(3) Represented common stock options and other equity-based awards outstanding but not included in the computation of diluted average shares,
because their effect was anti-dilutive.
(4) Calculations reflect allocation of earnings to participating securities using the two-class method, as this computation is more dilutive than the
treasury stock method.
Note 25. Line of Business Information
We have two lines of business: Investment Servicing and Investment Management. Given our services and
management organization, the results of operations for these lines of business are not necessarily comparable with
those of other companies, including companies in the financial services industry.
Investment Servicing provides services for U.S. mutual funds, collective investment funds and other
investment pools, corporate and public retirement plans, insurance companies, foundations and endowments
worldwide. Products include custody; product- and participant-level accounting; daily pricing and administration;
master trust and master custody; record-keeping; cash management; foreign exchange, brokerage and other
trading services; securities finance; deposit and short-term investment facilities; loans and lease financing;
investment manager and alternative investment manager operations outsourcing; and performance, risk and
compliance analytics to support institutional investors. We provide shareholder services, which include mutual fund
and collective investment fund shareholder accounting, through 50%-owned affiliates, Boston Financial Data
Services, Inc. and the International Financial Data Services group of companies.
Investment Management, through SSgA, provides a broad array of investment management, investment
research and investment advisory services to corporations, public funds and other sophisticated investors. SSgA
offers strategies for managing financial assets, including passive and active, such as enhanced indexing, using
quantitative and fundamental methods for both U.S. and global equities and fixed-income securities. SSgA also
offers exchange-traded funds, or ETFs, such as the SPDR® ETF brand.
Our investment servicing strategy is to focus on total client relationships and the full integration of our products
and services across our client base through cross-selling opportunities. In general, our clients will use a
combination of services, depending on their needs, rather than one product or service. For instance, a custody
client may purchase securities finance and cash management services from different business units. Products and
203
STATE STREET CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
services that we provide to our clients are parts of an integrated offering to these clients. We price our products and
services on the basis of overall client relationships and other factors; as a result, revenue may not necessarily
reflect the stand-alone market price of these products and services within the business lines in the same way it
would for separate business entities.
Generally, approximately 70% to 75% of our consolidated total revenue (fee revenue from investment
servicing and investment management, as well as trading services and securities finance activities) is generated by
these two business lines. The remaining 25% to 30% is composed of processing fees and other revenue, net
interest revenue, which is largely generated by our investment of client deposits, short-term borrowings and long-
term debt in a variety of assets, and net gains (losses) related to investment securities. These other revenue types
are generally fully allocated to, or reside in, Investment Servicing and Investment Management.
Revenue and expenses are directly charged or allocated to our lines of business through management
information systems. Assets and liabilities are allocated according to policies that support management’s strategic
and tactical goals. Capital is allocated based on the relative risks and capital requirements inherent in each
business line, along with management judgment. Capital allocations may not be representative of the capital that
might be required if these lines of business were separate business entities.
The following table provides a summary of our line of business results for the periods indicated. The “Other”
column for 2013 included net acquisition and restructuring costs of $104 million; certain provisions for litigation
exposure and other costs of $65 million; and severance costs associated with reorganization of certain non-U.S.
operations of $11 million. The “Other” column for 2012 included the net realized loss from the sale of all of our
Greek investment securities of $46 million; a benefit related to claims associated with the 2008 Lehman Brothers
bankruptcy of $362 million; certain provisions for litigation exposure and other costs of $118 million; and acquisition
and restructuring costs of $225 million. The “Other” column for 2011 included acquisition and restructuring costs of
$269 million. The amounts in the “Other” columns were not allocated to State Street's business lines. Results for
2012 reflect reclassifications, for comparative purposes, related to management changes in methodologies
associated with allocations of capital and expenses reflected in results for 2013. Results for 2011 were not adjusted
for these reclassifications.
Years Ended
December 31,
(Dollars in millions,
except where
otherwise noted)
Fee revenue:
Servicing fees
Management fees
Trading services
Securities finance
Processing fees and
other
Total fee revenue
Net interest revenue
Gains (losses) related
to investment
securities, net
Investment
Servicing
Investment
Management
Other
Total
2013
2012
2011
2013
2012
2011
2013
2012
2011
2013
2012
2011
$ 4,819
$ 4,414
$ 4,382
$ — $ — $ — $ — $ — $ — $ 4,819
$ 4,414
$ 4,382
—
994
324
238
6,375
2,221
—
912
363
259
5,948
2,464
1,131
333
284
6,130
2,231
(9)
69
67
—
1,106
993
917
67
35
7
98
42
7
1,215
1,140
82
—
74
—
89
45
13
1,064
102
—
Total revenue
8,587
8,481
8,428
1,297
1,214
1,166
Provision for loan
losses
6
(3)
—
Total expenses
6,176
6,041
5,890
—
836
—
864
—
899
—
—
—
—
—
—
—
—
—
180
—
—
—
—
—
—
(46)
(46)
—
(19)
—
—
—
—
—
—
—
—
—
1,106
1,061
359
245
7,590
2,303
993
1,010
405
266
7,088
2,538
917
1,220
378
297
7,194
2,333
(9)
23
67
9,884
9,649
9,594
6
(3)
—
269
7,192
6,886
7,058
Income before
income tax expense
Pre-tax margin
Average assets
(in billions)
$ 2,405
$ 2,443
$ 2,538
$
461
$
350
$
267
$ (180)
$ (27)
$ (269)
$ 2,686
$ 2,766
$ 2,536
28%
29%
30%
36%
29%
23%
27%
29%
26%
$203.24
$190.09
$170.45
$ 3.76
$ 3.72
$ 4.36
$207.00
$193.81
$174.81
204
STATE STREET CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Note 26. Non-U.S. Activities
We generally define our non-U.S. activities as those revenue-producing business activities that arise from
clients domiciled outside the U.S. Due to the integrated nature of our business, precise segregation of our U.S. and
non-U.S. activities is not possible. Subjective estimates and other judgments are applied to determine the financial
results and assets related to our non-U.S. activities, including our application of funds transfer pricing, our asset-
and-liability management policies and our allocation of certain indirect corporate expenses. Interest expense
allocations are based on our internal funds transfer pricing methodology.
The following table presents our non-U.S. financial results for the years ended December 31. Results for 2012
and 2011 reflect reclassifications associated with tax transfer pricing reflected in results for 2013. Results for 2011
reflect changes in methodology associated with funds transfer pricing and expense allocation reflected in results for
2012.
(In millions)
Total fee revenue
Net interest revenue
Gains (losses) related to investment securities, net
Total revenue
Expenses
Income before income taxes
Income tax expense
Net income
2013
2012
2011
$
3,119
$
2,917
$
3,004
1,191
(11)
4,299
3,130
1,169
289
880
$
$
953
(40)
3,830
3,013
817
204
613
$
966
(25)
3,945
3,089
856
218
638
Gains (losses) related to investment securities, net, for the year ended December 31, 2012 included a loss of
$46 million from the sale of all of our Greek investment securities (refer to note 4).
The following table presents the significant components of our non-U.S. assets as of December 31, based on
the domicile of the underlying counterparties:
(In millions)
Interest-bearing deposits with banks
Investment securities
Other assets
Total non-U.S. assets
2013
2012
9,584
$
31,522
16,778
57,884
$
20,665
28,976
13,441
63,082
$
$
Note 27. Parent Company Financial Statements
The following tables present the financial statements of the parent company without consolidation of its
banking and non-banking subsidiaries, as of and for the years ended December 31:
205
STATE STREET CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
STATEMENT OF INCOME - PARENT COMPANY
Years Ended December 31,
(In millions)
2013
2012
2011
Cash dividends from consolidated banking subsidiary
$
1,694
$
1,785
$
Cash dividends from consolidated non-banking subsidiaries and
unconsolidated entities
Other, net
Total revenue
Interest expense
Other expenses
Total expenses
Income tax benefit
Income (loss) before equity in undistributed income of consolidated
subsidiaries and unconsolidated entities
Equity in undistributed income of consolidated subsidiaries and
unconsolidated entities:
Consolidated banking subsidiary
Consolidated non-banking subsidiaries and unconsolidated entities
Net income
250
35
1,979
169
88
257
(84)
68
38
1,891
163
85
248
(63)
1,806
1,706
237
93
173
182
$
2,136
$
2,061
$
—
60
34
94
203
60
263
(125)
(44)
1,773
191
1,920
206
STATE STREET CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
STATEMENT OF CONDITION - PARENT COMPANY
As of December 31,
(In millions)
Assets:
2013
2012
Interest-bearing deposits with consolidated banking subsidiary
$
4,419
$
3,799
Trading account assets
Investment securities available for sale
Investments in subsidiaries:
Consolidated banking subsidiary
Consolidated non-banking subsidiaries
Unconsolidated entities
Notes and other receivables from:
Consolidated banking subsidiary
Consolidated non-banking subsidiaries and unconsolidated entities
Other assets
Total assets
Liabilities:
Commercial paper
Accrued expenses and other liabilities
Long-term debt
Total liabilities
Shareholders’ equity
$
$
216
31
19,985
2,617
272
1,528
256
327
155
28
19,805
2,563
458
746
258
294
29,651
$
28,106
1,819
$
447
7,007
9,273
20,378
2,318
313
4,606
7,237
20,869
28,106
Total liabilities and shareholders’ equity
$
29,651
$
207
STATE STREET CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
STATEMENT OF CASH FLOWS - PARENT COMPANY
Years Ended December 31,
(In millions)
2013
2012
2011
Net cash provided by (used in) operating activities
$
2,296
$
2,706
$
(571)
Investing Activities:
Net decrease (increase) in interest-bearing deposits with consolidated
banking subsidiary
Investments in consolidated banking and non-banking subsidiaries
Sale or repayment of investment in consolidated banking and non-banking
subsidiaries
Business acquisitions
(620)
(1,100)
32
—
1,115
(68)
28
(2)
Net cash provided by (used in) investing activities
(1,688)
1,073
Financing Activities:
Net decrease in short-term borrowings
Net decrease in commercial paper
Proceeds from issuance of long-term debt, net of issuance costs
Payments for long-term debt
Proceeds from issuance of preferred stock, net of issuance costs
Proceeds from exercises of common stock options
Purchases of common stock
Repurchases of common stock for employee tax withholding
Payments for cash dividends
Net cash provided by (used in) financing activities
Net change
Cash and due from banks at beginning of year
Cash and due from banks at end of year
—
(499)
2,485
—
—
121
(2,040)
(189)
(486)
(608)
—
—
(500)
(66)
—
(1,750)
488
53
(1,440)
(101)
(463)
(3,779)
—
—
$
— $
— $
144
(648)
39
(51)
(516)
—
(415)
1,986
—
500
49
(675)
(63)
(295)
1,087
—
—
—
208
STATISTICAL DISCLOSURE BY BANK HOLDING COMPANIES
Distribution of Average Assets, Liabilities and Shareholders’ Equity; Interest Rates and Interest Differential
(Unaudited)
The following table presents consolidated average statements of condition and net interest revenue for the
years indicated.
Years Ended December 31,
(Dollars in millions; fully
taxable-equivalent basis)
Assets:
2013
2012
2011
Average
Balance
Interest
Average
Rate
Average
Balance
Interest
Average
Rate
Average
Balance
Interest
Average
Rate
Interest-bearing deposits with U.S. banks
$
15,858
$
.25% $
9,305
$
25
.26% $
9,505
$
23
.25%
10,736
126
1.17
Interest-bearing deposits with non-U.S.
banks
Securities purchased under resale
agreements
Trading account assets
Investment securities:
U.S. Treasury and federal agencies(1)
State and political subdivisions(1)
Other investments
Loans
Lease financing(1)
Other interest-earning assets
Total interest-earning assets(1)
Cash and due from banks
Other assets
Total assets
Liabilities and shareholders’ equity:
Interest-bearing deposits:
Time
Savings
Non-U.S.
Total interest-bearing deposits
Securities sold under repurchase
agreements
Federal funds purchased
Other short-term borrowings
Long-term debt
Other interest-bearing liabilities
13,088
5,766
748
33,003
8,637
76,056
12,660
1,121
11,164
40
85
45
—
706
391
1,332
215
38
4
6
4
83
93
1
—
59
232
26
411
178,101
2,856
3,747
25,182
$ 207,030
$
2,504
$
6,358
100,391
109,253
8,436
298
3,785
8,415
6,457
Total interest-bearing liabilities
136,644
Noninterest-bearing deposits:
Special time
Demand
Non-U.S.(2)
Other liabilities
Shareholders’ equity
769
34,725
800
13,561
20,531
.65
.77
—
2.14
4.53
1.75
1.70
3.43
.04
1.60
17,518
7,243
651
34,576
7,346
71,988
10,404
1,206
7,378
116
51
—
800
338
1,552
211
42
3
167,615
3,138
3,811
22,384
$ 193,810
16
3
147
166
1
1
71
222
15
476
.23% $
7,245
$
.07
.08
.14
.01
—
1.57
2.75
.40
.30
2,088
89,059
98,392
7,697
784
4,676
7,008
5,898
124,455
1,203
34,850
459
12,660
20,183
.66
.71
—
2.31
4.60
2.16
2.03
3.54
.04
1.88
4,686
2,013
32,517
6,875
63,683
10,834
1,346
5,462
28
—
775
347
1,493
222
58
2
147,657
3,074
3,436
23,665
$ 174,758
11
—
209
220
10
—
86
289
8
613
.17% $
3,626
$
.15
.16
.17
.01
.09
1.52
3.17
.26
.39
423
84,011
88,060
9,040
845
5,134
8,966
3,535
115,580
691
24,847
387
13,890
19,363
.61
—
2.38
5.05
2.34
2.05
4.28
.03
2.08
.30%
—
.25
.25
.11
—
1.67
3.22
.24
.53
Total liabilities and shareholders’ equity
$ 207,030
$ 193,810
$ 174,758
Net interest revenue
$
2,445
$
2,662
$
2,461
Excess of rate earned over rate paid
Net interest margin(3)
1.30%
1.37
1.49%
1.59
1.55%
1.67
(1) Fully taxable-equivalent revenue is a method of presentation in which the tax savings achieved by investing in tax-exempt investment securities and certain leases are
included in interest revenue with a corresponding charge to income tax expense. This method facilitates the comparison of the performance of these assets. The
adjustments are computed using a federal income tax rate of 35%, adjusted for applicable state income taxes, net of the related federal tax benefit. The fully taxable-
equivalent adjustments included in interest revenue presented above were $142 million, $124 million and $128 million for the years ended December 31, 2013, 2012 and
2011, respectively, and were substantially related to tax-exempt securities (state and political subdivisions).
(2) Non-U.S. noninterest-bearing deposits were $714 million, $330 million and $194 million as of December 31, 2013, 2012 and 2011, respectively.
(3) Net interest margin is calculated by dividing fully taxable-equivalent net interest revenue by average total interest-earning assets.
209
The following table summarizes changes in fully taxable-equivalent interest revenue and interest expense
due to changes in volume of interest-earning assets and interest-bearing liabilities, and due to changes in interest
rates. Changes attributed to both volumes and rates have been allocated based on the proportion of change in
each category.
2013 Compared to 2012
2012 Compared to 2011
Change in
Volume
Change in
Rate
Net (Decrease)
Increase
Change in
Volume
Change in
Rate
Net (Decrease)
Increase
$
17
$
(2) $
15
$
— $
2
$
Years Ended December 31,
(In millions; fully
taxable-equivalent basis)
Interest revenue related to:
Interest-bearing deposits with U.S.
banks
Interest-bearing deposits with non-
U.S. banks
Securities purchased under resale
agreements
Investment securities:
U.S. Treasury and federal
agencies
State and political subdivisions
Other investments
Loans
Lease financing
Other interest-earning assets
Total interest-earning assets
Interest expense related to:
Deposits:
Time
Savings
Non-U.S.
Securities sold under repurchase
agreements
Federal funds purchased
Other short-term borrowings
Long-term debt
Other interest-bearing liabilities
Total interest-bearing liabilities
Net interest revenue
$
2
(10)
23
25
(9)
59
(11)
(16)
1
64
5
3
(62)
(9)
1
(15)
(67)
7
(137)
201
(29)
(10)
(36)
59
88
46
(3)
2
134
(8)
6
18
—
—
(14)
45
1
48
86
(2)
4
(58)
(6)
(308)
(42)
(1)
(1)
(416)
(2)
(5)
(82)
—
(1)
2
(35)
10
(113)
(31)
(6)
(94)
53
(220)
4
(4)
1
79
16
49
24
195
(9)
(7)
1
(89)
7
(24)
(33)
(136)
(2)
(9)
—
(282)
348
(284)
(10)
1
(64)
—
(1)
(12)
10
11
(65)
16
—
12
(2)
1
(8)
(63)
6
(38)
(11)
3
(74)
(7)
—
(7)
(4)
1
(99)
$
(303) $
(217) $
386
$
(185) $
210
Quarterly Summarized Financial Information (Unaudited)
2013 Quarters
2012 Quarters
(Dollars and shares in millions,
except per share amounts)
Total fee revenue
Interest revenue
Interest expense
Net interest revenue
Gains (losses) related to
investment securities, net
Fourth
Third
Second
First
Fourth
Third
Second
First
$ 1,879
$ 1,883
$ 1,971
$ 1,857
$ 1,806
$ 1,719
$ 1,778
$ 1,785
684
99
585
—
643
97
546
700
104
596
(4)
(7)
687
111
576
2
733
111
622
21
730
111
619
18
786
114
672
(27)
765
140
625
11
Total revenue
2,464
2,425
2,560
2,435
2,449
2,356
2,423
2,421
Provision for loan losses
6
—
—
—
(2)
—
(1)
—
Total expenses
1,846
1,722
1,798
1,826
1,864
1,415
1,772
1,835
Income before income tax
expense
Income tax expense
Net income
Net income available to common
shareholders
Earnings per common share(1):
612
59
553
545
$
$
703
163
540
531
$
$
762
183
579
571
$
$
609
145
464
455
$
$
587
117
470
468
$
$
941
267
674
654
$
$
652
162
490
480
$
$
$
$
Basic
Diluted
$
1.25
$
1.20
$
1.26
$
1.00
$
1.02
$
1.39
$
1.00
$
1.22
1.17
1.24
.98
1.00
1.36
.98
Average common shares
outstanding:
Basic
Diluted
436
445
443
452
452
461
454
463
459
467
472
480
481
489
Dividends per common share
$
.26
$
.26
$
.26
$
.26
$
.24
$
.24
$
.24
$
586
159
427
417
.86
.85
485
490
.24
Common stock price:
High
Low
Closing
$ 73.63
$ 71.27
$ 68.18
$ 60.65
$ 47.30
$ 45.09
$ 47.13
$ 47.20
64.25
73.39
64.92
65.75
54.57
65.21
47.71
59.09
41.09
47.01
38.95
41.96
39.27
44.64
38.21
45.50
__________________________
(1) Basic earnings per common share for full-year 2012 do not equal the sum of the four quarters for each year.
Diluted earnings per common share for full-year 2013 and full-year 2012 do not equal the sum of the four quarters
for each year.
211
ITEM 9.
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE
None.
ITEM 9A. CONTROLS AND PROCEDURES
DISCLOSURE CONTROLS AND PROCEDURES; CHANGES IN INTERNAL CONTROL OVER FINANCIAL
REPORTING
State Street has established and maintains disclosure controls and procedures that are designed to ensure
that material information related to State Street and its subsidiaries on a consolidated basis required to be disclosed
in its reports filed or submitted under the Securities Exchange Act of 1934 is recorded, processed, summarized, and
reported within the time periods specified in the SEC's rules and forms, and that such information is accumulated
and communicated to State Street's management, including its Chief Executive Officer and Chief Financial Officer,
as appropriate, to allow timely decisions regarding required disclosure. For the quarter ended December 31, 2013,
State Street's management carried out an evaluation, with the participation of the Chief Executive Officer and Chief
Financial Officer, of the effectiveness of the design and operation of State Street's disclosure controls and
procedures. Based on the evaluation of these disclosure controls and procedures, the Chief Executive Officer and
Chief Financial Officer concluded that State Street's disclosure controls and procedures were effective as of
December 31, 2013.
State Street has also established and maintains internal control over financial reporting as a process designed
to provide reasonable assurance regarding the reliability of financial reporting and the preparation of consolidated
financial statements for external purposes in conformity with GAAP. In the ordinary course of business, State Street
routinely enhances its internal controls and procedures for financial reporting by either upgrading its current
systems or implementing new systems. Changes have been made and may be made to State Street's internal
controls and procedures for financial reporting as a result of these efforts. During the quarter ended December 31,
2013, no change occurred in State Street's internal control over financial reporting that has materially affected, or is
reasonably likely to materially affect, State Street's internal control over financial reporting.
INTERNAL CONTROL OVER FINANCIAL REPORTING
Management’s Report on Internal Control Over Financial Reporting
The management of State Street is responsible for the preparation and fair presentation of the financial
statements and other financial information contained in this Form 10-K. Management is also responsible for
establishing and maintaining adequate internal control over financial reporting. Management has designed business
processes and internal controls and has also established and is responsible for maintaining a business culture that
fosters financial integrity and accurate reporting. To these ends, management maintains a comprehensive system of
internal controls intended to provide reasonable assurances regarding the reliability of financial reporting and the
preparation of the consolidated financial statements of State Street in conformity with GAAP. State Street's
accounting policies and internal control over financial reporting, established and maintained by management, are
under the general oversight of State Street's Board of Directors, including the Board's Examining & Audit
Committee.
Management has made a comprehensive review, evaluation and assessment of State Street's internal control
over financial reporting as of December 31, 2013. The standard measures adopted by management in making its
evaluation are the measures in the Internal Control - Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission (1992 framework) (the “COSO criteria”).
Based on its review and evaluation, management concluded that State Street's internal control over financial
reporting was effective as of December 31, 2013, and that State Street's internal control over financial reporting as
of that date had no material weaknesses.
Ernst & Young LLP, an independent registered public accounting firm, which has audited and reported on the
consolidated financial statements contained in this Form 10-K, has issued its written attestation report on its
assessment of State Street's internal control over financial reporting, which follows this report.
212
Report of Independent Registered Public Accounting Firm
THE SHAREHOLDERS AND BOARD OF DIRECTORS OF
STATE STREET CORPORATION
We have audited State Street Corporation's (the “Corporation”) internal control over financial reporting as of
December 31, 2013, based on criteria established in Internal Control - Integrated Framework issued by the
Committee of Sponsoring Organizations of the Treadway Commission (1992 framework) (the “COSO criteria”).
State Street Corporation's management is responsible for maintaining effective internal control over financial
reporting and for its assessment of the effectiveness of internal control over financial reporting included in the
accompanying Management's Report on Internal Control over Financial Reporting. Our responsibility is to express
an opinion on the Corporation's internal control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board
(United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about
whether effective internal control over financial reporting was maintained in all material respects. Our audit included
obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness
exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk,
and performing such other procedures as we considered necessary in the circumstances. We believe that our audit
provides a reasonable basis for our opinion.
A company's internal control over financial reporting is a process designed to provide reasonable assurance
regarding the reliability of financial reporting and the preparation of financial statements for external purposes in
accordance with generally accepted accounting principles. A company's internal control over financial reporting
includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail,
accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable
assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance
with generally accepted accounting principles and that receipts and expenditures of the company are being made
only in accordance with authorizations of management and directors of the company; and (3) provide reasonable
assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company's
assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect
misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that
controls may become inadequate because of changes in conditions, or that the degree of compliance with the
policies or procedures may deteriorate.
In our opinion, State Street Corporation maintained, in all material respects, effective internal control over
financial reporting as of December 31, 2013, based on the COSO criteria.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board
(United States), the consolidated statement of condition of State Street Corporation as of December 31, 2013 and
2012, and the related consolidated statements of income, comprehensive income, changes in shareholders' equity
and cash flows for each of the three years in the period ended December 31, 2013 and our report dated
February 21, 2014 expressed an unqualified opinion thereon.
Boston, Massachusetts
February 21, 2014
/s/ Ernst & Young LLP
213
ITEM 9B. OTHER INFORMATION
Not applicable.
PART III
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
Information concerning our directors will appear in our Proxy Statement for the 2014 Annual Meeting of
Shareholders, to be filed pursuant to Regulation 14A on or before April 30, 2014, referred to as the 2014 Proxy
Statement, under the caption “Election of Directors.” Information concerning compliance with Section 16(a) of the
Exchange Act will appear in our 2014 Proxy Statement under the caption “Section 16(a) Beneficial Ownership
Reporting Compliance.” Information concerning our Code of Ethics for Senior Financial Officers and our Examining
& Audit Committee will appear in our 2014 Proxy Statement under the caption “Corporate Governance at State
Street.” Such information is incorporated herein by reference.
Information about our executive officers is included under Part I.
ITEM 11. EXECUTIVE COMPENSATION
Information in response to this item will appear in our 2014 Proxy Statement under the caption “Executive
Compensation.” Such information is incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS
Information concerning security ownership of certain beneficial owners and management will appear in our
2014 Proxy Statement under the caption “Security Ownership of Certain Beneficial Owners and Management.”
Such information is incorporated herein by reference.
RELATED STOCKHOLDER MATTERS
The following table presents the number of outstanding common stock awards, options, warrants and rights
granted by State Street to participants in our equity compensation plans, as well as the number of securities
available for future issuance under these plans, as of December 31, 2013. The table provides this information
separately for equity compensation plans that have and have not been approved by shareholders. Shares
presented in the table and in the footnotes following the table are stated in thousands of shares.
(Shares in thousands)
Plan category:
Equity compensation plans approved
by shareholders
Equity compensation plans not
approved by shareholders
Total
(a)
Number of securities
to be issued
upon exercise of
outstanding
options,
warrants and rights
(b)
Weighted-average
exercise price of
outstanding
options,
warrants and rights(1)
(c)
Number of securities
remaining available for
future issuance under
equity compensation
plans (excluding
securities reflected
in column (a))
19,982 (2) $
68.45
24 (3)
20,006
22,096
—
22,096
(1) Excludes deferred stock awards and performance awards (for which there is no exercise price).
(2) Consists of 15,094 shares subject to deferred stock awards, 337 shares subject to stock options, 2,327 stock appreciation
rights, or SARs, and 2,224 shares subject to performance awards (assuming payout at 100% for all awards regarding which
performance is uncertain).
(3) Consists of shares subject to deferred stock awards.
214
Individual directors who are not our employees have received stock awards and cash retainers, both of which
may be deferred. Directors may elect to receive shares of our common stock in place of cash. If payment is in the
form of common stock, the number of shares is determined by dividing the approved cash amount by the closing
price on the date of the annual shareholders' meeting. All deferred shares, whether stock awards or common stock
received in place of cash retainers, are increased to reflect dividends paid on the common stock and, for certain
directors, may include share amounts in respect of an accrual under a terminated retirement plan. Directors may
elect to defer 50% or 100% of cash or stock awards until a date that they specify, usually after termination of service
on the Board. The deferral may also be paid in either a lump sum or in installments over a two- to ten-year period.
Stock awards totaling 194,040 shares of common stock were outstanding as of December 31, 2013; awards made
through June 30, 2003, totaling 23,606 shares outstanding as of December 31, 2013, have not been approved by
shareholders. There are no other equity compensation plans under which our equity securities are authorized for
issuance that have been adopted without shareholder approval. Awards of stock made or retainer shares paid to
individual directors after June 30, 2003 have been or will be made under our 1997 or 2006 Equity Incentive Plan,
both of which were approved by shareholders.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
Information concerning certain relationships and related transactions and director independence will appear in
our 2014 Proxy Statement under the caption “Corporate Governance at State Street.” Such information is
incorporated herein by reference.
ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
Information concerning principal accounting fees and services and the Examining & Audit Committee's pre-
approval policies and procedures will appear in our 2014 Proxy Statement under the caption “Examining and Audit
Committee Matters.” Such information is incorporated herein by reference.
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES
(A)(1) FINANCIAL STATEMENTS
The following consolidated financial statements of State Street are included in Item 8 hereof:
Report of Independent Registered Public Accounting Firm
Consolidated Statement of Income - Years ended December 31, 2013, 2012 and 2011
Consolidated Statement of Comprehensive Income - Years ended December 31, 2013, 2012 and 2011
Consolidated Statement of Condition - As of December 31, 2013 and 2012
Consolidated Statement of Changes in Shareholders' Equity - Years ended December 31, 2013, 2012 and
2011
Consolidated Statement of Cash Flows - Years ended December 31, 2013, 2012 and 2011
Notes to Consolidated Financial Statements
(A)(2) FINANCIAL STATEMENT SCHEDULES
Certain schedules to the consolidated financial statements have been omitted if they were not required by
Article 9 of Regulation S-X or if, under the related instructions, they were inapplicable, or the information was
contained elsewhere herein.
(A)(3) EXHIBITS
The exhibits listed in the Exhibit Index following the signature page of this Form 10-K are filed herewith or are
incorporated herein by reference to other SEC filings.
215
Pursuant to the requirement of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has
duly caused this report to be signed on its behalf by the undersigned, on February 21, 2014, hereunto duly
authorized.
SIGNATURES
STATE STREET CORPORATION
By
/s/ MICHAEL W. BELL
MICHAEL W. BELL,
Executive Vice President and
Chief Financial Officer
By
/s/ JAMES J. MALERBA
JAMES J. MALERBA,
Executive Vice President,
Corporate Controller and
Chief Accounting Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below on
February 21, 2014 by the following persons on behalf of the registrant and in the capacities indicated.
OFFICERS:
/s/ JOSEPH L. HOOLEY
JOSEPH L. HOOLEY,
Chairman, President and Chief Executive
Officer; Director
DIRECTORS:
/s/ JOSEPH L. HOOLEY
JOSEPH L. HOOLEY
/s/ JOSE E. ALMEIDA
JOSE E. ALMEIDA
/s/ KENNETT F. BURNES
KENNETT F. BURNES
/s/ PETER COYM
PETER COYM
/s/ PATRICK de SAINT-AIGNAN
PATRICK de SAINT-AIGNAN
/s/ AMELIA C. FAWCETT
AMELIA C. FAWCETT
/s/ LINDA A. HILL
LINDA A. HILL
/s/ MICHAEL W. BELL
MICHAEL W. BELL,
Executive Vice President and
Chief Financial Officer
/s/ JAMES J. MALERBA
JAMES J. MALERBA,
Executive Vice President,
Corporate Controller and
Chief Accounting Officer
/s/ ROBERT S. KAPLAN
ROBERT S. KAPLAN
/s/ RICHARD P. SERGEL
RICHARD P. SERGEL
/s/ RONALD L. SKATES
RONALD L. SKATES
/s/ GREGORY L. SUMME
GREGORY L. SUMME
/s/ THOMAS J. WILSON
THOMAS J. WILSON
216
* 3.1
* 3.2
* 4.1
* 4.2
* 10.1†
* 10.2†
* 10.3†
* 10.4†
EXHIBIT INDEX
Restated Articles of Organization, as amended (filed as Exhibit 4.1 to State Street's Registration
Statement on Form S-8 filed with the SEC on August 31, 2012 and incorporated herein by
reference)
By-Laws, as amended (filed as Exhibit 3.3 to State Street’s Quarterly Report on Form 10-Q for
the quarter ended June 30, 2009 filed with the SEC on August 10, 2009 and incorporated
herein by reference)
The description of State Street’s Common Stock is included in State Street’s Registration
Statement on Form 8-A, as filed on January 18, 1995 and March 7, 1995 (filed with the SEC on
January 18, 1995 and March 7, 1995 and incorporated herein by reference)
Deposit Agreement, dated August 21, 2012, among State Street Corporation, American Stock
Transfer & Trust Company, LLC and the holders from time to time of depositary receipts (filed
as Exhibit 4.1 to State Street's Current Report on Form 8-K filed with the SEC on August 21,
2012 and incorporated herein by reference)
(Note: None of the instruments defining the rights of holders of State Street’s outstanding long-
term debt are in respect of indebtedness in excess of 10% of the total assets of State Street
and its subsidiaries on a consolidated basis. State Street hereby agrees to furnish to the SEC
upon request a copy of any other instrument with respect to long-term debt of State Street and
its subsidiaries.)
State Street’s Management Supplemental Retirement Plan Amended and Restated, as
amended (filed as Exhibit 10.1 to State Street's Annual Report on Form 10-K for the year ended
December 31, 2012 filed with the SEC on February 22, 2013 and incorporated herein by
reference)
State Street’s Executive Supplemental Retirement Plan (formerly “State Street Supplemental
Defined Benefit Pension Plan for Executive Officers”) Amended and Restated, as amended
Supplemental Cash Incentive Plan, as amended, a the form of award agreement thereunder
Forms of Amended and Restated Employment Agreements entered into with each of Joseph L.
Hooley, Joseph C. Antonellis, James S. Phalen, Michael Rogers and Edward J. Resch (filed as
Exhibit 10.3 to State Street’s Annual Report on Form 10-K for the year ended December 31,
2009 filed with the SEC on February 22, 2010 and incorporated herein by reference)
* 10.5†
Employment Agreement entered into with Michael W. Bell dated June 17, 2013
* 10.6†
* 10.7†
* 10.8†
* 10.9†
* 10.10†
* 10.11†
State Street’s Executive Compensation Trust Agreement dated December 6, 1996 (Rabbi Trust)
(filed as Exhibit 10.5 to State Street’s Annual Report on Form 10-K for the year ended
December 31, 2008 filed with the SEC on February 27, 2009 and incorporated herein by
reference)
State Street’s 1997 Equity Incentive Plan, as amended, and forms of awards and agreements
thereunder (filed as Exhibit 10.6 to State Street’s Annual Report on Form 10-K for the year
ended December 31, 2008 filed with the SEC on February 27, 2009 and incorporated herein by
reference)
State Street’s 2006 Equity Incentive Plan, as amended, and forms of award agreements
thereunder
State Street’s 2006 Senior Executive Annual Incentive Plan (filed as Exhibit 10.2 to State
Street’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2010 filed with the
SEC on May 7, 2010 and incorporated herein by reference)
State Street’s Management Supplemental Savings Plan, Amended and Restated, as amended
(filed as Exhibit 10.10 to State Street's Annual Report on Form 10-K for the year ended
December 31, 2012 filed with the SEC on February 22, 2013 and incorporated herein by
reference)
Deferred Compensation Plan for Directors of State Street Corporation, Restated January 1,
2008, as amended (filed as Exhibit 10.11 to State Street's Annual Report on Form 10-K for the
year ended December 31, 2012 filed with the SEC on February 22, 2013 and incorporated
herein by reference)
217
* 10.12†
Deferred Compensation Plan for Directors of State Street Corporation, Restated January 1,
2007, as amended (filed as Exhibit 10.12 to State Street's Annual Report on Form 10-K for the
year ended December 31, 2011 filed with the SEC on February 27, 2012 and incorporated
herein by reference)
* 10.13†
Description of compensation arrangements for non-employee directors
* 10.14†
* 10.15†
* 10.16†
* 10.17†
Memorandum of agreement of employment of Edward J. Resch, accepted October 16, 2002
(filed as Exhibit 10.13 to State Street’s Annual Report on Form 10-K for the year ended
December 31, 2008 filed with the SEC on February 27, 2009 and incorporated herein by
reference)
Letter Agreement with Scott F. Powers dated April 1, 2008 (filed as Exhibit 10.15 to State
Street's Annual Report on Form 10-K for the year ended December 31, 2010 filed with the SEC
on February 28, 2011 and incorporated herein by reference)
Letter Agreement with Joseph C. Antonellis dated April 26, 2010 (filed as Exhibit 10.16 to State
Street's Annual Report on Form 10-K for the year ended December 31, 2010 filed with the SEC
on February 28, 2011 and incorporated herein by reference)
Letter Agreement with Michael W. Bell dated May 23, 2013 (filed as Exhibit 10.1 to State
Street's Quarterly Report on Form 10-Q for the quarter ended June 30, 2013 filed with the SEC
on August 6, 2013 and incorporated herein by reference)
* 10.18A†
Form of Indemnification Agreement between State Street Corporation and each of its directors
* 10.18B†
* 10.18C†
* 10.18D†
* 10.19†
* 10.20†
Form of Indemnification Agreement between State Street Corporation and each of its executive
officers
Form of Indemnification Agreement between State Street Bank and Trust Company and each of
its directors
Form of Indemnification Agreement between State Street Bank and Trust Company and each of
its executive officers
Forms of Retention Award Agreement entered into with Joseph L. Hooley on October 22, 2009
(filed as Exhibit 10.18 to State Street’s Annual Report on Form 10-K for the year ended
December 31, 2009 filed with the SEC on February 22, 2010 and incorporated herein by
reference)
Form of Retention Award Agreement entered into with Scott F. Powers on June 15, 2010 (filed
as Exhibit 10.20 to State Street's Annual Report on Form 10-K for the year ended December
31, 2010 filed with the SEC on February 28, 2011 and incorporated herein by reference)
* 10.21†
2011 Senior Executive Annual Incentive Plan (filed as Exhibit 99.2 to State Street's Current
Report on Form 8-K filed with the SEC on May 24, 2011 and incorporated herein by reference)
* 12
* 21
* 23
31.1
31.2
32
Statement of Ratios of Earnings to Fixed Charges
Subsidiaries of State Street Corporation
Consent of Independent Registered Public Accounting Firm
Rule 13a-14(a)/15d-14(a) Certification of Chairman, President and Chief Executive Officer
Rule 13a-14(a)/15d-14(a) Certification of Chief Financial Officer
Section 1350 Certifications
** 101.INS
XBRL Instance Document
** 101.SCH
XBRL Taxonomy Extension Schema Document
** 101.CAL
XBRL Taxonomy Calculation Linkbase Document
** 101.DEF
XBRL Taxonomy Extension Definition Linkbase Document
** 101.LAB
XBRL Taxonomy Label Linkbase Document
** 101.PRE
XBRL Taxonomy Presentation Linkbase Document
218
__________________________________________
†
*
**
Denotes management contract or compensatory plan or arrangement
Exhibit filed with the SEC, but not printed herein
Submitted electronically herewith
Attached as Exhibit 101 to this report are the following formatted in XBRL (Extensible Business Reporting
Language): (i) Consolidated Statement of Income for the years ended December 31, 2013, 2012 and 2011, (ii)
Consolidated Statement of Comprehensive Income for the years ended December 31, 2013, 2012 and 2011,
(iii) Consolidated Statement of Condition as of December 31, 2013 and 2012, (iv) Consolidated Statement of
Changes in Shareholders' Equity for the years ended December 31, 2013, 2012 and 2011, (v) Consolidated
Statement of Cash Flows for the years ended December 31, 2013, 2012 and 2011, and (vi) Notes to Consolidated
Financial Statements.
219
EXHIBIT 31.1
I, Joseph L. Hooley, certify that:
1.
I have reviewed this Annual Report on Form 10-K of State Street Corporation;
RULE 13a-14(a)/15d-14(a) CERTIFICATION
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a
material fact necessary to make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly
present, in all material respects, the financial condition, results of operations and cash flows of the registrant as
of, and for, the periods presented in this report;
4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls
and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial
reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to
be designed under our supervision, to ensure that material information relating to the registrant, including
its consolidated subsidiaries, is made known to us by others within those entities, particularly during the
period in which this report is being prepared;
(b) Designed such internal control over financial reporting, or caused such internal control over financial
reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of
financial reporting and the preparation of financial statements for external purposes in accordance with
generally accepted accounting principles;
(c) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this
report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of
the period covered by this report based on such evaluation; and
(d) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred
during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an
annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal
control over financial reporting; and
5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal
control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of
directors (or persons performing the equivalent functions):
(a) All significant deficiencies and material weaknesses in the design or operation of internal control over
financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process,
summarize and report financial information; and
(b) Any fraud, whether or not material, that involves management or other employees who have a significant
role in the registrant's internal control over financial reporting.
Date: February 21, 2014
By:
/s/ JOSEPH L. HOOLEY
Joseph L. Hooley,
Chairman, President and Chief Executive Officer
EXHIBIT 31.2
I, Michael W. Bell, certify that:
1.
I have reviewed this Annual Report on Form 10-K of State Street Corporation;
RULE 13a-14(a)/15d-14(a) CERTIFICATION
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a
material fact necessary to make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly
present, in all material respects, the financial condition, results of operations and cash flows of the registrant as
of, and for, the periods presented in this report;
4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls
and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial
reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to
be designed under our supervision, to ensure that material information relating to the registrant, including
its consolidated subsidiaries, is made known to us by others within those entities, particularly during the
period in which this report is being prepared;
(b) Designed such internal control over financial reporting, or caused such internal control over financial
reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of
financial reporting and the preparation of financial statements for external purposes in accordance with
generally accepted accounting principles;
(c) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this
report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of
the period covered by this report based on such evaluation; and
(d) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred
during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an
annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal
control over financial reporting; and
5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal
control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of
directors (or persons performing the equivalent functions):
(a) All significant deficiencies and material weaknesses in the design or operation of internal control over
financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process,
summarize and report financial information; and
(b) Any fraud, whether or not material, that involves management or other employees who have a significant
role in the registrant's internal control over financial reporting.
Date: February 21, 2014
By:
/s/ MICHAEL W. BELL
Michael W. Bell,
Executive Vice President and
Chief Financial Officer
SECTION 1350 CERTIFICATIONS
EXHIBIT 32
To my knowledge, this Annual Report on Form 10-K for the period ended December 31, 2013 fully complies
with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, and the information
contained in this Report fairly presents, in all material respects, the financial condition and results of operations of
State Street Corporation.
Date: February 21, 2014
By:
/s/ JOSEPH L. HOOLEY
Joseph L. Hooley,
Chairman, President and Chief Executive Officer
Date: February 21, 2014
By:
/s/ MICHAEL W. BELL
Michael W. Bell.
Executive Vice President and
Chief Financial Officer
RECONCILIATION OF OPERATING-BASIS (NON-GAAP) FINANCIAL RESULTS
In addition to presenting State Street’s financial results in conformity with U.S. generally accepted accounting principles,
referred to as GAAP, management also presents results on a non-GAAP, or "operating" basis, as it believes that this
presentation supports meaningful comparisons from period to period and the analysis of comparable financial trends with
respect to State Street’s normal ongoing business operations.
Management believes that operating-basis financial information, which reports revenue from non-taxable sources, such as
interest revenue from tax-exempt investment securities and processing fees and other revenue associated with tax-advantaged
investments, on a fully taxable-equivalent basis and excludes the impact of revenue and expenses outside of the normal
course of business, facilitates an investor's understanding and analysis of State Street's underlying financial performance and
trends in addition to financial information prepared and reported in conformity with GAAP. Non-GAAP financial measures
should be considered in addition to, not as a substitute for or superior to, financial measures determined in conformity with
GAAP.
The following table reconciles financial information prepared on a non-GAAP, or operating basis, which is presented in the
foregoing letter to shareholders, to financial information prepared in conformity with GAAP, which is reported in the
accompanying 2013 Annual Report on Form 10-K.
(Dollars in millions)
Total Revenue:
Total revenue, GAAP basis
Years Ended
December
31, 2013
December
31, 2012
%
Change
2013
vs.
2012
$
9,884
$
9,649
2.4%
Tax-equivalent adjustment associated with tax-exempt investment securities
Tax-equivalent adjustment associated with tax-advantaged investments
Loss on sale of Greek investment securities
142
158
—
124
126
46
Discount accretion related to former conduit securities
(137)
(215)
Total revenue, operating basis(1)
Expenses:
Total expenses, GAAP basis
$
10,047
$
9,730
3.26
$
7,192
$
6,886
4.4
Severance costs associated with reorganization of certain non-U.S. operations
Benefit related to claims associated with Lehman Brothers bankruptcy
Provisions for litigation exposure and other costs
Special one-time additional charitable contribution
Acquisition costs
Restructuring charges, net
Indemnification benefits for assumption of income tax liabilities related to a 2010
acquisition
(11)
—
(65)
—
(76)
(28)
—
—
362
(93)
(25)
(66)
(199)
40
Total expenses, operating basis(1)
$
7,012
$
6,905
1.55
(1) For the years ended December 31, 2013 and December 31, 2012, positive operating leverage in the year-over-year comparison was
approximately 171 basis points, based on an increase in total operating-basis revenue of 3.26% and an increase in total operating-basis
expenses of 1.55%.
RECONCILIATION OF OPERATING-BASIS (NON-GAAP) FINANCIAL RESULTS (Continued)
(Dollars in millions, except per share amounts)
Diluted Earnings per Common Share:
Diluted earnings per common share, GAAP basis
Loss on sale of Greek investment securities
Severance costs associated with reorganization of certain non-U.S. operations
Provisions for litigation exposure and other costs
Special one-time additional charitable contribution
Acquisition costs
Restructuring charges, net
Benefit related to claims associated with Lehman Brothers bankruptcy
Discount accretion related to former conduit securities
Out-of-period benefit to adjust deferred taxes
Net tax effect of audit settlements associated with a 2010 acquisition
Years Ended
December
31, 2013
December
31, 2012
%
Change
2013
vs.
2012
$
4.62
$
4.20
10.0%
—
.02
.09
—
.11
.04
—
(.18)
(.16)
—
.06
—
.12
.04
.09
.27
(.46)
(.27)
—
(.10)
Diluted earnings per common share, operating basis
$
4.54
$
3.95
14.9
Return on Average Common Equity:
Return on average common equity, GAAP basis
Loss on sale of Greek investment securities
Provisions for litigation exposure and other costs
Special one-time additional charitable contribution
Acquisition costs
Restructuring charges, net
Benefit related to claims associated with Lehman Brothers bankruptcy
Discount accretion related to former conduit securities
Out-of-period benefit to adjust deferred taxes
Net tax effect of audit settlements associated with a 2010 acquisition
10.5%
10.3%
20 bps
—
.2
—
.3
.1
—
(.4)
(.4)
—
.1
.3
.1
.2
.7
(1.1)
(.7)
—
(.2)
Return on average common equity, operating basis
10.3%
9.7%
60
BOARD OF DIRECTORS
February 21, 2014
Joseph L. Hooley
Chairman, President and Chief Executive Officer,
State Street Corporation
Linda A. Hill
Wallace Brett Donham Professor of Business
Administration, Harvard Business School
José E. Almeida
Chairman, President and Chief Executive Officer,
Covidien PLC, global healthcare products company
Robert S. Kaplan
Senior Associate Dean for External Relations and
Professor of Management Practice, Harvard Business
School; former Vice Chairman, Goldman Sachs Group,
financial services
Kennett F. Burnes
Retired Chairman, President and Chief Executive
Officer, Cabot Corporation, manufacturer of specialty
chemicals and performance materials
Richard P. Sergel
Retired President and Chief Executive Officer,
North American Electric Reliability Corporation,
electric reliability organization
Peter Coym
Retired head of Lehman Brothers Holdings Inc.
in Germany, financial services
Ronald L. Skates
Former Chief Executive Officer and President, Data
General Corp., manufacturer of multi-user computer
systems; private investor
Patrick de Saint-Aignan
Retired Managing Director and Advisory Director for
Morgan Stanley, global financial services
Gregory L. Summe
Managing Director and Vice Chairman of Global Buyout,
Carlyle Group, global alternative asset manager
Amelia C. Fawcett
Deputy Chairman, Investment AB Kinnevik, a long-term
oriented investment company based in Sweden
Thomas J. Wilson
Chairman, President and Chief Executive Officer,
Allstate Corporation, property and casualty insurance
EXECUTIVE LEADERSHIP
February 21, 2014
Scott R. FitzGerald
Executive Vice President
Peter O'Neill(1)(2)
Executive Vice President
Hannah M. Grove
Executive Vice President
Alison A. Quirk(1)(2)
Executive Vice President
David J. Gutschenritter
Executive Vice President and Treasurer
Bernard P. Reilly
Executive Vice President
Joseph L. Hooley(1)(2)
Chairman, President and Chief
Executive Officer
Joseph C. Antonellis(1)(2)
Vice Chairman
Tracy Atkinson
Executive Vice President
Michael W. Bell(1)(2)
Executive Vice President and
Chief Financial Officer
Stefan M. Gavell
Executive Vice President
Phillip S. Gillespie
Executive Vice President
Stefan Gmür
Executive Vice President
Anthony C. Bisegna
Executive Vice President
Alan D. Greene
Executive Vice President
Lynn S. Blake
Executive Vice President
Martine A. Bond
Executive Vice President
Nicholas J. Bonn
Executive Vice President
Marc P. Brown
Executive Vice President
James C. Caccivio, Jr.
Executive Vice President
Anthony M. Carey
Executive Vice President
Jeffrey N. Carp(1)(2)
Executive Vice President,
Chief Legal Officer and Secretary
Patrick D. Centanni
Executive Vice President
Jeff D. Conway
Executive Vice President
James A. Hardy
Executive Vice President
Kathryn M. Horgan
Executive Vice President
Robert Kaplan
Executive Vice President
Mark R. Keating
Executive Vice President
Gunjan Kedia
Executive Vice President
Karen C. Keenan
Executive Vice President
John L. Klinck, Jr.(1)(2)
Executive Vice President
Christopher Perretta(1)(2)
Executive Vice President
James S. Phalen(1)(2)
Executive Vice President
David C. Phelan
Executive Vice President, General
Counsel and Assistant Secretary
Scott F. Powers(1)(2)
President and Chief Executive Officer of
State Street Global Advisors
Doreen Rigby
Executive Vice President
Michael F. Rogers(1)(2)
Executive Vice President
Dennis E. Ross
Executive Vice President
James E. Ross
Executive Vice President
Wai Kwong Seck
Executive Vice President
Paul J. Selian
Executive Vice President
William Slattery
Executive Vice President
Mark J. Snyder
Executive Vice President
Cuan Coulter
Executive Vice President and
Chief Compliance Officer
Andrew Kuritzkes(1)(2)
Executive Vice President and
Chief Risk Officer
David C. Crawford
Executive Vice President
Albert J. Cristoforo
Executive Vice President
Susan Dargan
Executive Vice President
Denise A. DeAmore
Executive Vice President
Jayne K. Donahue
Executive Vice President and
General Auditor
Sharon E. Donovan Hart
Executive Vice President
Gregory A. Ehret
Executive Vice President
Ali M. El-Abboud
Executive Vice President
David Suetens
Richard F. Lacaille
Executive Vice President
Executive Vice President
Brenda Lyons
Executive Vice President
James J. Malerba(1)
Executive Vice President, Corporate
Controller and Chief Accounting Officer
Louis D. Maiuri
Executive Vice President
Ian Martin
Executive Vice President
Steven R. Meier
Executive Vice President
Kristi L. Michem
Executive Vice President
Stephen F. Nazzaro
Executive Vice President
George E. Sullivan
Executive Vice President
Kevin F. Sullivan
Executive Vice President
Richard Taggart
Executive Vice President
Brian J. Walsh
Executive Vice President
Michael J. Wilson
Executive Vice President
(1) Designated as executive officer for SEC purposes
(2) Member of State Street Management Committee
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