2016 Annual Report
to Shareholders
State Street Corporation
State Street Financial Center
One Lincoln Street
Boston, MA 02111
www.statestreet.com
©2017 STATE STREET CORPORATION 17-30278-0317
Joseph L. Hooley
Chairman and
Chief Executive Officer
We maintained
a strong capital
position in 2016,
which allowed
us to continue
to deliver on a
key priority of
returning capital
to shareholders.
To Our Shareholders
2016 was a year in which we generated strong shareholder returns,
deepened and expanded our client relationships, and continued to
digitize State Street to position us and our clients for growth in a
new financial landscape. We also intensified our focus on controlling
expenses, managing risk and optimizing our capital position in an
effort to create long-term value for our shareholders.
I’m proud of this performance in a
year marked by continued slow global
economic growth, ultra-low interest
rates and geopolitical shocks.
The volatile year began with a sharp
downturn in global equity markets
on concerns over sliding oil prices
and fears that China’s growth rate
would slow substantially. Stock prices
recovered nicely by spring with the
help of a rebound in oil prices and
accommodative monetary policy from
central banks in the U.S., Europe, Japan
and China, only to suffer another sharp
reversal in June following the U.K.’s
surprise vote to leave the European
Union. Stocks quickly regained their
footing following the Brexit vote and
rallied in November following the
conclusion of the U.S. elections, with
most global equity markets ending the
year with modest gains.
Summary Financial Results
Against this backdrop, we achieved
solid financial results. Our 2016 GAAP-
basis diluted earnings per common
share were $4.97, up 11.2% compared
with $4.47 in 2015. GAAP-basis total
revenue decreased 1.5% to $10.2 billion
for the year, while total expenses
were essentially flat. Our 2016 GAAP-
basis return on average common
shareholders’ equity was 10.5%, an
improvement of 70 basis points
compared with 2015.
On an operating basis1, our 2016 diluted
earnings per common share were $5.27,
up 7.8% from $4.89 in 2015. Revenue
rose 1.2% on an operating basis to $10.8
billion for the year, while expenses rose
4% to $7.8 billion. Without a one-time
adjustment to deferred compensation
in 2016, expense growth would have
been 1%. Our operating-basis return on
average common shareholders’ equity
was 11.1%, compared with 10.7% in 2015.
We maintained a strong capital position
in 2016, which allowed us to continue
to deliver on a key priority of returning
capital to shareholders. Net capital
distributions, including dividends and
stock repurchases, were $1.9 billion,
resulting in 90% of GAAP net income
being returned to shareholders.
This supported the performance of our
common stock, which generated a total
return of 19.8% for the year.
We digitized a
significant
number of
platforms that
enable straight-
through processing
of transactions,
and many of
our clients
are benefiting
from faster,
more accurate
processing,
improved
efficiencies,
better data
quality and real-
time insights.
State Street Beacon
In last year’s shareholder letter,
I discussed the launch of State Street
Beacon, a multiyear initiative to
transform our company to become
a digital leader. I’m pleased that we
made great strides in 2016 improving
operational and systems performance
and providing innovative client solutions,
particularly in the areas of data
management, risk and analytics.
We digitized a significant number of
platforms that enable straight-through
processing of transactions, and many
of our clients are benefiting from faster,
more accurate processing, improved
efficiencies, better data quality and
real-time insights.
We continue to make investments to
further digitize our company through
Beacon and remain on track to generate
$550 million of annual pretax net
run-rate expense savings by the end of
2020, compared with our 2015 expenses,
all else equal, with the full run-rate
benefit expected to be realized in 2021.2
Growing our Core Business
We saw strong demand for our services
across State Street, resulting in $1.4
trillion in new client commitments for
our asset servicing business in 2016, the
strongest results since 2011. Notable
client wins included Allianz Global
Investors, Chubb, DekaBank Deutsche
Girozentrale, Fiera Capital, First State
Super, Pimco, Russell Investments and
the Japanese investment trust business
of Sumitomo Mitsui Asset Management.
Many of these wins were expansions of
existing relationships, which I see as a
strong endorsement of the value we’re
providing to our clients.
Our acquisition of GE Asset Management
(GEAM) complements the core strengths
of our asset management business,
State Street Global Advisors (SSGA).
GEAM provides substantial benefits to
our clients, including the addition of new
alternative investment capabilities
and the enhancement of our fundamental
equity and active fixed income portfolio
management teams. It also establishes
SSGA as a leading provider of outsourced
chief investment officer (OCIO) services.
As a result of the transaction, SSGA
began managing more than $100 billion
in assets previously managed by GEAM
on behalf of more than 100 institutional
clients, including corporate and public
retirement plan sponsors, foundations,
endowments, sovereign wealth funds
and insurance companies. The integration
has gone smoothly, with the vast
majority of GEAM’s employees and
clients choosing to transition to SSGA.
Strengthening our Global Franchise
Over the past five decades, as we’ve
expanded our presence globally and
developed deep relationships with
many of the world’s top asset managers
and asset owners, we’ve built regional
scale and strengthened the depth of our
product offerings and expertise in local
markets. Early in 2016, we opened a new
Center of Excellence in Gda´nsk, Poland,
to build on the success of the Kraków
operations we opened in 2007. In both
of our Polish locations, our employees
deliver specialized services for clients
across Europe and beyond — including
fund accounting, securities valuation,
financial reporting and hedge fund
administration.
We also opened a new office in
Melbourne to enable us to strengthen
our relationship and client service
model in Australia and support our
suite of solutions and capabilities.
We now provide custody and accounting
services to four of the seven largest
superannuation funds in Australia.
A key element of our global growth and
expansion strategy is our international
bank, State Street Bank International
GmbH, headquartered in Germany
with branches in Austria, England,
Italy, Luxembourg, the Netherlands,
Poland and Switzerland, and with a
representative office in Denmark. In
light of Brexit, having this strong
European banking entity in addition
to our significant U.K. presence is a
distinct competitive advantage for State
Street and our clients who look to us
for multijurisdictional capabilities. With
more than 10,000 employees across
Europe and deep expertise in local and
global markets, we’re well-positioned
to deliver a broad array of solutions and
support our clients need.
Investing in New Products and Solutions
We continue to support the long-term
growth of our business by investing in
new products and solutions to address
our clients’ needs and differentiate State
Street from our competitors.
SSGA strengthened its position as a
leader in exchange-traded funds (ETFs)
with the launch of 30 ETFs globally in
2016. Net inflows to our ETFs totaled $52
billion in 2016, led by SPDR® S&P 500®
ETF Trust (SPY), the oldest and largest
ETF, which ended the year with $26 billion
in net inflows and $226 billion in total
assets.
Building on more than 30 years of
experience in environmental, social and
governance (ESG) investing globally,
SSGA expanded its suite of ESG
products in 2016. It launched an ETF to
track its proprietary Gender Diversity
Index, comprising the stock listings of
We continue to
support the long-
term growth of
our business
by investing in
new products
and solutions
to address our
clients’ needs
and differentiate
State Street from
our competitors.
We’ve taken
extraordinary
steps in
recent years
to strengthen
our regulatory
compliance and
risk management
controls and
operating
environment
with the goal
of making risk
excellence a
competitive
strength for
State Street.
U.S. large capitalization companies with
the highest levels of gender diversity on
their boards of directors and among
their senior leadership. The SPDR®
SSGA Gender Diversity Index ETF (SHE)
is designed to offer investors the
opportunity to invest in companies with
gender-diverse leadership, while
promoting efforts to increase gender
diversity in corporate America. SHE was
the second most successful ETF
launched in the U.S. in 2016 based on
assets under management at year end.
Data management and analytics
continues to evolve as an increasingly
important focus for institutional
investors searching for advanced tools
to support the multiasset solutions
that today’s complex investment
climate requires. In 2016, State Street
Global Exchange enhanced its hosted
“data-as-a-service” platform, DataGX,
a scalable, cloud-based service that
allows clients to aggregate investment
data from multiple service providers or
data vendors for a more holistic
and integrated view of their business
for portfolio management, analytics
and reporting.
insights from the massive amounts of
unstructured data found in digital media
and other large consumer datasets.
MediaStats scours more than 45,000
sources of traditional media, social
media and corporate communications,
in addition to other “big data” sources,
to estimate future price changes of
individual equities.
Pursuing Risk Excellence
As I discussed in last year’s letter,
we’ve taken extraordinary steps
in recent years to strengthen our
regulatory compliance and risk
management controls and operating
environment, with the goal of making
risk excellence a competitive strength
for State Street. Over the past five years,
we’ve devoted significant attention
and resources to risk excellence,
including a large increase in our annual
investment in compliance, audit and
risk management. We’ve adopted a
comprehensive compliance framework
across the company, more than doubled
the size of our compliance staff and
made risk management part of each
employee’s annual performance ratings.
We also launched State Street
MediaStats to help clients extract
accurate, valuable and predictive
While we have more work to do,
we continued to make considerable
progress in 2016 strengthening our
We believe
that being a
responsible
corporate citizen
is essential to
the long-term
success of our
business.
controls and operating environment
and reinforcing a strong culture of risk
excellence. We enhanced our Standard
of Conduct and underlying training that
all employees must complete annually,
and we implemented a program to
actively encourage employees to speak
up if they see something wrong and to
challenge decisions irrespective of their
role or level at State Street.
Strengthening our Organization
We took a number of steps to strengthen
our leadership team during the year.
SSGA President and CEO Ron O’Hanley
was named State Street vice chairman
effective January 1, 2017. Ron’s leadership
at SSGA together with his 30-plus
years of industry experience provide
invaluable contributions to our efforts to
deliver better solutions for our clients.
Eric Aboaf joined us in December 2016
and took the reins as chief financial
officer in March 2017, responsible for
our global financial strategy and finance
functions, including treasury, accounting,
tax and reporting, and investor relations.
Eric has extensive experience working
with a global financial institution
and deep knowledge of the financial
regulatory landscape.
I also promoted Karen Keenan to a
new role as chief administrative officer
and charged her with managing cross-
organizational activities and initiatives
with an initial focus on establishing
an enterprise-wide internal control
framework and ensuring its consistent
implementation across the company.
Since joining State Street nearly 10 years
ago, Karen has led a variety of complex
control groups and major business units.
I believe she’s ideally suited to lead this
critical new function, which includes
oversight for our data strategy and
regulatory compliance efforts.
Corporate Responsibility
We believe that being a responsible
corporate citizen is essential to the
long-term success of our business,
as the strength of our business is
directly linked to the well-being of the
communities in which we operate. Our
State Street Foundation provided $19.4
million to nonprofit organizations around
the world in 2016, including matching
employee contributions of $4.1 million
to 2,229 charitable organizations.
Our employees are passionate about
giving back to the communities in
which they live and work. Last year,
more than a fifth of them participated in
company-sponsored volunteer activities
and devoted more than 120,000 hours of
their time to charitable causes.
We focus our charitable efforts on
education and workforce development
because we believe that providing
people with the education and skills they
need to build careers is vitally important.
In June 2015, we launched Boston
Workforce Investment Network
(Boston WINs), a multiyear, $20
million initiative led by our Foundation
in partnership with five nonprofit
organizations working to advance job
readiness and create meaningful career
pathways for young people. Boston WINs
made great strides in 2016 instilling
close collaboration among State Street,
our five nonprofit partners and Boston
Public Schools to increase the number
of students receiving key services that
advance college and career readiness.
We also saw substantial progress toward
our four-year goal of expanding the reach
of the five partner groups by 60 percent,
and our commitment to hire 1,000 Boston
youth who have worked with one of more
of our Boston WINs partners.
Our efforts to be a responsible corporate
citizen received widespread recognition
in 2016. Corporate Responsibility Magazine
named State Street to its list of the 100
Best Corporate Citizens for the 10th
consecutive year. We also received
a perfect 100 rating for the third
consecutive year in the Human Rights
Campaign’s 2016 Corporate Equality
Index, a national benchmarking survey
and report on corporate policies and
practices related to LGBT workplace
equality. And we were named to the
North America Dow Jones Sustainability
Index, the gold standard for corporate
sustainability based on analysis of
financially relevant ESG factors.
Looking Ahead
As we celebrate State Street’s 225th
anniversary this year, we are keenly
aware that our strong heritage doesn’t
ensure our future success. Instead,
it is our ability to innovate on behalf of
our clients that will continue to shape
our destiny.
Technological innovation has sparked
profound change across the banking
and financial services industry in recent
years, but I believe we have just seen
the tip of the iceberg in terms of how
technology will disrupt and transform
our industry. We fully intend to be at the
forefront of that change, supported by
our digital leadership. We’re working
diligently across State Street and
collaborating with a broad range of
external partners to assess, pilot and
deploy new technologies with the potential
to unleash a host of benefits — from new
and innovative products to enhanced
operational efficiencies and controls.
I’m proud to lead a company that
for more than two centuries has
successfully adapted to meet the
evolving needs of our clients, and
thankful for the outstanding work our
nearly 34,000 employees around the
world are doing to find better ways to
serve our clients and help them achieve
their goals. I’m confident that we have
the right people in place and the right
strategy to build on our success as a
trusted and valued partner to many of
the world’s largest asset owners and
asset managers.
As always, I’m grateful to you, our
shareholders, for your investment
and confidence in us.
Sincerely,
Joseph L. Hooley
Chairman and Chief Executive Officer
March 17, 2017
1 This letter to shareholders includes financial information presented on a GAAP basis as well as on a non-GAAP,
or “operating,” basis. Refer to the Reconciliation of Operating Basis (Non-GAAP) Financial Results included within this
annual report for explanations of our non-GAAP financial measures and for reconciliations of our operating-basis
financial information.
2 Estimated pretax expense savings relate only to State Street Beacon and the targeted staff reductions announced as part
of our 3Q15 financial results and are based on projected improvement from our full-year 2015 operating-basis expenses,
all else being equal. Actual expenses may increase or decrease in the future due to other factors.
Forward-Looking Statements
This letter contains forward-looking statements as defined by U.S. securities laws.
Refer to Item 1A of the Form 10-K included within this annual report for details.
2016
Annual Report
to Shareholders
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 17, 2017, 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: +1 800/937-5449
Website: www.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 web-
site at:
www.statestreet.com/stockholder
For copies of our Forms 10-Q, quarterly earnings press releases, Forms 8-K or additional copies of this
Annual Report, please visit our website, 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, 2016
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
(State or other jurisdiction of incorporation)
One Lincoln Street
Boston, Massachusetts
(Address of principal executive office)
04-2456637
(I.R.S. Employer Identification No.)
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
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
Depositary Shares, each representing a 1/4,000th ownership interest in a share
of Fixed-to-Floating Rate Non-Cumulative Perpetual Preferred Stock, Series D,
without par value per share
Depositary Shares, each representing a 1/4,000th ownership interest in a share
of Non-Cumulative Perpetual Preferred Stock, Series E, without par value per
share
Depositary Shares, each representing a 1/4,000th ownership interest in a share
of Non-Cumulative Perpetual Preferred Stock, Series G, without par value per
share
(Name of each exchange on which registered)
New York Stock Exchange
New York Stock Exchange
New York Stock Exchange
New York Stock Exchange
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
(Do not check if a smaller reporting company)
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 ($53.92) 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 30, 2016) was approximately $20.88 billion
The number of shares of the registrant’s common stock outstanding as of January 31, 2017 was 381,939,896.
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 2017 Annual Meeting of Shareholders to be filed pursuant to Regulation 14A on or before May 1, 2017 (Part III).
* This Annual Report on Form 10-K is a composite document which includes the Form 10-K as filed with the SEC on February 16, 2017 and the
certifications as contained in Item 15, Exhibits, Financial Statement Schedules, as referenced in Amendment No. 1, filed with the SEC on Form 10-K/A
on March 27, 2017.
STATE STREET CORPORATION
ANNUAL REPORT ON FORM 10-K FOR THE YEAR ENDED
December 31, 2016
TABLE OF CONTENTS
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
Item 16
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
Form 10-K Summary
SIGNATURES
EXHIBIT INDEX
3
17
44
44
45
45
46
49
52
54
123
123
198
198
201
201
201
202
202
202
203
203
204
205
PART I
ITEM 1. BUSINESS
GENERAL
State Street Corporation, referred to as the
parent company, is a financial holding company
organized in 1969 under the laws of the
Commonwealth of Massachusetts. Our executive
offices are located at One Lincoln Street, Boston,
Massachusetts 02111 (telephone (617) 786-3000).
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 is a source of financial
and managerial strength to our 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, with $28.77 trillion of
AUCA and $2.47 trillion of AUM as of December 31,
2016.
As of December 31, 2016, we had consolidated
total assets of $242.70 billion, consolidated total
deposits of $187.16 billion, consolidated total
shareholders' equity of $21.22 billion and 33,783
employees. We operate in more than 100 geographic
markets worldwide, including in the U.S., Canada,
Europe, the Middle East and Asia.
On the “Investor Relations” section of our
corporate website at www.statestreet.com, we make
available, free of charge, all reports we electronically
file with, or furnish to, the 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 Examining and Audit
Committee, the Executive Committee, the Executive
Compensation Committee, the Nominating and
Corporate Governance Committee, the Risk
Committee and the Technology 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
the "Investor Relations" section of our website under
"Corporate Governance."
We provide additional disclosures required by
applicable bank regulatory standards, including
supplemental qualitative and quantitative information
with respect to regulatory capital (including market
risk associated with our trading activities), summary
results of semi-annual State Street-run stress tests
which we conduct under the Dodd-Frank Act and
resolution plan disclosures required under the Dodd-
Frank Act on the “Investor Relations” section of our
website under "Filings and Reports."
We use acronyms and other defined terms for
certain business terms and abbreviations, as defined
on the acronyms list and glossary included under
Item 8, Financial Statements and Supplementary
Data, of this Form 10-K.
BUSINESS DESCRIPTION
Overview
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 or custody bank, that services and manages
assets on behalf of its institutional clients.
Our clients include mutual funds, collective
investment funds and other investment pools,
corporate and public retirement plans, insurance
companies, foundations, endowments and investment
managers.
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 Item 7, Management's
Discussion and Analysis of Financial Condition and
Results of Operations, or Management's Discussion
and Analysis, and our consolidated financial
statements and accompanying notes included under
Item 8, Financial Statements and Supplementary
Data, of this Form 10-K.
State Street Corporation | 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, settlement and payment 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; our enhanced
custody product, which integrates principal securities
lending and custody; 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 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, 2016, we serviced
approximately $1.75 trillion of offshore assets in funds
located primarily in Luxembourg, Ireland and the
Cayman Islands. As of December 31, 2016, we
serviced $1.49 trillion of assets under custody and
administration in the Asia/Pacific region, and in
Japan, we serviced approximately 93% 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, 2016, we serviced
approximately $1.33 trillion of AUCA in such funds.
Investment Management
Our Investment Management line of business,
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 passive
and active asset management strategies across
equity, fixed-income, alternative, multi-asset solutions
(including OCIO) and cash asset classes. Products
are distributed directly and through intermediaries
using a variety of investment vehicles, including
ETFs, such as the SPDR® ETF brand.
Additional information about our lines of
business is provided under “Line of Business
Information” included under Item 7, Management's
Discussion and Analysis, and in Note 24 to the
consolidated financial statements included under
Item 8, Financial Statements and Supplementary
Data, of this Form 10-K. Additional information about
our non-U.S. activities is provided 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.
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.
State Street Corporation | 4
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 generally limits the activities in
which we and our non-banking subsidiaries may
engage to managing or controlling banks and to a
range of activities that are considered to be closely
related to banking. Bank holding companies that have
elected to be treated as financial holding companies
may engage in a broader range of activities
considered to be "financial in nature." 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 has elected to be treated
as a financial holding company and, as such, may
engage in a broader range of non-banking 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 by the Federal Reserve 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 U.S. 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. Currently,
under the Bank Holding Company Act, we may not be
able to engage in new activities or acquire shares or
control of other businesses.
The Dodd-Frank Act, which became law in July
2010, has had, and continues 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 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 FDIC to
calculate deposit insurance premiums; adopted
capital planning and stress test requirements for large
bank holding companies, including us; 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 final rule (refer to
“Regulatory Capital Adequacy and Liquidity
Standards” below in this “Supervision and Regulation”
section and under "Capital" in “Financial Condition”
included under Item 7, Management's Discussion and
Analysis, of this Form 10-K for a discussion of Basel
III) and the Alternative Investment Fund Managers
Directive (AIFMD), the Bank Recovery and
Resolution Directive (BRRD), the European Market
Infrastructure Resolution (EMIR), the Undertakings
for Collective Investments in Transferable Securities
(UCITS) directives, the Markets in Financial
Instruments Directive II (MiFID II) and the Markets in
Financial Instruments Regulation (MiFIR) (the
majority of the provisions of MiFID II and MiFIR will
apply from January 3, 2018) and the E.U. 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, corporate
governance principles and internal control systems
are subject to SOX, the Dodd-Frank Act and
regulations and rules of the SEC and the NYSE.
State Street Corporation | 5
Regulatory Capital Adequacy and Liquidity
Standards
Street) in order to avoid any limitations on
distributions and discretionary bonus payments.
Basel III Final Rule
In 2013, U.S. banking regulators jointly issued a
final rule implementing the Basel III framework in the
U.S. Provisions of the Basel III final rule become
effective under a transition timetable which began on
January 1, 2014, with full implementation required
beginning on January 1, 2019. In 2012, U.S. banking
regulators jointly issued a final market risk capital rule
to implement the changes to the market risk capital
framework in the U.S. The final market risk capital
rule became effective and was applicable to State
Street on January 1, 2013, and replaced the market
risk capital framework associated with Basel I and
Basel II.
The Basel III final rule provides for two
frameworks: the “standardized” approach, intended to
replace Basel I, and the “advanced” approaches,
applicable to advanced approaches banking
organizations, like State Street, as originally defined
under Basel II. The standardized approach modifies
the provisions of Basel I related to the calculation of
RWA and prescribes new standardized risk weights
for certain on- and off-balance sheet exposures.
Among other things, the Basel III final rule does
the following:
• Adds new requirements for a minimum
common equity tier 1 risk-based capital ratio
of 4.5% and a minimum supplementary
leverage ratio of 3% for advanced banking
organizations;
• Raises the minimum tier 1 risk-based capital
ratio from 4% under Basel I and Basel II to
6%;
•
•
•
•
Leaves the existing, minimum total capital
ratio at 8%;
Implements the capital conservation and
countercyclical capital buffers, referenced
below, as well as a G-SIB surcharge included
under "Capital" in "Financial Condition"
included under Item 7, Management's
Discussion and Analysis, of this Form 10-K;
Implements the previously described
standardized approach to replace the
calculation of RWA under Basel I; and
Implements the advanced approaches for the
calculation of RWA.
Additionally, beginning January 1, 2018, the SLR
rule introduces a higher minimum SLR requirement
for the eight U.S. G-SIBs of at least 6% for the
insured banking entity (State Street Bank) in order to
be well capitalized under the U.S. banking regulators’
PCA framework, as well as a requirement of a
minimum SLR of 5% for the holding company (State
Under the Basel III final rule, a banking
organization would be able to make capital
distributions, subject to other regulatory constraints,
such as regulator review of its capital plans, and
discretionary bonus payments without specified
limitations, as long as it maintains the required capital
conservation buffer of 2.5% plus applicable G-SIB
surcharge over the minimum required common equity
tier 1 risk-based capital ratio and each of the
minimum required tier 1 and total risk-based capital
ratios (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% of total risk-weighted assets under
certain economic conditions.
Under the Basel III final rule, our total regulatory
capital is divided into three tiers, composed of
common equity tier 1 capital, tier 1 capital (which
includes common equity tier 1 capital), and tier 2
capital. The total of tier 1 and tier 2 capital, adjusted
as applicable, is referred to as total regulatory capital.
Common equity tier 1 capital is composed of
core capital elements, such as qualifying common
shareholders' equity and related surplus; retained
earnings; the cumulative effect of foreign currency
translation; and net unrealized gains (losses) on debt
and equity securities classified as AFS; reduced by
treasury stock. Subject to certain phase-in or phase-
out provisions, tier 1 capital is composed of common
equity tier 1 capital plus additional tier 1 capital
composed of qualifying perpetual preferred stock and
minority interests. Goodwill and other intangible
assets, net of related deferred tax liabilities, are
deducted from tier 1 capital. Subject to certain
phase-in or phase-out provisions, tier 2 capital is
composed primarily of qualifying subordinated long-
term debt.
Certain other items, if applicable, must be
deducted from tier 1 and tier 2 capital. These items
primarily include deductible investments in
unconsolidated banking, financial and insurance
entities where we hold more than 50% of the entities'
capital; and the amount of expected credit losses that
exceeds recorded allowances for loan and other
credit losses. Expected credit losses are calculated
for wholesale credit exposures by formula in
conformity with the Basel III final rule.
As required by the Dodd-Frank Act, we and
State Street Bank, as advanced approaches banking
organizations, are subject to a permanent "capital
floor", also referred to as the Collins Amendment, in
the assessment of our regulatory capital adequacy,
including a capital conservation buffer and a
countercyclical capital buffer (both buffers are more
State Street Corporation | 6
fully described above in this "Supervision and
Regulation" section). From January 1, 2015 going
forward, our risk-based capital ratios for regulatory
assessment purposes are the lower of each ratio
calculated under the standardized approach and the
advanced approaches.
Global Systemically Important Bank
In addition to the 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. On
August 14, 2015, the Federal Reserve published a
final rule on the implementation of capital
requirements that impose a capital surcharge on U.S.
G-SIBs. The surcharge requirements within the final
rule began to phase in on January 1, 2016 and will be
fully effective on January 1, 2019. The eight U.S.
banks deemed to be G-SIBs, including State Street,
are required to calculate the G-SIB surcharge
according to two methods, and be bound by the
higher of the two:
• Method 1: Assesses systemic importance
based upon five equally-weighted
components: size, interconnectedness,
complexity, cross-jurisdictional activity and
substitutability;
• Method 2: Alters the calculation from Method
1 by factoring in a wholesale funding score in
place of substitutability and applying a 2x
multiplier to the sum of the five components
As part of the Basel III final rule, the Federal
Reserve published estimated G-SIB surcharges for
the eight U.S. G-SIBs based on relevant data from
2012 to 2014. Method 2 is identified as the binding
methodology for State Street and the applicable
surcharge on January 1, 2016 was calculated to be
1.5%. Assuming completion of the phase-in period
for the capital conservation buffer, and a
countercyclical buffer of 0%, the minimum capital
ratios as of January 1, 2019, including a capital
conservation buffer of 2.5% and G-SIB surcharge of
1.5% in 2019, would be 10.0% for tier 1 risk-based
capital, 12.0% for total risk-based capital, and 8.5%
for common equity tier 1 capital, in order for State
Street to make capital distributions and discretionary
bonus payments without limitation. Further, if State
Street fails to exceed the 2% leverage buffer
applicable to all U.S. G-SIBs under the Basel III final
rule, it will be subject to increased restrictions
(depending upon the extent of the shortfall) regarding
capital distributions and discretionary executive
bonus payments. 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.
Total Loss-Absorbing Capacity (TLAC)
On December 15, 2016, the Federal Reserve
released its final rule on TLAC, LTD and clean
holding company requirements for U.S. domiciled G-
SIBs, such as State Street, that are intended to
improve the resiliency and resolvability of certain U.S.
banking organizations through new enhanced
prudential standards. The TLAC final rule imposes:
(1) TLAC requirements (i.e., combined eligible tier 1
regulatory capital and eligible LTD); (2) separate
eligible LTD requirements; and (3) clean holding
company requirements designed to make short-term
unsecured debt (including deposits) and most other
ineligible liabilities structurally senior to eligible LTD.
Among other things, the TLAC final rule requires
State Street to comply with minimum requirements for
external TLAC and external LTD, plus an external
TLAC buffer. Specifically, State Street must hold (1)
combined eligible tier 1 regulatory capital and eligible
LTD in the amount equal to at least 21.5% of total
risk-weighted assets (using an estimated G-SIB
method 1 surcharge of 1%) and 9.5% of total
leverage exposure, as defined by the SLR final rule,
and (2) qualifying external LTD equal to the greater of
7.5% of risk-weighted assets (using an estimated G-
SIB method 2 surcharge of 1.5%) and 4.5% of total
leverage exposure, as defined by the SLR final rule.
State Street must comply with the TLAC final
rule starting on January 1, 2019.
Liquidity Coverage Ratio and Net Stable Funding
Ratio
In addition to capital standards, the Basel III final
rule introduced two quantitative liquidity standards:
the LCR and the NSFR.
In 2014, U.S. banking regulators issued a final
rule to implement the BCBS' LCR in the United
States. The LCR is intended to promote the short-
term resilience of internationally active banking
organizations, like State Street, to improve the
banking industry's ability to absorb shocks arising
from market stress over a 30 calendar day period and
improve the measurement and management of
liquidity risk.
The LCR measures an institution’s HQLA
against its net cash outflows. The LCR began being
phased in on January 1, 2015, at 80%, with full
implementation beginning on January 1, 2017.
We report LCR to the Federal Reserve daily. As
of December 31, 2016, our LCR was in excess of
100%. In addition, in December 2016, the Federal
Reserve issued a final rule requiring large banking
organizations, including us, to publicly disclose
certain qualitative and quantitative information about
their LCR. We must comply with the disclosure
requirements beginning on April 1, 2017.
State Street Corporation | 7
Compliance with the LCR has required that we
maintain an investment portfolio that contains an
adequate amount of HQLA. In general, HQLA
investments generate a lower investment return than
other types of investments, resulting in a negative
impact on our net interest revenue and our net
interest margin. In addition, the level of HQLA we are
required to maintain under the LCR is dependent
upon our client relationships and the nature of
services we provide, which may change over time.
For example, if the percentage of our operational
deposits relative to deposits that are not maintained
for operational purposes increases, we would expect
to require less HQLA in order to maintain our LCR.
Conversely, if the percentage of our operational
deposits relative to deposits that are not maintained
for operational purposes decreases, we would expect
to require additional HQLA in order to maintain our
LCR.
In October 2014, the BCBS issued final
guidance with respect to the NSFR. In the second
quarter of 2016, the OCC, Federal Reserve and FDIC
issued a proposal to implement the NSFR in the U.S.
that is largely consistent with the BCBS guidance.
The proposal would require banking organizations to
maintain an amount of available stable funding, which
is calculated by applying standardized weightings to
its equity and liabilities based on their expected
stability, that is no less than the amount of its required
stable funding, which is calculated by applying
standardized weightings to its assets, derivatives
exposures, and certain other off-balance sheet
exposures based on their liquidity characteristics. If
adopted as proposed, the requirements would apply
to us and our depository institution subsidiaries
beginning January 1, 2018.
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 "Capital" in “Financial
Condition" included under Item 7, Management's
Discussion and Analysis, and Note 16 to the
consolidated financial statements included under
Item 8, Financial Statements and Supplementary
Data, 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 CCAR framework. CCAR 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. Under the Federal
Reserve’s capital plan final rule, we must conduct
periodic stress testing of our business operations and
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 debt or
equity capital instruments, any capital distributions,
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 Basel III final rule that are phased in over
the planning horizon, 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 to
our plan from the Federal Reserve before making a
capital distribution. These requirements could require
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 strategy, merger or
acquisition activity or unanticipated uses of capital
could result in a change in our capital plan and its
associated capital actions, including capital raises or
modifications to planned capital actions, such as
purchases of our stock, and may require
resubmission of the capital plan to the Federal
Reserve for its non-objection if, among other reasons,
we would not meet our regulatory capital
requirements after making the proposed capital
distribution.
For additional information regarding capital
planning and stress test requirements and restrictions
on dividends, refer to "Capital Planning, Stress Tests
and Dividends” in this “Supervision and Regulation”
section and Item 5, Market for Registrant’s Common
Equity, Related Stockholder Matters and Issuer
Purchase of Equity Securities, in Part II of this Form
10-K.
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
State Street Corporation | 8
dividends and purchase our stock, or require us to
provide capital assistance to State Street Bank and
any other banking subsidiary.
In June 2016, we received the results of the
Federal Reserve’s review of our 2016 capital plan in
connection with its 2016 annual CCAR process. The
Federal Reserve did not object to the capital actions
we proposed in our 2016 capital plan and, in July
2016, our Board approved a new common stock
purchase program authorizing the purchase of up to
$1.4 billion of our common stock through June 30,
2017. As of December 31, 2016, we purchased
approximately 9.0 million shares of our common stock
at an average per-share cost of $72.66 and an
aggregate cost of approximately $650 million under
this program. Our 2016 capital plan included an
increase, subject to approval by our Board, to our
quarterly stock dividend to $0.38 per share from
$0.34 per share, beginning in the third quarter of
2016.
The Federal Reserve, under the Dodd-Frank
Act, requires 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 October 2016, we provided
summary results of our 2016 mid-cycle State Street-
run 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 must submit its 2017 annual State Street Bank-
run stress test to the Federal Reserve by April 5,
2017.
In September 2016, the Federal Reserve
proposed revisions to the capital plan and stress test
requirements that would, among other things, reduce
the de minimis threshold for additional capital
distributions that a firm may make during a capital
plan cycle without seeking the Federal Reserve’s
prior approval. The proposal would also establish a
one-quarter “blackout period” while the Federal
Reserve is conducting CCAR during which firms
would not be permitted to submit de minimis
exception notices or prior approval requests for
additional capital distributions.
The Volcker Rule
In December 2013, U.S. regulators issued final
regulations to implement the Volcker rule. The
Volcker rule prohibits banking entities, including us
and our affiliates, from engaging in certain prohibited
proprietary trading activities, as defined in the final
Volcker rule regulations, subject to exemptions for
market-making related activities, risk-mitigating
hedging, underwriting and certain other activities.
The Volcker rule also requires banking entities to
either restructure or divest certain ownership interests
in, and relationships with, covered funds (as such
terms are defined in the final Volcker rule
regulations).
The Volcker rule became effective in July 2012,
and the final implementing regulations became
effective in April 2014. We were required to bring our
activities and investments into conformance with the
Volcker rule and its final regulations by July 21, 2015,
with the exception of certain activities and
investments. Under a 2016 conformance period
extension issued by the Federal Reserve, all
investments in and relationships with investments in a
covered fund made or entered into after December
31, 2013 by a banking entity and its affiliates, and all
proprietary trading activities of those entities, were
required to be in conformance with the Volcker rule
and its final implementing regulations by July 21,
2016. On July 7, 2016, the Federal Reserve
announced a final one-year extension of the general
conformance period for banking entities to conform
ownership interests in, and relationships with, legacy
covered funds to July 21, 2017. On December 12,
2016, the Federal Reserve issued a policy statement
with information about how banking entities may seek
a statutory extension of the conformance period of
five years for certain legacy covered funds that are
also illiquid funds.
Whether certain types of investment securities
or structures such as CLOs constitute covered funds,
as defined in the final Volcker rule regulations, and do
not benefit from the exemptions provided in the
Volcker rule, and whether a banking organization's
investments therein constitute ownership interests
remain subject to (1) market, and ultimately
regulatory, interpretation and (2) the specific terms
and other characteristics relevant to such investment
securities and structures.
As of December 31, 2016, we held
approximately $972 million of investments in CLOs.
As of the same date, these investments had an
aggregate pre-tax net unrealized gain of
approximately $11 million, composed primarily of
gross unrealized gains. Comparatively, as of
December 31, 2015, we held approximately $2.10
billion of investments in CLOs, which had an
aggregate pre-tax net unrealized gain of
approximately $43 million composed of gross
unrealized gains of $46 million and gross unrealized
losses of $3 million. In the event that we or our
banking regulators conclude that such investments in
CLOs, or other investments, are covered funds under
the Volcker rule, we may be required to divest 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 such
State Street Corporation | 9
investments at a significant discount compared to the
investments' book value. This could result in a
material adverse effect on our consolidated statement
of income or on our consolidated statement of
condition in the period in which such a divestiture
occurs.
The final Volcker rule regulations also require
banking entities to establish extensive programs
designed to ensure compliance with the restrictions of
the Volcker rule. We have established a compliance
program which we believe complies with the final
Volcker rule regulations as currently in effect. Such
compliance program restricts our ability in the future
to service certain types of funds, in particular covered
funds for which SSGA acts as an advisor and certain
types of trustee relationships. Consequently, Volcker
rule compliance entails both the cost of a compliance
program and loss of certain revenue and future
opportunities.
Enhanced Prudential Standards
The Dodd-Frank Act established a new
regulatory framework to regulate banking
organizations designated as 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
2010.
The FSOC 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 February 2014, the Federal Reserve
approved a final rule implementing certain of the
Dodd-Frank Act’s enhanced prudential standards for
large bank holding companies such as State Street.
Under the final rule, we are required to comply with
various liquidity-related risk management standards
and maintain a liquidity buffer of unencumbered
highly liquid assets based on the results of internal
liquidity stress testing. This liquidity buffer is in
addition to other liquidity requirements, such as the
LCR and, when implemented, the NSFR. The final
rule also establishes requirements and
responsibilities for our risk committee and mandates
risk management standards. We became subject to
these new standards on January 1, 2015.
In March 2016, the Federal Reserve re-
proposed rules that would establish single-
counterparty credit limits for large banking
organizations, with more stringent limits for the
largest banking organizations. U.S. G-SIBs, including
us, would be subject to a limit of 15% of tier 1 capital
for credit exposures to any “major
counterparty” (defined as other U.S. G-SIBs, foreign
G-SIBs and non-bank SIFIs supervised by the
Federal Reserve) and to a limit of 25% of tier 1 capital
for credit exposures to any other unaffiliated
counterparty.
In May 2016, the Federal Reserve proposed a
rule that would impose contractual requirements on
certain “qualified financial contracts” to which U.S. G-
SIBs, including us, and their subsidiaries are parties.
Under the proposal, certain qualified financial
contracts must expressly provide that transfer
restrictions and default rights against a U.S. G-SIB, or
subsidiary of a U.S. G-SIB, are limited to the same
extent as provided under the Federal Deposit
Insurance Act and Title II of the Dodd-Frank Act and
their implementing regulations. In addition, certain
qualified financial contracts may not permit the
exercise of cross-default rights against a U.S. G-SIB
or subsidiary of a U.S. G-SIB based on an affiliate’s
entry into insolvency, resolution or similar
proceedings. If adopted as proposed, the
requirements would take effect at the start of the first
calendar quarter that begins at least one year after
the final rule is issued.
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 sovereign entities. This credit
exposure and concentration could expose us to
financial loss” included under "Risk Factors" under
Item 1A of this Form 10-K. In addition, the final rules
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
State Street Corporation | 10
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 of the grave threat. 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
State Street, like other bank holding companies
with total consolidated assets of $50 billion or more,
periodically submits a plan for its rapid and orderly
resolution under the U.S. Bankruptcy Code in the
event of material financial distress or failure —
commonly referred to as a resolution plan or a living
will — to the Federal Reserve and the FDIC under
Section 165(d) of the Dodd-Frank Act. Through
resolution planning, we seek, in the event of
insolvency, to maintain State Street Bank’s role as a
key infrastructure provider within the financial system,
while minimizing risk to the financial system and
maximizing value for the benefit of our stakeholders.
We have and will continue to focus management
attention and resources to meet regulatory
expectations with respect to resolution planning. In
the event of material financial distress or failure, our
preferred resolution strategy, referred to as the single
point of entry strategy, provides for the
recapitalization prior to the bankruptcy of the parent
company of State Street Bank and our other material
entities by the parent company (for example, by
forgiving inter-company indebtedness of State Street
Bank owed, directly or indirectly, to the parent
company), and potentially by a capital contribution
from a newly formed direct subsidiary of the parent
company that would be pre-funded by the parent
company. The recapitalization, if successful, is
intended to enable State Street Bank and our other
material entities to continue their operations. The
amount of assets available to support State Street
Bank and our other material entities is anticipated to
vary over time and may not be sufficient to meet their
liquidity and capital needs.
The parent company and the newly formed
direct subsidiary would obligate themselves, under a
contract we refer to as a support agreement and
using up to substantially all of their resources, to
recapitalize and/or provide liquidity to State Street
Bank and our other material entities in the event of
material financial distress. The parent company and
the newly formed direct subsidiary would secure their
obligations under the support agreement by entering
into a contract known as a security agreement and by
pledging their rights in the assets that the parent
company and the newly formed direct subsidiary
would use to fulfill their obligations under the support
agreement to State Street Bank and other material
entities. The parent company intends to pre-fund the
newly formed direct subsidiary upon the execution of
the support agreement by transferring assets to it that
will be available for the subsequent provision of
capital and liquidity to State Street Bank and our
other material entities. These contractual, funding and
related arrangements are expected to be in place
prior to July 1, 2017 to aid State Street in meeting its
regulatory obligations.
Under this single point of entry strategy, State
Street Bank and our other material entities would not
themselves enter into resolution proceedings. These
entities would instead be transferred to a newly
organized holding company held by a reorganization
trust for the benefit of the parent company’s
claimants. The single point of entry strategy and the
obligations under the support agreement may result
in the recapitalization of State Street Bank and the
commencement of bankruptcy proceedings by the
parent company at an earlier stage of financial stress
than might otherwise occur without such mechanisms
in place. There can be no assurance that there would
be sufficient recapitalization resources available to
ensure that State Street Bank and our other material
entities are adequately capitalized following the
triggering of the requirements to provide capital and/
or liquidity under the support agreement. In the event
that such recapitalization actions were taken and
were unsuccessful in stabilizing State Street Bank,
equity and debt holders of the parent company would
likely, as a consequence, be in a worse position than
if the recapitalization did not occur. An expected effect
of the single point of entry strategy and the TLAC final
rule is that State Street’s losses will be imposed on
the holders of eligible long-term debt and other forms
of eligible TLAC issued by the parent company, as
well as on any other parent company creditors, before
any of its losses are imposed on the holders of the
debt securities of the parent company’s operating
subsidiaries or any depositors or creditors thereof or
before U.S. taxpayers are put at risk. The
requirements of the single point of entry strategy and
the support agreement may adversely impact our
ability to issue, or to competitively price, additional
debt and equity securities.
We are required to submit our next annual
resolution plan to the Federal Reserve and the FDIC
on July 1, 2017. The Federal Reserve and the FDIC
may determine that our 2017 resolution plan is not
credible or would not facilitate an orderly resolution
due to a number of factors, including, but not limited
to: (1) challenges we may experience in interpreting
and addressing regulatory expectations; (2) any
failure to implement remediation actions in a timely
manner; (3) the complexities in developing and
implementing a comprehensive plan to resolve a
global custodial bank; and (4) related costs and
State Street Corporation | 11
dependencies. If our resolution plan submission filed
on July 1, 2017, or any future submission, fails to
meet regulatory expectations to the satisfaction of the
Federal Reserve and the FDIC, we could be subject
to more stringent capital, leverage or liquidity
requirements, restrictions on our growth, activities or
operations, or we could be required to divest certain
of our assets or operations.
State Street Bank is also required to submit
annually to the FDIC a plan for resolution in the event
of its failure, referred to as an IDI plan. State Street
Bank’s next IDI plan is due in October 2017.
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. Title VII also requires certain
persons to register as a major swap participant, a
swap dealer or a securities-based swap dealer. The
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, these regulators collectively
have adopted or proposed, among other things,
regulations relating to reporting and record-keeping
obligations, margin and capital requirements, the
scope of registration and the central clearing and
exchange trading requirements for certain over-the-
counter derivatives. The CFTC has also issued rules
to enhance the oversight of clearing and trading
entities. The CFTC, along with other regulators,
including the Federal Reserve, have also issued final
rules with respect to margin requirements for
uncleared derivatives transactions.
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 July 2014, the SEC adopted amendments to
the regulations governing money market funds to
address potential systemic risks and improve
transparency for money market fund investors.
Among other things, the amendments require a
floating net asset value for institutional prime money
market funds (i.e., money market funds that are either
not restricted to natural person investors or not
restricted to investing primarily in U.S. government
securities) and permit (and in some cases require) all
money market funds to impose redemption fees and
gates under certain circumstances. As a result of
these reforms, money market funds may be required
to take certain steps that will affect their structure
and/or operations, which could in turn affect the
State Street Corporation | 12
liquidity, marketability and return potential of such
funds. Full conformance with these amendments was
required by October 14, 2016.
Money market reforms are also being
considered in Europe. The timing and content of
those regulations remains uncertain. The SEC's July
2014 amended regulations, and the potential reforms
in Europe, could 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. As a result, these requirements may
have an adverse impact 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 OCC,
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, 2016, 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 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.
Our subsidiaries, SSGA FM and 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 and is
registered with the CFTC as a commodity trading
adviser and pool operator. 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 FCA and is an investment firm under the
MiFID. SSGA FM and SSGA Ltd. each offer a variety
of investment 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.
State Street Corporation | 13
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 MiFID. 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. In addition, we have a subsidiary
registered with the CFTC as a swap execution facility,
and our U.S. broker/dealer subsidiary also offers a
U.S. equities alternative trading system registered
with the SEC.
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 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, among others, the FCA, the
U.K. PRA and the Bank of England regulate our
activities in the U.K.; the Central Bank of Ireland
regulates our activities in Ireland; the German Federal
Financial Supervisory Authority regulates our
activities in Germany; the Commission de
Surveillance du Secteur Financier regulates our
activities in Luxembourg; our German banking group
and the Luxembourg banks are also subject to direct
supervision by the European Central Bank under the
ECB Single Supervisory Mechanism; the Australian
Prudential Regulation Authority and the Australian
Securities and Investments Commission regulate our
activities in Australia; and the Financial Services
Agency and the Bank of Japan 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, neither of which is subject to the
investment limitations applicable to Edge Act
subsidiaries.
Additionally, Massachusetts has its own bank
holding company statute, under which State Street,
among other things, may be required to obtain prior
approval by the Massachusetts Board of Bank
Incorporation for an acquisition of more than 5% of
any additional bank's voting shares, or for other forms
of bank acquisitions.
Anti-Money Laundering and Financial
Transparency
We and certain of our subsidiaries are subject to
the Bank Secrecy Act of 1970, as amended by the
USA PATRIOT Act of 2001, and related regulations,
which contain AML and financial transparency
provisions and which require implementation of an
AML compliance program, including processes 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
promote compliance with all applicable AML laws and
regulations. Compliance with applicable AML and
related requirements is a common area of review for
financial regulators, and any failure by us to comply
with these requirements could result in fines,
penalties, lawsuits, regulatory sanctions, difficulties in
obtaining governmental approvals, restrictions on our
business activities or harm to our reputation.
On June 1, 2015, we entered into a written
agreement with the Federal Reserve and the
Massachusetts Division of Banks relating to
deficiencies identified in our compliance programs
with the requirements of the Bank Secrecy Act, AML
regulations and U.S. economic sanctions regulations
State Street Corporation | 14
promulgated by OFAC. As part of this enforcement
action, we are required to, among other things,
implement improvements to our compliance programs
and to retain an independent firm to conduct a review
of account and transaction activity covering a prior
three-month period to evaluate whether any
suspicious activity not previously reported should
have been identified and reported in accordance with
applicable regulatory requirements. To the extent
deficiencies in our historical reporting are identified as
a result of the transaction review or if we fail to
comply with the terms of the written agreement, we
may become subject to fines and other regulatory
sanctions, which may have a material adverse effect
on us.
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 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". The FDIC has 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.
On March 15, 2016, the FDIC issued a final rule
that imposes on insured depository institutions with at
least $10 billion in assets, which includes State
Street, a surcharge of 4.5 cents per $100 per annum
of their assessment base for deposit insurance, as
defined by the FDIC, until the DIF reaches the
required ratio of 1.35, which the FDIC estimates
would take approximately two years. The surcharge
took effect for the assessment period beginning on
July 1, 2016.
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, including minimum
capital ratios. 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 if one of
our banking subsidiaries were undercapitalized.
Support of Subsidiary Banks
Under Federal Reserve regulations, 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 was added to the Federal Deposit
Insurance Act by the Dodd-Frank Act and 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 be treated differently
from and could receive, if anything, substantially less
than the depositors in U.S. offices of the depository
institution.
State Street Corporation | 15
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 ECB.
CYBER RISK MANAGEMENT
In October 2016, the Federal Reserve, FDIC
and OCC issued an advance notice of proposed
rulemaking regarding enhanced cyber risk
management standards, which would apply to a wide
range of large financial institutions and their third-
party service providers, including State Street and its
banking subsidiaries. The proposed standards would
expand existing cybersecurity regulations and
guidance to focus on cyber risk governance and
management; management of internal and external
dependencies; and incident response, cyber
resilience and situational awareness. In addition, the
proposal contemplates more stringent standards for
institutions with systems that are critical to the
financial sector.
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 3, “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 4, “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 4, “Loans and Leases,” to the consolidated
financial statements (Item 8) - disclose 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) - disclose 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 4, “Loans and Leases,” to the consolidated
financial statements (Item 8) - present the allocation
of the allowance for loan and lease 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 8, “Short-Term Borrowings,” to the
consolidated financial statements (Item 8) - discloses
information regarding short-term borrowings of State
Street.
State Street Corporation | 16
ITEM 1A. RISK FACTORS
Forward-Looking Statements
This Form 10-K, as well as other reports and
proxy materials 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, may contain statements (including
statements in the Management's Discussion and
Analysis included in such reports, as applicable) that
are considered “forward-looking statements” within
the meaning of U.S. securities laws, including
statements about our goals and expectations
regarding our business, financial and capital
condition, results of operations, strategies, financial
portfolio performance, dividend and stock purchase
programs, outcomes of legal proceedings, market
growth, acquisitions, joint ventures and divestitures,
cost savings and transformation initiatives, client
growth and new technologies, services and
opportunities, as well as industry, regulatory,
economic and market trends, initiatives and
developments, the business environment and other
matters that do not relate strictly to historical facts.
Terminology such as “plan,” “expect,” “intend,”
“objective,” “forecast,” “outlook,” “believe,” “priority,”
“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, 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, regulatory environment and 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:
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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
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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, the
valuation of the U.S. dollar relative to other
currencies in which we record revenue or accrue
expenses and the performance and volatility of
securities, credit, currency and other markets in
the U.S. and internationally; and the impact of
monetary and fiscal policy in the United States
and internationally on prevailing rates of interest
and currency exchange rates in the markets in
which we provide services to our clients;
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, our ability to manage levels
of such deposits and the relative portion of our
deposits that are determined to be operational
under regulatory guidelines and our ability to
deploy deposits in a profitable manner
consistent with our liquidity needs, regulatory
requirements and risk profile;
the manner and timing with which the Federal
Reserve and other U.S. and foreign regulators
implement or reevaluate changes to the
regulatory framework applicable to our
operations, including implementation or
modification of the Dodd-Frank Act, the Basel III
final rule and European legislation (such as the
Alternative Investment Fund Managers
Directive, Undertakings for Collective
Investment in Transferable Securities Directives
and Markets in Financial Instruments Directive
II); among other consequences, these regulatory
changes impact the levels of regulatory capital
we must maintain, acceptable levels of credit
exposure to third parties, margin requirements
applicable to derivatives, and restrictions on
banking and financial activities. In addition, our
regulatory posture and related expenses have
been and will continue to be affected by
changes in regulatory expectations for global
systemically important financial institutions
applicable to, among other things, risk
management, liquidity and capital planning,
resolution planning, compliance programs, and
State Street Corporation | 17
changes in governmental enforcement
approaches to perceived failures to comply with
regulatory or legal obligations;
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• we may not successfully implement our plans to
have a credible resolution plan by July 2017, or
that plan may not be considered to be sufficient
by the Federal Reserve and the FDIC, due to a
number of factors, including, but not limited to,
challenges we may experience in interpreting
and addressing regulatory expectations, failure
to implement remediation in a timely manner,
the complexities of development of a
comprehensive plan to resolve a global
custodial bank and related costs and
dependencies. If we fail to meet regulatory
expectations to the satisfaction of the Federal
Reserve and the FDIC in any future submission,
we could be subject to more stringent capital,
leverage or liquidity requirements, or restrictions
on our growth, activities or operations;
adverse changes in the regulatory ratios that we
are required or will be required to meet, whether
arising under the Dodd-Frank Act or the Basel III
final rule, 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;
requirements to obtain the prior approval or non-
objection of the Federal Reserve or other U.S.
and non-U.S. regulators for the use, allocation
or distribution of our capital or other specific
capital actions or corporate activities, including,
without limitation, acquisitions, investments in
subsidiaries, dividends and stock purchases,
without which our growth plans, distributions to
shareholders, share repurchase programs or
other capital or corporate 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;
economic or financial market disruptions in the
U.S. or internationally, including those which
may result from recessions or political instability;
for example, the U.K.'s decision to exit from the
European Union may continue to disrupt
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financial markets or economic growth in Europe
or, similarly, financial markets may react sharply
or abruptly to actions taken by the new
administration in the United States;
our ability to develop and execute State Street
Beacon, our multi-year transformation program
to digitize our business, deliver significant value
and innovation for our clients and lower
expenses across the organization, any failure of
which, in whole or in part, may among other
things, reduce our competitive position, diminish
the cost-effectiveness of our systems and
processes or provide an insufficient return on
our associated investment;
our ability to promote a strong culture of risk
management, operating controls, compliance
oversight, ethical behavior and governance that
meets our expectations and those of our clients
and our regulators, and the financial, regulatory,
reputation and other consequences of our failure
to meet such expectations; the impact on our
compliance and controls enhancement
programs of the appointment of a monitor under
the deferred prosecution agreement with the
DOJ and compliance consultant expected to be
appointed under a potential settlement with the
SEC, including the potential for such monitor
and compliance consultant to require changes to
our programs or to identify other issues that
require substantial expenditures, changes in our
operations, or payments to clients or reporting to
U.S. authorities;
the results of our review of our billing practices,
including additional amounts we may be
required to reimburse clients, as well as
potential consequences of such review,
including damage to our client relationships and
adverse actions by governmental authorities;
the results of, and costs associated with,
governmental or regulatory inquiries and
investigations, litigation and similar claims,
disputes, or civil or criminal proceedings;
changes or potential changes in the amount of
compensation we receive from clients for our
services, and the mix of services provided by us
that clients choose;
the large institutional clients on which we focus
are often able to exert considerable market
influence, and this, combined with strong
competitive market forces, subjects us to
significant pressure to reduce the fees we
charge, to potentially significant changes in our
assets under custody and administration or our
assets under management in the event of the
acquisition or loss of a client, in whole or in part,
and to potentially significant changes in our fee
revenue in the event a client re-balances or
State Street Corporation | 18
changes its investment approach or otherwise
re-directs assets to lower- or higher-fee asset
classes;
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
depositary 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, 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;
our ability to expand our use of technology to
enhance the efficiency, accuracy and reliability of
our operations and our dependencies on
information technology and our ability to control
related risks, including cyber-crime and other
threats to our information technology
infrastructure and systems (including those of
our third-party service providers) and their
effective operation both independently and with
external systems, and complexities and costs of
protecting the security of such systems and
data;
our ability to grow revenue, manage expenses,
attract and retain highly skilled people and raise
the capital necessary to achieve our business
goals and comply with regulatory requirements
and expectations;
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;
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
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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 or liabilities 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 evolving 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.
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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 in this
Form 10-K should not be relied on as representing
our expectations or beliefs as of any time
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 herein are not intended
to be a complete statement of all risks and
uncertainties that may affect our businesses. We
cannot anticipate all developments that may
adversely affect our business or operations or our
consolidated results of operations, financial
condition or cash flows.
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 annual reports on Form 10-K,
our quarterly reports on Form 10-Q and our current
reports on Form 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 corporate
website at www.statestreet.com.
State Street Corporation | 19
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 apply to 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, insurance companies and other financial
institutions. These financial institutions also include
collective investment funds, such as mutual funds,
UCITS and hedge funds that share these
interdependencies. Many financial institutions,
including collective investment funds, 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 and collective
investment funds, particularly large and complex
institutions, sovereign issuers, mutual funds and
UCITS and hedge funds. 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.
In the normal course of our business, we
assume concentrated credit risk at the individual
obligor, counterparty or group level. Such
concentrations may be material and can often 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, a variety of economic, market
and other factors have contributed to the perception
of many financial institutions as being 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 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. Economic, political or market turmoil or
other developments 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. These
same factors may contribute to increased risk of
default or downgrading for financial and corporate
issuers or other market risks associated with reduced
levels of liquidity. 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.
Additional areas where we experience exposure
to credit risk include:
• Short-term credit. 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. Our relationship with our
clients and the nature of the settlement
process for some types of payments 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.
Industry and country risks. In addition to our
exposure to financial institutions, we are from
time to time exposed to concentrated credit
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risk at an industry or country level. This
concentration risk also applies to groups of
unrelated counterparties that may have
similar investment strategies involving one or
more particular industries, regions, or other
characteristics. These unrelated
counterparties may concurrently experience
adverse effects to their performance, liquidity
or reputation due to events or other factors
affecting such investment strategies. Though
potentially not material individually (relative to
any one such counterparty), our credit
exposures to such a group of counterparties
could expose us to a single market or political
event or a correlated set of events that, in the
aggregate, could have a material adverse
impact on our business.
• Unavailability of netting. We are 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.
• Subcustodian risks. Our use of unaffiliated
subcustodians exposes us to credit risk, in
addition to other risks, such as operational
risk, dependencies on credit extensions and
risks of the legal systems of the jurisdictions
in which the subcustodians operate, each of
which may be material. These risks are
amplified due to changing regulatory
requirements with respect to our financial
exposures in the event those subcustodians
are unable to return a client’s assets,
including, in some regulatory regimes,
including the E.U.'s UCITS and AIFM
directive, requirements that we be
responsible for resulting losses suffered by
our clients.
• Settlement risks. We are exposed to
settlement risks, particularly in our payments
and foreign exchange activities. Those
activities may lead to losses in the event of a
counterparty breach, failure to provide credit
extensions or an operational error. Due to our
membership in several industry clearing or
settlement exchanges, we may be required to
guarantee obligations and liabilities, or
provide financial support, in the event that
other members do not honor their obligations
or default. Moreover, not all of our
counterparty exposure is secured, and even
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 and
with respect to clients protected by sovereign
immunity.
• Securities lending and repurchase agreement
indemnification. On behalf of clients enrolled
in our securities lending program, we lend
securities to banks, broker/dealers and other
institutions. In the event of a failure of the
borrower to return such securities, we
typically agree to indemnify our clients for the
amount by which the fair market value of
those securities exceeds the proceeds of the
disposition of the collateral recalled from the
borrower in connection with such transaction.
Borrowers are generally required to provide
collateral equal to a contractually agreed
percentage equal to or in excess of the fair
market value of the loaned securities. As the
fair market 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.
• Stable value arrangements. 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
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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.
• U.S. municipal obligations remarketing credit
facilities. 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 municipalities are subject
to increased investor concern, the risks
associated with such businesses increase.
• Senior secured bank loans. In recent years,
we have increased our investment in senior
secured bank loans. We invest in these loans
to non-investment grade borrowers through
participation in loan syndications in the non-
investment grade lending market. We rate
these loans as "speculative" under our
internal risk-rating framework, and these
loans have significant exposure to credit
losses relative to higher-rated loans. We are
therefore at a higher risk of default with
respect to these investments relative to other
of our investments activities. In addition,
unlike other financial institutions that may
have an active role in managing individual
loan compliance, our investment in these
loans is generally as a passive investor with
limited control. As our investment in these
loans has increased, we have also
experienced increases in our provision for
loan losses. As this portfolio grows and
becomes more seasoned, our allowance for
loan losses related to these loans may
increase through additional provisions for
credit losses.
Under evolving regulatory restrictions on 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, may require that we
expand our credit exposure to a broader range of
issuers, including issuers that represent increased
credit risk and may require that we modify our
operating models or the policies and practices we use
to manage our consolidated statement of condition.
The effects of these considerations may increase
when evaluated under a stressed environment in
stress testing, including CCAR. In addition, we are an
adherent to the ISDA 2015 Universal Resolution Stay
Protocol and as such are subject to restrictions
against the exercise of rights and remedies against
fellow adherents, including other major financial
institutions, in the event they or an affiliate of theirs
enters into resolution. Although our overall business
is subject to these interdependencies, several of our
business units are particularly sensitive to them,
including our Global Treasury group, that, among
other responsibilities, manages our investment
portfolio, 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 market factors including interest
rates, credit spreads and credit performance.
Our investment securities portfolio represented
approximately 40% of our total assets as of
December 31, 2016. The gross interest revenue
associated with our investment portfolio represented
approximately 17% of our total gross revenue for the
year ended December 31, 2016 and has represented
as much as 30% of our total gross revenue in the
fiscal years since 2007. 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 manage
changes in repayment rates of principal with respect
to these securities. Despite recent increases to
interest rates in the United States, the continued low
interest-rate environment that has persisted since the
financial crisis began in mid-2007 limits our ability to
achieve a net interest margin consistent with our
historical averages. Any further increases in interest
rates in the United States have the potential to
improve net interest revenue and net interest margin
over time. However, any such improvement could be
mitigated due to a greater disparity between interest
rates in the U.S. and international markets, especially
to the extent that interest rates remain low in Europe
and Japan. Higher interest rates could also reduce
mark-to-market valuations further. In addition, new
and proposed regulatory liquidity standards, such as
the LCR, require that we maintain minimum levels of
high quality liquid assets in our investment portfolio,
State Street Corporation | 22
which generally generate lower rates of return than
other investment assets, resulting in a negative
impact on our net interest revenue and our net
interest margin. For additional information regarding
these liquidity requirements, refer to the “Liquidity
Coverage Ratio and Net Stable Funding Ratio”
section of “Supervision and Regulation” included
under Item 1, Business, of this Form 10-K. We may
enter into derivative transactions to hedge or manage
our exposure to interest rate risk, as well as other
risks, such as foreign exchange risk and credit risk.
Derivative instruments that we hold for these or other
purposes may not achieve their intended results and
could result in unexpected losses or stresses on our
liquidity or capital resources.
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 8% of our total
assets as of December 31, 2016), in comparison to
many other major financial institutions. In some
respects, the accounting and regulatory treatment of
our investment securities portfolio may be less
favorable to us than a more traditional held-for-
investment lending portfolio. For example, under the
Basel III final rule, after-tax changes in the fair value
of AFS investment securities are 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. 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.
Additional risks associated with our investment
portfolio include:
• Asset class concentration. Our investment
portfolio continues to have significant
concentrations in several classes of
securities, including 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 crisis
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 an adverse effect on our consolidated
results of operations or financial condition".
Further, we hold a large 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 are significant.
• Effects of market conditions. If market
conditions deteriorate, our investment
portfolio could experience a decline in market
value, whether due to a decline in liquidity or
an increase in the yield required by investors
to hold such securities, 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. In addition, in general,
deterioration in credit quality, or changes in
management's expectations regarding
repayment timing or in management's
investment intent to hold securities to
maturity, in each case with respect to our
portfolio holdings, could result in other-than-
temporary impairment. Similarly, if a material
portion of our investment portfolio were to
experience credit deterioration, our capital
ratios as calculated pursuant to the Basel III
final rule could be adversely affected. This
risk is greater with portfolios of investment
securities that contain credit risk than with
holdings of U.S. Treasury securities.
• Effects of interest rates. 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 changes in those rates, whether
or not expected. This is particularly true in the
case of a quicker-than-anticipated increase in
interest rates, which would decrease market
values in the near-term or by monetary policy
that results in persistently low or negative
rates of interest on certain investments. The
latter has been the case, for example, with
respect to ECB monetary policy, including
negative interest rates in some jurisdictions,
with associated negative effects on our
investment portfolio reinvestment, net interest
revenue and net interest margin. The effect
on our net interest revenue has been
exacerbated by the effects of the strong U.S.
dollar relative to other currencies, particularly
the Euro. If ECB monetary policy continues to
pressure European interest rates downward
State Street Corporation | 23
and the U.S. dollar remains strong or
strengthens, the negative effects on our net
interest revenue likely will continue or
increase. The overall level of net interest
revenue can also be impacted by the size of
our deposit base, as further increases in
interest rates could lead to reduced deposit
levels and also lower overall net interest
revenue. Further, a reduction in deposit levels
could increase the requirements under the
regulatory liquidity standards requiring us to
invest a greater proportion of our investment
portfolio holdings in high quality liquid assets
that have lower yields than other investable
assets. See also, “Our business activities
expose us to interest-rate risk” below.
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 and net interest margin are affected by
among other things, 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. These factors are
influenced, among other things, by a variety of
economic and market forces and expectations,
including monetary policy and other activities of
central banks, such as the Federal Reserve, that we
do not control. Our ability to anticipate changes in
these factors or to hedge the related on- and off-
balance sheet exposures, and the cost of any such
hedging activity, can significantly influence the
success of our asset-and-liability management
activities and the resulting level of our net interest
revenue and net interest margin. The impact of
changes in interest rates and related factors 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 credit spreads generally have a constraining
effect on our net interest revenue. In addition, our
ability to change deposit rates in response to changes
in interest rates and other market and related factors
is limited by client relationship considerations. For
additional information about the effects on interest
rates on our business, refer to “Financial Condition -
Market Risk Management - 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 effectively manage our
liquidity, including by continuously attracting
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, including on an intra-day
basis, 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:
• meet clients' demands for return of their
deposits;
•
•
extend credit to our clients in connection with
our custody business; and
fund 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 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 disruption, 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, is subject to variability
based on a number of factors, including volume and
volatility in global financial markets, the relative
interest rates that we are prepared to pay for these
deposits, 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, and the classification of certain
deposits for regulatory purposes and related
discussions we may have from time to time with
clients regarding better balancing our clients' cash
management needs with our economic and regulatory
objectives.
The parent company is a non-operating holding
company. To effectively manage our liquidity we
routinely transfer assets among affiliated entities,
subsidiaries and branches. Internal or external
State Street Corporation | 24
factors, such as regulatory requirements and
standards, influence our liquidity management and
may limit our ability to effectively transfer liquidity
internally which could, among other things, restrict
our ability to fund operations, dividends or stock
repurchases, require us to seek external and
potentially more costly capital and impact our liquidity
position.
In addition, while not obligations of State Street,
the investment products that we manage for third
parties may be exposed to liquidity risks. These
products may be funded on a short-term basis, or the
clients participating in these products may 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 held by these asset pools 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,
including on an intra-day basis, 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, among other things, 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 the Basel III
final rule, 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.
Basel III and Dodd-Frank Act
We are required to calculate our risk-based
capital ratios under both the Basel III advanced
approaches and the Basel III standardized approach,
and we are subject to the more stringent of the risk-
based capital ratios calculated under the advanced
approaches and those calculated under the
standardized approach in the assessment of our
capital adequacy.
In implementing certain aspects of these capital
regulations, we are making interpretations of the
regulatory intent. The Federal Reserve may
determine that we are not in compliance with the
capital rules and may require us to take 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 final rule 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 final rule.
Along with the Basel III final rule, banking
regulators also introduced additional new
requirements, such as the SLR, LCR and the
proposed NSFR. In addition, further capital and
liquidity requirements are under consideration by U.S.
and international banking regulators, 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 LCR in the final rule, 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 subject to further regulatory guidance,
action or rule-making.
Systemic Importance
As a G-SIB, we generally expect to be held to
the most stringent provisions under the Basel III final
rule. For example, on August 14, 2015, the Federal
Reserve published a final rule on the implementation
of capital surcharges for U.S. G-SIBs, and on
December 15, 2016, the Federal Reserve released its
final rule, which we refer to as the "TLAC final rule,"
on TLAC, LTD and clean holding company
requirements for U.S. G-SIBs. For additional
information on these requirements, refer to the
“Regulatory Capital Adequacy and Liquidity
Standards” section under “Supervision and
Regulation” included under Item 1, Business. of this
Form 10-K.
State Street Corporation | 25
Not all of our competitors have similarly been
designated as systemically important, and therefore
some of our competitors are not subject to the same
additional capital requirements.
Liquidity Standards” included under Item 1, Business,
and “Financial Condition - Capital” in Management's
Discussion and Analysis included under Item 7 of this
Form 10-K.
CCAR
We are 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. That 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 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 its non-objection. We are
also subject to asset quality reviews and stress
testing by the ECB and may in the future be subject
to similar reviews and testing by other regulators.
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 the Basel III final rule, 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. In addition,
we may choose to forgo business opportunities, due
to their impact on our capital plan or stress tests,
including CCAR. 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.
For additional information about the above
matters, refer to “Business - Supervision and
Regulation - Regulatory Capital Adequacy and
Fee revenue represents a significant majority of
our consolidated revenue and is subject to
decline, among other things, in the event of a
reduction in, or changes to, the level or type of
investment activity by our clients.
We rely primarily on fee-based services to
derive our revenue. This contrasts with commercial
banks that may rely more heavily on interest-based
sources of revenue, such as loans. During 2016 total
fee revenue represented approximately 80% of our
total 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.
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.
For example, reductions in the level of economic and
capital markets activity tend to have a negative effect
on our fee revenue, as these often result in reduced
asset valuations and transaction volumes. They may
also result in investor preference trends towards
asset classes and markets deemed more secure,
such as cash or non-emerging markets, with respect
to which our fee rates are often lower.
In addition, our clients include institutional
investors, such as mutual funds, collective investment
funds, UCITS, hedge funds and other investment
pools, corporate and public retirement plans,
insurance companies, foundations, endowments and
investment managers. Economic, market or other
factors that reduce the level or rates of savings in or
with those institutions, either through reductions in
financial asset valuations or through changes in
investor preferences, could materially reduce our fee
revenue and have a material adverse effect on our
consolidated results of operations.
Our businesses have significant European
operations, and disruptions in European
economies could have an adverse effect on our
consolidated results of operations or financial
condition.
Since 2009, multiple European economies have
been experiencing, and may continue to experience,
negative or slow economic growth and difficulties in
financing their deficits and servicing their outstanding
debt. The slow pace of economic expansion,
concerns around sovereign debt sustainability and
State Street Corporation | 26
the associated instability in these economies and
their major financial institutions have contributed to
ongoing volatility in the financial markets. In 2016, the
European Central Bank continued to augment its
sweeping stimulus measures by maintaining interest
rates below zero, boosting and expanding the scope
of its asset purchase program and employing other
quantitative easing measures to support economic
growth, employment and inflation. The divergence
between U.S. and European monetary policy has led
to increased uncertainty around the strength of the
European economies and strength of the Euro.
Contributing to fears about European stability
were rising populist sentiments in a number of
countries, evidenced by key events in 2016 such as
the United Kingdom’s vote to exit the Eurozone and
an Italian referendum rejecting constitutional change
which resulted in the resignation of the Italian Prime
Minister. If populist groups gain political momentum
and push back against austerity measures adopted
by numerous European governments, concerns
regarding European sovereign debt may reemerge or
other countries may reevaluate their participation in
the E.U. or the Euro zone. As attitudes towards
economic austerity programs in Europe continue to
diverge, the political and economic environment is
becoming increasingly complex.
Europe has continued to experience an
unprecedented mass-migration of refugees from the
Middle East and Africa, which is placing pressure on
governments, creating divisions in society and
contributing to economic stresses. Finally, the threat
of terrorism remains high across Europe with recent
attacks in Belgium, France and Germany
compounding political and economic uncertainty.
The current geo-political and economic
uncertainty create ongoing concern regarding
Europe’s economic future, persistently high levels of
unemployment in many countries, 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 fully resolve sovereign debt concerns,
continued recession or below baseline growth in
significant European economies, further attempts by
countries to abandon the Eurozone, sub-national
independence movements and upcoming elections,
the failure of a significant European financial
institution, even if not an immediate counterparty to
us, persistent weakness in the Euro or prolonged
negative interest rates, could have a material adverse
impact on our consolidated results of operations or
financial condition.
Geopolitical and economic conditions and
developments could adversely affect us,
particularly if we face increased uncertainty and
unpredictability in managing our businesses.
Global credit and other financial markets can
suffer from substantial volatility, illiquidity and
disruption, particularly as global monetary authorities
begin to withdraw monetary policy easing measures.
If such volatility, illiquidity or disruption were to result
in an adverse economic environment in the U.S. or
internationally or result in a lack of confidence in the
financial stability of major developed and emerging
markets, such developments could have an adverse
affected on our business, as well as the businesses
of our clients and our significant counterparties.
These factors could be compounded by tighter
monetary conditions, trade restrictions and political
uncertainty in U.S. and internationally. This
environment, the potential for resurgent economic
difficulties, the possibility of continuing or additional
disruptions and the regulatory and enforcement
environment resulting from events in recent years
have also affected overall confidence in financial
institutions, could further exacerbate liquidity issues
and lead to anomalies in the pricing of risk within the
securities markets, increase the uncertainty and
unpredictability we face in managing our businesses
and have an adverse effect on our consolidated
results of operations and financial condition.
Numerous global financial services firms and the
sovereign debt of some nations experienced credit
downgrades in 2016 due to continued weak economic
performance and idiosyncratic risk factors. The
occurrence of disruptions in global markets, the
worsening of economic conditions, continued
economic or political uncertainty in Europe or in
emerging markets, volatility in the price of oil, or
prolonged slower rates of growth in China and other
regions, could 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 or increase. These factors
could 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 opportunity to generate foreign
exchange revenue. Conversely, periods of lower
currency volatility tend to decrease our market risk
State Street Corporation | 27
but also decrease our foreign exchange revenue.
In addition, as our business grows globally and a
significant percentage of our revenue is earned (and
of our expenses paid) in currencies other than U.S.
dollars, our exposure to foreign currency volatility
could affect our levels of consolidated revenue, 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. For example, throughout 2016 the
effect of a stronger U.S. dollar, particularly relative to
the Euro, reduced our servicing fee and management
fee revenue and also reduced our expenses. The
extent to which changes in the strength of the U.S.
dollar relative to other currencies affect our
consolidated results of operations, including the
degree of any offset between increases or decreases
to both revenue and expenses, will depend upon the
nature and scope of our operations and activities in
the relevant jurisdictions during the relevant periods,
which may vary from period to period.
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
compliance and risk management capabilities to
support these businesses, which may increase the
operating expenses of such businesses or, if our
control environment fails to keep pace with product
expansion, result in increased risk of loss from such
businesses.
We may need to raise additional capital or debt 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. In particular, the Federal Reserve’s
TLAC final rule, which goes into effect on January 1,
2019, will require State Street to maintain a minimum
amount of eligible LTD outstanding, and we may need
to issue more long-term debt in order to meet the
minimum eligible LTD requirement.
However, our ability to access the capital
markets, if needed, on a timely basis or at all will
depend on a number of factors, such as the state of
the financial markets and securities law requirements
and standards, including our receipt of waivers from
the SEC to maintain the applicability of relevant
securities law exemptions for which we would
otherwise be disqualified. 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 continue to 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
past downgraded, and may in the future downgrade,
our credit ratings, or have negatively revised their
outlook for our credit ratings. The current market and
regulatory 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 various 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 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
State Street Corporation | 28
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 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,
our acquisition activities and our interactions with
foreign regulatory agencies and officials.
In particular, 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 generally limits the
activities in which we and our non-banking
subsidiaries may engage to managing or controlling
banks and activities considered to be closely related
to banking. As a bank holding company that has
elected to be treated as a financial holding company
under the Bank Holding Company Act, State Street
may also engage in a broader range of activities
considered to be “financial in nature.” Financial
holding company status requires State Street and its
banking subsidiaries to remain well capitalized and
well managed and to comply with Community
Reinvestment Act obligations. Currently, under the
Bank Holding Company Act, we may not be able to
engage in new activities or acquire shares or control
of other businesses.
Various proposals are being or may be made or
are under consideration for legislative, regulatory or
policy amendments or changes following the recent
elections in the United States, which resulted in the
combination of a new President of the United States
and the majority of both Houses of Congress all being
members of the same political party. The nature,
scope and content of any such amendments or
changes, whether implemented by legislative,
regulatory, executive or judicial action or
interpretation, and any potential related effects on our
businesses, results of operations or financial
condition, including, without limitation, increased
expenses or changes in the demand for our services,
or on the U.S.-domestic or global economies or
financial markets, are uncertain. Several other
aspects of the regulatory environment in which we
operate, and related risks, are discussed below.
Additional information is provided under "Supervision
and Regulation” included under Item 1, Business, of
this Form 10-K.
Dodd-Frank Act
The Dodd-Frank Act, which became law in July
2010, has had, and continues 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. Several elements of the Dodd-Frank Act, such as
the Volcker rule and enhanced prudential standards
for financial institutions designated as 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 may be finalized in
2017, 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.
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 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
State Street Corporation | 29
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.
Resolution Planning
State Street Corporation, like other bank holding
companies with total consolidated assets of $50
billion or more, periodically submits a plan for its rapid
and orderly resolution under the U.S. Bankruptcy
Code in the event of material financial distress or
failure--commonly referred to as a resolution plan or a
living will--to the Federal Reserve and the FDIC under
Section 165(d) of the Dodd-Frank Act. Through
resolution planning, we seek, in the event of
insolvency, to maintain State Street Bank’s role as a
key infrastructure provider within the financial system,
while minimizing risk to the financial system and
maximizing value for the benefit of our stakeholders.
We have and will continue to focus management
attention and resources to meet regulatory
expectations with respect to resolution planning. In
the event of material financial distress or failure, our
preferred resolution strategy, referred to as the single
point of entry strategy, provides for the
recapitalization of State Street Bank and our other
material entities by the parent company (for example,
by forgiving inter-company indebtedness of State
Street Bank owed, directly or indirectly, to the parent
company), and potentially by capital contribution from
a newly formed direct subsidiary of the parent
company that would be pre-funded by the parent
company, prior to the parent company’s entry into
bankruptcy proceedings. The recapitalization, if
successful, is intended to enable State Street Bank
and our other material entities to continue their
operations. The amount of assets available to support
State Street Bank and our other material entities is
anticipated to vary over time and may not be
sufficient to meet their liquidity and capital needs.
The parent company and the newly formed
direct subsidiary would obligate themselves, under a
contract we refer to as a support agreement and
using up to substantially all of their resources, to
recapitalize and/or provide liquidity to State Street
Bank and our other material entities in the event of
material financial distress. The parent company and
the newly formed direct subsidiary would secure their
obligations under the support agreement by entering
into a contract known as a security agreement and by
pledging their rights in the assets that the parent
company and the newly formed direct subsidiary
would use to fulfill their obligations under the support
agreement to State Street Bank and other material
entities. The parent company intends to pre-fund the
newly formed direct subsidiary upon the execution of
the support agreement by transferring assets to it that
will be available for the subsequent provision of
capital and liquidity to State Street Bank and our
other material entities. These contractual, funding and
related arrangements are expected to be in place
prior to July 1, 2017 to aid State Street in meeting its
regulatory obligations.
Under this single point of entry strategy, State
Street Bank and our other material entities would not
themselves enter into resolution proceedings. These
entities would instead be transferred to a newly
organized holding company held by a reorganization
trust for the benefit of the parent company’s
claimants. The single point of entry strategy and the
obligations under the support agreement may result
in the recapitalization of State Street Bank and the
commencement of bankruptcy proceedings by the
parent company at an earlier stage of financial stress
than might otherwise occur without such mechanisms
in place.
There can be no assurance that there would be
sufficient recapitalization resources available to
ensure that State Street Bank and our other material
entities are adequately capitalized following the
triggering of the requirements to provide capital and/
or liquidity under the support agreement. In the event
that such recapitalization actions were taken and
were unsuccessful in stabilizing State Street Bank,
equity and debt holders of the parent company would
likely, as a consequence, be in a worse position than
if the recapitalization did not occur. An expected
effect of the single point of entry strategy and the
TLAC final rule is that State Street’s losses will be
imposed on the holders of eligible long-term debt and
other forms of eligible TLAC issued by the parent
company, as well as on other parent company
creditors, before any of its losses are imposed on the
holders of the debt securities of the parent company’s
operating subsidiaries or any depositors or creditors
thereof or before U.S. taxpayers are put at risk.
The requirements of the single point of entry
strategy and the support agreement may adversely
impact our ability to issue, or to competitively price,
additional debt and equity securities.
We are required to submit our next annual
resolution plan to the Federal Reserve and the FDIC
on July 1, 2017. The Federal Reserve and the FDIC
may determine that our 2017 resolution plan is not
credible or would not facilitate an orderly resolution
due to a number of factors, including, but not limited
to: (1) challenges we may experience in interpreting
and addressing regulatory expectations; (2) any
failure to implement remediation actions in a timely
manner; (3) the complexities in developing and
implementing a comprehensive plan to resolve a
global custodial bank; and (4) related costs and
dependencies. If our resolution plan submission filed
on July 1, 2017, or any future submission, fails to
meet regulatory expectations to the satisfaction of the
Federal Reserve and the FDIC, we could be subject
to more stringent capital, leverage or liquidity
State Street Corporation | 30
requirements, restrictions on our growth, activities or
operations, or we could be required to divest certain
of our assets or operations.
Volcker Rule
U.S. banking regulators have issued final
regulations to implement the Volcker rule. The
Volcker rule prohibits banking entities, including us
and our affiliates, from engaging in specified
prohibited proprietary trading activities, subject to
exemptions, including for market-making-related
activities and risk-mitigating hedging. The Volcker rule
also requires banking entities to either restructure or
divest specified ownership interests in, and
relationships with, covered funds, within the meaning
of the final Volcker rule regulations.
Whether various investment securities or
structures, such as CLOs, constitute covered funds,
as defined in the final Volcker rule regulations, and do
not benefit from the exemptions provided in the
Volcker rule, and whether a banking organization's
investments therein constitute ownership interests,
remain subject to (1) market, and ultimately
regulatory, interpretation, and (2) the specific terms
and other characteristics relevant to such investment
securities and structures. We hold significant
investments in CLOs. 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 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 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 or on
our consolidated financial condition in the period in
which such a divestiture occurs.
The final Volcker rule regulations also require
banking entities to establish extensive programs
designed to ensure compliance with the restrictions of
the Volcker rule. We have established a compliance
program which complies with the final Volcker rule
regulations as currently in effect. Such compliance
program restricts our ability in the future to service
various types of funds, in particular covered funds for
which SSGA acts as an advisor and specified types of
trustee relationships. Consequently, Volcker rule
compliance entails both the cost of a compliance
program and loss of certain revenue and future
opportunities.
Systemic Importance
Our qualification under the Dodd-Frank Act in
the U.S. as a SIFI, and our designation by the FSB as
a G-SIB, to which certain regulatory capital
surcharges may apply, will subject us to incrementally
higher capital and prudential requirements, increased
scrutiny of our activities and potential further
regulatory requirements or increased regulatory
expectations than those applicable to some of the
financial institutions with which we compete as a
custodian or asset manager. This qualification and
designation also has significantly increased, and may
continue to increase, our expenses associated with
regulatory compliance, including personnel and
systems, as well as implementation and related costs
to enhance our programs.
Global and Non-U.S. Regulatory Requirements
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, difficulties in obtaining governmental
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 laws and
regulations of multiple jurisdictions relating to
economic sanctions and money laundering. In
addition, we are required to comply not only with the
U.S. Foreign Corrupt Practices Act, but also with the
applicable anti-corruption laws of other jurisdictions in
which we operate. Further, our global operating
model requires we comply with outsourcing oversight
requirements, including with respect to affiliated
entities, and data security standards of multiple
jurisdictions. Regulatory scrutiny of compliance with
these and other laws and regulations is increasing.
State Street faces sometimes inconsistent laws and
regulations in the various jurisdictions in which we
operate. The 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. In particular, non-U.S.
regulations and initiatives that may be inconsistent or
conflict with current or proposed regulations in the
U.S. could create increased compliance and other
costs that would adversely affect our business,
operations or profitability.
In addition to U.S. regulatory initiatives such as
the Dodd-Frank Act and implementation of the Basel
III final rule, including the Basel III SLR and the
proposed NSFR, we are further affected by non-U.S.
regulatory initiatives, including, but not limited to, the
AIFMD, the BRRD, the EMIR, the UCITS directives,
MiFID II and MiFIR, the DPD and GDPR and the
upcoming new E.U. General Data Protection
Regulations. Recent, proposed or potential
State Street Corporation | 31
regulations in the U.S. and E.U. 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 the E.U., the AIFMD and UCITS V
increase the responsibilities and potential liabilities of
custodians and depositories to certain of their clients
for asset losses.
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. State Street is likely to become
indirectly subject to EMIR's risk mitigation obligations
when it transacts with E.U. counterparties. EMIR will
continue to 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 affect 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.
Consequences of Regulatory Environment and
Compliance Risks
The Dodd-Frank Act and 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.
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
continue to adversely affect our operations and, in
turn, our consolidated results of operations and
financial condition.
For additional information, see the risk factor
below, “Our businesses may be adversely affected by
regulatory enforcement and litigation.”
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
impact our risk exposures, our total risk-
weighted assets and our capital ratios from
period to period.
To calculate our credit, market and operational
risk exposures, our total risk-weighted assets and our
capital ratios for regulatory purposes, the Basel III
final rule involves 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
State Street Corporation | 32
components involve the exercise of judgment 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, precisely
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 the
output of 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. An operational loss that we experience
could also result in a material change in our capital
requirements for operational risk under the advanced
approaches, depending on the severity of the loss
event, its characterization among the seven Basel-
defined UOMs, and the stability of the distributional
approach for a particular UOM, and without direct
correlation to the effects of the loss event, or the
timing of such effects, on our results of operations.
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 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.
Our businesses may be adversely affected by
government 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 or markets in which we are involved or
may be specifically directed at us. In these matters,
claims for disgorgement, the imposition of civil or
criminal penalties or sanctions and the imposition of
other remedial sanctions are possible, any of which
could result in increased expenses, client loss or
harm to reputation.
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. Often, the announcement or other
publication of such a claim or action, or of any related
settlement, may spur the initiation of similar claims by
other clients or governmental parties. In any such
claims or actions, demands for substantial monetary
damages may be asserted against us and may result
in financial liability, criminal sanction, changes in our
business practices or an adverse effect on our
reputation or on client demand for our products and
services. The exposure associated with any
proceedings that may be threatened, commenced or
filed against us could have a material adverse effect
on our consolidated results of operations for the
period in which we establish a reserve with respect to
such potential liability or upon our reputation. In
government settlements since the financial crisis, the
fines imposed by authorities have increased
substantially and may exceed in some cases the
profit earned or harm caused by the regulatory or
other breach.
In many cases, we are required to self-report
inappropriate or non-compliant conduct to the
authorities, and our failure or delay to do so may
represent an independent regulatory violation or be
treated as an indication of non-cooperation with
governmental authorities. 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. Moreover, our settlement or
other resolution of any matter with any one or more
regulators or other applicable party may not forestall
other regulators or parties in the same or other
jurisdictions from pursuing a claim or other action
against us with respect to the same or a similar
matter.
Our operations are subject to regular and
ongoing inspection by our bank and other financial
market regulators in the U.S. and internationally. In
addition, under the deferred prosecution agreement
we entered into with the DOJ in early 2017
(referenced in connection with the Transition
Management matter discussed below), we have
agreed to retain an independent compliance
consultant and compliance monitor which will, among
other things, evaluate the effectiveness of our
compliance controls and business ethics and make
related recommendations. Other governmental
authorities may impose similar monitors or
compliance consultants as part of resolving
investigations or other matters. As a result of such
inspections and monitoring activities, governmental
authorities may identify areas in which we may need
State Street Corporation | 33
to take actions, which may be significant, to enhance
our regulatory compliance or risk management
practices. Such remedial actions may entail
significant cost, management attention, and systems
development and such efforts may affect our ability to
expand our business until such remedial actions are
completed. Our failure to implement enhanced
compliance and risk management procedures in a
manner and in a time frame deemed to be responsive
by the applicable regulatory authority could adversely
impact our relationship with such regulatory authority
and could lead to restrictions on our activities or other
sanctions.
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.
Our recent experience with matters of this
nature includes:
•
Invoicing Matter. In December 2015, we
announced a review of the manner in which
we invoiced certain expenses to some of our
Investment Servicing clients, primarily in the
United States, during an 18-year period going
back to 1998, and our determination that we
had incorrectly invoiced clients for certain
expenses. We informed our clients in
December 2015 that we will pay to them the
amounts we concluded were incorrectly
invoiced to them, plus interest. We currently
expect to pay at least $340 million (including
interest), in connection with that review,
which is ongoing. We are implementing
enhancements to our billing processes, and
we are reviewing the conduct of our
employees and have taken appropriate steps
to address conduct inconsistent with our
standards, including, in some cases,
termination of employment. We are also
evaluating other billing practices relating to
our Investment Servicing clients, including
calculation of asset-based fees. We have
received a purported class action demand
letter alleging that our invoicing practices
were unfair and deceptive under
Massachusetts law. A class of customers, or
particular customers, may assert that we
have not paid to them all amounts incorrectly
invoiced, and may seek double or treble
damages under Massachusetts law. We are
also responding to requests for information
from, and are cooperating with investigations
by, governmental authorities on these
matters, including the civil and criminal
divisions of the DOJ, the SEC, the
Department of Labor and the Massachusetts
Attorney General, which could result in
significant fines or other sanctions, civil and
criminal, against us. The severity of such
fines or other sanctions could take into
account factors such as the amount and
duration of our incorrect invoicing, the
government’s assessment of the conduct of
our employees, as well as prior conduct such
as that which resulted in our recent deferred
prosecution agreement in connection with
transition management services and our
recent settlement of civil claims regarding our
indirect foreign exchange business. Any of
the foregoing could have a material adverse
effect on our reputation or business, including
the imposition of restrictions on the operation
of our business or a reduction in client
demand.
• Transition Management. In January 2014, we
entered into a settlement with the FCA,
pursuant to which we paid a fine of £22.9
million (approximately $37.8 million), 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. The SEC and the DOJ
opened separate investigations into this
matter. In April 2016, the U.S. Attorney’s
office in Boston charged two former
employees in our transition management
business with criminal fraud in connection
with their alleged role in this matter, and, in
May 2016, the SEC commenced a parallel
civil enforcement proceeding against one of
these individuals. In January 2017, we
announced that we had entered into a
deferred prosecution agreement with the DOJ
and the United States Attorney for the District
of Massachusetts. Under the terms of the
agreement with the DOJ, State Street will,
among other actions, pay a penalty of $32.3
million and enter into a deferred prosecution
agreement. Pursuant to the terms of the
deferred prosecution agreement, State Street
has agreed to retain an independent
compliance consultant and compliance
monitor for a term of three years (subject to
extension). State Street is in discussions with
the SEC Staff regarding a resolution of the
matter and has reached an agreement with
the SEC Staff to pay a penalty of $32.3
million (equal to the penalty being paid to the
DOJ). Resolution of the matter is subject to
completion of negotiations with the SEC Staff
on the other terms of the settlement, followed
by review and consideration by the SEC.
• Foreign Exchange. In July 2016, we
State Street Corporation | 34
announced that we had entered into
settlement agreements with the DOJ, the
Department of Labor and the Massachusetts
Attorney General and the plaintiffs in three
putative class action lawsuits with respect to
investigations and claims 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) prior to 2008 were
not adequately disclosed or were otherwise
improper. Those settlements and a
settlement with the SEC became final in the
fourth quarter of 2016. The total amounts
paid in these settlements were $575 million.
In addition to these settlement costs, some
investment managers have elected to use
other foreign exchange execution methods
offered by us or have decided not to use our
foreign exchange execution methods. 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
execution option. We cannot provide
assurance that clients or investment
managers who choose to use less or none of
our indirect foreign exchange trading, or to
use alternatives to our existing indirect
foreign exchange trading, will choose the
alternatives offered by us. Accordingly, our
revenue earned from providing these foreign
exchange trading services may decline.
Moreover, there can be no assurance that
other, potentially material, claims relating to
our indirect foreign exchange business will
not be asserted against us in the United
States or elsewhere. An adverse outcome
with respect to such other, unasserted claims
could have a material adverse effect on our
reputation, our consolidated results of
operations or our consolidated financial
condition.
• Written Agreement. On June 1, 2015, we
entered into a written agreement with the
Federal Reserve and the Massachusetts
Division of Banks relating to deficiencies
identified in our compliance programs with
the requirements of the Bank Secrecy Act,
AML regulations and U.S. economic
sanctions regulations promulgated by OFAC.
As part of this enforcement action, we are
required to, among other things, implement
improvements to our compliance programs
and to retain an independent firm to conduct
a review of account and transaction activity
covering a prior three-month period to
evaluate whether any suspicious activity not
previously reported should have been
identified and reported in accordance with
applicable regulatory requirements. To the
extent deficiencies in our historical reporting
are identified as a result of the transaction
review or if we fail to comply with the terms of
the written agreement, we may become
subject to fines and other regulatory
sanctions, which may have a material
adverse effect on us.
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 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 are subject to variability in our assets under
custody and administration and assets under
management, and in our financial results, due to
the significant size of many of our institutional
clients, and are also subject to significant pricing
pressure due to the considerable market
influence exerted by those clients.
Our clients include institutional investors, such
as mutual funds, collective investment funds, UCITS,
hedge funds and other investment pools, corporate
and public retirement plans, insurance companies,
foundations, endowments and investment managers.
In both our asset servicing and asset management
businesses, we endeavor to attract institutional
investors controlling large and diverse pools of
assets, as those clients typically have the opportunity
to benefit from the full range of our expertise and
service offerings. Due to the large pools of asset
controlled by these clients, the loss or gain of one
client, or even a portion of the assets controlled by
one client, could have a significant effect on our
assets under custody and administration or our
assets under management, as applicable, in the
relevant period. Our assets under management or
administration are also affected by decisions by
institutional owners to favor or disfavor certain
investment instruments or categories. In 2016, for
State Street Corporation | 35
example, we saw redemptions from hedge funds,
emerging markets and actively managed advisers, as
to which are fees are generally higher, in favor of
ETFs, passively managed products and developed
markets, as to which our fees are generally lower. As
our fee revenue is largely reliant on the levels of our
assets under custody and administration and assets
under management, these changes in assets levels
could have a corresponding significant effect on our
results of operations in the relevant period. Similarly,
if one or more clients changes the asset class in
which a significant portion of assets are invested
(e.g., by shifting investments from emerging markets
to fixed income), those changes could have a
significant effect on our results of operations in the
relevant period, as our fee rates often change based
on the type of asset classes we are servicing or
managing. Large institutional clients also, by their
nature, are often able to exert considerable market
influence, and this, combined with strong competitive
forces in the markets for our services, has resulted in,
and may continue to result in, significant pressure to
reduce the fees we charge for our services in both
our asset servicing and asset management business
lines. Many of these large clients are also under
competitive and regulatory pressures that are driving
them to manage the expenses that they and their
investment products incur more aggressively, which
in turn exacerbates their pressures on our fees.
Our business may be negatively affected by
adverse business decisions or our failure to
properly implement or execute strategic
programs and priorities.
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
processes and efficiencies, plans to improve existing
and to develop new service offerings and
enhancements, plans for entering or exiting business
lines or geographic markets, plans for acquiring or
disposing of businesses, plans to build new systems,
migrate from existing systems and other infrastructure
and to address staffing needs.
In October 2015, we announced State Street
Beacon, a multi-year program to digitize our
business, deliver significant value and innovation for
our clients and lower expenses across the
organization. Operational process transformations,
such as State Street Beacon, entail significant risks.
The program, and any future strategic or business
plan we implement, may prove to be inadequate to
achieve its objectives, may not be responsive to
industry or market changes, may result in increased
or unanticipated costs, 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 addition, our efforts to
manage expenses may be matched or exceeded by
our competitors. Any failure to implement State Street
Beacon in whole or in part may, among other things,
reduce our competitive position, diminish the cost
effectiveness of our systems and processes or
provide an insufficient return on our associated
investment. In particular, elements of the program
include investment in systems integration and new
technologies, including straight-through-processing,
to increase global servicing capabilities, reduce
expenses and enhance the client experience, 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
enhancements to the security of our data systems.
The transition to new operating processes and
technology infrastructure may cause disruptions in
our relationships with clients and employees and may
present other unanticipated technical or operational
hurdles. As a result, we may not achieve some or all
of the cost savings or other benefits anticipated
through the program. In addition, other systems
development initiatives, which are not included in
State Street Beacon, may not have access to the
same level of resources or management attention
and, consequently, may be delayed or unsuccessful.
Many of our systems require enhancements to meet
the requirements of evolving regulation, to permit us
to optimize our use of capital or to reduce the risk of
operating error. We may not have the resources to
pursue all of these objectives, including State Street
Beacon, simultaneously.
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 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 "Expenses" in “Consolidated Results of
Operations” included under Item 7, Management’s
Discussion and Analysis, of this form 10-K.
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 or the failure to meet
State Street Corporation | 36
client expectations or fiduciary or other obligations
could materially and adversely affect our reputation,
our ability to attract and retain clients or key
employees or our sources of funding for the same or
other businesses. For example, over the past several
years we have experienced adverse publicity with
respect to our indirect foreign exchange trading, and
this adverse publicity has contributed to a shift of
client volume to other foreign exchange execution
methods. Similarly, governmental actions and
reputational issues in our transition management
business in the U.K. have adversely affected our
revenue from that business and, with the related
deferred prosecution agreement with the DOJ
entered into in early 2017, these effects have the
potential to continue. The client invoicing matter we
announced in December 2015 has the potential to
result in similar effects. 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
timely identify, understand 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. The risk of individuals, either
employees or contractors, engaging in conduct
harmful or misleading to clients or us, such as
consciously circumventing established control
mechanisms to exceed trading or investment
management limitations, committing fraud or
improperly selling products or services to clients, is
particularly challenging to manage through a control
framework. The financial and reputational impact of
control or conduct failures can be significant.
Persistent or repeated issues with respect to controls
or individual conduct 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
servicing our clients.
In addition, our businesses and the markets in
which we operate are continuously evolving. We may
fail to identify or 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 or industry 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 and magnitude 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 partially 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,
State Street Corporation | 37
which could have a material adverse effect on our
consolidated results of operations.
proceedings, subject us to fines, penalties or
judgments or harm our reputation.
The quantitative models we use to manage our
business may contain errors that result in
inadequate risk assessments, inaccurate
valuations or poor business decisions, and
lapses in disclosure controls and procedures or
internal control over financial reporting could
occur, any of which could result in material harm.
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
liquidity 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
activities, hedging, asset-and-liability management
and whether to change business strategy.
Weaknesses in the underlying model, inadequate
model assumptions, normal model limitations,
inappropriate model use, weaknesses in model
implementation or poor data quality, could result in
unanticipated and adverse consequences, including
material loss and material non-compliance with
regulatory requirements or expectations. Because of
our widespread usage of models, potential
weaknesses in our model risk management practices
pose an ongoing risk to us.
We also 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 purposes may not adequately
capture or express the true risk profiles of our
businesses. Moreover, as businesses and markets
evolve, our measurements may not accurately reflect
this evolution. While our risk measures may indicate
sufficient capitalization, they may underestimate the
level of capital necessary to conduct our businesses.
Additionally, our disclosure controls and
procedures may not be effective in every
circumstance, and, similarly, it is possible we may
identify a material weakness or significant deficiency
in internal control over financial reporting. Any such
lapses or deficiencies may materially and adversely
affect our business and consolidated results of
operations or consolidated financial condition, restrict
our ability to access the capital markets, require us to
expend significant resources to correct the lapses or
deficiencies, expose us to regulatory or legal
Cost shifting to non-U.S. jurisdictions and
outsourcing 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 India, Poland and China, and by outsourcing.
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, to the risks that
our outsourcing vendors or joint ventures may not
comply with their servicing and other contractual
obligations to us, including with respect to
indemnification and information security, and to the
risk that we may not satisfy applicable regulatory
responsibilities regarding the management and
oversight of third parties and outsourcing providers. In
addition, we are exposed to the relevant
macroeconomic, political, legal and similar risks
generally involved in doing business in the
jurisdictions in which we establish lower-cost
locations or joint ventures or in which our outsourcing
vendors locate their operations. The increased
elements of risk that arise from certain operating
processes being conducted in some jurisdictions
could lead to an increase in reputational risk. During
periods of transition of operations, 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, joint ventures and
outsourcing providers may also be affected by
political, regulatory and client acceptance issues.
Such relocation or outsourcing of functions also
entails costs, such as technology, real estate and
restructuring expenses, that may offset or exceed the
expected financial benefits of the relocation or
outsourcing. In addition, the financial benefits of
lower-cost locations and of outsourcings may
diminish over time or could be offset in the event that
the United States or other jurisdictions impose tax
and other measures which seek to discourage the
use of lower cost jurisdictions.
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,
State Street Corporation | 38
as well as servicing fees from our other businesses.
From time to time, we may invest 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 may be required to consolidate these funds
in our consolidated financial statements under GAAP.
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 amount
invested in the consolidated fund. 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.
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
investment in 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. Our
management of collective investment pools on behalf
of clients exposes us to reputational risk and
operational losses. If our clients incur substantial
investment losses in these pools, 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 investment 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 is a
particularly important feature in money market funds
and other products designed to maintain a constant
net asset value of $1.00. In the past, we have
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. We have also in the past continued to
process purchase and redemption of units of
investment products designed to maintain a constant
net asset value at $1.00 although the fair market
value of the fund’s assets were less than $1.00. Our
willingness in the future to continue to process
purchases and redemptions from such products at
$1.00 when the fair market value of our collateral
pools' assets is less than $1.00 could expose us to
significant liability.
If higher than normal demands for liquidity from
our clients were to occur, 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.
While it is currently not our intention, and we do
not have contractual or other obligations to do so, we
State Street Corporation | 39
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.
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. This dependency is exacerbated in the
current “FinTech” environment, where financial
institutions are investing significantly in evaluating
new technologies, such as “Blockchain,” and
developing potentially industry-changing new
products, services and industry standards. 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, the significant and ongoing investments
required to bring new products and services to market
in a timely manner at competitive prices and the
preparation of marketing, sales and other materials
that fully and accurately describe the product or
service and its underlying risks. Our failure to manage
these risks and uncertainties also exposes us to
enhanced risk of operational lapses which may result
in the recognition of financial statement liabilities.
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. In recent years, several financial
services firms have 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. We also have been subjected to
cyber-attack, and although we have not to our
knowledge suffered a material breach or suspension
of our systems, it is possible that we could suffer such
a breach or suspension in the future. Cyber-threats
are sophisticated and continually evolving. We may
not implement effective systems and other measures
to effectively prevent or mitigate the full diversity of
cyber-threats or improve and adapt such systems and
measures as such threats evolve and advance.
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 or data volumes, electrical or
telecommunications outages, cyber-attacks or
employee or contractor error or malfeasance.
The third parties with which we do business,
State Street Corporation | 40
which facilitate our business activities or with whom
we otherwise engage or interact, 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, infrastructure
or government 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 threats,
including computer viruses, malicious code,
distributed denial of service attacks, phishing attacks,
ransomware, 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, personal,
proprietary or other information or otherwise disrupt,
compromise or damage our or our clients' or other
parties' business assets, operations and activities.
Our status as a global systemically important financial
institution likely increases the risk that we are
targeted by such cyber- security threats. In addition,
some of our service offerings, such as data
warehousing, may also increase the risk we are, and
the consequences of being, so-targeted. 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, litigation, damage to our reputation or
property and enhanced competition.
Due to our dependence on technology and the
important role it plays in our business operations, we
must persist in improving and updating our
information technology infrastructure. Updating these
systems and facilities can require significant
resources and often involves implementation,
integration and security risks that could cause
financial, reputational and operational harm.
However, failing to properly respond to and invest in
changes and advancements in technology can limit
our ability to attract and retain clients, prevent us from
offering similar products and services as those
offered by our competitors and inhibit our ability to
meet regulatory requirements.
Any theft, loss or other misappropriation or
inadvertent disclosure of, or inappropriate access
to, 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, or failure of our controls with
respect to granting access to our systems, may
occur, resulting in theft, loss, or other
misappropriation of such information. Any theft, loss,
other misappropriation or inadvertent disclosure 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, maintaining trade secrets 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
State Street Corporation | 41
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, both in business units
and control functions, 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, could
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. Our efforts to develop and market new
products may position us in new markets with pre-
existing competitors with strong market position. We
have also experienced, and anticipate that we will
continue to experience, pricing pressure in many of
our core businesses, particularly our custodial and
investment management services. 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 or are not
subject to as stringent capital or other regulatory
requirements as are we. In some of our businesses,
we are service providers to significant competitors.
These 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. 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,
bolster existing servicing capabilities, 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 have resulted in the
recognition of goodwill and other significant intangible
assets in our consolidated statement of condition. For
example, we recorded goodwill and intangible assets
of $453 million associated with our acquisition of GE
Asset Management in July 2016. These assets are
not eligible for inclusion in regulatory capital under
applicable requirements. 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. During
2016, we recorded no impairment in our consolidated
statement of income associated with the impairment
of acquisition-related goodwill and other intangible
assets.
State Street Corporation | 42
Through our acquisitions or joint ventures, we
With any acquisition, the integration of the
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. Other major financial services firms
have recently paid significant penalties to resolve
government investigations into matters conducted in
significant part by acquired entities.
Various regulatory approvals or consents, formal
or informal, are generally required prior to closing of
these transactions, which may include approvals or
non-objections from 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, or may
not approve 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.
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.
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, including services related but not limited to
certain trading activities, cash reporting, settlement
and reconciliation activities, collateral management
and information technology development. We also
may 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.
State Street Corporation | 43
Changes in accounting standards may adversely
affect our consolidated financial statements.
New accounting standards, or changes to
existing accounting standards, resulting both from
initiatives of the FASB as well as changes in the
interpretation of existing accounting standards, by the
FASB or the SEC or otherwise reflected in U.S.
GAAP, potentially could affect our consolidated
results of operations, cash flows and financial
condition. These changes 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 revision 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, state
governments, including Massachusetts, 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 capital and/or after-tax earnings.
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.
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 7.6 million
square feet of office space and related facilities
worldwide, of which approximately 6.7 million square
feet are leased. Of the total leased space,
approximately 2.4 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
2.0 million square feet in the U.K. and elsewhere in
Europe, and approximately 900,000 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
127,000 square feet of the building.
We occupy four buildings located in Quincy,
Massachusetts, one of which we own and three of
which we lease. The buildings contain a total of
approximately 1.2 million square feet (720,000 square
feet owned and 470,000 square feet leased). These,
along with the Channel Center, an office building
located in Boston, of which we lease the entire
500,000 square feet, function as State Street Bank's
principal operations facilities.
We occupy other principal properties located in
Connecticut, Missouri, New Jersey, New York, and
Ontario, composed of five leased buildings containing
a total of approximately 840,000 square feet, under
leases expiring from August 2022 to December 2025.
Significant properties in the U.K. and Europe include
nine buildings located in England, Scotland, Poland,
Ireland, Luxembourg, Germany, and Italy, containing
approximately 1.3 million square feet under leases
expiring from January 2019 through August 2034.
Principal properties located in China, Australia and
India consist of four buildings containing
approximately 491,000 square feet (includes 83,000
square feet under construction in India) under leases
expiring from July 2019 through May 2021.
We believe that our owned and leased facilities
are suitable and adequate for our business needs.
State Street Corporation | 44
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,, Financial
Statements and Supplementary Data, of this Form
10-K.
ITEM 3. LEGAL PROCEEDINGS
The information required by this Item is provided
under "Legal and Regulatory Matters" in Note 13 to
the consolidated financial statements included under
Item 8, Financial Statements and Supplementary
Data, of this Form 10-K, and is incorporated herein by
reference.
ITEM 4. MINE SAFETY DISCLOSURES
Not applicable.
State Street Corporation | 45
EXECUTIVE OFFICERS OF THE REGISTRANT
The following table presents certain information with respect to each of our executive officers as of
February 16, 2017.
Name
Joseph L. Hooley
Eric W. Aboaf
Michael W. Bell
Jeffrey N. Carp
Jeff D. Conway
Andrew J. Erickson
Kathryn M. Horgan
Karen C. Keenan
Andrew P. Kuritzkes
Louis D. Maiuri
Sean P. Newth
Ronald P. O'Hanley
Alison A. Quirk
Michael F. Rogers
Wai-Kwong Seck
Antoine Shagoury
George E. Sullivan
Age
Position
59 Chairman and Chief Executive Officer
52 Executive Vice President
53 Executive Vice President and Chief Financial Officer
60 Executive Vice President, Chief Legal Officer and Secretary
51 Executive Vice President
47 Executive Vice President
51 Executive Vice President
54 Executive Vice President and Chief Administrative Officer
56 Executive Vice President and Chief Risk Officer
52 Executive Vice President
41 Senior Vice President, Chief Accounting Officer and Controller
60 Vice Chairman and Chief Executive Officer and President of SSGA
55 Executive Vice President
59 President and Chief Operating Officer
61 Executive Vice President
46 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
currently serves as Chairman and Chief Executive
Officer. He was appointed Chief Executive Officer in
March 2010 and Chairman of the Board in January
2011. He served as our President and Chief
Operating Officer from April 2008 until December
2014. 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.
Eric Aboaf joined State Street in December 2016
as Executive Vice President. Prior to joining State
Street, Mr. Aboaf served as chief financial officer of
Citizens Financial Group, a financial services and
retail banking firm, from April 2015 to December
2016, with responsibility for all finance functions and
corporate development. From February 2003 to
March 2015, he served in several senior
management positions for Citigroup, a global
investment banking and financial services
corporation, including the global treasurer and the
chief financial officer of the institutional client group,
which included the custody business. Mr. Aboaf will
assume the role of State Street’s Chief Financial
Officer no later than April 1, 2017.
Mr. Bell joined State Street in August 2013 as
Executive Vice President and Chief Financial Officer.
Prior to joining State Street, Mr. Bell served as senior
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 June 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. Bell will be
stepping down as chief financial officer no later than
April 1, 2017.
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. Conway joined State Street more than 25
years ago and since March 2015 has served as
Executive Vice President and Chief Executive Officer
for Europe, the Middle East and Africa. Prior to that,
Mr. Conway held several other management positions
within the Company, including leading Global
Exchange, State Street's data and analytics business
from April 2013 to March 2015. From 2007 to April
2013, Mr. Conway served as the global head of State
Street's Investment Management Services business.
State Street Corporation | 46
Mr. Erickson joined State Street in April 1991
and since June 2016 has served as the Executive
Vice President and head of Investment Services
business in the Americas. Prior to this role, Mr.
Erickson was the head of the Global Services
business in Asia Pacific from April 2014 to June 2016
and prior to that he was Head of North Asia for Global
Services from 2010 to 2014. Mr. Erickson has also
held several other positions within State Street during
his over 25 years with the Company.
Ms. Horgan joined State Street in April 2009 and
currently serves as Executive Vice President, since
2012, and Chief Operating Officer, since 2011, for
State Street's Global Human Resources division.
Prior to this role, Ms. Horgan served as the senior
vice president of human resources for State Street
Global Advisors. Prior to joining State Street, Ms.
Horgan was the executive vice president of human
resources for Old Mutual Asset Management, a
global, diversified multi-boutique asset management
company, from 2006 to 2009.
Ms. Keenan joined State Street in July 2007 as
part of the acquisition of Investors Financial Services
(IBT) and since June 2016 has served as the Chief
Administrative Officer for State Street, managing
cross-organizational initiatives, overseeing data
strategy projects, overseeing the Compliance
Department and leading key components of
regulatory initiatives. Prior to this role, from July 2015
to June 2016, Ms. Keenan led the Global Markets
division worldwide, following her role as the head of
Global Markets in EMEA from 2012 to 2016. From
2010 to 2012, Ms. Keenan served as the chief
strategy officer for Global Markets. While with IBT,
she served as chief financial officer during its initial
public offering and its early years as a public
company.
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 & 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. Maiuri joined State Street in October 2013
and has served as Executive Vice President and
head of State Street Global Markets since June 2016
and head of State Street Global Exchange since July
2015. From 2013 to July 2015, he led the Securities
Finance division. Before joining State Street, Mr.
Maiuri served as executive vice president and deputy
chief executive officer of asset servicing at BNY
Mellon, a global banking and financial services
corporation, from May 2009 to October 2013.
Mr. Newth joined State Street in 2005 and has
served as Senior Vice President, Chief Accounting
Officer and Corporate Controller since October 2014.
Prior to that, he held several senior positions in State
Street's Accounting Department, including Director of
Accounting Policy from 2009 to 2014 and Deputy
Controller from April 2014 to October 2014. Before
joining State Street, Mr. Newth served in various
transaction services, accounting advisory and
assurance roles at KPMG, from 1997 to 2005.
Mr. O'Hanley joined State Street in April 2015
and currently serves as Vice Chairman and the Chief
Executive Officer and President of State Street Global
Advisors, the investment management arm of State
Street Corporation. He was appointed Vice Chairman
January 1, 2017. Prior to joining State Street, Mr.
O'Hanley was president of Asset Management &
Corporate Services for Fidelity Investments, a
financial and mutual fund services corporation, from
2010 to February 2014. From 1997 to 2010, Mr.
O'Hanley served in various positions at Bank of New
York Mellon, a global banking and financial services
corporation, serving as President and Chief Executive
Officer of BNY Asset Management in Boston from
2007 to 2010.
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
the IBT acquisition and was appointed President and
Chief Operating Officer in December 2014. In that
role, he is responsible for State Street Global
Markets, State Street Global Services Americas,
Information Technology, Global Operations, and
Global Exchange, State Street’s data and analytics
business. Prior to that, Mr. Rogers served as head
of Global Markets and Global Services - Americas
since November 2011 and 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.
State Street Corporation | 47
Mr. Seck joined State Street in September 2011
as Executive Vice President and head of Global
Markets and Global Services across Asia Pacific.
Prior to joining State Street, Mr. Seck was chief
financial officer of the Singapore Exchange for eight
years. Previously he held senior-level positions in
the Monetary Authority of Singapore, the Government
of Singapore Investment Corporation, Lehman
Brothers and DBS Bank.
Mr. Shagoury joined State Street in November
2015 and has served as Executive Vice President
and Global Chief Information Officer (CIO). Prior to
joining State Street, Mr. Shagoury had several senior
management positions from February 2010 to
November 2015 with the London Stock Exchange
Group, a British-based stock exchange and financial
information company, including the group chief
operating officer and chief information officer.
Mr. Sullivan joined State Street in July 2007 as
part of the IBT acquisition and has served as
Executive Vice President and global head of State
Street’s Alternative Investment Solutions group. Mr.
Sullivan spent 15 years at IBT, where his role was
managing director of Global Fund Services.
State Street Corporation | 48
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 2,753 shareholders of record as of January 31,
2017. 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,
Financial Statements and Supplementary Data, of
this Form 10-K, and is incorporated herein by
reference.
In June 2016, our Board approved a common
stock purchase program authorizing the purchase by
us of up to $1.4 billion of our common stock through
June 30, 2017. As of December 31, 2016, we had
approximately $750 million remaining under that
program.
The following table presents purchases of our
common stock and related information for each of the
months in the quarter ended December 31, 2016. All
shares of our common stock purchased during the
quarter ended December 31, 2016 were purchased
under the above-described Board-approved program.
Stock purchases may be made using various types of
mechanisms, including open market purchases or
transactions off market, and may be made under Rule
10b5-1 trading programs. The timing of stock
purchases, types of transactions and number of
shares purchased will depend on several factors,
including market conditions, our capital position, our
financial performance and investment opportunities.
The common stock purchase program does not have
specific price targets and may be suspended at any
time.
(Dollars in millions, except per share amounts; shares
in thousands)
Total Number of
Shares Purchased
Average Price
Paid Per Share
Total Number of
Shares Purchased
as Part of Publicly
Announced
Program
Approximate
Dollar Value of
Shares That May
Yet be Purchased
Under Publicly
Announced
Program
Period:
October 1 - October 31, 2016
November 1 - November 30, 2016
December 1 - December 31, 2016
Total
184
$
2,438
1,615
4,237
70.52
75.29
79.54
76.70
184
$
2,438
1,615
4,237
1,062
878
750
750
Additional information about our common stock,
Payment of dividends by State Street Bank is
including Board authorization with respect to
purchases by us of our common stock, is provided
under "Capital" in “Financial Condition” included
under Item 7, Management's Discussion and
Analysis, and in Note 15 to the consolidated financial
statements included under Item 8, Financial
Statements and Supplementary Data, 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.
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.
State Street Corporation | 49
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 Federal Reserve regulations, 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 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 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 2016, our parent company declared
aggregate quarterly common stock dividends to its
shareholders of $1.44 per share, totaling
approximately $559 million. In 2015, our parent
company declared aggregate quarterly common stock
dividends to its shareholders of $1.32 per share,
totaling approximately $536 million. Currently, any
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 “Financial Condition” included
under Item 7,Management's Discussion and Analysis,
and in Note 15 to the consolidated financial
statements included under Item 8, Financial
Statements and Supplementary Data, 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 “Capital Planning, Stress
Tests and Dividends” in "Supervision and Regulation"
included under Item 1, Business, 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 the Basel III final rule, 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, Risk
Factors, of this Form 10-K.
Information about our equity compensation
plans is included under Item 12, Security Ownership
of Certain Beneficial Owners and Management and
Related Stockholder Matters, and in Note 18 to the
consolidated financial statements included under Item
8, Financial Statements and Supplementary Data, of
this Form 10-K, and is incorporated herein by
reference.
State Street Corporation | 50
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, 2011 at the closing
price on the last trading day of 2011, and also
assumes reinvestment of common stock dividends.
The S&P Financial Index is a publicly available
measure of 63 of the Standard & Poor's 500
companies, representing 25 diversified financial
services companies, 21 insurance companies, and 17
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
2011
2012
2013
2014
2015
2016
$
$
100
100
100
100
$
119
116
129
133
$
189
154
175
183
$
205
175
201
200
$
177
177
198
201
212
198
243
259
State Street Corporation | 51
ITEM 6. SELECTED FINANCIAL DATA
(Dollars in millions, except per share amounts or where otherwise noted)
2016
2015
2014
2013
2012
YEARS ENDED DECEMBER 31:
Total fee revenue
Net interest revenue
Gains (losses) related to investment securities, net(1)
Total revenue
Provision for loan losses
Total expenses
Income before income tax expense
Income tax expense (benefit)(2)
Net income from non-controlling interest
Net income
Adjustments to net income(3)
Net income available to common shareholders
PER COMMON SHARE:
Earnings per common share:
Basic
Diluted
Cash dividends declared
Closing market price (at year-end)
AS OF DECEMBER 31:
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:
$
8,116
$
8,278
$
8,010
$
7,570
$
7,069
2,084
7
2,088
(6)
2,260
4
10,207
10,360
10,274
10
8,077
2,120
(22)
1
2,143
(175)
1,968
5.03
4.97
1.44
$
$
$
12
8,050
2,298
318
—
1,980
(132)
1,848
4.53
4.47
1.32
10
7,827
2,437
415
—
2,022
(64)
1,958
4.62
4.53
1.16
$
$
$
$
$
$
2,303
(9)
9,864
6
7,192
2,666
616
—
2,050
(34)
2,016
4.52
4.43
1.04
$
$
$
2,538
23
9,630
(3)
6,886
2,747
700
—
2,047
(42)
2,005
4.23
4.17
.96
$
$
$
$
77.72
$
66.36
$
78.50
$
73.39
$
47.01
$ 97,167
$ 100,022
$ 112,636
$ 116,914
$ 121,061
199,184
242,698
187,163
11,430
21,219
28,771
2,468
33,783
220,456
245,155
191,627
11,497
21,103
27,508
2,245
32,356
209,054
274,089
209,040
10,012
21,328
28,188
2,448
29,970
178,101
243,262
182,268
9,670
20,248
27,427
2,345
29,430
167,615
222,561
164,181
7,408
20,824
24,371
2,086
29,650
Return on average common shareholders' equity
10.5%
9.8%
9.8%
10.2%
10.3%
Return on average assets
Common dividend payout
Average common equity to average total assets
Net interest margin, fully taxable-equivalent basis
Common equity tier 1 ratio(4)
Tier 1 capital ratio(4)
Total capital ratio(4)
Tier 1 leverage ratio(4)
Supplementary leverage ratio(5)
0.93
28.46
8.2
1.13
11.7
14.8
16.0
6.5
5.9
0.79
28.99
7.6
1.03
12.5
15.3
17.4
6.9
6.2
0.85
25.03
8.4
1.16
12.4
14.5
16.4
6.3
5.6
0.99
22.89
9.6
1.37
15.3
17.1
19.5
6.8
1.06
22.57
10.1
1.59
17.1
19.1
20.6
7.1
NA
NA
NA: Not applicable.
(1) Amount for 2012 reflects a $46 million loss from the sale of our Greek investment securities.
(2) Amount for 2012 reflects the net effects of certain tax matters ($7 million benefit) associated with the 2010 Intesa acquisition.
(3) Amounts represent preferred stock dividends and the allocation of earnings to participating securities using the two-class method.
(4) Ratios for 2014 through 2016 were calculated in conformity with the advanced approaches provisions of the Basel III final rule. Ratios for 2012 and 2013 were
calculated in conformity with the provisions of Basel I. Ratios for 2014 through 2016 are not directly comparable to ratios for prior years. Refer to Note 16 to the
consolidated financial statements included under Item 8, Financial Statements and Supplementary Data, of this Form 10-K.
(5) The supplementary leverage ratio was calculated using the transitional tier 1 capital as calculated under the supplementary leverage ratio provisions of the Basel
III final rule as of the date indicated.
State Street Corporation | 52
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
Provision for Loan Losses
Expenses
Income Tax Expense
Line of Business Information
Financial Condition
Investment Securities
Loans and Leases
Cross-Border Outstandings
Risk Management
Credit Risk Management
Liquidity Risk Management
Operational Risk Management
Market Risk Management
Model Risk Management
Strategic Risk Management
Capital
Off-Balance Sheet Arrangements
Significant Accounting Estimates
Recent Accounting Developments
54
55
57
57
57
59
61
62
64
64
71
72
78
79
80
85
90
95
98
105
106
107
119
119
122
We use acronyms and other defined terms for certain business terms and abbreviations, as defined on the acronyms
list and glossary included under Item 8, Financial Statements and Supplementary Data, of this Form 10-K.
State Street Corporation | 53
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
ITEM 7. MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
GENERAL
As of December 31, 2016, we had consolidated
total assets of $242.70 billion, consolidated total
deposits of $187.16 billion, consolidated total
shareholders' equity of $21.22 billion and 33,783
employees. We operate in more than 100 geographic
markets worldwide, including in the U.S., Canada,
Europe, the Middle East and Asia.
Our operations are organized into two lines of
business:
Investment Servicing and Investment
Management, which are defined based on products
and services provided.
Investment Servicing provides services for
institutional clients, including mutual funds, collective
investment funds and other investment pools,
corporate and public retirement plans, insurance
companies, investment managers, 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; our enhanced custody product,
which integrates principal securities lending and
custody; 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 SSGA,
provides a broad array of investment management,
investment research and investment advisory
services to corporations, public funds and other
sophisticated investors. SSGA offers passive and
active asset management strategies across equity,
fixed-income, alternative, multi-asset solutions
(including OCIO) and cash asset classes. Products
are distributed directly and through intermediaries
using a variety of investment vehicles, including
ETFs, such as the SPDR® ETF brand.
For financial and other information about our
lines of business, refer to “Line of Business
Information” in this Management's Discussion and
Analysis and Note 24 to the consolidated financial
statements included under Item 8, Financial
Statements and Supplementary Data, 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, Financial Statements and Supplementary Data, of
this Form 10-K. Certain previously reported amounts
presented in this Form 10-K have been reclassified to
conform to current-period presentation.
We prepare our consolidated financial
statements in conformity with U.S. GAAP. The
preparation of financial statements in conformity with
U.S. 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 judgments, estimates and assumptions
that are difficult, subjective or complex about matters
that are uncertain and may change in subsequent
periods include accounting for fair value
measurements; other-than-temporary impairment of
investment securities; impairment of goodwill and
other intangible assets; and contingencies. 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.
Additional information about these significant
accounting policies is included under “Significant
Accounting Estimates” in this Management's
Discussion and Analysis.
Certain financial information provided in this
Form 10-K, including in this Management's
Discussion and Analysis, is prepared on both a U.S.
GAAP, or reported basis, and a non-GAAP basis,
including certain non-GAAP measures used in the
calculation of identified regulatory ratios. We
measure and compare certain financial information on
a non-GAAP basis, including information (such as
capital ratios calculated under regulatory standards
scheduled to be effective in the future) that
management uses in evaluating our business and
activities.
Non-GAAP financial information should be
considered in addition to, not as a substitute for or
superior to, financial information prepared in
conformity with U.S. GAAP. Any non-GAAP financial
information presented in this Form 10-K, including
this Management’s Discussion and Analysis, is
reconciled to its most directly comparable currently
applicable regulatory ratio or U.S. GAAP-basis
measure.
We further believe that our presentation of fully
taxable-equivalent net interest revenue, a non-GAAP
measure, 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
State Street Corporation | 54
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Continued)
analysis of our underlying financial performance and
trends.
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 include
statements about our goals and expectations
regarding our business, financial and capital
condition, results of operations, strategies, financial
portfolio performance, dividend and stock purchase
programs, expected outcomes of legal proceedings,
market growth, acquisitions, joint ventures and
divestitures and new technologies, services and
opportunities, as well as industry, regulatory,
economic and market trends, initiatives and
developments, the business environment 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" under Item 1A of this Form
10-K.
We provide additional disclosures required by
applicable bank regulatory standards, including
supplemental qualitative and quantitative information
with respect to regulatory capital (including market
risk associated with our trading activities), summary
results of semi-annual State Street-run stress tests
which we conduct under the Dodd-Frank Act, and
resolution plan disclosures required under the Dodd-
Frank Act. These additional disclosures are
accessible on the “Investor Relations” section of our
corporate website at www.statestreet.com.
We have included our website address in this
report as an inactive textual reference only.
Information on our website is not incorporated by
reference into this Form 10-K.
We use acronyms and other defined terms for
certain business terms and abbreviations, as defined
on the acronyms list and glossary included under
Item 8, Financial Statements and Supplementary
Data, of this Form 10-K.
OVERVIEW OF FINANCIAL RESULTS
TABLE 1: OVERVIEW OF FINANCIAL RESULTS
Years Ended December 31,
(Dollars in millions, except per
share amounts)
Total fee revenue
2016
2015
2014
$ 8,116
$ 8,278
$ 8,010
Net interest revenue
2,084
2,088
2,260
Gains (losses) related to
investment securities, net
Total revenue
Provision for loan losses
Total expenses
Income before income tax expense
Income tax expense (benefit)
Net income from non-controlling
interest
Net income
Adjustments to net income:
7
(6)
4
10,207
10,360
10,274
10
8,077
2,120
(22)
1
12
8,050
2,298
318
10
7,827
2,437
415
—
—
$ 2,143
$ 1,980
$ 2,022
Dividends on preferred stock(1)
(173)
(130)
Earnings allocated to
participating securities(2)
Net income available to common
shareholders
Earnings per common share:
(2)
(2)
$ 1,968
$ 1,848
$ 1,958
(61)
(3)
Basic
Diluted
$
5.03
4.97
$
4.53
4.47
$
4.62
4.53
Average common shares
outstanding (in thousands):
Basic
Diluted
391,485
407,856
424,223
396,090
413,638
432,007
Cash dividends declared per
common share
Return on average common equity
$
1.44
$
1.32
$
1.16
10.5%
9.8%
9.8%
(1) Refer to Note 15 of the consolidated financial statements included under
Item 8, Financial Statements and Supplementary Data, of this Form 10-K for
additional information regarding our preferred stock dividends.
(2) Represents the portion of net income available to common equity allocated
to participating securities, composed of fully vested deferred director stock
and unvested restricted stock that contain non-forfeitable rights to dividends
during the vesting period on a basis equivalent to dividends paid to common
shareholders.
State Street Corporation | 55
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Continued)
The following “Highlights” and “Financial
Results” sections provide information related to
significant events, as well as highlights of our
consolidated financial results for the year ended
December 31, 2016 presented in Table 1: Overview
of Financial Results. More detailed information about
our consolidated financial results, including
comparisons of our financial results for the year
ended December 31, 2016 to those for the year
ended December 31, 2015, is provided under
“Consolidated Results of Operations,” which follows
these sections. In this Management’s Discussion and
Analysis, where we describe the effects of changes in
foreign exchange rates, those effects are determined
by applying applicable weighted average foreign
exchange rates from the relevant 2015 period to the
relevant 2016 results.
Highlights
•
In 2016, we secured new asset servicing
mandates of $1.41 trillion, of which
approximately $1.01 trillion was installed
prior to December 31, 2016 with the
remaining amount expected to be installed in
2017 or later. This does not include loss of
business which occurs from time to time or
changes in assets under custody and
administration usually from changes in
market values of customer assets or
subscriptions or redemptions from our
customer investment products. As more fully
described under "Servicing Fees" in "Line of
Business - Investment Servicing" in this
Management's Discussion and Analysis, in
2017 we were notified that one of our large
clients will move a portion of its assets
currently with State Street to another service
provider. The transition will not be fully
complete until 2018.
• On July 1, 2016, we completed our previously
announced acquisition of GE Asset
Management ("GEAM") from General Electric
Company, for a total purchase price of
approximately $485 million. This acquisition
extends our core investment management
capabilities, including in the high-growth
OCIO markets, and enhances our capabilities
in connection with the delivery of value-added
solutions to our client base. In 2016, we
incurred acquisition and restructuring costs
associated with the acquisition of
approximately $53 million and expect to incur
approximately $80 million of such costs
through 2018, including the 2016 costs.
• Excluding acquired AUM associated with the
GEAM operations of $118 billion as of
December 31, 2016, net outflows of AUM
totaled $42 billion in 2016.
• We declared aggregate common stock
dividends of $1.44 per share, totaling
approximately $559 million, in 2016.
• During 2016, we purchased approximately
21.1 million shares of our common stock at
an average per-share cost of $64.70 and an
aggregate cost of approximately $1,365
million. We have approximately $750 million
remaining under our current $1.4 billion
common stock purchase program approved
by our Board in July 2016.
Additional information with respect to
our common stock purchase program is
provided under "Capital" in "Financial
Condition" in this Management's Discussion
and Analysis.
Financial Results
• Total revenue in 2016 decreased slightly
compared to 2015, primarily due to a
decrease in processing fees and other
revenue, partially offset by increases in
management fee revenue and securities
finance revenue.
• Servicing fee revenue decreased 2% in 2016
compared to 2015, primarily due to lower
global equity markets, partially offset by
stronger net new business.
• Management fee revenue increased $118
million, or 10%, in 2016 compared to 2015,
primarily due to the impact of the acquired
GEAM business and the elimination of money
market fee waivers, partially offset by lower
global equity markets.
• Return on average common shareholders'
equity increased to 10.5% in 2016 compared
to 9.8% in 2015.
•
In 2016, we recorded restructuring charges of
$142 million related to State Street Beacon,
our multi-year transformation program to
digitize our business, deliver significant value
and innovation for our clients and lower
expenses across the organization. We expect
to achieve estimated annual pre-tax net run-
rate expense savings of $550 million by the
end of 2020, relative to 2015, all else equal,
for full effect in 2021. We generated $175
million in estimated annual year over year
pre-tax expense savings in 2016 related to
State Street Beacon, all else equal, and
expect to generate at least $140 million in
additional annual pre-tax expense savings in
2017. These savings include the effects of
the targeted staff reductions announced in
State Street Corporation | 56
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Continued)
October 2015. The full effect of the 2016
savings will be felt in 2017. Actual expenses
may increase or decrease in the future due to
other factors.
• Total expenses in 2016 were relatively flat
compared to 2015, primarily driven by
increases in compensation and employee
benefits, information systems and
communications and restructuring costs,
largely offset by decreases in professional
services expenses, securities processing
costs and lower litigation related expenses.
•
In December 2016, we incurred a pre-tax
charge of $249 million ($161 million after tax,
or $0.41 per share) associated with an
amendment of the terms of outstanding
deferred cash-settled incentive compensation
awards for employees below executive vice
president to remove continued service
requirements, thereby accelerating the future
expense that would have been recognized
over the remaining term of the awards (1 to 4
years, depending on the award) had the
continued service requirement not been
removed. The deferred portion of many of
our bonus-eligible employees' total
compensation had become disproportionate
relative to our peer organizations, hindering
our efforts to attract and retain talent. The
expense that would otherwise have been
associated with the amended awards will no
longer be reflected in future periods. We
expect that the acceleration of the expense
will financially enable us to increase the
immediate cash component of our mix of
incentive compensation in future periods
relative to what we have had in recent years
and that the impact of increased immediate
cash awards in 2017 will offset the benefit of
the acceleration of vesting that would
otherwise have been recognized in 2017.
The expense impact of future immediate and
deferred incentive compensation awards will
depend upon corporate performance and
market, regulatory, and other factors and
conditions, including the form of those
awards. The change did not affect deferred
equity-settled incentive compensation awards
(which, in the aggregate, represent a majority
of the outstanding deferred compensation
awards for the relevant employees), and we
expect that future deferred cash-settled
incentive compensation awards will retain the
continued service requirement. The payment
schedule associated with the recent deferred
cash-settled incentive compensation awards
will no longer be reflected in future periods.
CONSOLIDATED RESULTS OF OPERATIONS
This section discusses our consolidated results
of operations for 2016 compared to 2015, as well as
2015 compared to 2014, and should be read in
conjunction with the consolidated financial statements
and accompanying notes to the consolidated financial
statements included under Item 8, Financial
Statements and Supplementary Data, of this Form
10-K.
Total Revenue
TABLE 2: TOTAL REVENUE
Years Ended December 31,
2016
2015
2014
%
Change
2016
vs.
2015
%
Change
2015
vs.
2014
(Dollars in
millions)
Fee revenue:
Servicing fees
$ 5,073
$ 5,153
$ 5,108
(2)%
Management fees
1,292
1,174
1,207
10
1%
(3)
654
690
607
(5)
14
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:
445
456
477
1,099
1,146
1,084
562
90
496
309
437
174
8,116
8,278
8,010
Interest revenue
2,512
2,488
2,652
Interest expense
428
400
392
Net interest
revenue
Gains (losses)
related to
investment
securities, net
2,084
2,088
2,260
7
(6)
4
Total revenue
$10,207
$10,360
$10,274
(2)
(4)
13
(71)
(2)
1
7
—
(4)
6
14
78
3
(6)
2
(8)
nm
(1)
nm
1
nm Not meaningful
Fee Revenue
Table 2: Total Revenue, provides the breakout of
fee revenue for the years ended December 31, 2016,
2015 and 2014.
Servicing and management fees collectively
made up approximately 78% of total fee revenue in
2016, compared to approximately 76% and 79% for
2015 and 2014, respectively. 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), 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.
State Street Corporation | 57
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Continued)
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, the
geographical location in which services are provided
and other factors, may have a significant effect on our
servicing fee revenue.
Management fees are generally 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 more
sensitive to market valuations than servicing fee
revenue, as 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, 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 may reflect other
factors as well, including performance fee
arrangements, as well as our relationship pricing for
clients using multiple services.
Asset-based management fees for actively
managed products are generally charged at a higher
percentage of assets under management than for
passive products. Actively managed products may
also include performance fee arrangements which are
recorded when the performance period is complete.
Performance fees are generated when the
performance of certain managed portfolios exceeds
benchmarks specified in the management
agreements. Generally, we experience more volatility
with performance fees than with more traditional
management fees.
TABLE 3: DAILY, MONTH-END AND YEAR-END EQUITY INDICES
In light of the above, we estimate, using relevant
information as of December 31, 2016 and assuming
that all other factors remain constant, that:
• A 10% increase or decrease in worldwide
equity valuations, on a weighted average
basis, over the relevant periods for which our
servicing and management fees are
calculated, would result in a corresponding
change in our total servicing and
management fee revenues of approximately
3%; and
• A 10% increase or decrease in worldwide
fixed income markets, on a weighted average
basis, over the relevant periods for which our
servicing and management fees are
calculated, would result in a corresponding
change in our total servicing and
management fee revenues of approximately
1%.
See Table 3: Daily, Month-End and Year-End
Equity Indices, for selected equity market indices, and
see Table 4: Year-End Debt Indices, for selected debt
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, month-end averages, and year-
end indices demonstrate worldwide changes in equity
and debt 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.
Further discussion of fee revenue is provided
under “Line of Business Information” in this
Management's Discussion and Analysis.
Daily Averages of Indices
Averages of Month-End Indices
Years Ended December 31,
Years Ended December 31,
Year-End Indices
As of December 31,
2016
2015
% Change
2016
2015
% Change
2016
2015
% Change
S&P 500®
NASDAQ®
MSCI EAFE®
MSCI® Emerging Markets
2,095
4,988
1,645
835
2,061
4,946
1,809
918
2%
1
(9)
(9)
2,106
5,016
1,652
842
2,052
4,933
1,806
910
3%
2
(9)
(7)
2,239
5,383
1,684
862
2,044
5,007
1,716
794
TABLE 4: YEAR-END DEBT INDICES
Barclays Capital U.S. Aggregate Bond Index®
Barclays Capital Global Aggregate Bond Index®
1,976
451
1,925
442
As of December 31,
2016
2015
% Change
10%
8
(2)
9
3%
2
State Street Corporation | 58
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Continued)
Net Interest Revenue
See Table 2: Total Revenue, for the breakout of
interest revenue and interest expense for the years
ended December 31, 2016, 2015 and 2014. NIR was
$2,084 million for 2016 compared to $2,088 million
and $2,260 million for 2015 and 2014, respectively.
NIR 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 annualized fully taxable-equivalent net
interest revenue and average total interest-earning
assets for the period. It is calculated by dividing fully
taxable-equivalent net interest revenue by average
interest-earning assets. 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.
TABLE 5: AVERAGE BALANCES AND INTEREST RATES - FULLY TAXABLE-EQUIVALENT BASIS
(Dollars in millions; fully taxable-equivalent basis)
Interest-bearing deposits with banks
Securities purchased under resale agreements(1)
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(1)
Federal funds purchased
Other short-term borrowings
Long-term debt
Other interest-bearing liabilities
Average total interest-bearing liabilities
$ 148,263
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
2016
Interest
Revenue/
Expense
Average
Balance
$ 53,091
$
2,558
921
126
146
—
100,738
1,962
19,013
22,863
$ 199,184
$ 30,107
95,551
4,113
31
1,666
11,401
5,394
384
61
2,679
132
(47)
1
—
7
260
75
428
2,251
$
$
$
$
Years Ended December 31,
Rate
Average
Balance
2015
Interest
Revenue/
Expense
Rate
Average
Balance
2014
Interest
Revenue/
Expense
Rate
.24 % $ 69,753
$
208
.30 % $ 55,353
$
196
.35%
5.70
—
1.95
2.02
.27
1.34
3,233
1,194
62
1
105,611
2,069
17,948
22,717
$220,456
1.92
.08
1.96
1.73
.04
1.21
4,077
959
38
1
116,809
2,317
.94
.13
1.98
1.67
.05
266
7
15,912
15,944
$209,054
311
10
2,661
51
46
1
—
6
250
46
400
2,261
$
$
$
$
.44 % $ 30,819
(.05)
102,491
8,875
21
3,826
10,301
6,471
$162,804
.02
—
.40
2.29
1.39
.29
1.05 %
1.13 %
$
$
$
$
2,825
1.36
21
78
—
—
5
.10%
.07
—
—
.12
245
2.64
43
392
.59
.25
2,433
1.11%
1.16%
.16 % $ 21,296
109,003
8,817
20
4,177
9,282
7,351
$159,946
.05
.01
—
.15
2.43
.71
.25
.96 %
1.03 %
(167)
$
2,084
(173)
$
2,088
(173)
$
2,260
(1) Reflects the impact of balance sheet netting under enforceable netting agreements.
See Table 5: Average Balances and Interest
Rates - Fully Taxable-Equivalent Basis, for the
breakout of net interest revenue on a fully taxable-
equivalent basis for the years ended December 31,
2016, 2015 and 2014. Net interest revenue on a fully
taxable-equivalent basis remained flat in 2016
compared to 2015. Benefits during 2016 from the
U.S. rate hike in December 2015 were partially offset
by lower global interest rates that affected our
revenue from certain floating-rate assets, the rate at
which payments from the maturity or prepayment of
portfolio holdings could be reinvested, and the effect
of the stronger U.S. dollar. Average balances in 2016
reflect management actions to reduce the size of our
balance sheet toward the end of the third quarter of
2015. These actions contributed to the reduction of
average interest and non-interest bearing deposits of
$15 billion in 2016 compared to 2015. Additionally,
2016 net interest revenue reflects our efforts to
manage the size and composition of our investment
portfolio as we seek to optimize our capital and
liquidity positions in light of the evolving regulatory
environment.
During 2016, the effect of the stronger U.S.
dollar relative to other currencies, particularly the
GBP, also negatively impacted our net interest
revenue. The stronger U.S. dollar had the effect of
reducing fully taxable-equivalent net interest revenue
State Street Corporation | 59
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Continued)
by approximately $18 million in 2016 compared to
2015.
During 2015, the effect of the stronger U.S.
dollar relative to other currencies, particularly the
Euro, also negatively impacted our NIR, as we
maintained a portion of our investment portfolio in
Euro denominated securities. The stronger U.S. dollar
had the effect of reducing fully taxable-equivalent NIR
by approximately $54 million in 2015 compared to
2014.
We recorded aggregate discount accretion in
interest revenue of $82 million in 2016, related to the
assets we consolidated onto our balance sheet in
2009 from our asset-backed commercial paper
conduits. Subsequent to the commercial paper
conduit consolidation in 2009, we have recorded total
discount accretion in interest revenue as follows:
TABLE 6: TOTAL DISCOUNT ACCRETION IN INTEREST
REVENUE
(In millions)
Years Ended December 31,
2009
2010
2011
2012
2013
2014
2015
2016
Total discount accretion
Discount Accretion in
Interest Revenue
$
$
621
712
220
215
137
119
98
82
2,204
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 interest
revenue through 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 to our net interest revenue,
though generally in declining amounts. Assuming
that we hold them to maturity, all else being equal, we
expect the remaining former conduit securities carried
in our investment portfolio as of December 31, 2016
to generate aggregate discount accretion in future
periods of approximately $128 million over their
remaining terms, with approximately one third of this
discount accretion to be recorded through 2019. We
estimate that we will have approximately $15 million
to $25 million of discount accretion for 2017,
excluding the impact of potentially significant
unexpected prepayments.
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 17 to the consolidated financial
statements included under Item 8, Financial
Statements and Supplementary Data, of this Form
10-K.
Average total interest-earning assets were lower
in 2016 compared to 2015 as a result of the
previously described management actions.
Even though we have seen reductions in the
overall level of excess deposits during the past year,
our clients have continued to place elevated levels of
deposits with us, as central bank actions have
resulted in high levels of liquidity and low global
interest rates. We evaluate deposits as either
inherent in our relationship with our custodial clients,
which we generally invest in our investment portfolio
or excess deposits, which we generally deposit with
central banks. Deposits with central banks generate
low returns. Consequently, the elevated levels of
these transient deposits have contributed to a
reduction of our net interest margin relative to
historical levels.
The deposits with central banks are also
included in our total consolidated assets, and lower
deposit levels impact our regulatory leverage ratios.
If global interest rates increase, we would expect to
see some additional decreases in client deposits. In
general, we continue to anticipate higher levels of
client deposits when compared to longer-term
historical trends, irrespective of the interest rate
environment, particularly during periods of market
stress. If ECB monetary policy continues to pressure
European interest rates downward and the U.S. dollar
remains strong or strengthens, the negative effects
on our net interest revenue may continue or worsen.
Interest-bearing deposits with banks averaged
$53.09 billion in 2016 compared to $69.75 billion in
2015. These decreases reflect management’s effort
to reduce elevated client deposit levels as a
component of our balance sheet management
actions. These lower levels of deposits reflected our
maintenance of cash balances at the Federal
Reserve, the ECB and other non-U.S. central banks
both to satisfy regulatory reserve requirements, and
elevated levels of client deposits and our investment
of the excess deposits with central banks.
We expect to continue to invest deposits we
deem as elevated in investment securities or short-
term assets, including central bank deposits,
State Street Corporation | 60
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Continued)
depending on our assessment of the underlying
characteristics of the deposits.
Loans and leases averaged $19.01 billion in
2016 compared to $17.95 billion in 2015. The
increase in average loans and leases resulted from
growth in loans to municipalities and our continued
investment in senior secured loans, partially offset by
a reduction in mutual fund lending.
TABLE 7: U.S. AND NON-U.S. SHORT-DURATION ADVANCES
(Dollars in millions)
2016
2015
2014
Years Ended December 31,
Average U.S. short-duration
advances
Average non-U.S. short-duration
advances
Average total short-duration
advances
Average short-duration
advances to average loans and
leases
$ 2,279
$ 2,351
$ 2,355
1,355
1,404
1,512
$ 3,634
$ 3,755
$ 3,867
19%
21%
24%
Average loans and leases also includes short-
duration advances. The decline in the proportion of
average short-duration advances to average loans
and leases is primarily due to growth in the other
segments of the loan and lease portfolio. Short-
duration advances provide liquidity to clients in
support of their investment activities.
Average other interest-earning assets increased
to $22.86 billion in 2016 from $22.72 billion in 2015.
Our average other interest-earning assets, largely
associated with our enhanced custody business,
comprised approximately 12% of our average total
interest-earning assets in 2016, compared to
approximately 10% of our average total interest-
earning assets in 2015. The enhanced custody
business, which is our principal securities financing
business for our custody clients, generates securities
finance revenue. The net interest revenue earned on
these transactions is generally lower than the interest
earned on other alternative investments.
Aggregate average interest-bearing deposits
decreased to $125.66 billion in 2016 from $133.31
billion in 2015. The lower levels in 2016 were
primarily the result of management's actions to
reduce both U.S. and non-U.S. transaction accounts,
offset by increases in time deposits. Future deposit
levels will be influenced by the underlying asset
servicing business, client deposit behavior, 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
$1.67 billion in 2016 from $3.83 billion in 2015. The
decrease was the result of the phase-out of our
commercial paper program during 2015, consistent
with the objectives of our 2016 recovery and
resolution plan developed pursuant to the
requirements of the Dodd-Frank Act.
Average long-term debt increased to $11.40
billion in 2016 from $10.30 billion in 2015. The
increase primarily reflected the issuance of $3.0
billion of senior debt in August 2015 and $1.5 billion
of senior debt in May 2016, which was partially offset
by a $900 million extendible note called at the end of
February 2015 and the maturities of $200 million of
senior debt in December 2015, $400 million of senior
debt in January 2016 and $1.0 billion of senior debt in
March 2016.
Average other interest-bearing liabilities were
$5.39 billion in 2016 compared to $6.47 billion in
2015, primarily the result of changes in the level of
cash collateral received from clients in connection
with our enhanced custody business, which is
presented on a net basis in accordance with
enforceable netting agreements.
Several factors could affect future levels of our
net interest revenue and margin, including the volume
and 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; the yields earned on securities
purchased compared to the yields earned on
securities sold or matured; and changes in our
enhanced custody business.
Based on market conditions and other factors,
including regulatory requirements, 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, municipal 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, the implementation of
regulatory standards, and other factors over time.
We expect these factors and the levels of global
interest rates to influence what effect our
reinvestment program will have on future levels of our
net interest revenue and net interest margin.
Provision for Loan Losses
We recorded a provision for loan losses of $10
million in 2016 compared to $12 million in 2015 and
$10 million in 2014. The provisions in these periods
were recorded in connection with our exposure to
non-investment grade borrowers composed of senior
secured loans, which we purchased in connection
with our participation in loan syndications in the non-
investment grade lending market. Additional
information about these senior secured loans is
State Street Corporation | 61
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Continued)
provided under “Loans and Leases” in "Financial
Condition" in this Management's Discussion and
Analysis and in Note 4 to the consolidated financial
statements included under Item 8, Financial
Statements and Supplementary Data, of this Form
10-K.
Expenses
Table 8: Expenses provides the breakout of
expenses for the years ended December 31, 2016,
2015 and 2014.
TABLE 8: EXPENSES
Years Ended December 31,
(Dollars in millions)
2016
2015
2014
%
Change
2016
vs.
2015
%
Change
2015
vs.
2014
$ 4,353
$ 4,061
$ 4,060
7%
—%
Compensation and
employee benefits
Information systems and
communications
Transaction processing
services
Occupancy
Acquisition costs
Restructuring charges,
net
Other:
Professional services
Amortization of other
intangible assets
Securities processing
costs
Regulatory fees and
assessments
Other
Total other
1,105
1,022
800
440
69
140
379
207
42
82
460
793
444
20
5
490
197
79
115
824
976
784
461
58
75
440
222
68
74
609
1,170
1,705
1,413
8
1
(1)
245
nm
(23)
5
(47)
(29)
(44)
(31)
—
5
1
(4)
(66)
(93)
11
(11)
16
55
35
21
3
Total expenses
$ 8,077
$ 8,050
$ 7,827
Number of employees at
year-end
33,783
32,356
29,970
nm Not meaningful
Compensation and employee benefits expenses
increased 7% in 2016 compared to 2015. The
increase was primarily due to costs associated with
the acceleration of expense related to certain cash
settled deferred incentive compensation awards,
costs associated with the acquired GEAM business,
and higher costs to support regulatory initiatives and
new business, partially offset by State Street Beacon
savings, the benefit of the stronger U.S. dollar, and
lower employee benefit costs due to benefit
eliminations for post-retirement medical/life expense.
In December 2016, we recorded a pre-tax
charge of $249 million ($161 million after tax)
associated with an amendment of the terms of
outstanding deferred cash-settled incentive
compensation awards for employees below executive
vice president to remove continued service
requirements, thereby accelerating the future
expense that would have been recognized over the
remaining term of the awards had the continued
service requirement not been removed.
Compensation and employee benefits expenses
were flat in 2015 compared to 2014.
Information systems and communications
expenses increased 8% in 2016 compared to 2015.
The increase was primarily related to investments
supporting new business and State Street Beacon,
the impact of the acquired GEAM business, and costs
related to regulatory initiatives.
Information systems and communications
increased 5% in 2015 compared to 2014. The
increase was primarily related to $31 million in
additional depreciation costs supporting investments
associated with regulatory compliance initiatives and
costs to support new business.
Other expenses decreased 31% in 2016
compared to 2015. The decrease was primarily due
to lower litigation-related expenses and higher
expenses in 2015 associated with the previously
disclosed expense billing matter.
Other expenses increased 21% in 2015
compared to 2014. The increase was primarily due to
higher legal accruals and regulatory fees, partially
offset by a decrease in amortization of intangible
assets due to a write off of intangible assets in 2014.
Our compliance obligations have increased due
to new regulations in the U.S. and internationally that
have been adopted or proposed in response to the
2008 financial crisis. As a systemically important
financial institution, we are subject to enhanced
supervision and prudential standards. Our status as
a G-SIB has also resulted in heightened prudential
and conduct expectations of our U.S. and
international regulators with respect to our capital and
liquidity management and our compliance and risk
oversight programs. These heightened expectations
have increased our regulatory compliance costs,
including personnel and systems, as well as
significant additional implementation and related
costs to enhance our regulatory compliance
programs. We anticipate that these evolving and
increasing regulatory compliance requirements and
expectations, including our efforts to complete our
2017 resolution plan (due to be submitted on July 1,
2017), as discussed under "Liquidity Risk
Management" in "Financial Condition" included in this
Management's Discussion and Analysis, will continue
to affect our expenses. Our employee compensation
and benefits, information systems and other
expenses could increase, as we further adjust our
operations in response to new or proposed
requirements and heightened expectations.
State Street Corporation | 62
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Continued)
The following table presents aggregate
restructuring activity for the periods indicated.
TABLE 9: RESTRUCTURING CHARGES
(In millions)
Balance at December 31,
2013
Accruals for Business
Operations and IT
Payments and other
adjustments
Balance at December 31,
2014
Accruals for Business
Operations and IT
Payments and other
adjustments
Balance at December 31,
2015
Accruals for Business
Operations and IT
Accruals for State Street
Beacon
Payments and other
adjustments
Employee
Related
Costs
Real Estate
Consolidation
Asset
and
Other
Write-offs
Total
$
52
$
47
$
7
$
106
32
(45)
22
(46)
21
75
(21)
(112)
$
39
$
23
$
7
$
69
(5)
(25)
(3)
(9)
13
5
(17)
(51)
$
9
$
11
$
3
$
23
(2)
94
(64)
—
18
—
30
(2)
142
(12)
(31)
(107)
Balance at December 31,
2016
$
37
$
17
$
2
$
56
Acquisition Costs
We recorded acquisition costs of $69 million,
$20 million and $58 million in 2016, 2015 and 2014,
respectively. In 2016, approximately $53 million of
such costs related to our acquisition of GEAM on July
1, 2016. As we integrate GEAM's operations into our
business, we expect to incur total merger and
integration costs of approximately $80 million through
2018. For further information on the GEAM
acquisition, refer to Note 1 to the consolidated
financial statements included under Item 8, Financial
Statements and Supplementary Data, of this Form
10-K.
Restructuring Charges
In October 2015, we announced State Street
Beacon, a multi-year program to create cost
efficiencies through changes in our operational
processes and to further digitize our processes and
interfaces with our clients. In connection with State
Street Beacon, we expect to incur aggregate pre-tax
restructuring charges of approximately $300 million to
$400 million beginning in 2016 through December 31,
2020 to implement State Street Beacon. We estimate
those charges will include approximately $250 million
to $300 million in severance and benefits costs
associated with targeted staff reductions (a
substantial portion of which will result in future cash
expenditures) and approximately $50 million to $100
million in information technology application
rationalization and real estate actions. We expect to
achieve estimated annual pre-tax net run-rate
expense savings of $550 million by the end of 2020,
relative to 2015, all else equal, for full effect in 2021.
Actual expenses may increase or decrease in the
future due to other factors.
In 2016, we recorded restructuring charges of
$142 million related to State Street Beacon.
State Street Corporation | 63
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Continued)
Income Tax Expense
Investment Servicing
Income tax expense (benefit) was $(22) million
in 2016 compared to $318 million in 2015. Our
effective tax rate in 2016 was (1.0)% compared to
13.8% in 2015. The 2016 benefit included a reduction
in accrued tax expense attributable to retained foreign
earnings and tax benefits from capital actions
involving our overseas affiliates.
Income tax expense was $318 million in 2015
compared to $415 million in 2014. The decrease in
tax expense was primarily due to deductions for
litigation expense recorded in 2015. Our effective tax
rate in 2015 was 13.8% compared to 17.1% in 2014
and included effects of the approval of a tax refund
for prior years and the reduction of $61 million for an
Italian deferred tax liability, partially offset by a
change in New York tax law.
Additional information regarding income tax
expense, including unrecognized tax benefits, and tax
contingencies are provided in Notes 22 and 13, to the
consolidated financial statements under Item 8,
Financial Statements and Supplementary Data, of
this Form 10-K.
LINE OF BUSINESS INFORMATION
Our operations are organized into two lines of
business: Investment Servicing and Investment
Management, which are defined based on products
and services provided. 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. For
information about our two lines of business, as well
as the revenues, expenses and capital allocation
methodologies associated with them, refer to Note 24
to the consolidated financial statements included
under Item 8, Financial Statements and
Supplementary Data, in this Form 10-K.
TABLE 10: INVESTMENT SERVICING LINE OF BUSINESS
RESULTS
Years Ended December 31,
(Dollars in millions,
except where
otherwise noted)
2016
2015
2014
%
Change
2016
vs.
2015
%
Change
2015
vs.
2014
Servicing fees
$ 5,073
$ 5,153
$ 5,108
(2)%
1%
Trading services
1,052
1,108
1,039
Securities finance
Processing fees and
other
Total fee revenue
Net interest revenue
Gains (losses)
related to
investment
securities, net
Total revenue
Provision for loan
losses
562
105
6,792
2,081
496
325
7,082
2,086
437
179
6,763
2,245
7
(6)
4
8,880
9,162
9,012
10
12
10
Total expenses
6,660
6,990
6,648
(5)
13
(68)
(4)
—
nm
(3)
(17)
(5)
Income before
income tax
expense
Pre-tax margin
Average assets
(in billions)
nm Not meaningful
$ 2,210
$ 2,160
$ 2,354
2
25%
24%
26%
$ 225.3
$ 246.6
$ 234.2
7
14
82
5
(7)
nm
2
20
5
(8)
Net interest revenue remained flat in 2016
compared to 2015, as discussed under “Net Interest
Revenue" in “Consolidated Results of Operations -
Total Revenue" in this Management's Discussion and
Analysis.
Total expenses decreased 5% in 2016
compared to 2015, as discussed in more detail under
"Expenses" in "Consolidated Results of Operations"
included in this Management's Discussion and
Analysis and Note 21 to the consolidated financial
statements included under Item 8, Financial
Statements and Supplementary Data, of this Form
10-K.
In December 2015, we announced a review of
the manner in which we invoiced certain expenses to
certain of our Investment Servicing clients, primarily
in the United States, during a period going back to
1998. We have informed our clients that we will pay
to them the expenses we concluded were incorrectly
invoiced to them, plus interest. In conjunction with
that review, which is ongoing, we are implementing
enhancements to our billing processes and reviewing
the conduct of our employees and have taken
appropriate steps to address conduct inconsistent
with our standards, including, in some cases,
termination of employment. We are also evaluating
other aspects of invoicing relating to billing our
Investment Servicing clients, including calculation of
asset-based fees. See Note 13 to the consolidated
financial statements included under Item 8, Financial
Statements and Supplementary Data, of this Form
10-K.
State Street Corporation | 64
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Continued)
Servicing Fees
Servicing fees decreased 2% in 2016 compared
to 2015, primarily due to lower international market
levels, net redemptions in the hedge funds that we
service, and the effect of the strong U.S. dollar,
partially offset by net new business.
Servicing fees generated outside the U.S. were
approximately 42% of total servicing fees in each of
2016, 2015, and 2014.
TABLE 11: COMPONENTS OF ASSETS UNDER CUSTODY AND ADMINISTRATION
As of December 31,
(Dollars in billions)
2016
2015
2014
2013
2012
Mutual funds
$
6,841
$
6,768
$
6,992
$
6,811
$
Collective funds
Pension products
Insurance and other
products
Total
7,501
5,584
8,845
7,088
5,510
8,142
6,949
5,746
8,501
6,428
5,851
8,337
$
28,771
$
27,508
$
28,188
$
27,427
$
5,852
5,363
5,339
7,817
24,371
2015-2016 Annual
Growth Rate
2012-2016 Compound
Annual Growth Rate
1%
6
1
9
5
4%
9
1
3
4
TABLE 12: COMPOSITION OF ASSETS UNDER CUSTODY AND ADMINISTRATION
As of December 31,
(Dollars in billions)
2016
2015
2014
2013
2012
Equities
Fixed-income
Short-term and other
investments
Total
$
$
15,833
$
14,888
$
15,876
$
15,050
$
9,665
3,273
9,264
3,356
8,739
3,573
9,072
3,305
28,771
$
27,508
$
28,188
$
27,427
$
12,276
8,885
3,210
24,371
2015-2016 Annual
Growth Rate
2012-2016 Compound
Annual Growth Rate
6%
4
(2)
5
7%
2
—
4
TABLE 13: GEOGRAPHIC MIX OF ASSETS UNDER CUSTODY AND ADMINISTRATION(1)
(In billions)
North America
Europe/Middle East/Africa
Asia/Pacific
Total
As of December 31,
2016
2015
2014
2013
2012
$
$
21,544
$
20,842
$
21,217
$
20,764
$
5,734
1,493
5,387
1,279
5,633
1,338
5,511
1,152
28,771
$
27,508
$
28,188
$
27,427
$
18,463
4,801
1,107
24,371
(1) Geographic mix is based on the location in which the assets are serviced.
The increase in total assets under custody and
As a result of a decision to diversify providers,
administration as of December 31, 2016 compared to
December 31, 2015 primarily resulted from stronger
net new business and strengthening U.S. equity
markets. Asset levels as of December 31, 2016 did
not reflect the estimated $440 billion of new business
in assets to be serviced, which was awarded to us in
2016 and prior periods but not installed prior to
December 31, 2016. This new business will be
reflected in AUCA in future periods after installation
and will generate servicing fee revenue in subsequent
periods.
With respect to these new assets, we will
provide various services, 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.
one of our large clients will move a portion of its
assets, largely common trust funds, currently with
State Street to another service provider. We expect to
remain a significant service provider to this client. The
transition will not be fully complete until 2018 and
represents approximately $1 trillion in assets with
respect to which we will no longer derive revenue
post-transition.
State Street Corporation | 65
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Continued)
Trading Services
TABLE 14: TRADING SERVICES REVENUE
Years Ended December 31,
(Dollar in millions)
2016
2015
2014
%
Change
2016
vs.
2015
%
Change
2015
vs.
2014
Foreign exchange
trading:
Direct sales and
trading
Indirect foreign
exchange trading
Total foreign
exchange trading
Brokerage and other
trading services:
Electronic foreign
exchange services
Other trading,
transition
management and
brokerage
Total brokerage and
other trading services
Total trading services
revenue
$ 386
$ 410
$ 361
(6)%
14%
268
654
280
690
246
607
(4)
(5)
14
14
169
175
181
(3)
(3)
229
398
243
418
251
432
$ 1,052
$ 1,108
$ 1,039
(6)
(5)
(5)
(3)
(3)
7
Trading services revenue is composed of
revenue generated by FX trading, as well as revenue
generated by brokerage and other trading services as
noted in Table 14: Trading Services Revenue.
Foreign Exchange Trading Revenue
We primarily 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,” “indirect
FX trading” and “electronic FX services.” With
respect to electronic FX services, 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 generally
differentiated by our role as an agent of the
institutional investor. Revenue earned from these
services is recorded in other trading, transition
management and brokerage revenue within
brokerage and other trading services revenue.
Our FX trading revenue is influenced by multiple
factors, including: the volume and type of client FX
transactions and related spreads; currency volatility,
reflecting market conditions; and our management of
exchange rate, interest rate and other market risks
associated with our foreign exchange activities. The
relative impact of these factors on our total FX trading
revenues often differs from period to period. For
example, assuming all other factors remain constant,
increases or decreases in volumes or spreads across
product mix tend to result in increases or decreases,
as the case may be, in client-related FX revenue.
Revenue earned from direct sales and trading and
indirect FX trading is recorded in FX trading revenue.
Total FX trading revenue decreased 5% in 2016
compared to 2015, primarily due to lower volumes. In
2015, significant market events in Europe and China
stimulated trading activity, in contrast to 2016, which
included reduced trading volumes during the first half
of 2016 in advance of the U.K.'s referendum to exit
from the European Union, or "Brexit." These
decreases were partially offset by greater volumes
and market-making activity in the fourth quarter of
2016 following the U.S. Presidential election. Total
FX trading revenue comprises:
•
• Direct sales and trading: 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” and it includes
many transactions for funds serviced by third
party custodians or prime brokers, as well as
those funds under custody at State Street.
Direct sales and trading revenue represented
59% of total foreign exchange trading
revenue in 2016 and 2015. Our direct sales
and trading revenue decreased by 6% in
2016 compared to 2015. The decrease is
primarily due to lower volumes.
Indirect FX trading: 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 trading” and, in all
cases, we are the funds' custodian. We
execute indirect FX trades as a principal at
rates disclosed to our clients. Estimated
indirect sales and trading revenue
represented 41% of total foreign exchange
trading revenue in 2016 and 2015. We
calculate revenue for indirect FX trading
using an attribution methodology. This
methodology takes into consideration
estimated mark-ups/downs and observed
client volumes. Direct sales and trading
revenue is all other FX trading revenue other
than the revenue attributed to indirect FX
trading. Our estimated indirect FX trading
revenue decreased 4% in 2016 compared to
2015. The decrease mainly resulted from
lower volumes.
Our clients that utilize indirect FX trading can, in
addition to executing their FX transactions through
dealers not affiliated with us, transition from indirect
FX trading to either direct sales and trading
execution, including our “Street FX” service, or to one
State Street Corporation | 66
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Continued)
of our electronic trading platforms. Street FX, in
which we continue to act as a principal market-maker,
enables our clients to define their FX execution
strategy and automate the FX trade execution
process, both for funds under custody with us as well
as those under custody at another bank.
We continue to expect that some clients may
choose, over time, to reduce their level of indirect FX
trading transactions in favor of other execution
methods, including either direct sales and trading
transactions or electronic FX services 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 FX trading revenue increased 14% in 2015
compared to 2014, primarily the result of stronger
market-making revenue and higher client volumes.
Total brokerage and other trading services
revenue decreased 5% in 2016 compared to 2015.
Total brokerage and other trading services revenue
comprises:
• Electronic FX services: Our clients may
choose to execute FX transactions through
one of our electronic trading platforms.
These transactions generate revenue through
a “click” fee. Revenue from such electronic
FX services decreased 3% in 2016 compared
to 2015.
• Other trading, transition management and
brokerage revenue: Decreased 6% in 2016
compared to 2015, primarily due to lower
revenues resulting from the sale of WM/
Reuters in the second quarter of 2016.
Total brokerage and other trading services
revenue decreased 3% in 2015 compared to 2014,
primarily due to a decrease in transition management
revenue, partially offset by an increase in other
trading revenue.
In recent years, our transition management
revenue was adversely affected by compliance issues
in our U.K. business during 2010 and 2011, including
settlements with the FCA in 2014 and the DOJ in
2017, the latter including a deferred prosecution
agreement. The reputational and regulatory impact of
those compliance issues continues and may
adversely affect our results in future periods. See
Note 13 to the consolidated financial statements
included under Item 8, Financial Statements and
Supplementary Data, of this Form 10-K.
Securities Finance
Our securities finance business consists of three
components:
(1) 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;
(2) an agency lending program for third-party
investment managers and asset owners, which we
refer to as the agency lending funds; and
(3) security lending transactions which we enter
into as principal, which we refer to as our enhanced
custody business.
See Table 10: Investment Servicing Line of
Business Results, for the comparison of securities
finance revenue in 2016, 2015 and 2014.
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.
As principal, our enhanced custody business
borrows securities from the lending client and then
lends such securities to the subsequent borrower,
either a State Street client or a broker/dealer. We act
as principal when the lending client is unable to, or
elects not to, transact directly with the market and
execute the transaction and furnish the securities. In
our role as principal, we provide support to the
transaction through our credit rating. While we
source a significant proportion of the securities
furnished by us in our role as principal from third
parties, we have the ability to source securities
through our assets under custody and administration
from clients who have designated State Street as an
eligible borrower.
Securities finance revenue increased 13% in
2016 compared to 2015. Securities finance revenue
increased 14% in 2015 compared to 2014. The
increases in both years were primarily the result of
growth in our enhanced custody business.
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, the
constantly evolving regulatory environment may affect
the volume of our securities lending activity and
related revenue and profitability in future periods.
State Street Corporation | 67
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Continued)
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,
derivative financial instruments to support our clients'
needs and to manage our interest-rate and currency
risk, and amortization of our tax-advantaged
investments.
Processing fees and other revenue, presented in
Table 10: Investment Servicing Line of Business
Results, decreased 68% in 2016 compared to 2015.
The decrease was primarily due to a gain from the
sale of commercial real estate and a gain from the
final paydown of a commercial real estate loan in
2015, increased amortization related to the tax
advantaged investment business, unfavorable
valuation adjustments, and lower earnings from
equity method investments. The decrease was
partially offset by a pre-tax gain of $53 million on the
sale of WM/Reuters in 2016.
Processing fees and other revenue increased
82% in 2015 compared to 2014. The increase was
primarily due to the above noted commercial real
estate sale and loan paydown.
Investment Management
TABLE 15: INVESTMENT MANAGEMENT LINE OF BUSINESS
RESULTS
Years Ended December 31,
(Dollars in millions,
except where
otherwise noted)
2016
2015
2014
Management fees
$ 1,292
$ 1,174
$ 1,207
%
Change
2016
vs.
2015
%
Change
2015
vs.
2014
10%
24
(3)%
(16)
(6)
11
50
11
27
nm
(4)
(87)
(5)
—
47
(15)
38
(16)
45
(5)
1,324
1,196
1,247
3
1,327
1,218
2
1,198
962
15
1,262
960
$ 109
$ 236
$ 302
(54)
(22)
8%
20%
24%
$
4.4
$
3.9
$
3.9
Trading services
Processing fees
and other
Total fee revenue
Net interest
revenue
Total revenue
Total expenses
Income before
income tax
expense
Pre-tax margin
Average assets
(in billions)
nm Not meaningful
Total revenue for our Investment Management
Line of Business, presented in Table 15: Investment
Management Line of Business Results, increased
11% in 2016 compared to 2015. Total fee revenue
increased 11% in 2016 compared to 2015.
Total revenue and total fee revenue decreased
5% and 4%, respectively, in 2015 compared to 2014.
Total expenses increased in 2016 compared to
2015 primarily due to the incremental costs related to
the acquisition of GEAM on July 1, 2016, in addition
to the 2016 charge associated with an amendment of
the terms of outstanding deferred cash-settled
incentive compensation awards for employees below
executive vice president to remove continued service
requirements, thereby accelerating the future
expense that would have been recognized over the
remaining term of the awards had the continued
service requirement not been removed. These
increases were partially offset by savings related to
State Street Beacon.
For further information about expenses, refer to
"Expenses" in “Consolidated Results of Operations”
included in this Management's Discussion and
Analysis and Note 21 to the consolidated financial
statements included under Item 8, Financial
Statements and Supplementary Data, of this Form
10-K.
In July 2016, we completed our acquisition of
GEAM in a cash transaction with a total purchase
price of approximately $485 million. AUM associated
with the acquired GEAM operations totaled $118
billion as of December 31, 2016. Our consolidated
financial statements include the operating results for
the acquired business from the date of acquisition,
July 1, 2016.
Management Fees
Through SSGA, we provide a broad range of
investment management strategies, specialized
investment management advisory services, OCIO
and other financial services for corporations, public
funds, and other sophisticated investors. SSGA
offers an 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.
Management fees increased 10% in 2016
compared to 2015, primarily due to the acquired
GEAM operations for the second half of 2016 and a
decline in money market fee waivers, partially offset
by weaker international markets and the effect of the
strong U.S. dollar.
Management fees decreased 3%, in 2015
compared to 2014, primarily due to the stronger U.S.
dollar, offset by net new business.
State Street Corporation | 68
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Continued)
Management fees generated outside the U.S. were approximately 32% of total management fees in 2016
compared to 35% and 37% in 2015 and 2014, respectively.
TABLE 16: ASSETS UNDER MANAGEMENT BY ASSET CLASS AND INVESTMENT APPROACH
As of December 31,
(Dollars in billions)
2016
2015
2014
2013
2012
2015-2016 Annual
Growth Rate
2012-2016
Compound Annual
Growth Rate
Equity:
Active
Passive
Total Equity
Fixed-Income:
Active
Passive
Total Fixed-Income
Cash(1)
Multi-Asset-Class Solutions:
Active
Passive
Total Multi-Asset-Class Solutions
Alternative Investments(2):
Active
Passive
Total Alternative Investments
$
73
$
32
$
39
$
42
$
1,401
1,474
1,294
1,326
1,436
1,475
1,334
1,376
70
308
378
333
19
107
126
28
129
157
18
294
312
368
17
86
103
17
119
136
17
302
319
399
30
97
127
17
111
128
16
311
327
385
23
110
133
14
110
124
45
1,047
1,092
17
325
342
369
23
94
117
18
148
166
Total
$
2,468
$
2,245
$
2,448
$
2,345
$
2,086
128%
8
11
289
5
21
(10)
12
24
22
65
8
15
10
13%
8
8
42
(1)
3
(3)
(5)
3
2
12
(3)
(1)
4
(1) Includes both floating- and constant-net-asset-value portfolios held in commingled structures or separate accounts.
(2) 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.
TABLE 17: EXCHANGE - TRADED FUNDS BY ASSET CLASS(1)(2)
As of December 31,
(Dollars in billions)
Alternative Investments(2)
2016
2015
2014
2013
2012
$
42
$
34
$
38
$
39
$
Cash
Equity
Fixed-income
2
426
51
3
350
41
1
388
39
1
325
34
Total Exchange-Traded Funds
$
521
$
428
$
466
$
399
$
(1) ETFs are a component of assets under management presented in the preceding table.
(2) Includes SPDR® Gold Fund, for which State Street is not the investment manager, but acts as distribution agent.
TABLE 18: GEOGRAPHIC MIX OF ASSETS UNDER MANAGEMENT(1)
2015-2016 Annual
Growth Rate
2012-2016
Compound Annual
Growth Rate
79
1
227
30
337
24%
(33)
22
24
22
(In billions)
North America
Europe/Middle East/Africa
Asia/Pacific
Total
2016
2015
2014
2013
2012
As of December 31,
$
$
1,691
$
1,452
$
1,568
$
1,456
$
482
295
489
304
559
321
560
329
2,468
$
2,245
$
2,448
$
2,345
$
(1) Geographic mix is based on client location or fund management location.
(15)%
19
17
14
12
1,288
480
318
2,086
State Street Corporation | 69
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Continued)
TABLE 19: ACTIVITY IN ASSETS UNDER MANAGEMENT BY PRODUCT CATEGORY
(In billions)
Equity
Fixed-
Income
Cash(2)
Multi-Asset-
Class Solutions
Alternative
Investments(3)
Total
Balance as of December 31, 2013
$
1,376
$
327
$
385
$
133
$
124
$
2,345
Long-term institutional inflows(1)
Long-term institutional outflows(1)
Long-term institutional flows, net
ETF flows, net
Cash fund flows, net
Total flows, net
Market appreciation
Foreign exchange impact
Total market/foreign exchange impact
Balance as of December 31, 2014
Long-term institutional inflows(1)
Long-term institutional outflows(1)
Long-term institutional flows, net
ETF flows, net
Cash fund flows, net
Total flows, net
Market appreciation
Foreign exchange impact
Total market/foreign exchange impact
Balance as of December 31, 2015
Long-term institutional inflows(1)
Long-term institutional outflows(1)
Long-term institutional flows, net
ETF flows, net
Cash fund flows, net
Total flows, net
Market appreciation
Foreign exchange impact
Total market/foreign exchange impact
Acquisitions and transfers(4)
285
(297)
(12)
31
—
19
113
(33)
80
1,475
277
(363)
(86)
(29)
—
(115)
(13)
(21)
(34)
1,326
244
(301)
(57)
37
—
(20)
140
(10)
130
38
80
(103)
(23)
5
—
(18)
27
(17)
10
319
62
(70)
(8)
5
—
(3)
3
(7)
(4)
312
90
(96)
(6)
9
—
3
10
(3)
7
56
—
—
—
—
19
19
—
(5)
(5)
399
—
—
—
1
(27)
(26)
—
(5)
(5)
368
—
—
—
—
(37)
(37)
—
(2)
(2)
4
43
(35)
8
—
—
8
(9)
(5)
(14)
127
51
(59)
(8)
—
—
(8)
(12)
(4)
(16)
103
48
(34)
14
—
—
14
9
(3)
6
3
13
(11)
2
(2)
—
—
11
(7)
4
128
33
(31)
2
(1)
—
1
16
(9)
7
136
13
(21)
(8)
6
—
(2)
14
(2)
12
11
421
(446)
(25)
34
19
28
142
(67)
75
2,448
423
(523)
(100)
(24)
(27)
(151)
(6)
(46)
(52)
2,245
395
(452)
(57)
52
(37)
(42)
173
(20)
153
112
Balance as of December 31, 2016
$
1,474
$
378
$
333
$
126
$
157
$
2,468
(1) Amounts represent long-term portfolios, excluding ETFs.
(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.
(4) Includes assets under management acquired as part of the acquisition of GEAM on July 1, 2016.
The preceding table does not include approximately $9 billion of new asset management business which was
awarded but not installed as of December 31, 2016. New business will be reflected in AUM in future periods after
installation, and will generate management fee revenue in subsequent periods. Total AUM as of December 31,
2016 included managed assets lost but not 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.
State Street Corporation | 70
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Continued)
FINANCIAL CONDITION
TABLE 20: AVERAGE STATEMENT OF CONDITION(1)
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 resulting from client
initiated transactions are invested in assets that
generally have contractual maturities significantly
longer than our liabilities; however, we evaluate the
operational nature of our deposits and seek to
maintain appropriate short-term liquidity of those
liabilities that are not operational in nature and
maintain longer-termed assets for our operational
deposits. 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.
Years Ended December 31,
2016
2015
2014
Average
Balance
Average
Balance
Average
Balance
(In millions)
Assets:
Interest-bearing deposits with banks
$ 53,091
$ 69,753
$ 55,353
Securities purchased under resale
agreements
Trading account assets
2,558
921
3,233
1,194
4,077
959
Investment securities
100,738
105,611
116,809
Loans and leases
Other interest-earning assets
Average total interest-earning
assets
19,013
22,863
17,948
22,717
15,912
15,944
199,184
220,456
209,054
Cash and due from banks
3,157
2,460
4,139
Other non-interest-earning assets
27,386
27,516
24,908
Average total assets
$ 229,727
$ 250,432
$ 238,101
Liabilities and shareholders’ equity:
Interest-bearing deposits:
U.S.
Non-U.S.
$ 30,107
$ 30,819
$ 21,296
95,551
102,491
109,003
Total interest-bearing deposits
125,658
133,310
130,299
Securities sold under repurchase
agreements
4,113
8,875
8,817
Federal funds purchased
31
21
Other short-term borrowings
1,666
3,826
Long-term debt
11,401
10,301
Other interest-bearing liabilities
5,394
6,471
20
4,177
9,282
7,351
Average total interest-bearing
liabilities
Non-interest-bearing deposits
Other non-interest-bearing liabilities
Preferred shareholders’ equity
148,263
162,804
159,946
44,827
14,742
3,060
51,675
14,626
2,418
44,041
12,935
1,181
Common shareholders’ equity
18,835
18,909
19,998
Average total liabilities and
shareholders’ equity
$ 229,727
$ 250,432
$ 238,101
(1) Additional information about our average statement of condition, primarily
our interest-earning assets and interest-bearing liabilities, is included under
"Net Interest Revenue" in “Consolidated Results of Operations - Total
Revenue ” in this Management's Discussion and Analysis.
State Street Corporation | 71
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Continued)
Investment Securities
TABLE 21: CARRYING VALUES OF INVESTMENT
SECURITIES
(In millions)
Available-for-sale:
U.S. Treasury and federal agencies:
As of December 31,
2016
2015
2014
Direct obligations
$
4,263
$
5,718
$
10,655
Mortgage-backed securities
13,257
18,165
20,714
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
5,596
1,351
272
905
7,176
1,341
419
1,764
12,460
3,053
951
4,145
8,124
10,700
20,609
6,535
2,516
5,836
5,613
20,500
10,322
2,593
2,469
42
3
409
16
7,071
3,267
4,355
4,834
19,527
9,746
2,987
2,624
39
3
542
19
9,606
3,226
3,909
5,428
22,169
10,820
5,339
4,109
39
2
449
8
$
61,998
$
70,070
$
94,913
Held-to-maturity(2):
U.S. Treasury and federal agencies:
Direct obligations
$
17,527
$
20,878
$
5,114
Mortgage-backed securities
10,334
610
62
Additional information about our investment
securities portfolio is provided in Note 3 to the
consolidated financial statements included under Item
8, Financial Statements and Supplementary Data, of
this Form 10-K.
We manage our investment securities portfolio
to align with the interest-rate and duration
characteristics of our client liabilities that we consider
to be operational deposits 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.
In the fourth quarter of 2016, $4.9 billion of
Agency MBS and Student Loan ABS previously
classified as AFS were transferred to HTM and in the
fourth quarter of 2015, $7.1 billion of U.S. Treasuries
previously classified as AFS were transferred to HTM.
Both transfers reflect our intent to hold these
securities until their maturity. These securities were
transferred at fair value, which included a net
unrealized gain of $87 million and $89 million as of
December 31, 2016 and 2015, respectively, within
accumulated other comprehensive loss which will be
accreted into interest income over the remaining life
of the transferred security (ranging from
approximately 7 to 49 years).
Approximately 91% of the carrying value of the
portfolio was rated “AAA” or “AA” as of December 31,
2016 and 92% as of December 31, 2015.
TABLE 22: INVESTMENT PORTFOLIO BY EXTERNAL CREDIT
RATING
December 31, 2016
December 31, 2015
Asset-backed securities:
Student loans(1)
Credit cards
Other
Total asset-backed
securities
Non-U.S. debt securities:
2,883
1,592
1,814
897
35
897
366
897
577
AAA(1)
AA
A
BBB
3,815
2,855
3,288
Below BBB
78%
13
5
3
1
100%
80%
12
5
2
1
100%
Mortgage-backed securities
1,150
Asset-backed securities
Government securities
Other
Total non-U.S. debt
securities
State and political subdivisions
Collateralized mortgage
obligations
Total
531
286
113
2,080
—
1,413
2,202
1,415
239
65
3,921
1
1,687
3,787
2,868
154
72
6,881
9
2,369
$
35,169
$
29,952
$
17,723
(1) Primarily composed of securities guaranteed by the federal government
with respect to at least 97% of defaulted principal and accrued interest on
the underlying loans.
(2) At amortized cost or fair value on the date of transfer from available-for-
sale.
(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, 2016, the investment
portfolio of 12,080 securities was diversified with
respect to asset class. Approximately 52% of the
aggregate carrying value of the portfolio as of
December 31, 2016 was composed of mortgage-
backed and asset-backed securities, compared to
51% as of December 31, 2015. The asset-backed
securities portfolio, of which approximately 93% and
92% of the carrying value as of December 31, 2016
and December 31, 2015, respectively, was floating-
rate, consisted primarily of student loan-backed and
credit card-backed securities. Mortgage-backed
State Street Corporation | 72
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Continued)
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 Volcker rule. The
Volcker rule will prohibit banking entities, including us
and our affiliates, from engaging in certain prohibited
proprietary trading activities, as defined in the final
Volcker rule regulations, subject to exemptions for
market making-related activities, risk-mitigating
hedging, underwriting and certain other activities.
The Volcker rule will require banking entities to either
restructure or divest certain ownership interests in,
and relationships with, covered funds (as such terms
are defined in the final Volcker rule regulations).
The Volcker rule became effective in July 2012,
and the final implementing regulations became
effective in April 2014. Under a 2016 conformance
period extension issued by the Federal Reserve, all
investments in and relationships with investments in a
covered fund made or entered into after December
31, 2013 by a banking entity and its affiliates, and all
proprietary trading activities of those entities, were
required to be in conformance with the Volcker rule
and its final implementing regulations by July 21,
2016. On July 7, 2016, the Federal Reserve
announced a final one-year extension of the general
conformance period for banking entities to conform
ownership interests in and relationships with legacy
covered funds to July 21, 2017.
Whether certain types of investment securities
or structures such as CLOs constitute covered funds,
as defined in the final Volcker rule regulations, and do
not benefit from the exemptions provided in the
Volcker rule, and whether a banking organization's
investments therein constitute ownership interests
remain subject to (1) market, and ultimately
regulatory, interpretation, and (2) the specific terms
and other characteristics relevant to such investment
securities and structures.
As of December 31, 2016, we held
approximately $972 million of investments in CLOs.
As of the same date, these investments had an
aggregate pre-tax net unrealized gain of
approximately $11 million, composed primarily of
gross unrealized gains. Comparatively, as of
December 31, 2015, we held approximately $2.10
billion of investments in CLOs which had an
aggregate pre-tax net unrealized gain of
approximately $43 million, composed of gross
unrealized gains of $46 million and gross unrealized
losses of $3 million. In the event that we or our
banking regulators conclude that such investments in
CLOs, or other investments, are covered funds under
the Volker rule, 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 or on our consolidated financial condition
in the period in which such a divestiture occurs.
The final Volcker rule regulations also require
banking entities to establish extensive programs
designed to ensure compliance with the restrictions of
the Volcker rule. We have established a compliance
program which we believe complies with the final
Volcker rule regulations as currently in effect. Such
compliance program restricts our ability in the future
to engage in certain activities including priority trading
and service certain types of funds, in particular
covered funds for which SSGA acts as an advisor and
certain types of trustee relationships. Consequently,
Volcker rule compliance entails both the cost of a
compliance program and loss of certain revenue and
future opportunities.
State Street Corporation | 73
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Continued)
As of December 31, 2016, our non-U.S. debt
securities had an average market-to-book ratio of
100.5%, and an aggregate pre-tax net unrealized
gain of approximately $119 million, composed of
gross unrealized gains of $153 million and gross
unrealized losses of $34 million. These unrealized
amounts included a pre-tax net unrealized gain of $60
million, composed of gross unrealized gains of $79
million and gross unrealized losses of $19 million,
associated with non-U.S. debt securities available-for-
sale.
As of December 31, 2016, the underlying
collateral for non-U.S. mortgage- and asset-backed
securities primarily included Australian, Dutch and
U.K. prime mortgages and German automobile loans.
The securities listed under “Canada” were composed
of Canadian government securities and corporate
debt and covered bonds. The securities listed under
“France” were composed of automobile loans, prime
mortgages, and corporate debt and covered bonds.
The securities listed under “Japan” were substantially
composed of Japanese government securities and
corporate debt. The securities listed under “South
Korea” were composed of South Korean government
securities.
Non-U.S. Debt Securities
Approximately 23% of the aggregate carrying
value of our investment securities portfolio was non-
U.S. debt securities as of December 31, 2016 and
2015.
TABLE 23: NON-U.S. DEBT SECURITIES
(In millions)
Available-for-sale:
As of December 31,
2016
2015
United Kingdom
$
5,093
$
Australia
Canada
Japan
Netherlands
France
Germany
Italy
Hong Kong
South Korea
Norway
Belgium
Spain
Finland
Sweden
Other(1)
Total
Held-to-maturity:
United Kingdom
Netherlands
Australia
Germany
Singapore
Other(2)
Total
$
$
$
4,272
2,989
1,388
1,283
1,013
713
676
664
634
508
360
266
223
188
230
20,500
504
473
374
329
180
220
$
$
5,754
3,316
2,400
1,348
1,839
954
990
389
—
1,052
524
234
150
319
123
135
19,527
1,067
684
917
832
129
292
2,080
$
3,921
(1) Included approximately $164 million and $55 million as of December 31,
2016 and December 31, 2015, respectively, related to Ireland, Portugal and
Austria, all of which were related to mortgage-backed securities and auto
loans.
(2) Included approximately $178 million and $265 million as of December 31,
2016 and December 31, 2015, respectively, related to Spain, Italy, Portugal
and Norway, all of which were related to mortgage-backed securities and
auto loans.
Approximately 88% and 89% of the aggregate
carrying value of these non-U.S. debt securities was
rated “AAA” or “AA” as of December 31, 2016 and
December 31, 2015, respectively. The majority of
these securities comprised senior positions within the
security structures; these positions have a level of
protection provided through subordination and other
forms of credit protection. As of December 31, 2016
and December 31, 2015, approximately 65% and
70%, respectively, of the aggregate carrying value of
these non-U.S. debt securities was floating-rate, and
accordingly, we consider these securities to have
minimal interest-rate risk.
State Street Corporation | 74
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Continued)
Our aggregate municipal securities exposure
presented in Table 24: State and Municipal Obligors,
was concentrated primarily with highly-rated
counterparties, with approximately 92% of the
obligors rated “AAA” or “AA” as of December 31,
2016. As of that date, approximately 51% and 43% of
our aggregate municipal securities exposure was
associated with general obligation and revenue
bonds, respectively. In addition, we had no
exposures associated with industrial development or
land development bonds. The portfolios are also
diversified geographically, with the states that
represent our largest exposures 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 3 to the
consolidated financial statements included under Item
8, Financial Statements and Supplementary Data, of
this Form 10-K.
Municipal Obligations
We carried approximately $10.32 billion of
municipal securities classified as state and political
subdivisions in our investment securities portfolio as
of December 31, 2016 as shown in Table 21: Carrying
Values of Investment Securities, all of which were
classified as AFS. As of the same date, we also
provided approximately $9.25 billion of credit and
liquidity facilities to municipal issuers.
TABLE 24: STATE AND MUNICIPAL OBLIGORS(1)
(Dollars in
millions)
Total
Municipal
Securities
Credit and
Liquidity
Facilities(2)
Total
% of Total
Municipal
Exposure
As of December 31, 2016
State of Issuer:
Texas
California
New York
Massachusetts
Washington
Maryland
Total
$
1,781
$
1,685
$ 3,466
18%
523
740
916
708
488
2,298
1,293
1,071
234
411
2,821
2,033
1,987
942
899
14
10
10
5
5
$
5,156
$
6,992
$ 12,148
As of December 31, 2015
State of Issuer:
Texas
California
New York
Massachusetts
Maryland
Total
$
1,250
$
1,962
$ 3,212
17%
444
817
927
454
2,220
1,259
731
413
2,664
2,076
1,658
867
14
11
9
5
$
3,892
$
6,585
$ 10,477
(1) Represented 5% or more of our aggregate municipal credit exposure of
approximately $19.57 billion and $18.50 billion across our businesses as of
December 31, 2016 and December 31, 2015, respectively.
(2) Includes municipal loans which are also presented within Table 27.
State Street Corporation | 75
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Continued)
TABLE 25: CONTRACTUAL MATURITIES AND YIELDS
As of December 31, 2016
Under 1 Year
1 to 5 Years
6 to 10 Years
Over 10 Years
(Dollars in millions)
Available-for-sale(1):
U.S. Treasury and federal agencies:
Amount
Yield
Amount
Yield
Amount
Yield
Amount
Yield
Direct obligations
$
2,722
0.77% $
1,114
1.91% $
44
3.09% $
383
2.28%
Mortgage-backed securities
213
3.20
1,533
2.56
3,022
3.41
8,489
2.98
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(2)
Collateralized mortgage obligations
Other U.S. debt securities
590
4
3
1
598
1,301
289
4,372
1,901
7,863
509
2
508
1.55
0.75
1.73
1.11
2.28
0.66
0.55
1.48
4.76
1.15
3.89
3,181
1,052
1
21
4,255
3,339
1,877
987
3,304
9,507
2,347
44
1,003
1.36
1.55
2.20
0.92
1.08
0.46
0.97
0.95
5.01
2.73
4.25
757
295
2
883
1,937
731
346
477
408
1,962
5,548
871
922
1.46
1.96
1.40
2.42
1.24
1.06
1.29
1.60
6.25
3.05
2.29
1,068
—
266
—
1,334
1,164
4
—
—
1,168
1,918
1,676
36
1.69
—
1.52
—
2.87
2.07
—
—
6.32
3.26
1.44
Total
$ 12,415
$ 19,803
$ 14,306
$ 15,004
Held-to-maturity(1):
U.S. Treasury and federal agencies:
Direct obligations
$
400
0.75% $ 14,888
2.11% $
2,167
1.73% $
72
0.83%
Mortgage-backed securities
—
—
193
2.57
1,536
2.89
8,605
2.88
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
Collateralized mortgage obligations
442
99
7
548
148
163
180
71
562
102
1.22
0.79
1.12
1.22
0.05
1.04
2.02
2.92
201
798
18
1,017
339
368
106
42
855
23
1.53
1.17
2.27
0.56
0.57
0.25
0.01
349
—
8
357
47
—
—
—
47
1.16
—
1.12
1.43
—
1.34
1,891
—
2
1,893
2.63
616
1.02
—
—
—
—
—
—
616
800
—
—
—
2.07
2.97
488
1.77
Total
$
1,612
$ 16,976
$
4,595
$ 11,986
(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.
State Street Corporation | 76
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Continued)
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
AFS and HTM debt securities, 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
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 change in the net unrealized gain/(loss)
position as of December 31, 2016 compared to
December 31, 2015, presented in Table 26:
Amortized Cost, Fair Value and Net Unrealized Gains
(Losses) of Investment Securities, was primarily
attributable to higher interest rates.
TABLE 26: AMORTIZED COST, FAIR VALUE AND NET UNREALIZED GAINS (LOSSES) OF INVESTMENT SECURITIES
(In millions)
Available-for-sale(1)
Held-to-maturity(1)
Total investment securities
Net after-tax unrealized gain (loss)
Amortized
Cost
$
$
62,056
35,169
97,225
December 31, 2016
Net
Unrealized
Gain (Losses)
$
(58) $
(175)
(233) $
(140)
$
$
Fair Value
Amortized
Cost
61,998
34,994
96,992
$
$
69,843
29,952
99,795
December 31, 2015
Net
Unrealized
Gain (Losses)
227
$
(154)
73
44
$
$
Fair Value
$
$
70,070
29,798
99,868
(1) AFS securities are carried at fair value, with after-tax net unrealized gains and losses recorded in AOCI. HTM securities are carried at amortized cost, and
unrealized gains and losses are not recorded in our consolidated financial statements.
We conduct periodic reviews of individual
securities to assess whether OTTI exists. Our
assessment of OTTI 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 or due to idiosyncratic bond
performance, OTTI could increase, in particular the
credit-related component that would be recorded in
our consolidated statement of income.
We recorded net losses from OTTI of $2 million
and $1 million in 2016 and 2015, respectively.
Management considers the aggregate decline in fair
value of the remaining investment securities and the
resulting gross unrealized losses of $820 million as of
December 31, 2016 to be temporary and not the
result of any material changes in the credit
characteristics of the securities. Additional
information with respect to OTTI, net impairment
losses and gross unrealized losses is provided in
Note 3 to the consolidated financial statements
included under Item 8, Financial Statements and
Supplementary Data, of this Form 10-K.
Our evaluation of potential OTTI of structured
credit securities with collateral in the U.K. and Italy
takes into account the outcome from the Brexit
referendum and the Italian constitutional referendum,
and assumes no disruption of payments on these
securities.
Our evaluation of potential OTTI of mortgage-
backed securities with collateral in Spain, Italy,
Ireland, and Portugal takes into account slow
economic growth, austerity measures, and
government intervention in the corresponding
mortgage markets and assumes a conservative
baseline macroeconomic environment. Our baseline
view assumes a recessionary period characterized by
high unemployment and by additional declines in
housing prices between 3% and 23%. Our evaluation
of OTTI in our base case does not assume a
disorderly sovereign debt restructuring or a break-up
of the Eurozone.
State Street Corporation | 77
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Continued)
Loans and Leases
TABLE 27: U.S. AND NON- U.S. LOANS AND LEASES
As of December 31,
(In millions)
2016
2015
2014
2013
2012
Domestic:
Commercial and
financial
Commercial real
estate
Lease financing
$16,412
$15,899
$14,515
$10,305
$ 9,265
27
338
28
337
28
335
209
339
411
380
Total domestic
16,777
16,264
14,878
10,853
10,056
Non-U.S.:
Commercial and
financial
Lease financing
2,476
1,957
2,653
1,877
1,467
504
578
668
756
784
Total non-U.S.
2,980
2,535
3,321
2,633
2,251
Total loans and
leases
Average loans and
leases
$19,757
$18,799
$18,199
$13,486
$12,307
$19,013
$17,948
$15,912
$13,781
$11,610
The increase in loans in the commercial and
financial segment as of December 31, 2016
compared to December 31, 2015 was primarily driven
by higher levels of senior secured bank loans and
loans to municipalities.
financial statements included under Item 8, Financial
Statements and Supplementary Data, in this Form
10-K), are externally rated “BBB,” “BB” or “B,” with
approximately 92% and 93% of the loans rated “BB”
or “B” as of December 31, 2016 and December 31,
2015, respectively. Our investment strategy involves
generally limiting our investment to larger, more liquid
credits underwritten by major global financial
institutions, applying our internal credit analysis
process to each potential investment, and diversifying
our exposure by counterparty and industry segment.
However, these loans have significant exposure to
credit losses relative to higher-rated loans.
Loans to municipalities included in the
commercial and financial segment were $1.4 billion
and $1.0 billion as of December 31, 2016 and
December 31, 2015, respectively.
As of December 31, 2016 and December 31,
2015, unearned income deducted from our
investment in leveraged lease financing was $94
million and $102 million, respectively, for U.S. leases
and $192 million and $231 million, respectively, for
non-U.S. leases.
As of December 31, 2016 and December 31,
Additional information about all of our loan-and-
2015, our investment in senior secured loans totaled
approximately $3.5 billion and $3.1 billion,
respectively. In addition, we had binding unfunded
commitments as of December 31, 2016 and
December 31, 2015 of $76 million and $186 million,
respectively, to participate in such syndications.
lease segments, as well as underlying classes, is
provided in Note 4 to the consolidated financial
statements included under Item 8, Financial
Statements and Supplementary Data, of this Form
10-K.
No loans, including CRE loans, were modified in
These senior secured loans, which are primarily
troubled debt restructurings in 2016 or 2015.
rated “speculative” under our internal risk-rating
framework (refer to Note 4 to the consolidated
TABLE 28: CONTRACTUAL MATURITIES FOR LOANS AND LEASES
(In millions)
Domestic:
Commercial and financial
Commercial real estate
Lease financing
Total domestic
Non-U.S.:
Commercial and financial
Lease financing
Total non-U.S.
Total loans and leases
As of December 31, 2016
Total
Under 1 Year
1 to 5 Years
Over 5 Years
$
16,412
$
9,508
$
5,028
$
27
338
16,777
2,476
504
2,980
27
67
9,602
1,510
117
1,627
—
69
5,097
821
86
907
1,876
—
202
2,078
145
301
446
$
19,757
$
11,229
$
6,004
$
2,524
TABLE 29: CLASSIFICATION OF LOAN AND LEASE BALANCES DUE AFTER ONE YEAR
(In millions)
Loans and leases with predetermined interest rates
Loans and leases with floating or adjustable interest rates
Total
As of December 31, 2016
$
$
3,336
5,192
8,528
State Street Corporation | 78
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Continued)
TABLE 30: ALLOWANCE FOR LOAN AND LEASE LOSSES
Years Ended December 31,
(In millions)
2016
2015
2014
2013
2012
Allowance for loan and lease losses:
Beginning balance
Provision for loan and lease losses(1)
Charge-offs(2)
Recoveries(3)
Ending balance
$
$
46
10
(3)
—
53
$
$
38
12
(4)
—
46
$
$
28
10
—
—
38
$
$
22
$
6
—
—
28
$
22
(3)
—
3
22
(1) The provision for loan and lease losses is related to commercial and financial loans in 2016, 2015, 2014 and 2013. The $(3) million provision related to CRE loans
in 2012.
(2) The charge-offs are related to commercial and financial loans.
(3) Includes $3 million in recoveries related to CRE loans for 2012.
The provision of $10 million and the charge-offs
of $3 million recorded in 2016 were associated with
our exposure to senior secured loans to non-
investment grade institutional borrowers, which were
purchased in connection with our participation in
syndicated loans.
As of December 31, 2016 and December 31,
2015, approximately $44 million and $35 million,
respectively, of our allowance for loan and lease
losses were related to senior secured loans included
in the commercial and financial segment. As this
portfolio grows and matures, our allowance for loan
and lease losses related to these loans may increase
through additional provisions for credit losses. The
remaining $9 million and $11 million as of
December 31, 2016 and December 31, 2015,
respectively, were related to other components of
commercial and financial loans.
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.
As market and economic conditions change, the
major independent credit rating agencies may
downgrade 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, and
may do so again in the future. As a result, we may be
exposed to increased counterparty risk, leading to
negative ratings volatility.
The cross-border outstandings presented in
Table 31: Cross-Border Outstandings, represented
approximately 28%, 25% and 17% of our
consolidated total assets as of December 31, 2016,
2015 and 2014, respectively.
TABLE 31: CROSS-BORDER OUTSTANDINGS(1)
(In millions)
Investment
Securities and
Other Assets
Derivatives
and
Securities
on Loan
Total Cross-
Border
Outstandings
December 31, 2016
$
$
$
United Kingdom
Japan
Germany
Australia
Luxembourg
Canada
December 31, 2015
United Kingdom
Japan
Germany
Australia
Canada
Luxembourg
December 31, 2014
United Kingdom
Japan
Australia
Netherlands
Canada
Germany
$
$
$
18,712
17,922
13,812
5,122
3,389
3,179
16,965
17,328
12,111
4,035
3,156
3,034
15,288
9,465
5,981
4,425
3,227
3,075
$
$
$
1,761
1,171
484
986
762
781
1,589
87
569
292
1,113
514
1,769
644
1,039
330
974
792
20,473
19,093
14,296
6,108
4,151
3,960
18,554
17,415
12,680
4,327
4,269
3,548
17,057
10,109
7,020
4,755
4,201
3,867
(1) Cross-border outstandings included countries in which we do business,
and which amounted to at least 1% of our consolidated total assets as of the
dates indicated.
State Street Corporation | 79
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Continued)
As of December 31, 2016, aggregate cross-
border outstandings in countries which amounted to
between 0.75% and 1% of our consolidated assets
totaled approximately $1.84 billion and $2.38 billion to
France and Netherlands, respectively. As of
December 31, 2015, aggregate cross-border
outstandings in countries which amounted to between
0.75% and 1% of our consolidated assets totaled
approximately $2.20 billion to Netherlands. As of
December 31, 2014, there were no countries whose
aggregate cross-border outstandings amounted to
between 0.75% and 1% of our total consolidated
assets.
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. Our risk
management framework focuses on material risks,
which include the following:
•
•
•
•
credit and counterparty risk;
liquidity risk, funding and management;
operational risk;
information technology risk;
• market risk associated with our trading
activities;
• market risk associated with our non-trading
activities, which we refer to as asset-and-
liability management, and which consists
primarily of interest-rate risk;
•
strategic risk;
• model risk; and
•
reputational, fiduciary and business conduct
risk.
Many of these risks, as well as certain factors
underlying each of these risks that could affect our
businesses and our consolidated financial
statements, are discussed in detail under Item 1A,
Risk Factors, 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,
can result in losses to State Street as well as erosion
of our capital and damage to our reputation. Our
approach, including Board and senior management
oversight and a system of policies, procedures, limits,
risk measurement and monitoring and internal
controls, 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 objective is to optimize our return while
operating 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 goals:
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;
A direct link between risk and strategic-
decision making processes and incentive
compensation practices; and
The overall flexibility to adapt to the ever-
changing business and market conditions.
Our risk appetite framework 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. Our risk appetite framework is
established by ERM, a corporate risk oversight group,
in conjunction with the MRAC and the RC of the
Board. The Board formally reviews and approves our
risk appetite statement annually, or more frequently
as required.
The risk appetite framework describes the level
and types of risk that we are willing to accommodate
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 framework, 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” under Item 7, Management's
Discussion and Analysis, of this Form 10-K.
State Street Corporation | 80
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Continued)
Disclosures about our management of
significant risks can be found on the following pages
within this Form 10-K.
Governance and Structure
Credit Risk Management
Liquidity Risk Management
Operational Risk Management
Market Risk Management
Model Risk Management
Strategic Risk Management
Governance and Structure
Form 10-K Page
Number
81
85
90
95
98
105
106
We have an approach to risk management that
involves all levels of management, from the Board
and its committees, including its E&A Committee, RC,
the ECC, as well as the Technology 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, are considered
the first line of defense; ERM and other support
functions, such as Compliance, Finance and Vendor
Management, provide the second line of defense; 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, management
oversight committees, Corporate Audit and,
ultimately, the Board and its committees. While we
believe that our risk management program is effective
in managing the risks in our businesses, internal and
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, market, liquidity, operational, information
technology as well as new business products,
regulatory compliance and ethics, vendor risk 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, management and mitigation
of various risks facing State Street in connection with
its business activities. This governance structure is
enhanced and integrated through multi-disciplinary
involvement, particularly through ERM. The following
chart presents this structure.
State Street Corporation | 81
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Continued)
Management Risk Governance Committee
Structure
Executive Management Committees:
Management Risk and
Capital Committee
(MRAC)
Risk Committees:
Business
Conduct Risk
Committee
(BCRC)
Technology and Operational
Risk Committee
(TORC)
Asset-Liability
Committee
(ALCO)
Credit Risk and
Policy Committee
(CRPC)
Fiduciary Review
Committee
Operational Risk
Committee
Technology Risk
Governance
Committee
Trading and
Market Risk
Committee
(TMRC)
Recovery and
Resolution
Planning
Executive Review
Board
Basel Oversight
Committee
(BOC)
New Business and
Product Approval
Committee
Executive
Continuity Steering
Committee
Executive
Information
Security
Committee
Model Risk
Committee
(MRC)
Compliance and
Ethics Committee
Third Party Risk
Management
Steering
Committee
Access Control
Board
Legal Entity
Oversight Committee
Business Controls
Steering
Committee
Global Transitions
Oversight
Committee
CCAR Steering
SSGA Risk
Committee
Committee
Country Risk
Committee
Enterprise Risk Management
The goal of ERM is to ensure that risks are
proactively identified, well-understood and prudently
managed in support of our business strategy. 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
corporate-wide risk management policies and
guidelines. In addition, ERM establishes and reviews
limits and, in collaboration with business unit
management, monitors key risks. Ultimately, ERM
works to validate that risk-taking occurs within the risk
appetite statement approved by the Board and
conforms to associated risk policies, limits and
guidelines.
The CRO is responsible for State Street’s risk
management globally, leads ERM and has a dual
reporting line to State Street’s CEO and the Board’s
RC. ERM manages its responsibilities globally
through a three-dimensional organization structure:
Data Governance
Board
•
•
“Vertical” business unit-aligned risk groups that
support 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
combines intersecting “Verticals” and
“Horizontals” through a hub and spoke model to
provide important regional and legal entity
perspectives to the global risk framework.
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
corporate-level risk appetite framework and
associated limits and policies, and for dynamic risk
assessment across State Street.
State Street Corporation | 82
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Continued)
Board Committees
The Board has four committees which assist it in
discharging its responsibilities with respect to risk
management: the RC, the E&A Committee, the ECC,
and the Technology Committee.
The RC is responsible for oversight related to
the operation of our global risk management
framework, including policies and procedures
establishing risk management governance and
processes and risk control infrastructure for our global
operations. The RC is responsible for reviewing and
discussing with management our assessment and
management of all risks applicable to our operations,
including credit, market, interest rate, liquidity,
operational and business risks, as well as compliance
and reputational risk and related policies.
In addition, the RC provides oversight on
strategic capital governance principles and controls,
and monitors capital adequacy in relation to risk. The
RC is also responsible for discharging the duties and
obligations of the Board under applicable Basel and
other regulatory requirements.
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. 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 ECC has direct responsibility for the
oversight of all compensation plans, policies, and
programs of State Street in which executive officers
participate and incentive, retirement, welfare as well
as equity plans in which certain other employees of
State Street participate. In addition, the ECC
oversees the alignment of our incentive
compensation arrangements with our safety and
soundness, including the integration of risk
management objectives, and related policies,
arrangements and control processes consistent with
applicable related regulatory rules and guidance.
The Technology Committee leads and assists in
the Board’s oversight of the role of technology in
executing State Street’s strategy and supporting
State Street’s global business and operational
requirements. The Technology Committee reviews
the use of technology in our activities and operations,
as well as significant technology and technology-
related strategies, investments and policies. In
addition, the Technology Committee reviews and
approves technology and technology-related risk
matters, including information and cyber security.
Executive Management Committees
MRAC is the senior management decision-
making body for risk and capital issues, and oversees
our financial risks, our consolidated statement of
condition, and our capital adequacy, liquidity and
recovery and resolution planning. Its responsibilities
include:
• The approval of the policies of our global risk,
capital and liquidity management
frameworks, including our risk appetite
framework;
• The monitoring and assessment of our capital
adequacy based on internal policies and
regulatory requirements;
• The oversight of our firm-wide risk
identification, model risk governance, stress
testing and Recovery and Resolution Plan
programs; and
• The ongoing monitoring and review of risks
undertaken within the businesses, and our
senior management oversight and approval
of risk strategies and tactics.
MRAC, which is co-chaired by our CRO and the
CFO, regularly presents a report to the RC outlining
developments in the risk environment and
performance trends in our key business areas.
BCRC provides additional risk governance and
leadership, by overseeing our business practices in
terms of our compliance with laws, regulations and
our standards of business conduct, our commitments
to clients and others with whom we do business, and
potential reputational risks. Management considers
adherence to high ethical standards to be critical to
the success of our business and to our reputation.
The BCRC is co-chaired by our CAO and our Chief
Legal Officer.
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. TORC is co-chaired by the Chief
Administrative Officer and the Chief Information
Officer.
Risk Committees
The following risk committees, under the
oversight of the respective executive management
committees, have focused responsibilities for
oversight of specific areas of risk management:
State Street Corporation | 83
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Continued)
MRAC
• ALCO oversees the management of our
consolidated statement of condition and the
management of our global liquidity, our
interest-rate risk, and our non-traded market
risk positions, as well as the business
activities of our Global Treasury group and
the risks associated with the generation of
net interest revenue and overall balance
sheet management. ALCO’s roles and
responsibilities are designed to work
complementary to, and be coordinated with,
MRAC, which approves our corporate risk
appetite and associated balance sheet
strategy;
• CRPC has primary responsibility for the
oversight and review of credit and
counterparty risk across business units, as
well as oversight, review and approval of the
credit risk policies and guidelines; the
Committee consists of senior executives
within ERM, and reviews policies and
guidelines related to all aspects of our
business which give rise to credit risk; our
business units are also represented on the
CRPC; credit risk policies and guidelines are
reviewed periodically, but at least annually;
• TMRC reviews the effectiveness of, and
approves, the market risk framework at least
annually; it is the senior oversight and
decision-making committee for risk
management within our global markets
businesses; the TMRC is responsible for the
formulation of guidelines, strategies and
workflows with respect to the measurement,
monitoring and control of our trading market
risk, and also approves market risk tolerance
limits, collateral and margin policies, and
trading authorities; the TMRC meets regularly
to monitor the management of our trading
market risk activities;
• BOC provides oversight and governance over
Basel related regulatory requirements,
assesses compliance with respect to Basel
regulations and approves all material
methodologies and changes, policies and
reporting;
• The Recovery and Resolution Planning
Executive Review Board oversees the
development of recovery and resolution plans
as required by banking regulators;
• MRC monitors the overall level of model risk
and provides oversight of the model
governance process pertaining to financial
models, including the validation of key
models and the ongoing monitoring of model
performance. The MRC may also, as
appropriate, mandate remedial actions and
compensating controls to be applied to
models to address modeling deficiencies as
well as other issues identified;
• The CCAR Steering Committee provides
primary supervision of the stress tests
performed in conformity with the Federal
Reserve's CCAR process and the 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 SSGA Risk Committee is the most senior
oversight and decision making committee for
risk management within SSGA; the
committee is responsible for overseeing the
alignment of SSGA's strategy, budget, and
risk appetite, as well as alignment with State
Street corporate-wide strategies and risk
management standards; and
• The Country Risk Committee oversees the
identification, assessment, monitoring,
reporting and mitigation, where necessary, of
country risks.
BCRC
• The Fiduciary Review Committee reviews
and assesses the fiduciary risk management
programs of those units in which we serve in
a fiduciary capacity;
• The New Business and Product Approval
Committee provides oversight of the
evaluation of the risk inherent in proposed
new products or services and new business,
and extensions of existing products or
services, evaluations including economic
justification, material risk, compliance,
regulatory and legal considerations, and
capital and liquidity analyses;
• The Compliance and Ethics Committee
provides review and oversight of our
compliance programs, including its culture of
compliance and high standards of ethical
behavior; and
• The Legal Entity Oversight Committee
establishes standards with respect to the
governance of State Street legal entities,
monitors adherence to those standards, and
oversees the ongoing evaluation of our legal
entity structure, including the formation,
maintenance and dissolution of legal entities.
State Street Corporation | 84
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Continued)
TORC
• The Technology Risk Governance Committee
provides regular reporting to TORC and
escalates technology risk issues to TORC, as
appropriate;
• The Executive Continuity Steering Committee
reviews overall business continuity program
performance, provides for executive
accountability for compliance with the
business continuity program and standards,
and reviews and approves major changes or
exceptions to program policy and standards;
• The Executive Information Security
Committee is responsible for managing the
Enterprise Information Security posture and
program, including cyber security protections,
provides enterprise-wide oversight of the
Information Security Program to provide that
controls are measured and managed, and
serves as an escalation point for issues
identified during the execution of information
technology activities and risk mitigation;
• The Third Party Risk Management Steering
Committee provides oversight over the
vendor management program, approves
policies, and serves as an escalation path for
program compliance exceptions;
• The Access Control Board establishes and
provides appropriate governance and
controls over our access control security
framework;
• The Operational Risk Committee, along with
the support of regional business or entity-
specific working groups and committees, is
responsible for oversight of our operational
risk programs, including determining that the
implementation of those programs is
designed to identify, manage, and control
operational risk in an effective and consistent
manner across the firm;
• The Business Controls Steering Committee is
responsible for overseeing and monitoring
the execution and ongoing monitoring of our
program of enhanced business controls
practices across the organization;
• The Global Transitions Oversight Committee
is responsible for establishing a framework to
monitor and oversee transitions between and
among State Street legal entities against
State Street resolvability principles, to
monitor compliance with that framework to
support optimization of State Street’s global
operating footprint through increased
consistency, transparency and sharing of
best practices among State Street legal
entities, and to serve as a forum for review
and discussion of issues impacting internal
transitions among State Street legal entities;
and
• The Data Governance Board is responsible
for overseeing State Street’s data
governance vision, strategies and priorities
and ensuring alignment of data governance
policies and practices with corporate strategy
and with State Street’s obligations to comply
with data-related regulations.
Credit Risk Management
Core Policies and Principles
We define credit risk as the risk of financial loss
if a counterparty, borrower or obligor, collectively
referred to as a counterparty, is either unable or
unwilling to repay borrowings or settle a transaction in
accordance with underlying contractual terms. We
assume credit 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 and indirect trading activities, such as principal
securities lending and foreign exchange and
indemnified agency securities lending. We also
assume credit 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 major types of
credit risk:
Default risk - the risk that a counterparty fails
to meet its contractual payment obligations;
Country risk - 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 - the risk that the settlement
or clearance of transactions will fail, which
arises whenever the exchange of cash,
securities and/or other assets is not
simultaneous.
The acceptance of credit risk by State Street is
governed by corporate policies and guidelines, which
include standardized procedures applied across the
entire organization. These policies and guidelines
include specific requirements related to each
counterparty's risk profile; the markets served;
counterparty, industry and country concentrations;
and regulatory compliance. These policies and
State Street Corporation | 85
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Continued)
procedures also implement a number of core
principles, which include the following:
• We measure and consolidate credit risks to
each counterparty, or group of
counterparties, in accordance with a “one-
obligor” principle that aggregates risks
across our business units;
• ERM reviews and approves all extensions of
credit, or material changes to extensions of
credit (such as changes in term, collateral
structure or covenants), in accordance with
assigned credit-approval authorities;
• Credit-approval authorities are assigned to
individuals according to their qualifications,
experience and training, and these
authorities are periodically reviewed. Our
largest exposures require approval by the
Credit Committee, a sub-committee of the
CRPC. With respect to small and low-risk
extensions of credit to certain types of
counterparties, approval authority is granted
to individuals outside of ERM;
• We seek to avoid or limit 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 our risk appetite;
• We determine the creditworthiness of
counterparties through a detailed risk
assessment, including the use of
comprehensive internal risk-rating
methodologies;
• We review all extensions of credit and the
creditworthiness of counterparties at least
annually. The nature and extent of these
reviews are determined by the size, nature
and term of the extensions of credit and the
creditworthiness of the counterparty; and
• We subject all corporate policies and
guidelines to annual review as an integral
part of our periodic assessment of our risk
appetite.
Our corporate policies and guidelines require
that the business units which engage in activities that
give rise to credit and counterparty risk comply with
procedures that promote the extension of credit for
legitimate business purposes; are consistent with the
maintenance of proper credit standards; limit credit-
related losses; and are consistent with our goal of
maintaining a strong financial condition.
Structure and Organization
The Credit Risk group within ERM is responsible
for the assessment, approval and monitoring of credit
risk across State Street. The group is managed
centrally, has dedicated teams in a number of
locations worldwide across our businesses, and is
responsible for related policies and procedures, and
for our internal credit-rating systems and
methodologies. In addition, the group, in conjunction
with the business units, establishes appropriate
measurements and limits to control the amount of
credit risk accepted across its various business
activities, both at the portfolio level and for each
individual counterparty or group of counterparties, to
individual industries, and also to counterparties by
product and country of risk. These measurements
and limits are reviewed periodically, but at least
annually.
In conjunction with other groups in ERM, the
Credit Risk group is jointly responsible for the design,
implementation and oversight of our credit risk
measurement and management systems, including
data and assessment systems, quantification systems
and the reporting framework.
Various key committees within State Street are
responsible for the oversight of credit risk and
associated credit risk policies, systems and models.
All credit-related activities are governed by our risk
appetite framework and our credit risk guidelines,
which define our general philosophy with respect to
credit risk and the manner in which we control,
manage and monitor such risks.
The previously described CRPC (refer to "Risk
Committees") has primary responsibility for the
oversight, review and approval of the credit risk
guidelines and policies. Credit risk guidelines and
policies are reviewed periodically, but at least
annually.
The Credit Committee, a sub-committee of the
CRPC, has responsibility for assigning credit authority
and approving the largest and higher-risk extensions
of credit to individual counterparties or groups of
counterparties.
CRPC provides periodic updates to MRAC and
the Board's RC.
Credit Ratings
We perform initial and ongoing reviews to
exercise due diligence on the creditworthiness of our
counterparties when conducting any business with
them or approving any credit limits.
This due diligence process generally includes
the assignment of an internal credit rating, which is
determined by the use of internally developed and
validated methodologies, scorecards and a 15-grade
rating scale. This risk-rating process incorporates the
use of risk-rating tools in conjunction with
management judgment; qualitative and quantitative
inputs are captured in a replicable manner and,
following a formal review and approval process, an
State Street Corporation | 86
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Continued)
internal credit rating based on our rating scale is
assigned. Credit ratings are reviewed and approved
by the Credit Risk group or designees within ERM.
To facilitate comparability across the portfolio,
counterparties within a given sector are rated using a
risk-rating tool developed for that sector.
Our risk-rating methodologies are approved by
the CRPC, after completion of internal model
validation processes, and are subject to an annual
review, including re-validation.
We generally rate our counterparties individually,
although a small number of accounts defined by us
as low-risk are rated on a pooled basis. We evaluate
and rate the credit risk of our counterparties on an
ongoing basis.
Risk Parameter Estimates
Our internal risk-rating system promotes a clear
and consistent approach to the determination of
appropriate credit risk classifications for our credit
counterparties and exposures, tracking the changes
in risk associated with these counterparties and
exposures over time. This capability enhances our
ability to more accurately calculate both risk
exposures and capital, enabling better strategic
decision making across the organization.
We use credit risk parameter estimates for the
following purposes:
• The assessment of the creditworthiness of
new counterparties and, in conjunction with
our risk appetite statement, the development
of appropriate credit limits for our products
and services, including loans, foreign
exchange, securities finance, placements
and repurchase agreements;
• The use of an automated process for limit
approvals for certain low-risk counterparties,
as defined in our credit risk guidelines,
based on the counterparty’s probability-of-
default, or PD, rating class;
• The development of approval authority
matrices based on PD; riskier counterparties
with higher ratings require higher levels of
approval for a comparable PD and limit size
compared to less risky counterparties with
lower ratings;
• The analysis of risk concentration trends
using historical PD and exposure-at-default,
or EAD, data;
• The standardization of rating integrity testing
by GCR using rating parameters;
• The determination of the level of
management review of short-duration
advances depending on PD; riskier
counterparties with higher rating class
values generally trigger higher levels of
management escalation for comparable
short-duration advances compared to less
risky counterparties with lower rating-class
values;
• The monitoring of credit facility utilization
levels using EAD values and the
identification of instances where
counterparties have exceeded limits;
• The aggregation and comparison of
counterparty exposures with risk appetite
levels to determine if businesses are
maintaining appropriate risk levels; and
• The determination of our regulatory capital
requirements for the AIRB provided in the
Basel framework.
Credit Risk Mitigation
We seek to limit our credit exposure and reduce
our potential credit losses through various types of
risk mitigation. In our day-to-day management of
credit risks, we utilize and recognize the following
types of risk mitigation.
Collateral
In many parts of our business, we regularly
require or agree for collateral to be received from or
provided to clients and counterparties in connection
with contracts that incur credit risk. In our trading
businesses, this collateral is typically in the form of
cash and highly-rated securities (government
securities and other bonds or equity securities).
Credit risks in our non-trading and securities finance
businesses are also often secured by bonds and
equity securities and by other types of assets.
Collateral serves to reduce the risk of loss inherent in
an exposure by improving the prospect of recovery in
the event of a counterparty default. However, rapidly
changing market values of the collateral we hold,
unexpected increases in the credit exposure to a
client or counterparty, reductions in the value or
change in the type of securities held by us, as well as
operational errors or errors in the manner in which we
seek to exercise our rights, may reduce the risk
mitigation effects of collateral or result in other
security interests not being effective to reduce
potential credit exposure. While collateral is often an
alternative source of repayment, it generally does not
replace the requirement within our policies and
guidelines for high-quality underwriting standards.
We also may choose to incur credit exposure without
the benefit of collateral or other risk mitigating credits
rights.
Our credit risk guidelines require that the
collateral we accept for risk mitigation purposes is of
high quality, can be reliably valued and can be
liquidated if or when required. Generally, when
collateral is of lower quality, more difficult to value or
more challenging to liquidate, higher discounts to
State Street Corporation | 87
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Continued)
market values are applied for the purposes of
measuring credit risk. For certain less liquid
collateral, longer liquidation periods are assumed
when determining the credit exposure.
All types of collateral are assessed regularly by
ERM, as is the basis on which the collateral is valued.
Our assessment of collateral, including the ability to
liquidate collateral in the event of a counterparty
default, and also with regard to market values of
collateral under a variety of hypothetical market
conditions, is an integral component of our
assessment of risk and approval of credit limits. We
also seek to identify, limit and monitor instances of
"wrong-way" risk, where a counterparty’s risk of
default is positively correlated with the risk of our
collateral eroding in value.
We maintain policies and procedures requiring
that documentation used to collateralize a transaction
is legal, valid, binding and enforceable in the relevant
jurisdictions. We also conduct legal reviews to
assess whether our documentation meets these
standards on an ongoing basis.
in whole or in part. Support of this kind may take
different forms. Typical forms of guarantees provided
to State Street include financial guarantees, letters of
credit, bankers’ acceptances, PUA contracts and
insurance.
ERM and Legal teams have established a
review process to evaluate guarantees under the
applicable requirements of State Street policies and
Basel III requirements. Governance for this evaluation
is covered under policies and procedures that require
regular reviews of documentation, jurisdictions, and
credit quality of protection providers.
Pursuant to the Basel III final rule, we are
permitted to reflect the application of credit risk
mitigation which may include, for example,
guarantees, collateral, netting, secured interests in
non-financial assets and credit default swaps. State
Street does not actively use credit default swaps as a
risk mitigation tool, although it increasingly applies the
recognition of guarantees, collateral and security over
non-financial assets to mitigate overall risk within its
counterparty credit portfolio.
Netting
Credit Limits
Netting is a mechanism that allows institutions
and counterparties to net offsetting exposures and
payment obligations against one another through the
use of qualifying master netting agreements. A
master netting agreement allows the netting of rights
and obligations arising under derivative or other
transactions that have been entered into under such
an agreement upon the counterparty’s default,
resulting in a single net claim owed by, or to, the
counterparty. This is commonly referred to as "close-
out netting,” and is pursued wherever possible. We
may also enter into master agreements that allow for
the netting of amounts payable on a given day and in
the same currency, reducing our settlement risk. This
is commonly referred to as “payment netting,” and is
widely used in our foreign exchange activities.
As with collateral, we have policies and
procedures in place to apply close-out and payment
netting only to the extent that we have verified legal
validity and enforceability of the master agreement.
In the case of payment netting, operational
constraints with our counterparties may preclude us
from reducing settlement risk, notwithstanding the
legal right to require the same under the master
netting agreement.
Guarantees
A guarantee is a financial instrument that results
in credit support being provided by a third party, (i.e.,
the protection provider) to the underlying obligor (the
beneficiary of the provided protection) on account of
an exposure owing by the obligor. The protection
provider may support the underlying exposure either
Central to our philosophy for our management of
credit risk is the approval and imposition of credit
limits, against which we monitor the actual and
potential future credit exposure arising from our
business activities with counterparties or groups of
counterparties. Credit limits are a reflection of our
risk appetite, which may be determined by the
creditworthiness of the counterparty, the nature of the
risk inherent in the business undertaken with the
counterparty, or a combination of relevant credit
factors. Our risk appetite for certain sectors and
certain countries and geographic regions may also
influence the level of risk we are willing to assume to
certain counterparties.
The analysis and approval of credit limits is
undertaken in a consistent manner across our
businesses, although the nature and extent of the
analysis may vary, based on the type, term and
magnitude of the risk being assumed. Credit limits
and underlying exposures are assessed and
measured on both a gross and net basis where
appropriate, with net exposure determined by
deducting the value of any collateral held. For certain
types of risk being assumed, we will also assess and
measure exposures under a variety of hypothetical
market conditions. Credit limit approvals across State
Street are undertaken by the Credit Risk group, by
individuals to whom credit authority has been
delegated, or by the Credit Committee.
Credit limits are re-evaluated annually, or more
frequently as needed, and are revised periodically on
prevailing and anticipated market conditions, changes
in counterparty or country-specific credit ratings and
State Street Corporation | 88
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Continued)
outlook, changes in State Street's risk appetite for
certain counterparties, sectors or countries, and
enhancements to the measurement of credit
utilization.
Reporting
Ongoing active monitoring and management of
our credit risk is an integral part of our credit risk
management framework. We maintain management
information systems to identify, measure, monitor and
report credit risk across businesses and legal entities,
enabling ERM and our businesses to have timely
access to accurate information on credit limits and
exposures. Monitoring is performed along the
dimensions of counterparty, industry, country and
product-specific risks to facilitate the identification of
concentrations of risk and emerging trends.
Key aspects of this credit risk reporting structure
include governance and oversight groups, policies
that define standards for the reporting of credit risk,
data aggregation and sourcing systems, and separate
testing of relevant risk reporting functions by
Corporate Audit.
The Credit Portfolio Management group
routinely assesses the composition of our overall
credit risk portfolio for alignment with our stated risk
appetite. This assessment includes routine analysis
and reporting of the portfolio, monitoring of market-
based indicators, the assessment of industry trends
and developments, and regular reviews of
concentrated risks. The Credit Portfolio Management
group is also responsible, in conjunction with the
business units, for defining the appetite for credit risk
in the major sectors in which we have a concentration
of business activities. These sector-level risk appetite
statements, which include counterparty selection
criteria and granular underwriting guidelines, are
reviewed periodically and approved by the CRPC.
Monitoring
Regular surveillance of credit and counterparty
risks is undertaken by our business units, the Credit
Risk group and designees with ERM, allowing for
frequent and extensive oversight. This surveillance
process includes, but is not limited to, the following
components:
• Annual Reviews. A formal review of
counterparties is conducted at least annually
and includes a thorough review of operating
performance, primary risk factors and our
internal credit risk rating. This annual review
also includes a review of current and
proposed credit limits, an assessment of our
ongoing risk appetite and verification that
supporting legal documentation remains
effective.
•
Interim Monitoring. Periodic monitoring of
our largest and riskiest counterparties is
undertaken more frequently, utilizing
financial information, market indicators and
other relevant credit and performance
measures. The nature and extent of this
interim monitoring is individually tailored to
certain counterparties and/or industry
sectors to identify material changes to the
risk profile of a counterparty (or group of
counterparties) and assign an updated
internal risk rating in a timely manner.
We maintain an active "watch list" for all
counterparties where we have identified a concern
that the actual or potential risk of default has
increased. The watch list status denotes a concern
with some aspect of a counterparty's risk profile that
warrants closer monitoring of the counterparty's
financial performance and related risk factors. Our
ongoing monitoring processes are designed to
facilitate the early identification of counterparties
whose creditworthiness is deteriorating; any
counterparty may be placed on the watch list by ERM
at its sole discretion.
Counterparties that receive an internal risk rating
within a certain range on our rating scale are eligible
for watch list designation. These risk ratings
generally correspond with the non-investment grade
or near non-investment grade ratings established by
the major independent credit-rating agencies, and
also include the regulatory classifications of “Special
Mention,” “Substandard,” “Doubtful” and “Loss.”
Counterparties whose internal ratings are outside this
range may also be placed on the watch list.
The Credit Risk group maintains primary
responsibility for our watch list processes, and
generates a monthly report of all watch list
counterparties. The watch list is formally reviewed at
least on a quarterly basis, with participation from
senior ERM staff, and representatives from the
business units and our corporate finance and legal
groups as appropriate. These meetings include a
review of individual watch list counterparties, together
with credit limits and prevailing exposures, and are
focused on actions to contain, reduce or eliminate the
risk of loss to State Street. Identified actions are
documented and monitored.
Controls
GCR provides a separate level of surveillance
and oversight over the integrity of our credit risk
management processes, including the internal risk-
rating system. GCR reviews counterparty credit
ratings for all identified sectors on an ongoing basis.
GCR is subject to oversight by the CRPC, and
provides periodic updates to the Board’s RC.
State Street Corporation | 89
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Continued)
Specific activities of GCR include the following:
• Separate and objective assessments of our
credit and counterparty exposures to
determine the nature and extent of risk
undertaken by the business units;
• Periodic credit process and credit product
reviews, focusing on and assessing credit
analysis, policy compliance, prudent
transaction structure and underwriting
standards, administration and documentation,
risk-rating integrity, and relevant trends;
•
Identification and monitoring of developing
counterparty, market and/or industry sector
trends to limit risk of loss and protect capital;
• Regular and formal reporting of reviews,
including findings and requisite actions to
remedy identified deficiencies;
• Allocation of resources for specialized risk
assessments (on an as-needed basis);
• Assessment of the level of the allowance for
loan and lease losses and OTTI; and
•
Liaison with auditors and regulatory
personnel on matters relating to risk rating,
reporting, and measurement.
Reserve for Credit Losses
We maintain an allowance for loan and lease
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
economic conditions and their effect on our
counterparties. Additional information about the
allowance for loan and lease losses is provided in
Note 4 to the consolidated financial statements
included under Item 8, Financial Statements and
Supplementary Data, 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
demands of our clients and our available sources of
cash under both normal and adverse economic and
business conditions.
We 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 or time 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,
2016, the value of our parent company's net liquid
assets totaled $3.64 billion, compared with $5.73
billion as of December 31, 2015. As of December 31,
2016, our parent company has approximately $450
million of senior notes outstanding that will mature in
the next twelve months.
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 our overall liquidity as of December 31,
2016 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 ALCO, MRAC and the
Board's RC.
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
State Street Corporation | 90
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Continued)
guidelines; the monitoring of limits related to
adherence to the liquidity risk guidelines and
associated reporting.
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
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 are 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 severe but plausible scenarios
at the consolidated level 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.
CFPs are designed to assist senior
management with decision-making associated with
any contingency funding response to a possible or
actual crisis scenario. The CFPs define roles,
responsibilities and management actions to be taken
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 our routine liquidity
management include measures of our fungible cash
position, purchased wholesale funds, unencumbered
liquid assets, deposits, and the total of investment
securities and loans as a percentage of total client
deposits.
Asset Liquidity
Central to the management of our liquidity is
asset liquidity, which consists primarily of
unencumbered highly liquid securities, cash and cash
equivalents reported on our consolidated statement of
condition. We restrict the eligibility of securities of
asset liquidity to U.S. Government and federal
agency securities (including mortgage-backed
securities), selected non-U.S. Government and
supranational securities as well as certain other high-
quality securities which generally are more liquid than
other types of assets even in times of stress. Our
asset liquidity metric is similar to the HQLA under the
U.S. LCR, and our HQLA, under the LCR final rule
definition, were estimated to be $100.93 billion and
$109.39 billion as of December 31, 2016 and
December 31, 2015, respectively.
TABLE 32: COMPONENTS OF HQLA BY TYPE OF ASSET
(In millions)
December 31,
2016
December 31,
2015
Excess Central Bank Balances
$
65,790
$
U.S. Treasuries
Other Investment securities
Foreign government
15,821
13,753
5,561
66,063
22,518
16,952
3,861
Total
$
100,925
$
109,394
State Street Corporation | 91
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Continued)
With respect to highly liquid short-term
investments presented in the preceding table, due to
the continued elevated level of client deposits as of
December 31, 2016, we maintained cash balances in
excess of regulatory requirements governing deposits
with the Federal Reserve of approximately $65.79
billion at the Federal Reserve, the ECB and other
non-U.S. central banks, compared to $66.06 billion as
of December 31, 2015. The lower levels of deposits
with central banks as of December 31, 2016
compared to December 31, 2015 was due to normal
deposit volatility. The decrease in other investment
securities as of December 31, 2016 compared to
December 31, 2015, presented in the table above,
was primarily associated with repositioning the
investment portfolio in light of the liquidity
requirements of the LCR.
Liquid securities carried in our asset liquidity
include securities pledged without corresponding
advances from the FRBB, the 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.
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, 2016 and
December 31, 2015, we had no outstanding primary
credit borrowings from the FRBB 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
unencumbered investment securities. The aggregate
fair value of those securities was $38.23 billion as of
December 31, 2016, compared to $41.00 billion as of
December 31, 2015. These securities are available
sources of liquidity, although not as rapidly deployed
as those included in our asset liquidity.
Measures of liquidity include LCR, NSFR and
TLAC which are described in "Supervision and
Regulation" included under Item 1, Business, of this
Form 10-K.
Uses of Liquidity
Significant uses of our liquidity could result from
the following: withdrawals of 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 $28.15
billion and $26.57 billion as of December 31, 2016
and December 31, 2015, respectively. These
amounts do not reflect the value of any collateral. As
of December 31, 2016, approximately 73% of our
unfunded commitments to extend credit expire within
one year. 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.
Information about our resolution planning and
the impact actions under our resolution plans could
have on our liquidity is provided in "Supervision and
Regulation," included under Item 1,Business, of this
Form 10-K.
Funding
Deposits
We provide products and services including
custody, accounting, administration, daily pricing,
foreign exchange services, cash management,
financial asset management, securities finance 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. We invest these client deposits in a
combination of investment securities and short-
duration financial instruments whose mix is
determined by the characteristics of the deposits.
For the past several years, we have frequently
experienced higher client deposit inflows toward the
end of each fiscal quarter or the end of the fiscal year.
As a result, we believe average client deposit
balances are more reflective of ongoing funding than
period-end balances.
TABLE 33: CLIENT DEPOSITS
December 31,
Average Balance
Years Ended
December 31,
(In millions)
Client deposits(1)
2016
2015
2016
2015
$ 176,693
$ 177,907
$ 156,029
$ 171,425
(1) Balance as of December 31, 2016 and December 31, 2015 excluded
term wholesale CDs of $10.47 billion and $13.72 billion, respectively;
average balances in 2016 and 2015 excluded average CDs of $14.46
billion and $13.56 billion, respectively.
Short-Term Funding
We phased out our commercial paper program
prior to December 31, 2015, consistent with the
objectives of our 2015 recovery and resolution plan
developed pursuant to the requirements of the Dodd-
Frank Act. Accordingly, we had no commercial paper
outstanding as of December 31, 2016 or
December 31, 2015.
Our on-balance sheet liquid assets are also an
integral component of our liquidity management
strategy. These assets provide liquidity through
State Street Corporation | 92
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Continued)
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 with 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. These balances
were $4.40 billion and $4.50 billion as of
December 31, 2016 and December 31, 2015,
respectively.
State Street Bank currently maintains a line of
credit with a financial institution of CAD 1.40 billion, or
approximately $1.04 billion as of December 31, 2016,
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, 2016, there was no
balance outstanding on this line of credit.
Long-Term Funding
As of December 31, 2016, 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, 2016, $4 billion was
available for issuance pursuant to this authority. As of
December 31, 2016, State Street Bank also had
Board authority to issue an additional $500 million of
subordinated debt.
State Street Corporation maintains 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.
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 preparedness for current or future
regulatory developments. High ratings limit borrowing
costs and enhance 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, which could increase the related cost of
funds. In turn, this could cause the sudden and large-
scale withdrawal of unsecured deposits by our clients,
which could lead to draw-downs of unfunded
commitments to extend credit or trigger 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
additional collateral or termination payments related
to our net derivative liabilities under these
arrangements that could have been called by
counterparties in the event of a downgrade in our
credit ratings below levels specified in the
agreements is disclosed in Note 10 to the
consolidated financial statements included under Item
8, Financial Statements and Supplementary Data, of
this Form 10-K. Other funding sources, such as
secured financing transactions and other margin
requirements, for which there are no explicit triggers,
could also be adversely affected.
State Street Corporation | 93
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Continued)
TABLE 34: CREDIT RATINGS
State Street:
Senior debt
Subordinated debt
Junior subordinated debt
Preferred stock
Outlook
State Street Bank:
Short-term deposits
Long-term deposits
Senior debt/Long-term issuer
Subordinated debt
Outlook
As of December 31, 2016
Standard &
Poor’s
Moody’s
Investors
Service
A
A-
BBB
BBB
Stable
A-1+
AA-
AA-
A
A1
A2
A3
Baa1
Stable
P-1
Aa1
Aa3
Aa3
Fitch
AA-
A+
BBB+
BBB
Stable
F1+
AA+
AA
A+
Stable
Stable
Stable
Dominion Bond
Rating Service
AA (Low)
A (High)
A (High)
A (Low)
Stable
R-1 (High)
AA
AA
AA (Low)
Stable
Contractual Cash Obligations and Other Commitments
The long-term contractual cash obligations included within Table 35: Long-Term Contractual Cash Obligations
were recorded in our consolidated statement of condition as of December 31, 2016, except for operating leases and
the interest portions of long-term debt and capital leases.
TABLE 35: LONG-TERM CONTRACTUAL CASH OBLIGATIONS
(In millions)
Long-term debt(1) (2)
Operating leases
Capital lease obligations(2)
Total contractual cash obligations
PAYMENTS DUE BY PERIOD
Total
Less than 1
year
1-3
years
4-5
years
Over 5
years
11,137
$
450
$
1,423
$
3,155
$
6,109
1,149
325
205
57
323
99
241
90
380
79
12,611
$
712
$
1,845
$
3,486
$
6,568
$
$
(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, 2016.
(2) Additional information about contractual cash obligations related to long-term debt and operating and capital leases is provided in Notes 9 and 20 to the
consolidated financial statements included under Item 8, Financial Statements and Supplementary Data, 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.
Total contractual cash obligations shown in
Table 35: Long-Term Contractual Cash Obligations,
do 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, Financial
Statements and Supplementary Data, of this
Form 10-K.
• Obligations related to derivative instruments
because the derivative-related amounts
recorded in our consolidated statement of
condition as of December 31, 2016 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 10 to the
consolidated financial statements included
under Item 8, Financial Statements and
Supplementary Data, 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
Table 35: Long-Term Contractual Cash
Obligations.
State Street Corporation | 94
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Continued)
TABLE 36: OTHER COMMERCIAL COMMITMENTS
(In millions)
Indemnified securities financing
Stable value protection(2)
Unfunded credit facilities
Standby letters of credit
Purchase obligations(3)
Total commercial commitments
$
$
DURATION OF COMMITMENT
Total amounts
committed(1)
Less than
1 year
1-3
years
4-5
years
Over 5
years
360,452
$
360,452
$
— $
— $
27,182
28,154
3,459
235
27,182
18,403
836
55
—
5,823
2,234
62
—
3,862
389
45
—
—
66
—
73
419,482
$
406,928
$
8,119
$
4,296
$
139
(1) Total amounts committed reflect participations to independent third parties, if any.
(2) The stable value commitments do not have a contractual maturity date; however, the agreements may generally be terminated by State Street at any time upon
settlement of any outstanding payment obligations. Refer to Note 12 to the consolidated financial statements included under Item 8, Financial Statements and
Supplementary Data, of this Form 10-K for further information.
(3) 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 Table 36: Other Commercial
Commitments, except for purchase obligations, is
provided in Note 12 to the consolidated financial
statements included under Item 8, Financial
Statements and Supplementary Data, of this Form
10-K.
Operational Risk Management
Overview
Operational risk is the risk of loss resulting from
inadequate or failed internal processes, people and
systems or from external events. Operational risk
encompasses fiduciary risk and legal risk. Fiduciary
risk is defined as the risk that State Street fails to
properly exercise its fiduciary duties in its provision of
products or services to clients. Legal risk is the risk of
loss resulting from failure to comply with laws and
contractual obligations as well as prudent ethical
standards in business practices in addition to
exposure to litigation from all aspects of State Street’s
activities.
Operational risk is inherent in the performance
of investment servicing and investment management
activities on behalf of our clients. Whether it be
fiduciary risk, risk associated with execution and
processing or other types of operational risk, a
consistent, transparent and effective operational risk
framework is key to identifying, monitoring and
managing operational risk.
We have established an operational risk
framework that is based on three major goals:
• Strong, active governance;
• Ownership and accountability; and
• Consistency and transparency.
Governance
Our Board is responsible for the approval and
oversight of our overall operational risk framework. It
does so through its RC, which reviews our
operational risk framework and approves our
operational risk policy annually.
Our operational risk policy establishes our
approach to our management of operational risk
across State Street. The policy identifies the
responsibilities of individuals and committees charged
with oversight of the management of operational risk,
and articulates a broad mandate that supports
implementation of the operational risk framework.
ERM and other control groups provide the
oversight, validation and verification of the
management and measurement of operational risk.
Executive management actively manages and
oversees our operational risk framework through
membership on various risk management
committees, including MRAC, the BCRC, TORC, the
Operational Risk Committee, the Executive
Information Security Committee, and the Fiduciary
Review Committee, all of which ultimately report to
the appropriate committee of the board.
The Operational Risk Committee, chaired by the
global head of Operational Risk, provides cross-
business oversight of operational risk and reviews
and approves operational risk guidelines intended to
maintain a consistent implementation of our corporate
operational risk policy and framework.
Ownership and Accountability
We have implemented our operational risk
framework to support the broad mandate established
by our operational risk policy. This framework
represents an integrated set of processes and tools
that assists us in the management and measurement
of operational risk, including our calculation of
required capital and RWA.
The framework takes a comprehensive view and
integrates the methods and tools used to manage
and measure operational risk. The framework utilizes
aspects of the COSO framework and other industry
leading practices, and is designed foremost to
State Street Corporation | 95
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Continued)
address State Street's risk management needs while
complying with regulatory requirements. The
operational risk framework is intended to provide a
number of important benefits, including:
• A common understanding of operational risk
management and its supporting processes;
• The clarification of responsibilities for the
management of operational risk across State
Street;
• The alignment of business priorities with risk
management objectives;
• The active management of risk and early
identification of emerging risks;
• The consistent application of policies and the
collection of data for risk management and
measurement; and
• The estimation of our operational risk capital
requirement.
The operational risk framework employs a
distributed risk management infrastructure executed
by ERM groups aligned with the business units, which
are responsible for the implementation of the
operational risk framework at the business unit level.
As with other risks, senior business unit
management is responsible for the day-to-day
operational risk management of their respective
businesses. It is business unit management's
responsibility to provide oversight of the
implementation and ongoing execution of the
operational risk framework within their respective
organizations, as well as coordination and
communication with ERM.
Consistency and Transparency
A number of corporate control functions are
directly responsible for implementing and assessing
various aspects of State Street's operational risk
framework, with the overarching goal of consistency
and transparency to meet the evolving needs of the
business:
• The global head of Operational Risk, a
member of the CRO’s executive
management team, leads ERM’s corporate
ORM group. ORM is responsible for the
strategy, evolution and consistent
implementation of our operational risk
guidelines, framework and supporting tools
across State Street. ORM reviews and
analyzes operational key risk information,
events, metrics and indicators at the business
unit and corporate level for purposes of risk
management, reporting and escalation to the
CRO, senior management and governance
committees;
• ERM’s Corporate Risk Analytics group
develops and maintains operational risk
capital estimation models, and ERM's
Operations group calculates State Street's
required capital for operational risk;
• ERM’s MVG independently validates the
quantitative models used to measure
operational risk, and ORM performs
validation checks on the output of the model;
• CIS establishes the framework, policies and
related programs to measure, monitor and
report on information security risks, including
the effectiveness of cyber security program
protections. CIS defines and manages the
enterprise-wide information security program.
CIS coordinates with Information Technology,
control functions and business units to
support the confidentiality, integrity and
availability of corporate information assets.
CIS identifies and employs a risk-based
methodology consistent with applicable
regulatory cyber security requirements and
monitors the compliance of our systems with
information security policies; and
• Corporate Audit performs separate reviews of
the application of operational risk
management practices and methodologies
utilized across State Street.
Our operational risk framework consists of five
components, each described below, which provide a
working structure that integrates distinct risk
programs into a continuous process focused on
managing and measuring operational risk in a
coordinated and consistent manner.
Risk Identification, Assessment and Measurement
The objective of risk identification, assessment
and measurement is to understand business unit
strategy, risk profile and potential exposures. It is
achieved through a series of risk assessments across
State Street using techniques for the identification,
assessment and measurement of risk across a
spectrum of potential frequency and severity
combinations. Three primary risk assessment
programs, which occur annually, augmented by other
business-specific programs, are the core of this
component:
• The RCSA program seeks to understand the
risks associated with day-to-day activities,
and the effectiveness of controls intended to
manage potential exposures arising from
these activities. These risks are typically
frequent in nature but generally not severe in
terms of exposure;
• The Material Risk Identification process
utilizes a bottom-up approach to identify
State Street Corporation | 96
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Continued)
State Street’s most significant risk exposures
across all on- and off-balance sheet risk-
taking activities. The program is specifically
designed to consider risks that could have a
material impact irrespective of their likelihood
or frequency. This can include risks that may
have an impact on longer-term business
objectives, such as significant change
management activities or long-term strategic
initiatives;
• The Scenario Analysis program focuses on
the set of risks with the highest severity and
most relevance from a capital perspective.
These are generally referred to as “tail risks,"
and serve as important benchmarks for our
loss distribution approach model (see below);
they also provide inputs into stress testing;
and
• Business-specific programs to identify,
assess and measure risk, including new
business and product review and approval,
new client screening, and, as deemed
appropriate, targeted risk assessments.
The primary measurement tool used is an
internally developed loss distribution approach model,
referred to as the LDA model. We use the LDA model
to quantify required operational risk capital, from
which we calculate RWA related to operational risk.
Such required capital and RWA totaled $3.57 billion
and $44.58 billion, respectively, as of December 31,
2016; refer to the "Capital" section in "Financial
Condition," of this Management's Discussion and
Analysis.
The LDA model incorporates the four required
operational risk elements described below:
•
Internal loss event data is collected from
across State Street in conformity with our
operating loss policy that establishes the
requirements for collecting and reporting
individual loss events. We categorize the
data into seven Basel-defined event types
and further subdivide the data by business
unit, as deemed appropriate. Each of these
loss events are represented in a UOM which
is used to estimate a specific amount of
capital required for the types of loss events
that fall into each specific category. Some
UOMs are measured at the corporate level
because they are not “business specific,”
such as damage to physical assets, where
the cause of an event is not primarily driven
by the behavior of a single business unit.
Internal losses of $500 or greater are
captured, analyzed and included in the
modeling approach. Loss event data is
collected using a corporate-wide data
collection tool, which stores the data in a
Loss Event Data Repository, referred to as
the LEDR, to support processes related to
analysis, management reporting and the
calculation of required capital. Internal loss
event data provides State Street-specific
frequency and severity information to our
capital calculation process for historical loss
events experienced by State Street. Internal
loss event data may be incorporated into our
LDA model in a future quarter following the
realization of the losses, with the timing and
categorization dependent on the processes
for model updates and, if applicable, model
revalidation and regulatory review and related
supervisory processes. An individual loss
event can have a significant effect on the
output of our LDA model and our operational
risk RWA under the advanced approaches
depending on the severity of the loss event,
its categorization among the seven Basel-
defined UOMs and the stability of the
distributional approach for a particular UOM.
• External loss event data provides information
with respect to loss event severity from other
financial institutions to inform our capital
estimation process of events in similar
business units at other banking
organizations. This information supplements
the data pool available for use in our LDA
model. Assessments of the sufficiency of
internal data and the relevance of external
data are completed before pooling the two
data sources for use in our LDA model.
• Scenario analysis workshops are conducted
annually across State Street to inform
management of the less frequent but most
severe, or “tail,” risks that the organization
faces. The workshops are attended by senior
business unit managers, other support and
control partners and business-aligned risk
management staff. The workshops are
designed to capture information about the
significant risks and to estimate potential
exposures for individual risks should a loss
event occur. Workshops are aligned with
specific UOMs and business units where
appropriate. The results of these workshops
are used to benchmark our LDA model
results to determine that our calculation of
required capital considers relevant risk-
related information.
• Business environment and internal control
factors are gathered as part of our scenario
analysis program to inform the scenario
analysis workshop participants of internal
loss event data and business-relevant
State Street Corporation | 97
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Continued)
metrics, such as RCSA results, along with
industry loss event data and case studies
where appropriate. Business environment
and internal control factors are those
characteristics of a bank’s internal and
external operating environment that bear an
exposure to operational risk. The use of this
information indirectly influences our
calculation of required capital by providing
additional relevant data to workshop
participants when reviewing specific UOM
risks.
Monitoring
The objective of risk monitoring is to proactively
monitor the changing business environment and
corresponding operational risk exposure. It is
achieved through a series of quantitative and
qualitative monitoring tools that are designed to allow
us to understand changes in the business
environment, internal control factors, risk metrics, risk
assessments, exposures and operating effectiveness,
as well as details of loss events and progress on risk
initiatives implemented to mitigate potential risk
exposures.
Effectiveness and Testing
The objective of effectiveness and testing is to
verify that internal controls are designed
appropriately, are consistent with corporate and
regulatory standards, and are operating effectively. It
is achieved through a series of assessments by both
internal and external parties, including Corporate
Audit, independent registered public accounting firms,
business self-assessments and other control function
reviews, such as a SOX testing program.
Consistent with our standard model validation
process, the operational risk LDA model is subject to
a detailed review, overseen by the MRC. In addition,
the model is subject to a rigorous internal governance
process. All changes to the model or input
parameters, and the deployment of model updates,
are reviewed and approved by the Operational Risk
Committee, which has oversight responsibility for the
model, with technical input from the MRC.
Reporting
Operational risk reporting is intended to provide
transparency, thereby enabling management to
manage risk, provide oversight and escalate issues in
a timely manner. It is designed to allow the business
units, executive management, and the Board's control
functions and committees to gain insight into activities
that may result in risks and potential exposures.
Reports are intended to identify business activities
that are experiencing processing issues, whether or
not they result in actual loss events. Reporting
includes results of monitoring activities, internal and
external examinations, regulatory reviews, and
control assessments. These elements combine in a
manner designed to provide a view of potential and
emerging risks facing State Street and information
that details its progress on managing risks.
Documentation and Guidelines
Documentation and guidelines allow for
consistency and repeatability of the various
processes that support the operational risk framework
across State Street.
Operational risk guidelines document our
practices and describe the key elements 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 the business units' responsibilities to identify,
assess, measure, monitor and report operational risk.
The guideline supports our operational risk policy.
Data standards have been established to
maintain consistent data repositories and systems
that are controlled, accurate and available on a timely
basis to support operational risk management.
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. We are exposed to market risk
in both our trading and certain of our non-trading, or
asset-and-liability management, activities.
Information about the market risk associated
with our trading activities is provided below under
“Trading Activities.” Information about the market risk
associated with our non-trading activities, which
consists primarily of interest-rate risk, is provided
below under “Asset-and-Liability Management
Activities.”
Trading Activities
In the conduct of our trading activities, we
assume market risk, the level of which 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.
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.
State Street Corporation | 98
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Continued)
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 interest-rate futures. As
of December 31, 2016, the notional amount of these
derivative contracts was $1.45 trillion, of which $1.42
trillion was composed of foreign exchange forward,
swap and spot contracts. 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.
Governance
Our assumption of market risk in our trading
activities is an integral part of our corporate risk
appetite. Our 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 previously described TMRC (refer to "Risk
Committees") oversees all market risk-taking
activities across State Street associated with trading.
The TMRC, which reports to MRAC, is composed of
members of ERM, our global markets business and
our Global Treasury group, as well as our senior
executives who manage our trading businesses and
other members of management who possess
specialized knowledge and expertise. 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 group
also establishes and approves market risk tolerance
limits and trading authorities based on, but not limited
to, measures of notional amounts, sensitivity, VaR
and stress. Such limits and authorities are specified
in our trading and market risk guidelines which
govern our management of trading market risk.
Corporate Audit separately assesses the design
and operating effectiveness of the market risk
controls within our business units and ERM. Other
related responsibilities of Corporate Audit include the
periodic review of ERM and business unit compliance
with market risk policies, guidelines, and corporate
standards, as well as relevant regulatory
requirements. We are subject to regular monitoring,
reviews and supervisory exams of our market risk
function by the Federal Reserve. In addition, we are
regulated by, among others, the SEC, the Financial
Industry Regulatory Authority and the U.S.
Commodities Futures Trading Commission.
Risk Appetite
Our corporate market risk appetite is specified in
policy statements that outline the governance,
responsibilities and requirements surrounding the
identification, measurement, analysis, management
and communication of market risk arising from our
trading activities. These policy statements also set
forth the market risk control framework to monitor,
support, manage and control this portion of our risk
appetite. All groups involved in the management and
control of market risk associated with trading activities
are required to comply with the qualitative and
quantitative elements of these policy statements. Our
trading market risk control framework is composed of
the following components:
• A trading market risk management process
led by ERM, separate from the business
units' discrete activities;
• Clearly defined responsibilities and
authorities for the primary groups involved in
trading market risk management;
• A trading market risk measurement
methodology that captures correlation effects
and allows aggregation of market risk across
risk types, markets and business lines;
• Daily monitoring, analysis, and reporting of
market risk exposures associated with trading
activities against market risk limits;
State Street Corporation | 99
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Continued)
• A defined limit structure and escalation
Covered Positions
process in the event of a market risk limit
excess;
• Use of VaR models to measure the one-day
market risk exposure of trading positions;
• Use of VaR as a ten-day-based regulatory
capital measure of the market risk exposure
of trading positions;
• Use of non-VaR-based limits and other
controls;
• Use of stressed-VaR models, stress-testing
analysis and scenario analysis to support the
trading market risk measurement and
management process by assessing how
portfolios and global business lines perform
under extreme market conditions;
• Use of back-testing as a diagnostic tool to
assess the accuracy of VaR models and
other risk management techniques; and
• A new product approval process that requires
market risk teams to assess trading-related
market risks and apply risk tolerance limits to
proposed new products and business
activities.
We use our CAP to assess our overall capital
and liquidity in relation to our risk profile and provide
a comprehensive strategy for maintaining appropriate
capital and liquidity levels. With respect to market
risk associated with trading activities, our risk
management and our calculations of regulatory
capital are based primarily on our internal VaR
models and stress testing analysis. As discussed in
detail under “Value-at-Risk” below, VaR is measured
daily by ERM.
The TMRC oversees our market risk exposure 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. These limits are designed to
prevent any undue concentration of market risk
exposure, in light of the primarily non-proprietary
nature of our trading activities. The risk appetite
framework and associated limits are reviewed and
approved by the Board's RC.
Our trading positions are subject to regulatory
market risk capital requirements if they meet the
regulatory definition of a “covered position.” A
covered position is generally defined by U.S. banking
regulators as an on- or off-balance sheet position
associated with the organization's trading activities
that is free of any restrictions on its tradability, but
does not include intangible assets, certain credit
derivatives recognized as guarantees and certain
equity positions not publicly traded. All FX and
commodity positions are considered covered
positions, regardless of the accounting treatment they
receive. The identification of covered positions for
inclusion in our market risk capital framework is
governed by our covered positions policy, which
outlines the standards we use to determine whether a
trading position is a covered position.
Our covered positions consist primarily of the
trading portfolios held by our global markets
business. They also arise from certain positions held
by our Global Treasury group. These trading positions
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. 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.
We use spot rates, forward points, yield curves
and discount factors imported from third-party
sources to measure the value of our covered
positions, and we use such values to mark our
covered positions to market on a daily basis. These
values are subject to separate validation by us in
order to evaluate reasonableness and consistency
with market experience. The mark-to-market gain or
loss on spot transactions is calculated by applying the
spot rate to the foreign currency principal and
comparing the resultant base currency amount to the
original transaction principal. The mark-to-market
gain or loss on a forward foreign exchange contract
or forward cash flow contract is determined as the
difference between the life-to-date (historical) value of
the cash flow and the value of the cash flow at the
inception of the transaction. The mark-to-market gain
or loss on interest-rate swaps is determined by
discounting the future cash flows from each leg of the
swap transaction.
State Street Corporation | 100
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Continued)
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 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 requirements.
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.
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 historical
volatilities of market risk factors during a two-year
observation period calibrated to a one-tail, 99%
confidence interval and a ten-business-day holding
period. 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. Changes
in our models may result in changes in our
measurements of our market risk exposures,
including VaR, and related measures, including
regulatory capital. These changes could result in
material changes in those risk measurements and
related measures as calculated and compared from
period to period.
Value-at-Risk
VaR measures are based on the most recent
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. Historically, these instruments
have exhibited a higher degree of liquidity relative to
other available capital markets instruments. As a
result, the VaR measures shown reflect our ability to
rapidly adjust exposures in highly dynamic markets.
For this reason, risk inventory, in the form of net open
positions, across all currencies is typically limited. In
addition, long and short positions in major, as well as
minor, currencies provide risk offsets that limit our
potential downside exposure.
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 approximately 5,000 risk
factors and includes correlations among currency,
interest rates, and other market rates.
All VaR measures are subject to limitations and
must be interpreted accordingly. Some, but not all, of
the limitations of our VaR methodology include the
following:
• Compared to a shorter observation period, a
two-year observation period is slower to
reflect increases in market volatility (although
temporary increases in market volatility will
affect the calculation of VaR for a longer
period); consequently, in periods of sudden
increases in volatility or increasing volatility,
in each case relative to the prior two-year
period, the calculation of VaR may understate
current risk;
• Compared to a longer observation period, a
two-year observation period may not reflect
as many past periods of volatility in the
markets, because such past volatility is no
longer in the observation period;
consequently, historical market scenarios of
high volatility, even if similar to current or
likely future market circumstances, may fall
outside the two-year observation period,
resulting in a potential understatement of
current risk;
• The VaR-based measure is calibrated to a
specified level of confidence and does not
indicate the potential magnitude of losses
beyond this confidence level;
•
In certain cases, VaR-based measures
approximate the impact of changes in risk
factors on the values of positions and
portfolios; this may happen because the
number of inputs included in the VaR model
is necessarily limited; for example, yield
State Street Corporation | 101
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Continued)
curve risk factors do not exist for all future
dates;
• The use of historical market information may
not be predictive of future events, particularly
those that are extreme in nature; this
“backward-looking” limitation can cause VaR
to understate or overstate risk;
• The effect of extreme and rare market
movements is difficult to estimate; this may
result from non-linear risk sensitivities as well
as the potential for actual volatility and
correlation levels to differ from assumptions
implicit in the VaR calculations; and
•
Intra-day risk is not captured.
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 stressed VaR model
identifies the second-worst outcome occurring in the
worst continuous one-year rolling period since July
2007. This stressed VaR meets the regulatory
requirement as the rolling ten-day period with an
outcome that is worse than 99% of other outcomes
during that twelve-month period of financial stress.
For each portfolio, the stress period is determined
algorithmically by seeking the one-year time horizon
that produces the largest ten-business-day VaR from
within the available historical data. This historical
data set includes the financial crisis of 2008, the
highly volatile period surrounding the Eurozone
sovereign debt crisis and the Standard & Poor's
downgrade of U.S. Treasury debt in August 2011. As
the historical data set used to determine the stress
period expands over time, future market stress events
will be automatically incorporated.
We perform scenario analysis daily 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. Relevant scenarios are chosen from
an inventory of historical financial stresses and
applied to our current portfolio. These historical event
scenarios involve spot foreign exchange, credit,
equity, unforeseen geo-political events and natural
disasters, and government and central bank
intervention scenarios. Examples of the specific
historical scenarios we incorporate in our stress
testing program may include the Asian financial crisis
of 1997, the September 11, 2001 terrorist attacks in
the U.S., and the 2008 financial crisis. We continue
to update our inventory of historical stress scenarios
as new stress conditions emerge in the financial
markets.
As each of the historical stress events is
associated with a different time horizon, we normalize
results by scaling down the longer horizon events to a
ten-day horizon and keeping the shorter horizon
events (i.e., events that are shorter than ten days) at
their original terms. We also conduct sensitivity
analysis daily to calculate the impact of a large
predefined shock in a specific risk factor or a group of
risk factors on our current portfolio. These predefined
shocks include parallel and non-parallel yield curve
shifts and foreign exchange spot and volatility surface
shifts. In a parallel shift scenario, we apply a
constant factor shift across all yield curve tenors. In a
non-parallel shift scenario, we apply different shock
levels to different tenors of a yield curve, rather than
shifting the entire curve by a constant amount. Non-
parallel shifts include steepening, flattening and
butterflies.
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.
State Street Corporation | 102
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Continued)
Validation and Back-Testing
We perform frequent 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 daily, actual profit-and-loss outcomes, or
P&L, 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. Our VaR
definition of trading losses excludes items that are not
specific to the price movement of the trading assets
and liabilities themselves, such as fees, commissions,
changes to reserves and gains or losses from intra-
day activity.
We experienced one back-testing exception in
2016 and one back-testing exception in 2015. In
reference to the 2016 exception, the trading P&L that
day exceeded the VaR based on the prior day’s
closing positions, following a large depreciation in the
U.S. dollar against several major and emerging
market currencies, primarily attributable to U.S. GDP
growth rate being lower than expected and market
reaction to Bank of Japan’s decision to leave the
interest rate unchanged. In reference to the 2015
exception, the trading P&L that day exceeded the
VaR based on the prior day’s closing positions,
following a large depreciation in the U.S. dollar
against several major and emerging market
currencies, which depreciation can be attributed to a
decision and related statements by the Federal
Reserve’s Federal Open Market Committee to hold
interest rates at current levels.
Our model validation process also evaluates the
integrity of our VaR models through the use of regular
outcome analysis. This outcome analysis includes
back-testing, which compares the VaR model's
predictions to actual outcomes using out-of-sample
information. MVG examined back testing results for
the market risk regulatory capital model used for
2016. 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.
Market Risk Reporting
Our ERM market risk management group is
responsible for market risk monitoring and reporting.
We use a variety of systems and controlled market
feeds from third-party services to compile data for
several daily, weekly, and monthly management
reports.
The following tables present VaR and stressed
VaR associated with our trading activities for covered
positions held during the quarters ended December
31, 2016 and September 30, 2016, and as of
December 31, 2016 and September 30, 2016, as
measured by our VaR methodology:
TABLE 37: TEN-DAY VaR ASSOCIATED WITH TRADING ACTIVITIES FOR COVERED POSITIONS
Quarter Ended December 31, 2016
Quarter Ended September 30, 2016
As of
December 31,
2016
As of
September 30,
2016
(In thousands)
Global Markets
Global Treasury
Total VaR
Average
Maximum Minimum
Average
Maximum Minimum
VaR
VaR
$
$
8,307
$ 15,847
527
756
8,285
$ 15,723
$
$
3,048
333
2,970
$
$
7,594
$
14,160
563
762
7,497
$
14,048
$
$
4,215
399
4,124
$
$
4,088
756
3,938
$
$
9,393
584
9,746
TABLE 38: TEN-DAY STRESSED VaR ASSOCIATED WITH TRADING ACTIVITIES FOR COVERED POSITIONS
Quarter Ended December 31, 2016
Quarter Ended September 30, 2016
As of
December 31,
2016
As of
September 30,
2016
Average
Maximum Minimum
Average
Maximum Minimum
Stressed VaR
Stressed VaR
(In thousands)
Global Markets
Global Treasury
Total Stressed VaR
$
38,645
$ 55,899
$
20,646
$
37,194
$
53,771
$
23,077
$
36,168
$ 52,057
$
18,883
$
35,056
$
56,298
$
20,763
10,275
13,868
7,030
11,080
15,123
7,611
$
$
26,811
11,342
28,624
$
$
41,487
10,283
45,019
State Street Corporation | 103
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Continued)
The twelve month average of our stressed VaR-
based measure was approximately $39 million for the
quarter ended December 31, 2016, compared to an
average of approximately $37 million for the quarter
ended September 30, 2016.
The decline in the total VaR and stressed VaR-
based measures as of December 31, 2016,
compared to September 30, 2016, was driven mainly
by lower end of day foreign exchange positions on
December 31, 2016 compared to September 30,
2016.
The VaR-based measures presented in the
preceding tables are primarily a reflection of the
overall level of market volatility and our appetite for
taking market risk in our trading activities. 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.
We may in the future modify and adjust our
models and methodologies used to calculate VaR and
stressed VaR, subject to regulatory review and
approval, and these modifications and adjustments
may result in changes in our VaR-based and stressed
VaR-based measures.
The following tables present the VaR and
stressed-VaR associated with our trading activities
attributable to foreign exchange risk, interest-rate risk
and volatility risk as of December 31, 2016 and
September 30, 2016. The totals of the VaR-based
and stressed VaR-based measures for the three
attributes for each VaR and stressed-VaR component
exceeded the related total VaR and total stressed
VaR presented in the foregoing tables as of each
period-end, primarily due to the benefits of
diversification across risk types.
TABLE 39: TEN-DAY VaR ASSOCIATED WITH TRADING ACTIVITIES BY RISK FACTOR(1)
(In thousands)
By component:
Global Markets
Global Treasury
Total VaR
Foreign
Exchange Risk
As of December 31, 2016
Interest Rate
Risk
Volatility Risk
Foreign
Exchange Risk
As of September 30, 2016
Interest Rate
Risk
Volatility Risk
$
$
3,279
220
3,269
$
$
3,281
737
3,004
$
$
102
—
102
$
$
7,198
184
7,082
$
$
4,407
576
4,589
$
$
160
—
160
TABLE 40: TEN-DAY STRESSED VaR ASSOCIATED WITH TRADING ACTIVITIES BY RISK FACTOR(1)
(In thousands)
By component:
Global Markets
Global Treasury
Total Stressed VaR
Foreign
Exchange Risk
As of December 31, 2016
Interest Rate
Risk
Volatility Risk
Foreign
Exchange Risk
As of September 30, 2016
Interest Rate
Risk
Volatility Risk
$
$
5,026
258
5,056
$
$
36,563
11,597
36,592
$
$
111
—
111
$
$
23,236
229
22,837
$
$
47,093
10,310
43,256
$
$
183
—
183
(1) For purposes of risk attribution by component, foreign exchange refers only to the risk from market movements in period-end rates. Forwards, futures, options and
swaps with maturities greater than period-end have embedded interest-rate risk that is captured by the measures used for interest-rate risk. Accordingly, the interest-
rate risk embedded in these foreign exchange instruments is included in the interest-rate risk component.
Asset-and-Liability Management Activities
The primary objective of asset-and-liability
management is to provide sustainable NIR under
varying economic conditions, 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.
We manage interest rate risk on a consolidated
basis using two different, but complementary,
approaches. NIR sensitivity is a short-term, earnings-
based simulation that measures re-pricing
mismatches on the balance sheet. It compares our
baseline view of NIR over a twelve-month horizon,
based on our internal forecast of interest rates, to a
wide range of instantaneous and gradual rate shocks.
The baseline NIR forecast includes our expectations
for new business growth, changes in balance sheet
mix and investment portfolio positioning. In our
interest rate shocks, investment portfolio balances
can fluctuate with the level of rates as prepayment
State Street Corporation | 104
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Continued)
assumptions change, however deposit balances
remain consistent with the baseline. On the other
hand, economic value of equity sensitivity is a
discounted cash flow model designed to estimate the
change in fair value of assets and liabilities under a
series of immediate interest rate shocks. It measures
the duration mismatch of the spot balance sheet only
and does not include the impact of new business.
While there are clear differences between NIR
and EVE sensitivity, there are several important
similarities. First, both measures utilize consistent
data and assumptions when modeling positions
currently held on the balance sheet. Second, each
approach assumes no management action is taken to
mitigate the adverse effects of interest rate changes
on our financial performance (and thus provides a
conservative view of interest rate risk). NIR and EVE
sensitivity metrics are continuously monitored as
market conditions change and managed within
internally-approved risk limits and guidelines.
interest rates; and management actions taken in
response to the preceding conditions.
As of December 31, 2016, NIR sensitivity
remains positioned to benefit from rising interest
rates. Compared to prior year-end, the increase in
asset sensitivity is primarily driven by fixed-rate
deposit growth and slower forecasted re-pricing on
interest-bearing deposits. Gradual rate shocks have a
similar positioning compared with instantaneous
shocks, but are less impactful due to the severity of
the rate shift.
Economic Value of Equity
The following table highlights our economic
value of equity sensitivity to a +/-200 basis point
instantaneous rate shock, relative to spot interest
rates. Management compares the change in EVE
sensitivity against State Street's aggregate tier 1 and
tier 2 risk-based capital, calculated in conformity with
current applicable regulatory requirements.
Net Interest Revenue at Risk
TABLE 42: EVE SENSITIVITY
In the table below, we report the expected
change in net interest revenue over the next twelve
months from +/-100 basis point instantaneous and
gradual parallel rate shocks. Note that in each
scenario, all currencies interest rates are shifted
higher or lower. For the two gradual parallel rate
scenarios, or interest rate ramps, the change in rates
is applied evenly throughout the horizon. In each
scenario, we assume no change in client behavior as
a result of the changes in interest rates.
We also routinely measure NIR sensitivity to
non-parallel rate shocks to isolate the impact of short-
term or long-term market rates. In the up 100 basis
point instantaneous shock, the majority of the benefit
stems from the short-end of the yield curve.
Additionally, we quantify how much of the change is a
result of shifts in U.S. and non-U.S. rates. In the up
100 basis point instantaneous shock, approximately
60% of the benefit is driven by U.S. rates.
TABLE 41: NIR SENSITIVITY
(In millions)
Rate change:
December 31,
2016
December 31,
2015
Exposure/Benefit
+100 bps shock
$
585
$
–100 bps shock
+100 bps ramp
–100 bps ramp
(265)
284
(161)
471
(181)
198
(96)
Other important factors which affect the levels of
NIR are the size and mix of assets carried in our
consolidated statement of condition; asset and liability
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
December 31,
2016
December 31,
2015
December 31,
2015
(In millions)
Rate change:
(as reported)
(pro forma)
Exposure/Benefit
+200 bps shock
$
(1,092) $
(2,355) $
–200 bps shock
877
1,655
(791)
(25)
As of December 31, 2016, economic value of
equity sensitivity remains exposed to upward shifts in
interest rates. Compared to prior year, the increased
exposure in the up rate shock was primarily driven by
an increase in our modeled deposit duration, partially
offset by investment portfolio activity. In the second
quarter of 2016, we refined our deposit modeling
framework to better reflect recent client activity and
pricing actions. These enhancements extended our
expected deposit duration resulting in a significant
exposure reduction in the up 200 basis point
scenario. To allow for comparison between periods,
we have included December 31, 2015 pro-forma
information to show what the results would have been
under the same model refinements that are included
as of December 31, 2016.
Model Risk Management
The use of quantitative models is widespread
throughout the financial services industry, with large
and complex organizations relying on sophisticated
models to support numerous aspects of their financial
decision making. The models contemporaneously
represent both a significant advancement in financial
management and a new source of risk. In large
banking organizations like State Street, model results
influence business decisions, and model failure could
have a harmful effect on our financial performance.
As a result, the Model Risk Management Framework
seeks to mitigate model risk at State Street.
State Street Corporation | 105
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Continued)
Our model risk management program has three
Model Validation
principal components:
• A model risk governance program that
defines roles and responsibilities, including
the authority to restrict model usage, provides
policies and guidance, monitors compliance,
and reports regularly to the Board on the
overall degree of model risk across the
corporation;
• A model development process that focuses
on sound design and computational
accuracy, and includes activities designed to
test for robustness, stability, and sensitivity to
assumptions; and
• An independent model validation function
designed to verify that models are
conceptually sound, computationally
accurate, are performing as expected, and
are in line with their design objectives.
Governance
Models used in the regulatory capital calculation
can only be deployed for use after receiving a
satisfactory validation review and approval decision
from Model Risk Management.
ERM’s Model Risk Management group is
responsible for defining the corporate-wide model risk
governance framework, and maintains policies that
achieve the framework’s objectives. The team is
responsible for overall model risk governance
capabilities, with particular emphasis in the areas of
model validation, model risk reporting, model
performance monitoring, tracking of new model
development status, and committee-level review and
challenge.
MRC, which is composed of senior staff with
technical expertise, reports to MRAC, and provides
guidance and oversight to the Model Risk
Management function.
Model Development and Usage
Models are developed under standards
governing data sourcing, methodology selection and
model integrity testing. Model development includes a
statement of purpose to align development with
intended use. It also includes a comparison of
alternative approaches to promote a sound modeling
approach.
Model developers conduct an assessment of
data quality and relevance. The development teams
conduct a variety of tests of the accuracy, robustness
and stability of each model.
Model owners submit models to the Model
Validation Group for validation on a regular basis, as
per existing policy.
MVG is part of Model Risk Management within
ERM and performs model validations. MVG is
independent, as contemplated by applicable bank
regulatory requirements, of both the developers and
users of the models. MVG validates models through
a review process that assesses the appropriateness,
accuracy, and suitability of data inputs,
methodologies, assumptions, and processing code.
Model validation also encompasses an assessment
of model performance, sensitivity, and robustness, as
well as a model’s potential limitations given its
particular assumptions or deficiencies. Based on the
results of its review, MVG issues a model use
decision and may require remedial actions and
compensating controls on model use. MVG also
maintains a model risk-rating system, which assigns a
risk rating to each model based on an assessment of
a model's inherent and residual risks. These ratings
aid in the understanding and reporting of model risk
across the model portfolio, and enable the triaging of
needs for remediation.
Although model validation is the primary method
of subjecting models to independent review and
challenge, in practice, a multi-step governance
process provides the opportunity for challenge by
multiple parties. First, MVG conducts model
validation and issues a model use decision that may
be accompanied by mandatory remedial actions and
compensating controls. Second, these decisions are
reviewed, challenged, and confirmed by the MRC.
Finally, model use decisions, risk ratings, and overall
levels of model risk are reported to and reviewed by
MRAC. MRM also reports regularly on model risk
issues to the Board.
Strategic Risk Management
We define strategic risk as the current or
prospective impact on earnings or capital arising from
adverse business decisions, improper implementation
of strategic initiatives, or lack of responsiveness to
industry-wide changes. Strategic risks are influenced
by changes in the competitive environment; decline in
market performance or changes in our business
activities; and the potential secondary impacts of
reputational risks, not already captured as market,
interest rate, credit, operational, model or liquidity
risks. We incorporate strategic risk into our
assessment of our business plans and risk and
capital management processes. Active management
of strategic risk is an integral component of all
aspects of our business.
Separating the effects of a potential material
adverse event into operational and strategic 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
State Street Corporation | 106
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Continued)
loss, while the impact on our reputation and
consequently the potential loss of clients and
corresponding decline in revenue would be classified
as a strategic risk loss. An additional example of
strategic 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 strategic risk.
Strategic risk is managed with a long-term focus.
Techniques for its assessment and management
include the development of business plans, which are
subject to robust review and challenge from senior
management and the Board of Directors, as well as a
formal review and approval process for all new
business and product proposals. The potential
impact of the various elements of strategic 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 strategic risk. Management and
control of strategic risks are generally the
responsibility of the business units, with oversight
from the control functions, as part of their overall
strategic planning and internal risk management
processes.
Capital
Managing our capital involves evaluating
whether our actual and projected levels of capital are
commensurate with our risk profile, are in compliance
with all applicable regulatory requirements, and are
sufficient to provide us with the financial flexibility to
undertake future strategic business initiatives. We
assess capital adequacy based on relevant regulatory
capital requirements, as well as our own internal
capital goals, targets and other relevant metrics.
Framework
Our objective with respect to management of our
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 requirements.
Our capital management focuses on our risk
exposures, the regulatory requirements applicable to
us with respect to multiple capital measures, the
evaluations and resulting credit ratings of the major
independent rating agencies, our return on capital at
both the consolidated and line-of-business level, and
our capital position relative to our peers.
Assessment of our overall capital adequacy
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. The assessment seeks 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 assessment of capital adequacy
are strategic and contingency planning, stress testing
and planned capital actions.
Capital Adequacy Process
Our primary federal 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 FDICIA. 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, one of
our primary goals with respect to capital management
is to exceed all applicable minimum regulatory capital
requirements and to be “well-capitalized” under the
PCA guidelines established by the FDIC. Our capital
management activities are conducted as part of our
corporate-wide CAP and associated Capital Policy
and guidelines.
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
our credit ratings and the ratings of our principal
subsidiaries.
In conformity with our Capital Policy and
guidelines, we strive to achieve and maintain specific
internal capital levels, 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
CAP to assess our overall capital in relation to our
risk profile and to provide a comprehensive strategy
for maintaining appropriate capital levels. The CAP
considers material risks under multiple scenarios,
with an emphasis on stress scenarios, and
encompasses existing processes and systems used
to measure our capital adequacy.
Capital Contingency Planning
Contingency planning is an integral component
of capital management. The objective of contingency
planning is to monitor current and forecast levels of
select capital, liquidity and other measures that serve
State Street Corporation | 107
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Continued)
as early indicators of a potentially adverse capital or
liquidity adequacy situation. These measures are
one of the inputs used to set our internal capital
adequacy level. We review these measures annually
for appropriateness and relevance in relation to our
financial budget and capital plan.
Through the evaluation of State Street’s capital
adequacy and/or future performance under adverse
conditions, the stress testing processes provide
important insights for capital planning, risk
management, and strategic decision-making at State
Street.
Stress Testing
Governance
We administer a robust State Street-wide stress-
In order to support integrated decision making,
testing program that executes multiple stress tests
each year to assess the institution’s capital adequacy
and/or future performance under adverse conditions.
Our stress testing program is structured around what
we determine to be the key risks incurred by State
Street, as assessed through a recurring material risk
identification process. The material risk identification
process represents a bottom-up approach to
identifying the institution’s most significant risk
exposures across all on- and off-balance sheet risk-
taking activities, including credit, market, liquidity,
interest rate, operational, fiduciary, business,
reputation, and regulatory risks. These key 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, a severe recession in China and an oil
shock precipitated by turmoil in the Middle East/North
Africa region.
In connection with the focus on our key risks,
each stress test incorporates idiosyncratic loss events
tailored to State Street‘s unique risk profile and
business activities. 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 assets of $50
billion or more, which includes State Street, to submit
a capital plan on an annual basis. The Federal
Reserve uses its annual CCAR process, which
incorporates hypothetical financial and economic
stress scenarios, to review those capital plans and
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 its 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, challenge, and approve
CCAR results and assumptions before submission to
the Federal Reserve.
we have identified three management elements to aid
in the compatibility and coordination of our CAP:
• 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 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 the Capital Policy and guidelines,
development of the Capital Plan, the management of
global capital, capital optimization, and business unit
capital management.
MRAC provides oversight of our capital
management, our capital adequacy, our internal
targets and the expectations of the major
independent credit rating agencies. In addition,
MRAC approves our balance sheet strategy and
related activities. The Board’s RC assists the Board
in fulfilling its oversight responsibilities related to the
assessment and management of risk and capital. Our
Capital Policy is reviewed and approved annually by
the Board's RC.
Global Systemically Important Bank
We are one among a group of 30 institutions
worldwide that have been identified by the FSB and
the BCBS as G-SIBs. Our designation as a G-SIB
requires us to maintain an additional capital buffer
above the Basel III final rule minimum common equity
tier 1 capital ratio of 4.5%, based on a number of
factors, as evaluated by banking regulators.
We and our depository institution subsidiaries
are subject to the current Basel III minimum risk-
based capital and leverage ratio guidelines. The
Basel III final rule incorporates several multi-year
transition provisions for capital components and
minimum ratio requirements for common equity tier 1
capital, tier 1 capital and total capital.
Additional information about G-SIBs is provided
under “Regulatory Capital Adequacy and Liquidity
State Street Corporation | 108
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Continued)
Standards” in "Supervision and Regulation" under
Item 1, Business, of this Form 10-K.
Regulatory Capital
We and State Street Bank, as advanced
approaches banking organizations, are subject to the
current Basel III minimum risk-based capital and
leverage ratio guidelines. The Basel III final rule
incorporates several multi-year transition provisions
for capital components and minimum ratio
requirements for common equity tier 1 capital, tier 1
capital and total capital. The transition period started
in January 2014 and will be completed by January 1,
2019, which is concurrent with the full implementation
of the Basel III final rule in the U.S.
Among other things, the Basel III final rule
introduced a minimum common equity tier 1 risk-
based capital ratio of 4.5% and raises the minimum
tier 1 risk-based capital ratio from 4% to 6%. In
addition, for advanced approaches banking
organizations such as State Street, the Basel III final
rule 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.
The Basel III final rule also introduced 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. The countercyclical capital buffer is
currently set at zero by U.S. banking regulators.
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 on January 1,
2015, the “well-capitalized” standard for our banking
subsidiaries was revised to reflect the higher capital
requirements in the Basel III final rule.
In addition to introducing new capital ratios and
buffers, the 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 were phased out
from tier 1 capital over a two-year period that ended
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. As of December 31, 2016, we retired the
trusts related to our trust preferred securities and the
underlying indentures do not qualify as tier 2
regulatory capital.
Under the Basel III final rule, certain new items
are deducted from common equity tier 1 capital and
certain regulatory capital deductions were modified as
compared to the previously applicable capital
regulations. 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 AFS investment securities flow
through to and affect State Street’s and State Street
Bank's common equity tier 1 capital, subject to a
phase-in schedule.
We are required to use the advanced
approaches framework as provided in the Basel III
final rule to determine our risk-based capital
requirements. The Dodd-Frank Act applies a "capital
floor" to advanced approaches banking organizations,
such as State Street and State Street Bank. We are
subject to the more stringent of the risk-based capital
ratios calculated under the standardized approach
and those calculated under the advanced approaches
in the assessment of our capital adequacy under the
PCA framework.
State Street Corporation | 109
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Continued)
The following table sets forth the transition to full implementation and the minimum risk-based capital ratio
requirements under the Basel III final rule. This does not include the potential imposition of an additional
countercyclical capital buffer.
TABLE 43: BASEL III FINAL RULES TRANSITION ARRANGEMENTS AND MINIMUM RISK-BASED CAPITAL RATIOS(1) (2)
Capital conservation buffer (Common Equity Tier 1)
G-SIB surcharge (CET1)(1)
Minimum common equity tier 1(3)
Minimum tier 1 capital(3)
Minimum total capital(3)
2015
2016
2017
2018
2019
—%
—
0.625%
0.375
1.250%
0.750
1.875%
1.125
2.500%
1.500
4.5
6.0
8.0
5.500
7.000
9.000
6.500
8.000
10.000
7.500
9.000
11.000
8.500
10.000
12.000
(1) As part of the G-SIB Surcharge final rule, the Federal Reserve published estimated G-SIB surcharges for the eight U.S. G-SIBs based on relevant data from
2012-2014 and the estimated resulting G-SIB surcharge for State Street is 1.5%. Including the 1.5% surcharge, State Street's minimum risk-based capital ratio
requirements, as of January 1, 2019 would be 8.5% for common equity tier 1, 10.0% for tier 1 capital and 12.0% for total capital.
(2) Minimum ratios shown above do not reflect the countercyclical buffer, currently set at zero by U.S. banking regulators.
(3) Minimum common equity tier 1 capital, minimum tier 1 capital and minimum total capital presented include the transitional capital conservation buffer as well as the
estimated transitional G-SIB surcharge being phased-in beginning January 1, 2016 through January 1, 2019 based on an estimated 1.5% surcharge in all periods.
The specific calculation of State Street's and State Street Bank's risk-based capital ratios will change as the
provisions of the Basel III final rule related to the numerator (capital) and denominator (risk-weighted assets) are
phased in, and as our risk-weighted assets calculated using the advanced approaches change due to potential
changes in methodology. These ongoing methodological changes will result in differences in our reported capital
ratios from one reporting period to the next that are independent of applicable changes to our capital base, our
asset composition, our off-balance sheet exposures or our risk profile.
The following table presents the regulatory capital structure and related regulatory capital ratios for State
Street and State Street Bank as of the dates indicated. We are subject to the more stringent of the risk-based
capital ratios calculated under the standardized approach and those calculated under the advanced approaches in
the assessment of our capital adequacy under applicable bank regulatory standards.
As a result of changes in the methodologies used to calculate our regulatory capital ratios from period to
period, as the provisions of the Basel III final rule are phased in, the ratios presented in the table for each period are
not directly comparable. Refer to the footnotes following the table.
State Street Corporation | 110
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Continued)
TABLE 44: REGULATORY CAPITAL STRUCTURE AND RELATED REGULATORY CAPITAL RATIOS
(In millions)
Common shareholders' equity:
State Street
State Street Bank
Basel III
Advanced
Approaches
December 31,
2016(1)
Basel III
Standardized
Approach
December 31,
2016(2)
Basel III
Advanced
Approaches
December 31,
2015(1)
Basel III
Standardized
Approach
December 31,
2015(2)
Basel III
Advanced
Approaches
December 31,
2016(1)
Basel III
Standardized
Approach
December 31,
2016(2)
Basel III
Advanced
Approaches
December 31,
2015(1)
Basel III
Standardized
Approach
December 31,
2015(2)
Common stock and related surplus
$
10,286
$
10,286
$
10,250
$
10,250
$
11,376
$
11,376
$
10,938
$
10,938
Retained earnings
17,459
17,459
16,049
16,049
12,285
12,285
10,655
10,655
Accumulated other comprehensive income
(loss)
Treasury stock, at cost
Total
Regulatory capital adjustments:
Goodwill and other intangible assets, net of
associated deferred tax liabilities(3)
Other adjustments
Common equity tier 1 capital
Preferred stock
Trust preferred capital securities subject to
phase-out from tier 1 capital
Other adjustments
Tier 1 capital
Qualifying subordinated long-term debt
Trust preferred capital securities phased out
of tier 1 capital
ALLL and other
Other adjustments
Total capital
Risk-weighted assets:
Credit risk
Operational risk(4)
Market risk(5)
Total risk-weighted assets
Adjusted quarterly average assets
(1,936)
(7,682)
18,127
(6,348)
(155)
11,624
3,196
—
(103)
14,717
1,172
—
19
1
15,909
50,900
44,579
3,822
99,301
226,310
$
$
$
$
(1,936)
(7,682)
18,127
(6,348)
(155)
11,624
3,196
—
(103)
14,717
1,172
—
77
1
15,967
98,125
NA
1,751
99,876
226,310
(1,422)
(6,457)
18,420
(5,927)
(60)
12,433
2,703
237
(109)
15,264
1,358
713
12
2
17,349
51,733
43,882
3,937
99,552
221,880
(1,422)
(6,457)
18,420
(5,927)
(60)
12,433
2,703
237
(109)
15,264
1,358
713
66
2
17,403
93,515
NA
2,378
95,893
221,880
$
$
$
$
$
$
$
$
$
$
$
$
(1,648)
—
22,013
(6,060)
(148)
15,805
—
—
—
15,805
1,179
—
15
—
16,999
47,383
44,043
3,822
95,248
222,584
$
$
$
$
(1,648)
(1,230)
(1,230)
—
22,013
(6,060)
(148)
15,805
—
—
—
15,805
1,179
—
77
—
17,061
94,413
NA
1,751
96,164
222,584
—
—
20,363
20,363
(5,631)
(85)
14,647
—
—
—
14,647
1,371
—
8
—
16,026
47,677
43,324
3,939
94,940
217,358
$
$
$
$
(5,631)
(85)
14,647
—
—
—
14,647
1,371
—
66
—
16,084
89,164
NA
2,378
91,542
217,358
$
$
$
$
$
$
$
$
2016 Minimum
Requirements
Including Capital
Conservation
Buffer and G-
SIB Surcharge(6)
2015 Minimum
Requirements(7)
5.5%
4.5%
11.7%
11.6%
12.5%
13.0%
16.6%
16.4%
15.4%
16.0%
7.0
9.0
4.0
6.0
8.0
4.0
14.8
16.0
6.5
14.7
16.0
6.5
15.3
17.4
6.9
15.9
18.1
6.9
16.6
17.8
7.1
16.4
17.7
7.1
15.4
16.9
6.7
16.0
17.6
6.7
Capital
Ratios(1):
Common
equity tier 1
capital
Tier 1
capital
Total capital
Tier 1
leverage
NA: Not applicable.
(1) Common equity tier 1 capital, tier 1 capital and total capital ratios as of December 31, 2016 and December 31, 2015 were calculated in conformity with the advanced approaches provisions of
the Basel III final rule. Tier 1 leverage ratio as of December 31, 2016 and December 31, 2015 were calculated in conformity with the Basel III final rule.
(2) Common equity tier 1 capital, tier 1 capital and total capital ratios as of December 31, 2016 and December 31, 2015 were calculated in conformity with the standardized approach provisions
of the Basel III final rule. Tier 1 leverage ratio as of December 31, 2016 and December 31, 2015 were calculated in conformity with the Basel III final rule.
(3) Amounts for State Street and State Street Bank as of December 31, 2016 consisted of goodwill, net of associated deferred tax liabilities, and 60% of other intangible assets, net of associated
deferred tax liabilities. Amounts for State Street and State Street Bank as of December 31, 2015 consisted of goodwill, net of deferred tax liabilities and 40% of other intangible assets, net of
associated deferred tax liabilities. Intangible assets, net of associated deferred tax liabilities is phased in as a deduction from capital, in conformity with the Basel III final rule.
(4) Under the current advanced approaches rules and regulatory guidance concerning operational risk models, RWA attributable to operational risk can vary substantially from period-to-period,
without direct correlation to the effects of a particular loss event on our results of operations and financial condition and impacting dates and periods that may differ from the dates and periods as
of and during which the loss event is reflected in our financial statements, with the timing and categorization dependent on the processes for model updates and, if applicable, model revalidation
and regulatory review and related supervisory processes. An individual loss event can have a significant effect on the output of our operational risk RWA under the advanced approaches
depending on the severity of the loss event and its categorization among the seven Basel-defined UOMs.
(5) Market risk risk-weighted assets reported in conformity with the Basel III advanced approaches included a CVA which reflected the risk of potential fair-value adjustments for credit risk
reflected in our valuation of over-the-counter derivative contracts. The CVA was not provided for in the final market risk capital rule; however, it was required by the advanced approaches
provisions of the Basel III final rule. We used a simple CVA approach in conformity with the Basel III advanced approaches.
(6) Minimum requirements will be phased in up to full implementation beginning on January 1, 2019; minimum requirements listed are as of December 31, 2016. See Table 43: Basel III Final
Rules Transition Arrangements and Minimum Risk Based Capital Ratios.
(7) Minimum requirements will be phased in up to full implementation beginning on January 1, 2019; minimum requirements listed are as of December 31, 2015. See Table 43: Basel III Final
Rules Transition Arrangements and Minimum Risk Based Capital Ratios.
State Street Corporation | 111
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Continued)
As of January 1, 2015 we used the standardized
provisions of the Basel III final rule in addition to the
advanced approaches provisions which were
previously implemented in the second quarter of
2014, and the lower of our regulatory capital ratios
calculated under the advanced approaches and those
ratios calculated under the standardized approach
are applied in the assessment of our capital
adequacy for regulatory capital purposes. Beginning
in the second quarter of 2014, until January 1, 2015,
we used the advanced approaches provisions in the
Basel III final rule, and transitional provisions of the
Basel III final rule, and the lower of our regulatory
capital ratios calculated under the advanced
approaches and those ratios calculated under the
transitional provisions were applied in the
assessment of our capital adequacy for regulatory
capital purposes.
Our common equity tier 1 capital decreased
$809 million as of December 31, 2016 compared to
December 31, 2015 as a result of purchases by us of
our common stock of approximately $1.37 billion,
declarations of common and preferred stock
dividends of $732 million, foreign currency translation
impact on accumulated other comprehensive income,
the impact of the phase-in provisions of the Basel III
final rule related to other intangible assets and the
impact of the acquired GEAM business on deductions
for goodwill and intangibles. The decreases in
common equity tier 1 capital were mostly offset by net
income. In the same comparative period, our tier 1
capital decreased $547 million, due to the decrease
in common equity tier 1 capital and the phase out of
trust preferred capital securities of $237 million from
tier 1 to tier 2 capital, offset by $493 million issuance
of preferred stock in April 2016. Total capital
decreased $1.44 billion under advanced approaches
and decreased $1.44 billion under standardized
approach due to the changes to tier 1 capital, and the
retirement of the trusts related to our trust preferred
capital securities. State Street Bank's tier 1 capital
increased $1.16 billion, and total capital increased
$973 million and $977 million under the advanced
and standardized approaches, respectively, as of
December 31, 2016, compared to December 31,
2015. The increase resulted from year-to-date net
income and the GEAM acquisition, partly offset by the
phase-in provisions of the Basel III final rule related to
other intangible assets, the previously-described
impact to accumulated other comprehensive income
and dividends paid to State Street.
The table below presents a roll-forward of
common equity tier 1 capital, tier 1 capital and total
capital for the years ended December 31, 2016 and
2015.
TABLE 45: CAPITAL ROLL-FORWARD
State Street
Basel III
Advanced
Approaches
December 31,
2016
Basel III
Standardized
Approach
December 31,
2016
Basel III
Advanced
Approaches
December 31,
2015
Basel III
Standardized
Approach
December 31,
2015
(In millions)
Common equity tier 1 capital:
Common equity tier 1
capital balance,
beginning of period
$
12,433 $
12,433 $
13,327 $
13,327
Net income
2,143
2,143
1,980
1,980
Changes in treasury
stock, at cost
(1,225)
(1,225)
(1,299)
(1,299)
Dividends declared
(732)
(732)
(666)
(666)
Goodwill and other
intangible assets, net
of associated
deferred tax liabilities
Effect of certain items
in accumulated other
comprehensive
income (loss)
Other adjustments
Changes in common
equity tier 1 capital
Common equity tier 1
capital balance, end of
period
Additional tier 1 capital:
Tier 1 capital balance,
beginning of period
Change in common
equity tier 1 capital
Net issuance of
preferred stock
Trust preferred
capital securities
phased out of tier 1
capital
Other adjustments
Changes in tier 1
capital
Tier 1 capital balance,
end of period
Tier 2 capital:
Tier 2 capital balance,
beginning of period
Net issuance and
changes in long-term
debt qualifying as tier 2
Trust preferred
capital securities
phased into tier 2
capital
Changes in ALLL and
other
Change in other
adjustments
Changes in tier 2
capital
Tier 2 capital balance,
end of period
Total capital:
Total capital balance,
beginning of period
Changes in tier 1
capital
Changes in tier 2
capital
Total capital balance,
end of period
(421)
(421)
(58)
(58)
(514)
(60)
(809)
(514)
(60)
(809)
(780)
(71)
(894)
(780)
(71)
(894)
11,624
11,624
12,433
12,433
15,264
15,264
15,618
15,618
(809)
493
(237)
6
(547)
(809)
493
(237)
6
(547)
(894)
742
(238)
36
(354)
(894)
742
(238)
36
(354)
14,717
14,717
15,264
15,264
2,085
2,139
2,097
2,097
(186)
(186)
(260)
(260)
(713)
(713)
238
238
7
(1)
11
(1)
(893)
(889)
12
(2)
(12)
66
(2)
42
1,192
1,250
2,085
2,139
17,349
17,403
17,715
17,715
(547)
(893)
(547)
(889)
(354)
(12)
(354)
42
$
15,909 $
15,967 $
17,349 $
17,403
State Street Corporation | 112
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Continued)
The following table presents a roll-forward of the
Basel III advanced approaches risk-weighted assets
for the years ended December 31, 2016 and 2015.
TABLE 46: ADVANCED APPROACHES RWA ROLL-
FORWARD
(In millions)
Total risk-weighted assets,
beginning of period
Changes in credit risk-weighted
assets:
Net increase (decrease) in
investment securities-wholesale
Net increase (decrease) in loans
and leases
Net increase (decrease) in
securitization exposures
Net increase (decrease) in repo-
style transaction exposures
Net increase (decrease) in OTC
derivatives exposures
Net increase (decrease) in all
other(1)
Net increase (decrease) in credit
risk-weighted assets
Net increase (decrease) in credit
valuation adjustment
Net increase (decrease) in market
risk-weighted assets
Net increase (decrease) in
operational risk-weighted assets
Total risk-weighted assets, end of
period
State Street
December 31,
2016
December 31,
2015
$
99,552
$
107,827
(1,027)
575
597
(944)
(3,246)
(9,569)
606
1,812
447
(833)
512
(627)
697
842
(1,317)
(4,750)
(15,141)
(618)
(532)
8,016
$
99,301
$
99,552
(1) Includes assets not in a definable category, cleared transactions, non-
material portfolio, other wholesale, cash and due from, and interest-bearing
deposits with banks, equity exposures, and 6% credit risk supervisory
charge.
As of December 31, 2016, total advanced
approaches risk-weighted assets decreased $251
million compared to December 31, 2015, mainly due
to a decrease in credit risk and market risk, partially
offset by an increase in operational risk and credit
valuation adjustment. The decrease in credit risk was
mainly due to a decrease in securitization exposures
as a result of sell-offs and maturities as well as calls
of agency debt securities within our wholesale
investment portfolio, mostly offset by an increase in
derivatives exposure from marked-to-market FX
contracts stemming from a stronger dollar and an
increase in securities finance agency lending. The
market risk decrease was a result of reduced end of
day positions in FX and interest rate risk. Operational
risk increased approximately $700 million mainly due
to an increase in loss event frequency. The increase
in credit valuation adjustment was driven by an
increase in the marked-to-market FX contracts.
As of December 31, 2015, total advanced
approaches risk-weighted assets decreased $8.28
billion compared to December 31, 2014, primarily the
result of a reduction in credit risk due to sales,
maturities and amortization of the securitized
investment portfolio and the subsequent reinvestment
in HQLA, a decrease associated with the usage of the
alternative modified look through approach for
investments in investment funds, and a decline in
over-the-counter foreign exchange derivatives mainly
due to a decrease in volumes and the addition of new
netting agreements. The decreases were partially
offset by an $8.02 billion increase in operational risk,
which reflects adjustments to the model inputs.
The following table presents a roll-forward of the
Basel III standardized approach risk-weighted assets
for the years ended December 31, 2016 and 2015.
TABLE 47: STANDARDIZED APPROACH RWA ROLL-
FORWARD
(In millions)
Total estimated risk-weighted
assets, beginning of period(1)
Changes in credit risk-weighted
assets:
Net increase (decrease) in
investment securities-wholesale
Net increase (decrease) in loans
and leases
Net increase (decrease) in
securitization exposures
Net increase (decrease) in repo-
style transaction exposures
Net increase (decrease) in OTC
derivatives exposures
Net increase (decrease) in all
other(2)
Net increase (decrease) in credit
risk-weighted assets
Net increase (decrease) in market
risk-weighted assets
Total risk-weighted assets, end of
period
State Street
December 31,
2016
December 31,
2015
$
95,893
$
125,011
(1,471)
(2,579)
998
(3,144)
4,994
3,462
(229)
4,610
(627)
(539)
(9,569)
(7,535)
(4,007)
(4,357)
(28,586)
(532)
$
99,876
$
95,893
(1) Standardized approach risk-weighted assets as of the periods noted
above were calculated using State Street’s estimates, based on our then
current interpretation of the Basel III final rule.
(2) Includes assets not in a definable category, cleared transactions, other
wholesale, cash and due from, and interest-bearing deposits with banks and
equity exposures.
As of December 31, 2016, total standardized
approach risk-weighted assets increased $3.98 billion
compared to December 31, 2015, primarily the result
of an increase in securities finance agency lending,
an increase in market values of FX contracts, partially
offset by a decrease in securitization exposures,
wholesale investments and market risk. The
decrease in securitization was due to sell-offs and
maturities while the decrease in wholesale
investments was due calls of agency debt securities.
Market risk reduction is resulting from a lower
stressed VaR.
State Street Corporation | 113
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Continued)
The regulatory capital ratios as of December 31,
2016, presented in Table 44: Regulatory Capital
Structure and Related Regulatory Capital Ratios, are
calculated under the standardized approach and
advanced approaches in conformity with the Basel III
final rule. The advanced approaches-based ratios
(actual and estimated pro forma) reflect calculations
and determinations with respect to our capital and
related matters as of December 31, 2016, 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 first reported such ratios
in a quarterly report on Form 10-Q. Significant
components of these advanced systems involve the
exercise of judgment by us and our regulators, and
our advanced systems may not, individually or
collectively, precisely represent or calculate the
scenarios, circumstances, outputs or other results for
which they are designed or intended.
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 the output of
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. An operational loss that we experience could
also result in a material change in our capital
requirements for operational risk under the advanced
approaches, depending on the severity of the loss
event, its characterization among the seven Basel-
defined UOMs, and the stability of the distributional
approach for a particular UOM, and without direct
correlation to the effects of the loss event, or the
timing of such effects, on our results of operations.
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.
Models implemented under the Basel III final rule,
particularly those implementing the advanced
approaches, 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.
Estimated Basel III Fully Phased-in Capital Ratios
Table 48: Regulatory Capital Structure and
Related Regulatory Capital Ratios - State Street, and
Table 49: Regulatory Capital Structure and Related
Regulatory Capital Ratios - State Street Bank,
present our capital ratios for State Street and State
Street Bank as of December 31, 2016, calculated in
conformity with the advanced approaches provisions
and standardized approach of the Basel III final rule
on a pro forma basis under the fully phased-in
provisions of the Basel III final rule.
State Street Corporation | 114
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Continued)
TABLE 48: REGULATORY CAPITAL STRUCTURE AND RELATED REGULATORY CAPITAL RATIOS - STATE STREET
December 31, 2016
(In millions)
Total common shareholders' equity
Regulatory capital adjustments:
Goodwill and other intangible assets, net of associated deferred tax
liabilities
Other adjustments
Common equity tier 1 capital
Additional tier 1 capital:
Preferred stock
Trust preferred capital securities
Other adjustments
Additional tier 1 capital
Tier 1 capital
Tier 2 capital:
Qualifying subordinated long-term debt
Trust preferred capital securities
Basel III
Advanced
Approaches
Phase-In
Provisions
Basel III
Advanced
Approaches
Fully
Phased-In
Pro-Forma
Estimate
Basel III
Standardized
Approach
Phase-In
Provisions
Basel III
Standardized
Approach
Fully
Phased-In
Pro-Forma
Estimate
$
18,127
$
(104) $
18,023
$
18,127
$
(104)
$
18,023
(6,348)
(155)
11,624
3,196
—
(103)
3,093
14,717
1,172
—
19
1
1,192
15,909
99,301
226,310
251,033
$
$
(6,909)
(259)
10,855
3,196
—
—
3,196
14,051
(6,348)
(155)
11,624
3,196
—
(103)
3,093
14,717
1,172
1,172
(561)
(104)
(769)
—
—
103
103
(666)
—
—
—
(1)
(1)
—
19
—
1,191
—
77
1
$
$
1,250
15,967
99,876
226,310
251,033
$
$
$
$
(667) $
15,242
33
$
99,334
(474)
(474)
225,836
250,559
(561)
(104)
(769)
—
—
103
103
(666)
—
—
—
(1)
(1)
(667)
31
(474)
(474)
(6,909)
(259)
10,855
3,196
—
—
3,196
14,051
1,172
—
77
—
1,249
15,300
99,907
225,836
250,559
$
$
ALLL and other
Other
Tier 2 capital
Total capital
Risk weighted assets
Adjusted average assets
Total assets for SLR
Capital ratios(1):
Common equity tier 1
capital(2)
Tier 1 capital
Total capital
Tier 1 leverage
Supplementary leverage
Minimum
Requirement
Including
Capital
Conservation
Buffer and G-
SIB Surcharge
2016
Minimum
Requirement
Including
Capital
Conservation
Buffer and G-
SIB Surcharge
2019
Minimum
Requirement
4.5%
6.0
8.0
4.0
5.0
5.5%
7.0
9.0
NA
NA
8.5%
11.7%
10.9%
11.6%
10.0
12.0
NA
NA
14.8
16.0
6.5
5.9
14.1
15.3
6.2
5.6
14.7
16.0
6.5
5.9
10.9%
14.1
15.3
6.2
5.6
NA: Not applicable.
(1) Common equity tier 1 ratio is calculated by dividing common equity tier 1 capital (numerator) by risk-weighted assets (denominator); tier 1 capital ratio is calculated
by dividing tier 1 capital (numerator) by risk-weighted assets (denominator); total capital ratio is calculated by dividing total capital (numerator) by risk-weighted assets
(denominator); tier 1 leverage ratio is calculated by dividing tier 1 capital (numerator) by adjusted average assets (denominator); and supplementary leverage ratio, or
SLR, is calculated by dividing tier 1 capital (numerator) by total assets for SLR (denominator).
(2) Common equity tier 1 ratios were calculated in conformity with the provisions of the Basel III final rule; refer to Table 44: Regulatory Capital Structure and Related
Regulatory Capital Ratios.
State Street Corporation | 115
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Continued)
TABLE 49: REGULATORY CAPITAL STRUCTURE AND RELATED REGULATORY CAPITAL RATIOS - STATE STREET BANK
December 31, 2016
(In millions)
Total common shareholders' equity
Regulatory capital adjustments:
Goodwill and other intangible assets, net of associated deferred
tax liabilities
Other adjustments
Common equity tier 1 capital
Additional tier 1 capital:
Preferred stock
Other adjustments
Additional tier 1 capital
Tier 1 capital
Tier 2 capital:
Qualifying subordinated long-term debt
ALLL and other
Other
Tier 2 capital
Total capital
Risk weighted assets
Adjusted average assets
Total assets for SLR
Basel III
Advanced
Approaches
Phase-In
Provisions
Basel III
Advanced
Approaches
Fully Phased-In
Pro-Forma
Estimate
Basel III
Standardized
Approach
Phase-In
Provisions
Basel III
Standardized
Approach Fully
Phased-In Pro-
Forma
Estimate
$
22,013
$
(96)
$
21,917
$
22,013
$
(96)
$
21,917
(6,060)
(148)
15,805
—
—
—
(540)
—
(636)
—
—
—
(6,600)
(148)
15,169
(6,060)
(148)
15,805
—
—
—
—
—
—
(540)
—
(636)
—
—
—
(6,600)
(148)
15,169
—
—
—
15,805
(636)
15,169
15,805
(636)
15,169
1,179
15
—
1,194
16,999
95,248
222,584
247,409
$
$
$
$
—
—
—
—
(636)
(262)
(454)
(454)
$
$
1,179
1,179
15
—
1,194
16,363
94,986
222,130
246,955
77
—
$
$
1,256
17,061
96,164
222,584
247,409
—
—
—
—
(636)
(249)
(454)
(454)
$
$
1,179
77
—
1,256
16,425
95,915
222,130
246,955
$
$
Capital ratios(1):
Common equity tier 1
capital(2)
Tier 1 capital
Total capital
Tier 1 leverage
Supplementary leverage
Minimum
Requirement
4.5%
6.0
8.0
4.0
6.0
Minimum
Requirement
Including
Capital
Conservation
Buffer and G-
SIB Surcharge
2016
Minimum
Requirement
Including
Capital
Conservation
Buffer and G-
SIB Surcharge
2019
5.5%
7.0
9.0
NA
NA
8.5%
16.6%
16.0%
16.4%
10.0
12.0
NA
NA
16.6
17.8
7.1
6.4
16.0
17.2
6.8
6.1
16.4
17.7
7.1
6.4
15.8%
15.8
17.1
6.8
6.1
NA: Not applicable.
(1) Common equity tier 1 capital ratio is calculated by dividing common equity tier 1 capital (numerator) by risk-weighted assets (denominator); tier 1 capital ratio is
calculated by dividing tier 1 capital (numerator) by risk-weighted assets (denominator); total capital ratio is calculated by dividing total capital (numerator) by risk-
weighted assets (denominator); tier 1 leverage ratio is calculated by dividing tier 1 capital (numerator) by adjusted average assets (denominator); and supplementary
leverage ratio is calculated by dividing tier 1 capital (numerator) by total assets for SLR (denominator).
(2) Common equity tier 1 ratios were calculated in conformity with the provisions of the Basel III final rule; refer to Table 44: Regulatory Capital Structure and Related
Regulatory Capital Ratios.
Fully phased-in pro-forma estimates of common
The Volcker rule, including the required capital
shareholders' equity include 100% of accumulated
other comprehensive income, including accumulated
other comprehensive income attributable to available-
for-sale securities, cash flow hedges and defined
benefit pension plans. Fully phased-in pro-forma
estimates of common equity tier 1 capital reflect
100% of applicable deductions, including but not
limited to, intangible assets net of deferred tax
liabilities. Fully phased-in tier 1 capital reflects the
transition of trust preferred capital securities from tier
1 capital to tier 2 capital. For both Basel III advanced
and standardized approaches, fully phased-in pro-
forma estimates of risk-weighted assets reflect the
exclusion of intangible assets, offset by additions
related to non-significant equity exposures and
deferred tax assets related to temporary differences.
deduction for investments in a covered fund, became
effective on July 21, 2015, for investments in and
relationships with a covered fund made after
December 31, 2013. The Federal Reserve issued an
order extending the Volcker rule's general
conformance period until July 21, 2016 for legacy
covered funds and announced its intention to grant
banking entities an additional one-year extension of
the conformance period until July 21, 2017. As a
result, for legacy covered funds, the Volcker rule
capital deduction will not become effective until July
21, 2017. On July 7, 2016, the Federal Reserve
formally announced the extension of the general
conformance period to July 21, 2017. For additional
information on the Volcker rule, refer to "Supervision
and Regulation" included under Item 1, Business, of
this Form 10-K.
State Street Corporation | 116
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Continued)
Supplementary Leverage Ratio
In 2014, U.S. banking regulators issued final
rules implementing an SLR, for certain bank holding
companies, like State Street, and their insured
depository institution subsidiaries, like State Street
Bank, which we refer to as the SLR final rule. Upon
implementation, the SLR final rule requires that, as of
January 1, 2018, (i) State Street Bank maintain an
SLR of at least 6% to be well capitalized under the
U.S. banking regulators’ PCA framework and (ii) State
Street maintain an SLR of at least 5% to avoid
TABLE 50: SUPPLEMENTARY LEVERAGE RATIO
limitations on capital distributions and discretionary
bonus payments. In addition to the SLR, State Street
is subject to a minimum tier 1 leverage ratio of 4%,
which differs from the SLR primarily in that the
denominator of the tier 1 leverage ratio is only a
quarterly average of on-balance sheet assets and
does not include any off-balance sheet exposures.
Beginning with reporting for March 31, 2015, State
Street was required to include SLR disclosures,
calculated on a transitional basis, with its other Basel
disclosures.
December 31, 2016
(Dollars in millions)
State Street:
Tier 1 capital
On-and off-balance sheet leverage exposure
Less: regulatory deductions
Total assets for SLR
Supplementary leverage ratio
State Street Bank:
Tier 1 capital
On-and off-balance sheet leverage exposure
Less: regulatory deductions
Total assets for SLR
Supplementary leverage ratio
Transitional SLR
Phase-In
Provisions
Fully Phased-in
Pro Forma SLR
Estimate
$
$
$
$
14,717
$
(666)
$
14,051
257,509
(6,476)
251,033
$
5.9%
—
(474)
(474)
(0.3)%
$
257,509
(6,950)
250,559
5.6%
15,805
$
(636)
$
15,169
253,487
(6,078)
247,409
$
6.4%
—
(454)
(454)
(0.3)%
$
253,487
(6,532)
246,955
6.1%
State Street Corporation | 117
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Continued)
Capital Actions
Preferred Stock
The following table summarizes selected terms of each of the series of the preferred stock issued and
outstanding as of December 31, 2016:
TABLE 51: PREFERRED STOCK ISSUED AND OUTSTANDING
Issuance Date
Preferred Stock(2):
Depositary
Shares
Issued
Ownership
Interest per
Depositary
Share
Liquidation
Preference
Per Share
Liquidation
Preference Per
Depositary Share
Net Proceeds
of Offering
(In millions)
Redemption Date(1)
Series C
August 2012
20,000,000
1/4,000th
$
100,000
$
Series D
February 2014
30,000,000
1/4,000th
Series E
November 2014
30,000,000
1/4,000th
Series F
May 2015
750,000
1/100th
Series G
April 2016
20,000,000
1/4,000th
100,000
100,000
100,000
100,000
25
25
25
1,000
25
$
488 September 15, 2017
742 March 15, 2024
728 December 15, 2019
742 September 15, 2020
493 March 15, 2026
(1) On the redemption date, or any dividend declaration date thereafter, the preferred stock and corresponding depositary shares may be redeemed by us, in whole or in part, at the liquidation
price per share and liquidation price per depositary share plus any declared and unpaid dividends, without accumulation of any undeclared dividends.
(2) The preferred stock and corresponding depositary shares may be redeemed at our option in whole, but not in part, prior to the redemption date upon the occurrence of a regulatory capital
treatment event, as defined in the certificate of designation, at a redemption price equal to the liquidation price per share and liquidation price per depositary share plus any declared and unpaid
dividends, without accumulation of any undeclared dividends.
The following table presents the dividends declared for each of the series of preferred stock issued and
outstanding for the periods indicated:
TABLE 52: PREFERRED STOCK DIVIDENDS
Dividends
Declared per
Share
$
5,250
$
5,900
6,000
5,250
3,626
Preferred Stock:
Series C
Series D
Series E
Series F
Series G
Total
2016
Dividends
Declared per
Depositary
Share
Years Ended December 31,
Total
(In millions)
Dividends
Declared per
Share
2015
Dividends
Declared per
Depositary
Share
Total
(In millions)
1.32
1.48
1.52
52.50
0.90
$
$
$
5,250
$
5,900
6,333
1,663
—
26
44
45
40
18
173
1.32
1.48
1.60
16.63
—
$
$
26
44
48
12
—
130
In January 2017, we declared dividends on our Series C, D, E, F and G preferred stock of approximately
$1,313, $1,475, $1,500, $2,625 and $1,338, respectively, per share, or approximately $0.33, $0.37, $0.38, $26.26
and $0.33, respectively, per depositary share. These dividends total approximately $6 million, $11 million, $11
million, $20 million and $7 million on our Series C, D, E, F and G preferred stock, respectively, which will be paid in
March 2017.
Common Stock
In July 2016, our Board approved a common stock purchase program authorizing the purchase of up to $1.4
billion of our common stock through June 30, 2017 (the 2016 Program). In March 2015, our Board approved a
common stock purchase program authorizing the purchase of up to $1.8 billion of our common stock through
June 30, 2016 (the 2015 Program). The table below presents the activity under both the 2016 Program and the
2015 Program during the year ended December 31, 2016.
TABLE 53: SHARES REPURCHASED
2016 Program
2015 Program
Total
Shares Purchased
(In millions)
Average Cost per Share
Total Purchased
(In millions)
9.0
12.1
21.1
$
$
72.66
58.83
64.70
$
$
650
715
1,365
State Street Corporation | 118
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Continued)
The table below presents the dividends declared on common stock for the periods indicated:
TABLE 54: COMMON STOCK DIVIDENDS
Dividends Declared
per Share
Total
(In millions)
Dividends Declared
per Share
Total
(In millions)
Years Ended December 31,
Common Stock
$
2016
1.44
$
559
$
2015
$
1.32
536
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. For
information concerning limitations on dividends from
our subsidiary banks, refer to “Related Stockholder
Matters” included under Item 5, Market for
Registrant’s Common Equity, Related Stockholder
Matters and Issuer Purchases of Equity Securities,
and to Note 15 to the consolidated financial
statements included under Item 8, Financial
Statements and Supplementary Data, of this Form
10-K.
Stock purchases may be made using various
types of mechanisms, including open market
purchases or transactions off market, and may be
made under Rule 10b5-1 trading programs. The
timing of stock purchases, types of transactions and
number of shares purchased will depend on several
factors, including, market conditions and State
Street’s capital positions, its financial performance
and investment opportunities. The common stock
purchase program does not have specific price
targets and may be suspended at any time.
OFF-BALANCE SHEET ARRANGEMENTS
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 $360.45 billion as of December 31, 2016,
compared to $320.44 billion as of December 31,
2015. We require the borrower to provide collateral in
an amount 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 $377.92 billion and $335.42 billion as
collateral for indemnified securities on loan as of
December 31, 2016 and December 31, 2015,
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 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 $377.92
billion and $335.42 billion, referenced above, $60.00
billion and $63.06 billion was invested in indemnified
repurchase agreements as of December 31, 2016
and December 31, 2015, respectively. We or our
agents held $63.96 billion and $67.02 billion as
collateral for indemnified investments in repurchase
agreements as of December 31, 2016 and
December 31, 2015, respectively.
Additional information about our securities
finance activities and other off-balance sheet
arrangements is provided in Notes 10 and 12 to the
consolidated financial statements included under Item
8, Financial Statements and Supplementary Data, of
this Form 10-K.
SIGNIFICANT ACCOUNTING ESTIMATES
Our consolidated financial statements are
prepared in conformity with U.S. GAAP, and we apply
accounting policies that affect the determination of
amounts reported in the consolidated financial
statements. Additional information on our significant
accounting policies, including references to applicable
footnotes, is provided in Note 1 to the consolidated
financial statements included under Item 8, Financial
Statements and Supplementary Data, of this Form
10-K.
Certain of our 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
State Street Corporation | 119
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Continued)
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 more significant accounting policies
applied by State Street have been identified by
management as those associated with recurring fair-
value measurements, OTTI of investment securities,
impairment of goodwill and other intangible assets,
and contingencies. 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 discussion of the above-
mentioned significant accounting estimates.
Management 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, AFS investment securities and
derivative instruments.
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.
Additional information with respect to the assets and
liabilities carried by us at fair value on a recurring
basis is provided in Note 2 to the consolidated
financial statements included under Item 8, Financial
Statements and Supplementary Data, of this Form
10-K.
U.S. 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
U.S. GAAP's 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, 2016, including the effect of
netting, we categorized approximately 6% 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 2% of our
financial assets carried at fair value in level 3 of the
fair value hierarchy. As of December 31, 2015,
including the effect of netting, we categorized
approximately 8% of our financial assets carried at
fair value in level 1, approximately 89% of our
financial assets carried at fair value in level 2, and
approximately 3% of our financial assets carried at
fair value in level 3 of the fair value hierarchy.
As of December 31, 2016, on the same basis,
we categorized none of our financial liabilities carried
at fair value in level 1, approximately 100% of our
financial liabilities carried at fair value in level 2, and
less than 1% of our financial liabilities carried at fair
value in level 3 of the fair value hierarchy. As of
December 31, 2015, on the same basis, we
categorized approximately 2% of our financial
liabilities carried at fair value in level 1, we
categorized approximately 98% of our financial
liabilities carried at fair value in level 2, and less than
1% of our financial liabilities carried at fair value in
level 3 of the fair value hierarchy.
The assets categorized in level 1 were primarily
U.S. Treasury obligations and trading account assets.
Fair value for these securities was measured by
management using unadjusted quoted prices in
active markets for identical securities.
State Street Corporation | 120
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Continued)
The assets categorized in level 2 were primarily
AFS investment securities 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
primarily comprised of 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 asset-backed AFS
securities. 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, 2016 decreased
approximately 45% compared to 2015, primarily the
result of transfers out of level 3 and paydowns 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
performance in 2016, 2015 or 2014.
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. U.S. GAAP requires the use of expected
future cash flows to evaluate OTTI of these
investment securities. The amount and timing of
these expected future cash flows are significant
estimates used in our evaluation of OTTI. An OTTI is
triggered if the intent is to sell the security or the
security will more likely than not have to be sold
before the amortized cost basis is recovered.
Additional information with respect to management's
assessment of OTTI is provided in Note 3 to the
consolidated financial statements included under
Item 8, Financial Statements, 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 “Investment Securities” in "Financial
Condition" of 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 long-lived intangible
assets, primarily client relationships and core deposit
intangible 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.
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 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,
State Street Corporation | 121
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Continued)
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 5 to the consolidated
financial statements included under Item 8, Financial
Statements and Supplementary Data, of this Form
10-K.
Intangible assets are supported by the future
cash flows that are directly associated with and
expected to arise as a direct result of the use of the
intangible asset, less any costs associated with the
intangible asset’s eventual disposition. We evaluate
other intangible assets for impairment at the lowest
level for which there are identifiable cash flows that
are largely independent of the cash flows from other
groups of assets using a two-step process. First, if
the intangible asset's estimated future net
undiscounted cash flows are greater than the carrying
value, there is no indication of impairment, but if the
intangible asset's net undiscounted cash flows are
less than its carrying value, there is an indication that
the intangible asset is not recoverable and we
proceed to the second step of the impairment test. In
the second step, if the fair value of the intangible
asset is below the carrying value, an impairment is
recognized by writing the intangible asset down to its
fair value. We evaluate intangible assets for
impairment on an annual basis, or more frequently if
circumstances arise that may indicate an impairment
of the carrying amount.
Our evaluation of goodwill and other intangible
assets indicated that no significant impairment
occurred in 2016, 2015 or 2014. Goodwill and other
intangible assets recorded in our consolidated
statement of condition as of December 31, 2016
totaled approximately $5.81 billion and $1.75 billion,
respectively, compared to $5.67 billion and $1.77
billion, respectively, as of December 31, 2015.
Contingencies
The significant estimates and judgments related
with establishing litigation reserves are discussed in
Note 13 of the consolidated financial statements
included under Item 8, Financial Statements and
Supplementary Data, of this Form 10-K.
RECENT ACCOUNTING DEVELOPMENTS
Information with respect to recent accounting
developments is provided in Note 1 to the
consolidated financial statements included under Item
8, Financial Statements and Supplementary Data, of
this Form 10-K.
State Street Corporation | 122
ITEM 7A. QUANTITATIVE AND QUALITATIVE
DISCLOSURES ABOUT MARKET RISK
The information provided under "Market Risk
Management" in "Financial Condition" included under
Item 7, Management’s Discussion and Analysis, 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 "Related Stockholder
Matters" included under Item 5, Market for
Registrant’s Common Equity, Related Stockholder
Matters and Issuer Purchases of Equity Securities,
and under "Capital" in “Financial Condition” under
Item 7, Management’s Discussion and Analysis, of
this Form 10-K.
State Street Corporation | 123
Report of Independent Registered Public Accounting Firm
The Shareholders and Board of Directors of
State Street Corporation
We have audited the accompanying consolidated statements of condition of State Street Corporation (the
“Corporation”) as of December 31, 2016 and 2015, 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, 2016. 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, 2016 and 2015, and the consolidated
results of its operations and its cash flows for each of the three years in the period ended December 31, 2016, 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, 2016, based
on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission (2013 framework) and our report dated February 16, 2017 expressed
an unqualified opinion thereon.
Boston, Massachusetts
February 16, 2017
/s/ Ernst & Young LLP
State Street Corporation | 124
STATE STREET CORPORATION
CONSOLIDATED STATEMENT OF INCOME
(Dollars in millions, except per share amounts)
Years Ended December 31,
2016
2015
2014
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:
Gains (losses) from sales of available-for-sale securities, net
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
Acquisition and restructuring costs
Professional services
Amortization of other intangible assets
Other
Total expenses
Income before income tax expense
Income tax expense (benefit)
Net income from non-controlling interest
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
$
5,073
$
5,153
$
1,292
1,099
562
90
8,116
2,512
428
2,084
10
(2)
(1)
7
10,207
10
4,353
1,105
800
440
209
379
207
584
8,077
2,120
(22)
1
2,143
1,968
5.03
4.97
$
$
$
$
$
$
1,174
1,146
496
309
8,278
2,488
400
2,088
(5)
(1)
—
(6)
5,108
1,207
1,084
437
174
8,010
2,652
392
2,260
15
(1)
(10)
4
10,360
10,274
12
10
4,061
1,022
793
444
25
490
197
1,018
8,050
2,298
318
—
1,980
1,848
4.53
4.47
$
$
$
4,060
976
784
461
133
440
222
751
7,827
2,437
415
—
2,022
1,958
4.62
4.53
391,485
396,090
407,856
413,638
424,223
432,007
$
1.44
$
1.32
$
1.16
The accompanying notes are an integral part of these consolidated financial statements.
State Street Corporation | 125
STATE STREET CORPORATION
CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME
(In millions)
Net income
Other comprehensive income (loss), net of related taxes:
Foreign currency translation, net of related taxes of ($11), ($101) and ($94),
respectively
Net unrealized gains (losses) on available-for-sale securities, net of
reclassification adjustment and net of related taxes of ($119), ($195) and $269,
respectively
Net unrealized gains (losses) on available-for-sale securities designated in fair
value hedges, net of related taxes of $16, $5 and ($15), respectively
Other-than-temporary impairment on held-to-maturity securities related to factors
other than credit, net of related taxes of $5, $8 and $12, respectively
Net unrealized gains (losses) on cash flow hedges, net of related taxes of ($42),
$24 and $74, respectively
Net unrealized gains (losses) on retirement plans, net of related taxes of $1, $51
and ($50), respectively
Other comprehensive income (loss)
Total comprehensive income
Years Ended December 31,
2016
2015
2014
$
2,143
$
1,980
$
2,022
(372)
(735)
(889)
(181)
(331)
23
7
(64)
(11)
(598)
12
13
17
89
(935)
437
(24)
18
115
(69)
(412)
$
1,545
$
1,045
$
1,610
The accompanying notes are an integral part of these consolidated financial statements.
State Street Corporation | 126
STATE STREET CORPORATION
CONSOLIDATED STATEMENT OF CONDITION
(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 $34,994 and $29,798)
Loans and leases (less allowance for losses of $53 and $46)
Premises and equipment (net of accumulated depreciation of $3,333 and $4,820)
Accrued interest and fees receivable
Goodwill
Other intangible assets
Other assets
Total assets
Liabilities:
Deposits:
Non-interest-bearing
Interest-bearing—U.S.
Interest-bearing—non-U.S.
Total deposits
Securities sold under repurchase agreements
Other short-term borrowings
Accrued expenses and other liabilities
Long-term debt
Total liabilities
Commitments, guarantees and contingencies (Notes 12 and 13)
Shareholders’ equity:
Preferred stock, no par, 3,500,000 shares authorized:
Series C, 5,000 shares issued and outstanding
Series D, 7,500 shares issued and outstanding
Series E, 7,500 shares issued and outstanding
Series F, 7,500 shares issued and outstanding
Series G, 5,000 shares issued and outstanding
Common stock, $1 par, 750,000,000 shares authorized:
503,879,642 and 503,879,642 shares issued
Surplus
Retained earnings
Accumulated other comprehensive income (loss)
Treasury stock, at cost (121,940,502 and 104,227,647 shares)
Total shareholders’ equity
Non-controlling interest-equity
Total shareholders' equity
December 31,
2016
2015
$
1,314
$
70,935
1,956
1,024
61,998
35,169
19,704
2,062
2,644
5,814
1,750
1,207
75,338
3,404
849
70,070
29,952
18,753
1,894
2,346
5,671
1,768
$
$
38,328
33,903
242,698
$
245,155
59,397
$
30,911
96,855
187,163
4,400
1,585
16,901
11,430
65,800
29,958
95,869
191,627
4,499
1,754
14,643
11,497
221,479
224,020
491
742
728
742
493
504
9,782
17,459
(2,040)
(7,682)
21,219
—
21,219
491
742
728
742
—
504
9,746
16,049
(1,442)
(6,457)
21,103
32
21,135
Total liabilities and shareholders' equity
$
242,698
$
245,155
The accompanying notes are an integral part of these consolidated financial statements.
State Street Corporation | 127
STATE STREET CORPORATION
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
(Dollars in millions, except per share
amounts, shares in thousands)
PREFERRED
STOCK
Shares
Amount
Surplus
COMMON STOCK
Retained
Earnings
Accumulated
Other
Comprehensive
Income (Loss)
TREASURY STOCK
Shares
Amount
Total
Balance as of December 31, 2013
$
491
503,883
$
504
$ 9,776
$ 13,265
$
(95)
69,754
$(3,693) $ 20,248
1,470
Net income
Other comprehensive loss
Preferred stock issued
Cash dividends declared:
Common stock - $1.16 per share
Preferred stock
Common stock acquired
Common stock awards and options
exercised, including income tax
benefit of $72
Other
(412)
2,022
(490)
(61)
2,022
(412)
1,470
(490)
(61)
23,749
(1,650)
(1,650)
(3)
17
(2)
1
(4,805)
185
(13)
202
(1)
Balance as of December 31, 2014
$
1,961
503,880
$
504
$ 9,791
$ 14,737
$
(507)
88,685
$(5,158) $ 21,328
742
Net income
Other comprehensive income
Preferred stock issued
Cash dividends declared:
Common stock - $1.32 per share
Preferred stock
Common stock acquired
Common stock awards and options
exercised, including income tax
benefit of $70
Other
(935)
1,980
(536)
(130)
1,980
(935)
742
(536)
(130)
20,521
(1,520)
(1,520)
(41)
(4)
(2)
(4,976)
221
(2)
180
(6)
Balance as of December 31, 2015
$
2,703
503,880
$
504
$ 9,746
$ 16,049
$
(1,442) 104,228
$(6,457) $ 21,103
493
Net income
Other comprehensive loss
Preferred stock issued
Cash dividends declared:
Common stock - $1.44 per share
Preferred stock
Common stock acquired
Common stock awards and options
exercised, including income tax
benefit of $13
Other
2,143
(559)
(173)
(1)
36
(598)
2,143
(598)
493
(559)
(173)
21,098
(1,365)
(1,365)
(3,369)
(16)
139
1
175
—
Balance as of December 31, 2016
$
3,196
503,880
$
504
$ 9,782
$ 17,459
$
(2,040) 121,941
$(7,682) $ 21,219
The accompanying notes are an integral part of these consolidated financial statements.
State Street Corporation | 128
STATE STREET CORPORATION
CONSOLIDATED STATEMENT OF CASH FLOWS
(In millions)
Operating Activities:
Net income
Adjustments to reconcile net income to net cash provided by (used in) operating activities:
Deferred income tax (benefit) expense
Amortization of other intangible assets
Other non-cash adjustments for depreciation, amortization and accretion, net
(Gains) losses 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 accrued expenses and other liabilities, net
Other, net
Net cash provided by (used in) 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 in loans and leases
Business acquisitions
Purchases of equity investments and other long-term assets
Purchases of premises and equipment, net
Other, net
Net cash provided by (used in) investing activities
Financing Activities:
Net increase (decrease) in time deposits
Net decrease in all other deposits
Net increase (decrease) in other 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, net
Proceeds from exercises of common stock options
Purchases of common stock
Excess tax benefit related to stock-based compensation
Repurchases of common stock for employee tax withholding
Payments for cash dividends
Other, net
Net cash (used in) 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 paid, net
Years Ended December 31,
2016
2015
2014
$
2,143
$
1,980
$
2,022
(358)
207
722
(7)
(175)
(298)
(18)
(1,057)
1,772
(1,147)
506
2,290
4,403
1,448
1,401
30,070
(30,162)
7,942
(8,425)
(924)
(437)
(643)
(613)
170
(168)
197
604
6
75
(104)
(6,662)
982
1,156
(48)
579
(1,403)
18,185
(1,014)
12,309
28,025
(25,397)
3,842
(9,398)
(561)
—
(366)
(703)
73
60
222
477
(4)
(81)
(119)
(4,362)
(2,042)
3,612
(635)
289
(561)
(29,266)
3,840
9,766
36,120
(43,146)
3,217
(3,778)
(4,785)
—
(182)
(427)
149
4,230
24,995
(28,492)
8,488
(12,952)
(268)
1,492
(1,441)
493
—
(9,878)
(7,535)
(7,074)
2,983
(1,155)
742
4
54,404
(27,632)
1,575
994
(788)
1,470
14
(1,365)
(1,520)
(1,650)
13
(122)
(723)
(28)
70
(222)
(655)
—
(6,413)
(24,240)
107
1,207
(648)
1,855
1,314
$
1,207
$
72
(232)
(539)
—
27,688
(1,365)
3,220
1,855
$
441
371
$
385
211
398
358
$
$
The accompanying notes are an integral part of these consolidated financial statements.
State Street Corporation | 129
STATE STREET CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
TABLE OF CONTENTS
Note 1. Summary of Significant Accounting Policies
Note 2. Fair Value
Note 3. Investment Securities
Note 4. Loans and Leases
Note 5. Goodwill and Other Intangible Assets
Note 6. Other Assets
Note 7. Deposits
Note 8. Short-Term Borrowings
Note 9. Long-Term Debt
Note 10. Derivative Financial Instruments
Note 11. Offsetting Arrangements
Note 12. Commitments and Guarantees
Note 13. Contingencies
Note 14. Variable Interest Entities
Note 15. Shareholders’ Equity
Note 16. Regulatory Capital
Note 17. Net Interest Revenue
Note 18. Equity-Based Compensation
Note 19. Employee Benefits
Note 20. Occupancy Expense and Information Systems and Communications Expense
Note 21. Expenses
Note 22. Income Taxes
Note 23. Earnings Per Common Share
Note 24. Line of Business Information
Note 25. Non-U.S. Activities
Note 26. Parent Company Financial Statements
131
135
143
152
155
157
157
157
159
160
166
171
172
174
176
179
181
181
183
184
185
185
187
188
190
190
We use acronyms and other defined terms for certain business terms and abbreviations, as defined on the acronyms
list and glossary accompanying these consolidated financial statements.
State Street Corporation | 130
STATE STREET CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1. Summary of Significant Accounting
Policies
Basis of Presentation:
The accounting and financial reporting policies
of State Street Corporation conform to U.S. 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.
We have two lines of business:
Investment Servicing provides products and
services including: 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; our
enhanced custody product, which integrates principal
securities lending and custody; 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 SSGA,
provides a broad array of investment management,
investment research and investment advisory
services to corporations, public funds and other
sophisticated investors. SSGA offers passive and
active asset management strategies across equity,
fixed-income, alternative, multi-asset solutions
(including OCIO) and cash asset classes. Products
are distributed directly and through intermediaries
using a variety of investment vehicles, including
ETFs, such as the SPDR® ETF brand.
Consolidation:
Our consolidated financial statements include
the accounts of the Parent Company and its majority-
and wholly-owned and otherwise controlled
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.
Use of Estimates:
The preparation of consolidated financial
statements in conformity with U.S. 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.
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
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
State Street Corporation | 131
STATE STREET CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
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.
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,
including mutually agreed changes to 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.
Other Significant Policies:
The following table identifies our other significant
accounting policies and the note and page where a
detailed description of each policy can be found.
Fair Value
Note 2
Page
135
Investment Securities
Note 3
Page
143
Loans and Leases
Note 4
Page
152
Goodwill and Other Intangible
Assets
Derivative Financial
Instruments
Offsetting Arrangements
Note 5
Page
155
Note 10
Page
160
Note 11
Page
166
Contingencies
Note 13
Page
172
Variable Interest Entities
Note 14
Page
174
Regulatory Capital
Note 16
Page
179
Equity-Based Compensation Note 18
Page
181
Income Taxes
Note 22
Page
185
Earnings Per Common Share Note 23
Page
187
Acquisition:
On July 1, 2016, we completed our acquisition of
GE Asset Management ("GEAM") from General
Electric Company, with a total purchase price of
approximately $485 million.
The acquisition of GEAM extends our core
investment management capabilities, including in the
high growth OCIO markets, and enhances our
capabilities in connection with the delivery of value
added solutions to our client base. AUM associated
with the acquired GEAM operations was $112 billion
as of the date of acquisition.
We accounted for this acquisition as a business
combination and, in accordance with ASC Topic 805,
Business Combinations, we have recorded assets
acquired and liabilities assumed at their respective
fair values as of the acquisition date. Our
consolidated financial statements include the
operating results for the acquired business from the
date of acquisition, July 1, 2016.
State Street Corporation | 132
STATE STREET CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Recent Accounting Developments:
Relevant standards that were recently issued but not yet adopted
Standard
Description
ASU 2014-09, Revenue from
Contracts with Customers (Topic
606)
The standard, and its related amendments, will replace
existing revenue recognition standards and expand the
disclosure requirements for revenue arrangements with
customers. Under the new standard, revenue is
recognized when a customer obtains control of promised
goods or services and is recognized in an amount that
reflects the consideration which the entity expects to
receive in exchange for those goods or services.
The guidance permits two methods of adoption:
retrospectively to each prior reporting period presented
(full retrospective method), or retrospectively with the
cumulative effect of initially applying the guidance
recognized at the date of initial application (the modified
retrospective method).
Date of
Adoption
Effects on the financial statements or
other significant matters
January 1, 2018 We are currently assessing the full impact of the
revenue recognition standard and its
amendments on our consolidated financial
statements and evaluating the alternative
methods of adoption.
The standard does not apply to revenue
associated with financial instruments, including
loans and securities, or revenue recognized
under other U.S. GAAP standards. Therefore net
interest revenue, securities gains/ losses,
revenue related to derivative instruments are not
impacted by the standard. Our implementation
efforts include the scoping of material revenue
streams into cohorts, analysis of underlying
contracts for each cohort, business unit
workshops to further assess specific contracts
and products, and the development of updated
disclosures. Based on our efforts to date, we
expect both the timing and amount of our
material revenue streams, including servicing
fees, management fees, trading services, and
securities finance to remain substantially
unchanged as these revenues likely will continue
to be recognized over time. Specifically, under
the new standard we expect to recognize
revenue related to these activities ratably over
the term of the related agreements with
customers as the customer simultaneously
benefits from the services as they are performed.
Due to the complexity of certain of our
agreements, the actual revenue recognition
treatment required under the standard will be
dependent on contract-specific terms, and
certain aspects may vary in some instances from
recognition ratably over the contract term. While
we have not yet identified any material changes,
we continue to monitor industry progress and
focus our assessment on areas such as any
additional costs that may require capitalization
under the new standard as well as assessing the
impact of changes to principal and agent
guidance. The new standard modified some of
the principal and agent considerations which may
result in changes to gross or net treatment of
revenue and expenses but would not affect final
net income.
Although we currently expect no material
changes to the timing or amount of revenue, we
are still assessing the operational and disclosure
impacts of each transition method.
ASU 2016-01, Financial
Instruments-Overall (Subtopic
825-10): Recognition and
Measurement of Financial Assets
and Financial Liabilities
ASU 2016-02, Leases (Topic
842)
The standard makes limited amendments to the
guidance on the classification and measurement of
financial instruments. Under the new standard, all equity
securities will be measured at fair value through earnings
with certain exceptions, including investments accounted
for under the equity method of accounting. In addition,
the FASB clarified the guidance related to valuation
allowance assessments when recognizing deferred tax
assets on unrealized losses on available-for-sale debt
securities. This standard must be applied on a
retrospective basis.
The standard represents a wholesale change to lease
accounting and requires all leases, other than short-term
leases, to be reported on balance sheet through
recognition of a right-of-use asset and a corresponding
liability for future lease obligations. The standard also
requires extensive disclosures for assets, expenses, and
cash flows associated with leases, as well as a maturity
analysis of lease liabilities.
ASU 2016-05, Derivatives and
Hedging (Topic 815): Effect of
Derivative Contract Novations on
Existing Hedge Accounting
Relationships (a consensus of
the Emerging Issues Task Force)
The standard clarifies that the novation of a derivative
contract that is part of a hedge accounting relationship
does not automatically require a dedesignation of that
hedge relationship. This may be applied on a prospective
or modified retrospective basis.
January 1, 2018 We are currently assessing the impact of the
standard on our consolidated financial
statements. Based on our initial assessments,
we do not currently anticipate this standard to
have a material impact on our consolidated
financial statements due to the limited number of
investments on our consolidated statement of
condition that are within scope of the standard.
January 1, 2019 We are currently assessing the impact of the
standard on our consolidated financial
statements, but we anticipate an increase in
assets and liabilities due to the recognition of the
required right-of-use asset and corresponding
liability for all lease obligations that are currently
classified as operating leases, primarily real
estate leases for office space, as well as
additional disclosure on all our lease obligations.
January 1, 2017
State Street will apply this standard prospectively
as applicable, but we do not anticipate a material
impact on our consolidated financial statements.
State Street Corporation | 133
STATE STREET CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Relevant standards that were recently issued but not yet adopted (continued)
Standard
Description
ASU 2016-09, Compensation -
Stock Compensation (Topic 718):
Improvements to Employee
Share-Based Payment
Accounting
The standard simplifies the guidance related to stock
compensation, including the accounting for income taxes
by eliminating the windfall pool and requiring recognition
of all excess tax benefits and deficiencies within the
statement of income, as well as changes in the
accounting for forfeitures, classification in the statement
of cash flows and tax withholding requirements.
ASU 2016-13, Financial
Instruments-Credit Losses (Topic
326): Measurement of Credit
Losses on Financial Instruments
The standard requires immediate recognition of expected
credit losses for financial assets carried at amortized
cost, including trade and other receivables, loans and
commitments, held-to-maturity debt securities, and other
financial assets, held at the reporting date to be
measured based on historical experience, current
conditions, and reasonable supportable forecasts. Credit
losses on available for sale securities will be recorded as
an allowance versus a write-down of the amortized cost
basis of the security and will allow for a reversal of
impairment loss when the credit of the issuer improves.
Date of
Adoption
Effects on the financial statements or
other significant matters
January 1, 2017 We anticipate increased income statement
volatility due to the recognition of all excess tax
benefits and deficiencies within the consolidated
statement of income. Income statement volatility
will be driven by the number of shares vesting in
any given period, and the change in share price
between grant date and vesting. Directionally,
increasing share prices from grant date to
vesting date will result in lower income tax
expense and higher net income.
Upon adoption of the standard on January 1,
2017, excess tax benefits accumulated in surplus
of approximately $352 million will be reversed
through retained earnings.
January 1, 2020 We are currently assessing the impact of the
standard on our consolidated financial
statements, but we anticipate a significant
implementation effort to ensure that expected
credit losses are calculated in accordance with
the standard. We have established a steering
committee to provide cross-functional
governance over the project plan and key
decisions, and are currently developing key
accounting policies, evaluating existing credit
loss models and processes and identifying a
complete set of data requirements and sources.
Based on our analysis to date, we expect a
significant effort to develop new or modified
credit loss models and that the timing of the
recognition of credit losses will accelerate under
the new standard.
ASU 2016-15, Statement of Cash
Flows (Topic 230): Classification
of Certain Cash Receipts and
Cash Payments (a consensus of
the Emerging Issues Task Force)
The standard amends the statement of cash flow
guidance to address specific cash flow issues with the
objective of reducing the existing diversity in practice.
January 1, 2018 We are currently assessing the impact of the
standard on our consolidated financial
statements, however based on our current
presentation we do not anticipate a significant
change to our financial statement presentation of
the statement of cash flows.
Relevant standards that were adopted during the year
ended December 31, 2016:
We adopted ASU 2015-02, Consolidation (Topic
810): Amendments to the Consolidation Analysis,
effective January 1, 2016. The implementation of the
new standard did not result in any significant changes
to our previous consolidation conclusions.
We adopted ASU 2015-03, Simplifying the
Presentation of Debt Issuance Costs, effective
January 1, 2016 with retrospective application for all
prior periods presented. The implementation of this
standard resulted in debt issuance costs of $38
million and $37 million as of December 31, 2016 and
December 31, 2015, respectively, being netted
against long-term debt in our consolidated statement
of condition.
State Street Corporation | 134
STATE STREET CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Note 2. Fair Value
Fair-Value Measurements:
We carry trading account assets, AFS
investment securities 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 U.S.
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 U.S. 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 (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 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
levels of the valuation hierarchy 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. 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 carried in trading account assets. We may
carry U.S. government securities in our AFS portfolio
in connection with our asset-and-liability management
activities. Our level 1 financial assets also include
active exchange-traded equity securities and non-
cash collateral received from counterparties in
connection with our enhanced custody business.
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 non-U.S. debt securities carried in
trading account assets and various types of 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, 2016
and 2015.
State Street Corporation | 135
STATE STREET CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Level 3. Financial assets and liabilities with
• The fair value of certain foreign exchange
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.
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.
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.
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 2016 or 2015.
State Street Corporation | 136
STATE STREET CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Fair-Value Measurements on a Recurring Basis
as of December 31, 2016
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
(In millions)
Assets:
Trading account assets:
U.S. government securities
Non-U.S. government securities
Other
Total trading account assets
AFS Investment securities:
U.S. Treasury and federal agencies:
Direct obligations
Mortgage-backed securities
Asset-backed securities:
Student loans
Credit cards
Sub-prime
Other(2)
Total asset-backed securities
Non-U.S. debt securities:
Mortgage-backed securities
Asset-backed securities
Government securities
Other(3)
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
$
$
30
$
— $
495
—
525
3,824
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
174
325
499
439
13,257
5,499
1,351
272
—
7,122
6,535
2,484
5,836
5,365
20,220
10,283
2,577
2,469
42
3
409
16
—
—
—
—
—
—
97
—
—
905
1,002
—
32
—
248
280
39
16
—
—
—
—
—
Total investment securities available-for-sale
3,824
56,837
1,337
Other assets:
Derivative instruments:
Foreign exchange contracts
Interest-rate contracts
Total derivative instruments
Total assets carried at fair value
Liabilities:
Accrued expenses and other liabilities:
Derivative instruments:
Foreign exchange contracts
Interest-rate contracts
Other derivative contracts
Total derivative instruments
Total liabilities carried at fair value
—
—
—
16,476
68
16,544
8
—
8
$
(9,163)
(68)
(9,231)
4,349
$
73,880
$
1,345
$
(9,231) $
— $
15,948
$
—
—
—
— $
348
380
16,676
16,676
$
8
—
—
8
8
$
(10,456) $
(226)
—
(10,682)
$
(10,682) $
$
$
$
(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 $906 million and $2,356 million, respectively, for cash collateral received from and provided
to derivative counterparties.
(2) As of December 31, 2016, the fair value of other asset-backed securities was primarily composed of $905 million of collateralized loan obligations.
(3) As of December 31, 2016, the fair value of other non-U.S. debt securities was primarily composed of $3,769 million of covered bonds and $988 million of corporate
bonds.
State Street Corporation | 137
30
669
325
1,024
4,263
13,257
5,596
1,351
272
905
8,124
6,535
2,516
5,836
5,613
20,500
10,322
2,593
2,469
42
3
409
16
61,998
7,321
—
7,321
70,343
5,500
122
380
6,002
6,002
STATE STREET CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Fair-Value Measurements on a Recurring Basis
as of December 31, 2015
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
(In millions)
Assets:
Trading account assets:
U.S. government securities
Non-U.S. government securities
Other
Total trading account assets
AFS Investment securities:
U.S. Treasury and federal agencies:
Direct obligations
Mortgage-backed securities
Asset-backed securities:
Student loans
Credit cards
Sub-prime
Other(2)
Total asset-backed securities
Non-U.S. debt securities:
Mortgage-backed securities
Asset-backed securities
Government securities
Other(3)
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
Other derivative contracts
Total derivative instruments
Other
Total assets carried at fair value
Liabilities:
Accrued expenses and other liabilities:
Trading account liabilities:
U.S. government securities
Non-U.S. government securities
Other
Derivative instruments:
Foreign exchange contracts
Interest-rate contracts
Other derivative contracts
Total derivative instruments
Other
$
$
$
$
32
479
10
521
— $
—
328
328
5,206
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
5,206
—
—
—
—
2
512
18,165
6,987
1,341
419
—
8,747
7,071
3,093
4,355
4,579
19,098
9,713
2,948
2,614
39
3
542
19
62,400
11,311
135
5
11,451
—
$
—
—
—
—
—
—
189
—
—
1,764
1,953
—
174
—
255
429
33
39
10
—
—
—
—
2,464
5
—
—
5
—
$
(6,562)
(115)
(2)
(6,679)
—
5,729
$
74,179
$
2,469
$
(6,679) $
$
5
76
5
—
—
—
—
2
— $
—
13
10,863
182
103
11,148
—
— $
— $
—
—
5
—
—
5
—
5
—
—
(6,995)
(24)
(2)
(7,021)
—
$
(7,021) $
32
479
338
849
5,718
18,165
7,176
1,341
419
1,764
10,700
7,071
3,267
4,355
4,834
19,527
9,746
2,987
2,624
39
3
542
19
70,070
4,754
20
3
4,777
2
75,698
5
76
18
3,873
158
101
4,132
2
4,233
Total liabilities carried at fair value
$
88
$
11,161
$
(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 $776 million and $1.12 billion, respectively, for cash collateral received from and provided
to derivative counterparties.
(2) As of December 31, 2015, the fair value of other asset-backed securities was primarily composed of $1,764 million of collateralized loan obligations.
(3) As of December 31, 2015, the fair value of other non-U.S. debt securities was primarily composed of $3,184 million of covered bonds and $613 million of corporate
bonds.
State Street Corporation | 138
STATE STREET CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The following tables present activity related to our level 3 financial assets during the years ended December
31, 2016 and 2015, respectively. Transfers into and out of level 3 are reported as of the beginning of the period
presented. During the years ended December 31, 2016 and 2015, transfers out of level 3 were mainly related to
certain mortgage- and asset-backed securities, including 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, 2016
Total Realized and
Unrealized Gains (Losses)
(In millions)
Assets:
Fair Value
as of
December 31,
2015
Recorded in
Revenue(1)
Recorded in
Other
Comprehensive
Income(1)
Purchases
Sales
Settlements
Transfers out
of Level 3
Change in
Unrealized
Gains
(Losses)
Related to
Financial
Instruments
Held as of
December 31,
2016
Fair Value
December 31,
as of
2016(2)
— $
— $
— $
325
$ — $
— $
(325)
$
—
AFS Investment securities:
U.S. Treasury and federal agencies,
mortgage-backed securities
$
Asset-backed securities:
Student loans
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
189
1,764
1,953
—
174
255
429
33
39
10
Total AFS investment securities
2,464
Other assets:
Derivative instruments:
Foreign exchange contracts
Total derivative instruments
5
5
1
31
32
—
—
—
—
—
—
—
32
9
9
3
(23)
(20)
—
—
—
—
9
2
—
(9)
—
—
—
469
469
90
196
222
508
—
89
—
—
(82)
(82)
—
—
—
—
—
(66)
—
—
(1,254)
(1,254)
—
(60)
(7)
(67)
(3)
(27)
(10)
(96)
—
(96)
(90)
(278)
(222)
(590)
—
(21)
—
97
905
1,002
—
32
248
280
39
16
—
1,391
(148)
(1,361)
(1,032)
1,337
3
3
—
—
(9)
(9)
—
—
8
8
$
$
5
5
5
Total assets carried at fair value
$
2,469
$
41
$
(9)
$
1,394
$ (148)
$
(1,370)
$
(1,032)
$
1,345
(1) Total realized and unrealized gains (losses) on AFS investment securities are included within gains (losses) related to investment securities, net. Total realized and
unrealized gains (losses) on derivative instruments are included within trading services.
(2) There were no transfers of assets into level 3 during the year ended December 31, 2016.
State Street Corporation | 139
STATE STREET CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Fair-Value Measurements Using Significant Unobservable Inputs
Year Ended December 31, 2015
Total Realized and
Unrealized Gains (Losses)
Change in
Unrealized
Gains
(Losses)
Related to
Financial
Instruments
Held as of
December 31,
2015
Fair Value
as of
December 31,
2014
Recorded
in
Revenue(1)
Recorded
in Other
Comprehensive
Income(1)
Purchases
Sales
Settlements
Transfers
into
Level 3
Transfers
out of
Level 3
as of
December 31,
2015
Fair Value
(In millions)
Assets:
Investment securities available-for-sale:
Asset-backed securities:
Student loans
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
3,780
4,039
—
295
371
666
38
614
9
Total AFS investment securities
5,366
Other assets:
Derivative instruments:
Foreign exchange contracts
Total derivative instruments
81
81
$
259
$
1
$
(4)
$
— $
— $
(6)
$
— $
(61)
$
53
54
—
2
—
2
1
(1)
—
56
48
48
(50)
(54)
—
(1)
(1)
(2)
(3)
(2)
—
(61)
—
—
—
—
43
249
111
403
—
294
—
697
9
9
(1,105)
(1,105)
—
—
—
—
—
(88)
—
(914)
(920)
—
(190)
(39)
(229)
(3)
(105)
—
—
—
97
4
—
101
—
—
10
—
(61)
(140)
(185)
(187)
(512)
—
(673)
(9)
189
1,764
1,953
—
174
255
429
33
39
10
(1,193)
(1,257)
111
(1,255)
2,464
—
—
(133)
(133)
—
—
—
—
$
5
5
(4)
(4)
(4)
Total assets carried at fair value
$
5,447
$
104
$
(61)
$
706
$ (1,193)
$
(1,390)
$
111
$
(1,255)
$
2,469
$
(1) Total realized and unrealized gains (losses) on AFS investment securities are included within gains (losses) related to investment securities, net. Total realized and
unrealized gains (losses) on derivative instruments are included within trading services.
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.
(Dollars in millions)
Significant unobservable inputs readily
available to State Street:
Assets:
Asset-backed securities, other
State and political subdivisions
Derivative instruments, foreign exchange contracts
Total
Liabilities:
Derivative instruments, foreign exchange contracts
Total
Quantitative Information about Level 3 Fair-Value Measurements
Fair Value
Weighted-Average
As of
December 31,
2016
As of
December 31,
2015
Valuation
Technique
Significant
Unobservable
Input(1)
As of
December 31,
2016
As of
December 31,
2015
Credit spread
0.3%
(0.1)%
$
$
$
$
1
$
39
8
48
8
8
$
$
$
Discounted
cash flows
Discounted
cash flows
28
33
Credit spread
5 Option model
Volatility
66
5 Option model
Volatility
5
1.8
14.4
14.4
2.2
9.3
9.2
(1) Significant changes in these unobservable inputs would result in significant changes in fair value measurement.
State Street Corporation | 140
STATE STREET CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Fair Value Estimates:
Estimates of fair value for financial instruments
not carried at fair value on a recurring basis in our
consolidated statement of condition 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 U.S. 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 loans, 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, commercial real estate loans, purchased
receivables and municipal 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.
State Street Corporation | 141
STATE STREET CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The following tables present the reported amounts and estimated fair values of the financial assets and
liabilities not carried at fair value on a recurring basis, as they would be categorized within the fair-value hierarchy,
as of the dates indicated.
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
(In millions)
December 31, 2016
Financial Assets:
Cash and due from banks
$
1,314
$
1,314
$
1,314
$
— $
Interest-bearing deposits with banks
Securities purchased under resale agreements
Investment securities held-to-maturity
Net loans (excluding leases)
Financial Liabilities:
Deposits:
Non-interest-bearing
Interest-bearing - U.S.
Interest-bearing - non-U.S.
Securities sold under repurchase agreements
Other short-term borrowings
Long-term debt
70,935
1,956
35,169
18,862
70,935
1,956
34,994
18,877
—
—
17,400
—
70,935
1,956
17,439
18,781
$
59,397
$
59,397
$
— $
59,397
$
30,911
96,855
4,400
1,585
11,430
30,911
96,855
4,400
1,585
11,618
—
—
—
—
—
30,911
96,855
4,400
1,585
11,282
—
—
—
155
96
—
—
—
—
—
336
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
(In millions)
December 31, 2015
Financial Assets:
Cash and due from banks
$
1,207
$
1,207
$
1,207
$
— $
Interest-bearing deposits with banks
Securities purchased under resale agreements
Investment securities held-to-maturity
Net loans (excluding leases)(1)
75,338
3,404
29,952
17,838
75,338
3,404
29,798
17,792
—
—
—
—
75,338
3,404
29,798
17,667
Financial Liabilities:
Deposits:
Non-interest-bearing
Interest-bearing - U.S.
Interest-bearing - non-U.S.
Securities sold under repurchase agreements
Other short-term borrowings
Long-term debt
$
65,800
$
65,800
$
— $
65,800
$
29,958
95,869
4,499
1,754
11,497
29,958
95,869
4,499
1,754
11,604
—
—
—
—
—
29,958
95,869
4,499
1,754
11,215
—
—
—
—
125
—
—
—
—
—
389
(1) Includes $14 million of loans classified as held-for-sale that were measured at fair value on a non-recurring basis as of December 31, 2015.
State Street Corporation | 142
STATE STREET CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Note 3. Investment Securities
Investment securities held by us are classified
as either trading, AFS, or HTM at the time of
purchase and reassessed periodically, based on
management’s intent.
Generally, trading 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. AFS investment securities are those
securities that we intend to hold for an indefinite
period of time. AFS investment securities include
securities utilized as part of our asset-and-liability
management activities that may be sold in response
to changes in interest rates, prepayment risk, liquidity
needs or other factors. HTM securities are debt
securities that management has the intent and the
ability to hold to maturity.
Trading assets are carried at fair value. Both
realized and unrealized gains and losses on trading
assets are recorded in trading services revenue in our
consolidated statement of income. Debt and
marketable equity securities classified as AFS are
carried at fair value, and after-tax net unrealized
gains and losses are recorded in AOCI. Gains or
losses realized on sales of AFS investment 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. HTM investment securities are
carried at cost, adjusted for amortization of premiums
and accretion of discounts.
State Street Corporation | 143
STATE STREET CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The following table presents the amortized cost and fair value, and associated unrealized gains and losses, of
investment securities as of the dates indicated:
(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(2)
Total asset-backed securities
Non-U.S. debt securities:
Mortgage-backed securities
Asset-backed securities
Government securities
Other(3)
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
December 31, 2016
Gross
Unrealized
Gains
Losses
Amortized
Cost
Fair
Value
Amortized
Cost
December 31, 2015
Gross
Unrealized
Gains
Losses
Fair
Value
$
4,265
$
13,340
5,659
1,377
289
895
8,220
6,506
2,513
5,834
5,587
20,440
10,233
2,610
2,481
39
3
409
16
7
76
12
—
1
10
23
35
4
8
31
78
201
18
18
6
—
—
—
$
9
$
4,263
$
5,717
$
6
$
5
$
5,718
159
13,257
18,168
131
134
18,165
75
26
18
—
5,596
1,351
272
905
7,358
1,378
448
1,724
119
8,124
10,908
6
1
6
5
18
112
35
30
3
—
—
—
6,535
2,516
5,836
5,613
20,500
10,322
2,593
2,469
42
3
409
16
7,010
3,272
4,348
4,817
19,447
9,402
2,993
2,611
33
3
542
19
16
—
2
43
61
72
2
7
29
110
371
16
31
9
—
—
—
198
37
31
3
7,176
1,341
419
1,764
269
10,700
11
7
—
12
30
27
22
18
3
—
—
—
7,071
3,267
4,355
4,834
19,527
9,746
2,987
2,624
39
3
542
19
Total
$
62,056
$ 427
$
485
$
61,998
$
69,843
$
735
$
508
$ 70,070
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
$
17,527
$
10,334
2,883
897
35
3,815
1,150
531
286
113
2,080
—
1,413
17
20
5
2
—
7
70
—
3
1
74
—
42
$
58
$
17,486
$
20,878
$
221
10,133
610
30
—
—
30
15
—
—
—
15
—
11
2,858
899
35
3,792
1,205
531
289
114
2,139
—
1,444
1,592
897
366
2,855
2,202
1,415
239
65
3,921
1
1,687
2
2
—
—
2
2
109
4
—
—
113
—
60
$
217
8
47
1
1
49
26
3
1
—
30
—
29
$ 20,663
604
1,545
896
367
2,808
2,285
1,416
238
65
4,004
1
1,718
Total
$
35,169
$ 160
$
335
$
34,994
$
29,952
$
179
$
333
$ 29,798
(1) Primarily composed of securities guaranteed by the federal government with respect to at least 97% of defaulted principal and accrued interest on the underlying
loans.
(2) As of December 31, 2016 and December 31, 2015, the fair value of other ABS was primarily composed of $905 million and $1,764 million, respectively, of
collateralized loan obligations.
(3) As of December 31, 2016 and December 31, 2015, the fair value of other non-U.S. debt securities was primarily composed of $3,769 million and $3,184 million,
respectively, of covered bonds and $988 million and $613 million, as of December 31, 2016 and December 31, 2015, respectively, of corporate bonds.
State Street Corporation | 144
STATE STREET CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Aggregate investment securities with carrying
values of approximately $46 billion and $41 billion as
of December 31, 2016 and 2015, respectively, were
designated as pledged for public and trust deposits,
short-term borrowings and for other purposes as
provided by law.
In the fourth quarter of 2016, $4.9 billion of
Agency MBS and Student Loan ABS previously
classified as AFS were transferred to HTM and in the
fourth quarter of 2015, $7.1 billion, of U.S. Treasuries
previously classified as AFS were transferred to HTM.
Both transfers reflect our intent to hold these
securities until their maturity. These securities were
transferred at fair value, which included a net
unrealized gain of $87 million and $89 million as of
December 31, 2016 and 2015, respectively, within
accumulated other comprehensive loss which will be
accreted into interest income over the remaining life
of the transferred security (ranging from
approximately 7 to 49 years).
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:
State Street Corporation | 145
STATE STREET CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 31, 2016
(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
U.S. equity 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. mortgage-backed securities:
Mortgage-backed securities
Asset-backed securities
Government securities
Total non-U.S. debt securities
Collateralized mortgage obligations
Less than 12 months
12 months or longer
Total
Fair
Value
Gross
Unrealized
Losses
Fair
Value
Gross
Unrealized
Losses
Fair
Value
Gross
Unrealized
Losses
$
651
$
8
$
180
$
1
$
831
$
7,072
131
1,114
54
795
1
75
925
442
253
1,314
670
2,679
3,390
1,259
944
8
—
1
—
—
1
1
—
6
4
11
102
31
24
—
28
75
25
18
—
8,186
3,799
1,289
253
75
3,745
494
252
—
4,491
118
5,416
893
276
—
218
1,387
304
162
157
5
5
1
—
1
7
10
4
6
3
1,335
529
1,314
888
4,066
3,694
1,421
1,101
13
9
159
75
26
18
—
119
6
1
6
5
18
112
35
30
3
$
16,928
$
308
$
7,800
$
177
$ 24,728
$
485
$
8,891
$
57
$
6,838
221
$
86
—
705
33
18
756
54
28
180
262
537
9
—
—
9
2
—
—
2
4
1,235
—
9
1,244
330
35
—
365
204
1
—
21
—
—
21
13
—
—
13
7
$
8,977
$
6,838
1,940
33
27
2,000
384
63
180
627
741
58
221
30
—
—
30
15
—
—
15
11
Total
$
17,284
$
293
$
1,899
$
42
$ 19,183
$
335
State Street Corporation | 146
STATE STREET CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 31, 2015
(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
U.S. equity 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
Collateralized mortgage obligations
Less than 12 months
12 months or longer
Total
Fair
Value
Gross
Unrealized
Losses
Fair
Value
Gross
Unrealized
Losses
Fair
Value
Gross
Unrealized
Losses
$
3,123
$
4
$
121
$
1
$
3,244
$
5,729
2,841
838
7
720
4,406
1,457
2,190
1,691
1,548
6,886
206
1,511
475
—
48
54
7
—
3
64
7
7
—
5
19
1
14
9
—
3,166
86
8,895
3,217
490
387
43
144
30
31
—
6,058
1,328
394
763
4,137
205
8,543
437
22
—
527
986
658
217
178
5
4
—
—
7
11
26
8
9
3
1,894
2,212
1,691
2,075
7,872
864
1,728
653
5
5
134
198
37
31
3
269
11
7
—
12
30
27
22
18
3
$ 22,336
$
159
$
9,468
$
349
$ 31,804
$
508
$ 16,370
$
120
$
3,005
$
560
896
636
102
1,634
338
1,015
128
—
1,481
634
8
25
1
—
26
2
3
1
—
6
9
—
615
—
31
646
524
69
—
43
636
537
97
—
22
—
1
23
24
—
—
—
24
20
$ 19,375
$
560
1,511
636
133
2,280
862
1,084
128
43
2,117
1,171
217
8
47
1
1
49
26
3
1
—
30
29
Total
$ 20,679
$
169
$
4,824
$
164
$ 25,503
$
333
State Street Corporation | 147
STATE STREET CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The following table presents contractual maturities of debt investment securities by carrying amount as of
December 31, 2016. The maturities of certain asset-backed securities, mortgage-backed securities, and
collateralized mortgage obligations are based on expected principal payments. Actual maturities may differ from
these expected maturities since certain borrowers have the right to prepay obligations with or without prepayment
penalties.
December 31, 2016
(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
Collateralized mortgage obligations
Total
Under 1
Year
1 to 5
Years
6 to 10
Years
Over 10
Years
Total
$
2,722
$
1,114
$
44
$
383
$
4,263
1,533
3,022
8,489
13,257
213
590
4
3
1
3,181
1,052
1
21
757
295
2
883
1,068
—
266
—
598
4,255
1,937
1,334
1,301
289
4,372
1,901
7,863
509
2
508
3,339
1,877
987
3,304
9,507
2,347
44
1,003
731
346
477
408
1,962
5,548
871
922
1,164
4
—
—
1,168
1,918
1,676
36
5,596
1,351
272
905
8,124
6,535
2,516
5,836
5,613
20,500
10,322
2,593
2,469
$
12,415
$
19,803
$
14,306
$
15,004
$
61,528
$
400
$
14,888
$
2,167
$
72
$
17,527
—
442
99
7
548
148
163
180
71
562
102
193
201
798
18
1,017
339
368
106
42
855
23
1,536
8,605
10,334
349
—
8
357
47
—
—
—
47
488
1,891
—
2
1,893
616
—
—
—
616
800
2,883
897
35
3,815
1,150
531
286
113
2,080
1,413
$
1,612
$
16,976
$
4,595
$
11,986
$
35,169
State Street Corporation | 148
STATE STREET CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The following tables present gross realized
gains and losses from sales of AFS investment
securities, and the components of net impairment
losses included in net gains and losses related to
investment securities for the periods indicated.
(In millions)
Gross realized gains from sales of
AFS investment securities
Gross realized losses from sales of
AFS investment securities
Net impairment losses
Gross losses from OTTI
Losses reclassified (from) to other
comprehensive income
Net impairment losses(1)
Gains (losses) related to investment
securities, net
(1) Net impairment losses,
recognized in our consolidated
statement of income, were
composed of the following:
Impairment associated with
expected credit losses
Impairment associated with
adverse changes in timing of
expected future cash flows
Net impairment losses
Years Ended December 31,
2016
2015
2014
$
15
$
57
$
64
(5)
(2)
(1)
(3)
(62)
(49)
(1)
—
(1)
(1)
(10)
(11)
$
7
$
(6) $
4
$
$
(1) $
— $
(10)
(2)
(1)
(3) $
(1) $
(1)
(11)
The following table presents a roll-forward with
respect to net impairment losses that have been
recognized in income for the periods indicated.
(In millions)
Years Ended December 31,
2016
2015
2014
Balance, beginning of period
$
92
$
115
$
122
Additions:
Losses for which OTTI was
previously recognized
Deductions:
2
1
11
Previously recognized losses related
to securities sold or matured
Losses related to securities intended
or required to be sold
Balance, end of period
$
(28)
(24)
—
66
$
—
92
(12)
(6)
$
115
Interest revenue related to debt securities is
recognized in our consolidated statement of income
using the effective 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 non-refundable fees or
costs, as well as purchase premiums or discounts,
resulting in amortization or accretion, accordingly.
For debt securities acquired for 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. Increases in expected
future cash flows are recognized prospectively over
the securities’ estimated remaining terms through the
recalculation of their yields.
For 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. Increases in expected future
cash flows are recognized prospectively over the
securities’ estimated remaining terms through the
recalculation of their yields.
Impairment:
We conduct periodic reviews of individual
securities to assess whether OTTI 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
AFS and HTM debt securities, 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 OTTI, 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;
State Street Corporation | 149
STATE STREET CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
•
•
•
•
the analysis of the underlying collateral for
mortgage- and asset-backed securities;
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;
evaluation of factors or triggers that could
cause individual securities to be deemed
OTTI and those that would not support OTTI;
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 OTTI 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 of its
amortized cost basis.
The following provides a description of our
process for the identification and assessment of
OTTI, as well as information about OTTI recorded in
2016, 2015 and 2014 and changes in period-end
unrealized losses, for major security types as of
December 31, 2016.
U.S. Agency Securities
Our portfolio of U.S. agency direct obligations
and 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 OTTI on these
securities in 2016, 2015 or 2014. The overall increase
in the unrealized losses on these securities as of
December 31, 2016 was primarily attributable to
interest rate increases in 2016.
Asset-Backed Securities - Student Loans
Asset-backed securities collateralized by student
loans are primarily composed of securities
collateralized by 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 OTTI on these securities in
2016, 2015 or 2014. The gross unrealized losses in
our FFELP loan-backed securities portfolio as of
December 31, 2016 were primarily attributable to the
widening FFELP spreads during the year as some
rating agencies are reviewing the FFELP market for
bonds with cash flows that might extend past their
legal final maturities.
Our assessment of OTTI 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 4.1 years as of
December 31, 2016.
In the fourth quarter of 2016, Moody’s and Fitch
downgraded approximately $1.7 billion of FFELP
loan-backed securities in our portfolio due to potential
extension of student loan repayments beyond the
securities’ legal final maturity dates. Approximately
$2.2 billion of our FFELP loan-backed portfolio are on
credit watch negative by Fitch. Based on the limited
price impact on the overall FFELP loan-backed
securities portfolio and recent remedial actions by
issuers, including amending loan-backed securities
maturity dates and exercising cleanup calls, the credit
quality of the FFELP loan-backed securities portfolio
remains stable and we, as a bondholder, remain
protected from principal loss as a result of the
aforementioned federal government guarantee and
over-collateralization. Downside risks remain should
remedial actions fail to address the extension risks.
Our total exposure to private student loan-
backed securities was less than $200 million as of
December 31, 2016. Our assessment of OTTI of
State Street Corporation | 150
STATE STREET CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
private student loan-backed securities considers,
among other factors, the impact of high
unemployment rates on the collateral performance of
private student loans. We recorded no OTTI on these
securities in 2016, 2015 or 2014.
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 and leases. 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
OTTI exists.
We recorded OTTI of $2 million, $1 million, and
$1 million in 2016, 2015 and 2014, respectively, on
non-U.S. residential mortgage-backed securities in
our consolidated statement of income associated with
adverse changes in the timing of expected future
cash flows from the securities.
Our assessment of OTTI of these securities
takes into account government intervention in the
corresponding mortgage markets and assumes a
conservative baseline macroeconomic environment
for this region, factoring in 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 3% and
23% across these four countries. Our evaluation of
OTTI 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 understand the impact
of more severe assumptions on potential OTTI.
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 14. Our portfolio of other
U.S. debt securities is primarily composed of
securities issued by U.S. corporations.
Our assessment of OTTI 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 OTTI on these securities in
2016, 2015 or 2014. The decline in the unrealized
losses on these securities as of December 31, 2016
was primarily attributable to the narrowing of spreads
and U.S. Treasury rates in 2016.
U.S. Non-Agency Residential Mortgage-Backed
Securities
We assess OTTI of our portfolio of U.S. non-
agency residential mortgage-backed securities 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 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 OTTI on these securities in
2016, 2015 or 2014.
U.S. Non-Agency Commercial Mortgage-Backed
Securities
With respect to our portfolio of U.S. non-agency
commercial mortgage-backed securities, OTTI 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. In 2016, we recorded $1
million of OTTI on these securities, all associated with
State Street Corporation | 151
STATE STREET CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
expected credit losses. We recorded no OTTI on
these securities 2015. In 2014, we recorded $10
million of OTTI on these securities, all associated with
expected credit losses.
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 OTTI, since the loss is ultimately subject
to a discount commensurate with the purchase yield
of the security.
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
OTTI recorded in 2016, management considers the
aggregate decline in fair value of the investment
securities portfolio and the resulting gross pre-tax
unrealized losses of $820 million related to 1,727
securities as of December 31, 2016 to be temporary,
and not the result of any material changes in the
credit characteristics of the securities.
Note 4. 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 have
been initially recorded at fair value 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 that are classified
as held-for-sale are measured at lower of cost or fair
value on an individual basis.
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.
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
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.
The following table presents our recorded
investment in loans and leases, by segment, as of the
dates indicated:
(In millions)
Domestic:
Commercial and financial:
December 31,
2016
December 31,
2015
Loans to investment funds
$
11,734
$
Senior secured bank loans
Loans to municipalities
Other
Commercial real estate
Lease financing
Total domestic
Non-U.S.:
Commercial and financial:
Loans to investment funds
Senior secured bank loans
Lease financing
Total non-U.S.
Total loans and leases
Allowance for loan and lease losses
3,256
1,352
70
27
338
11,915
2,929
962
93
28
337
16,777
16,264
2,224
252
504
2,980
19,757
(53)
1,752
205
578
2,535
18,799
(46)
Loans and leases, net of allowance
$
19,704
$
18,753
We segregate our loans and leases into three
segments: commercial and financial loans,
commercial real estate loans, and lease financing.
We further classify commercial and financial loans as
loans to investment funds, senior secured bank loans,
loans to municipalities, and other. These
classifications reflect their risk characteristics, their
initial measurement attributes and the methods we
use to monitor and assess credit risk.
The commercial and financial segment is
composed of primarily floating-rate loans to mutual
fund clients, purchased senior secured bank loans,
State Street Corporation | 152
STATE STREET CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
and loans to municipalities. Investment fund lending
is composed of short-duration revolving credit lines
providing liquidity to fund clients in support of their
transaction flows associated with securities'
settlement activities.
Certain loans are pledged as collateral for
access to the Federal Reserve's discount window. As
of December 31, 2016 and December 31, 2015, the
loans pledged as collateral totaled $1.5 billion and
$2.5 billion, respectively.
The lease financing segment includes our
investment in leveraged lease financing. The
components of our net investment in leveraged lease
financing, included in the lease financing 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
2016
2015
$
1,039
$
1,159
89
(286)
842
(313)
89
(333)
915
(334)
581
Net investment in leveraged lease financing
$
529
$
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, 2016
(In millions)
Investment grade(1)
Speculative(2)
Substandard(4)
Total
December 31, 2015
(In millions)
Investment grade(1)
Speculative(2)
Special mention(3)
Total
Commercial and
Financial
Commercial Real
Estate
Lease
Financing
Total Loans and
Leases
$
$
$
$
14,889
$
3,984
15
18,888
$
27
—
—
27
Commercial and
Financial
Commercial Real
Estate
14,288
$
3,537
31
17,856
$
28
—
—
28
$
$
$
$
842
$
—
—
842
$
15,758
3,984
15
19,757
Lease
Financing
Total Loans and
Leases
888
$
27
—
915
$
15,204
3,564
31
18,799
(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.
(4) Substandard loans and leases consist of counterparties with well-defined weakness that jeopardizes repayment with the possibility we will sustain some loss.
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 source 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 historical and current information, and involve
subjective assessment and interpretation. Credit
counterparties are evaluated and risk-rated on an
individual basis at least annually. Management
considers the ratings to be current as of
December 31, 2016.
State Street Corporation | 153
STATE STREET CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The following table presents our recorded investment in loans and leases, disaggregated based on our
impairment methodology, as of the dates indicated:
(In millions)
Loans and leases(1):
Individually evaluated
for impairment
Collectively evaluated
for impairment
Total
December 31, 2016
December 31, 2015
Commercial
and
Financial
Commercial
Real Estate
Lease
Financing
Total Loans
and Leases
Commercial
and
Financial
Commercial
Real Estate
Lease
Financing
Total Loans
and Leases
$
$
15
$
— $
— $
15
$
— $
— $
— $
—
18,873
18,888
$
27
27
$
842
842
19,742
17,856
$
19,757
$
17,856
$
28
28
$
915
915
$
18,799
18,799
(1) For those portfolios where there are a small number of loans each with a large balance, we review each loan annually for indicators of impairment. For those loans
where no such indicators are identified, the loans are collectively evaluated for impairment. As of December 31, 2016, $195 thousand of the allowance for loan and
lease loss related to commercial and financial loans individually evaluated for impairment, and the remainder of the allowance related to commercial and financial
loans collectively evaluated for impairment. As of December 31, 2015, all of the allowance for loan and lease loss related to commercial and financial loans
collectively evaluated for impairment.
The following table presents information related to our recorded investment in impaired loans and leases for
the dates or periods indicated. As of December 31, 2015, we had no impaired loans and leases.
(In millions)
Commercial and financial(1)
Total
As of December 31, 2016
Year Ended December 31, 2016
Recorded
Investment
Unpaid
Principal
Balance(1)
Related
Allowance(2)
Average
Recorded
Investment
Interest Revenue
Recognized
$
$
15
15
$
$
15
15
$
$
— $
— $
15
15
$
$
—
—
(1) As of December 31, 2016, the related allowance for loan loss was approximately $195 thousand. This relates to one loan, which was on non-accrual status.
(2) As of December 31, 2016 and December 31, 2015, with exception of the aforementioned specific allowance, all of the allowance for loan and lease losses of $53
million and $46 million, respectively, related to loans that were not impaired.
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. No loans were
modified in troubled debt restructurings during the
years ended December 31, 2016 and December 31,
2015.
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. 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.
As of December 31, 2016, there was one
commercial and financial loan on non-accrual status,
no CRE loans or leases were on non-accrual status,
and no loans and leases were 90 days or more
contractually past due. As of December 31, 2015, no
loans or leases were on non-accrual status or 90
days or more contractually past due.
Allowance for loan and lease losses
The allowance for loan and lease 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 each segment
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.
State Street Corporation | 154
STATE STREET CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Loans and leases are charged off to the
allowance for loan and lease losses in the reporting
period in which either an event occurs that confirms
the existence of a loss on a loan or lease or a portion
of a loan or lease is determined to be uncollectible. In
addition, any impaired loan or lease 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 or lease 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 following table presents activity in the
allowance for loan and lease losses for the periods
indicated:
Years Ended December 31,
2016
2015
2014
Total Loans
and Leases
Total Loans
and Leases
Total Loans
and Leases
(In millions)
Allowance for loan
and lease losses(1):
Beginning balance
$
46
$
38
$
Provision for loan and
lease losses
Charge-offs
10
(3)
12
(4)
Ending balance
$
53
$
46
$
28
10
—
38
(1) The provisions and charge-offs for loans and leases were attributable to
exposure to senior secured loans to non-investment grade borrowers,
purchased in connection with our participation in syndicated loans.
Loans and leases are reviewed on a regular
basis, and any provisions for loan and lease losses
that are recorded reflect management's estimate of
the amount necessary to maintain the allowance for
loan and lease losses at a level considered
appropriate to absorb estimated incurred losses in the
loan and lease portfolio.
Off-balance sheet credit exposures
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 and
lease 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.
Note 5. 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 long-lived intangible
assets, primarily client relationships and core deposit
intangible 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.
State Street Corporation | 155
STATE STREET CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The following table presents changes in the carrying amount of goodwill during the periods indicated:
(In millions)
Goodwill:
Beginning balance
Acquisitions(1)
Divestitures and other reductions
Foreign currency translation
Ending balance
December 31, 2016
December 31, 2015
Investment
Servicing
Investment
Management
Total
Investment
Servicing
Investment
Management
Total
$
5,671
$
5,793
$
$
5,826
$
5,641
$
—
(11)
(80)
5,550
$
$
30
236
—
(2)
264
236
(11)
(82)
5,814
$
—
—
(152)
5,641
$
33
—
—
(3)
—
—
(155)
5,671
$
30
$
(1) Amounts for 2016 reflect our acquisition of GEAM, which is more fully described in Note 1.
The following table presents changes in the net carrying amount of other intangible assets during the periods
indicated:
(In millions)
Other intangible assets:
Beginning balance
Acquisitions(1)
Divestitures
Amortization
Foreign currency translation and other, net
Ending balance
December 31, 2016
December 31, 2015
Investment
Servicing
Investment
Management
Total
Investment
Servicing
Investment
Management
Total
$
$
1,753
—
(8)
(186)
(20)
1,539
$
$
15
217
—
(21)
—
211
$
$
1,768
217
(8)
(207)
(20)
1,750
$
$
1,998
16
—
(187)
(74)
1,753
$
$
$
27
—
—
(10)
(2)
15
$
2,025
16
—
(197)
(76)
1,768
(1) Amounts for 2016 reflect our acquisition of GEAM, which is more fully described in Note 1.
The following table presents the gross carrying amount, accumulated amortization and net carrying amount of
other intangible assets by type as of the dates indicated:
(In millions)
Other intangible assets:
Client relationships
Core deposits
Other
Total
December 31, 2016
December 31, 2015
Gross
Carrying
Amount
Accumulated
Amortization
Net
Carrying
Amount
Gross
Carrying
Amount
Accumulated
Amortization
Net
Carrying
Amount
$
$
2,620
$
661
132
3,413
$
(1,306) $
(277)
(80)
(1,663) $
1,314
$
2,486
$
384
52
1,750
667
147
$
3,300
$
(1,198) $
(246)
(88)
(1,532) $
1,288
421
59
1,768
Amortization expense related to other intangible
Expected future amortization expense for other
assets was $207 million, $197 million and $222 million
in 2016, 2015 and 2014, respectively. An impairment
of approximately $9 million associated with intangible
assets was included in amortization expense in 2014.
intangible assets recorded as of December 31, 2016 is
as follows:
(In millions)
Years Ending December 31,
Future
Amortization
2017
2018
2019
2020
2021
$
208
186
169
166
161
State Street Corporation | 156
STATE STREET CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Note 6. Other Assets
Note 7. Deposits
The following table presents the components
As of December 31, 2016, we had $55.03 billion
of other assets as of the dates indicated:
(In millions)
Receivable - securities lending(1)
Derivative instruments, net
Bank-owned life insurance
Investments in joint ventures and
other unconsolidated entities
Collateral, net
Accounts receivable
Prepaid expenses
Deferred tax assets, net of
valuation allowance(2)
Deposits with clearing
organizations
Income taxes receivable
Receivable for securities
settlement
Other(3)
December 31,
2016
December 31,
2015
$
21,204
$
20,121
7,321
3,158
2,363
2,236
886
333
210
132
106
40
339
4,777
3,078
2,034
1,344
1,018
284
182
127
154
311
473
Total
$
38,328
$
33,903
(1) Refer to Note 11 for further information on the impact of collateral on our
financial statement presentation of securities borrowing transactions.
(2) Deferred tax assets and liabilities recorded in our consolidated statement
of condition are netted within the same tax jurisdiction as of December 31,
2015. Gross deferred tax assets and liabilities are presented in Note 22.
(3) Includes amounts held in escrow accounts at third parties related to the
negotiated settlements in the indirect foreign exchange legal matter
presented in Note 13.
of time deposits outstanding, of which $214 million
were non-U.S. and all of which are scheduled to
mature in 2017. As of December 31, 2015, we had
$46.55 billion of time deposits outstanding, of which
$127 million were non-U.S. As of December 31, 2016
and 2015, substantially all U.S. and non-U.S. time
deposits were in amounts of $100,000 or more.
Note 8. 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 14. We phased out our commercial
paper program prior to December 31, 2015 consistent
with the objectives of our 2015 recovery and
resolution plan developed pursuant to the
requirements of the Dodd-Frank Act.
Collectively, short-term borrowings had
weighted-average interest rates of 0.13% and 0.05%
in 2016 and 2015, respectively.
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)
2016
2015
2014
2016
2015
2014
Balance as of December 31
$
4,400
$
4,499
$
8,925
$
— $
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
5,572
4,113
.040%
.02
10,977
8,875
.020%
.01
10,955
8,817
.005%
.00
29
31
.00 %
.17
$
6
29
21
.03%
.01
21
29
20
.01%
.00
Tax-Exempt
Investment Program
Corporate Commercial Paper
Program(1)
(Dollars in millions)
2016
2015
2014
2015
2014
Balance as of December 31
$
1,158
$
1,748
$
1,870
$
— $
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
1,726
1,512
.67%
.36
1,865
1,807
.03%
.06
1,938
1,903
.06%
.08
2,919
1,897
.00%
.26
2,485
2,485
2,136
.16%
.17
(1) We phased out our commercial paper program prior to December 31, 2015.
State Street Corporation | 157
STATE STREET CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
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 $4.49 billion underlying the repurchase agreements
remained in our investment securities portfolio as of
December 31, 2016.
The following table presents information about
these U.S. government securities and the carrying
value of the related repurchase agreements, including
accrued interest, as of December 31, 2016. The
table excludes repurchase agreements collateralized
by securities purchased under resale agreements and
collateralized by trading account assets.
U.S. Government
Securities Sold
Amortized
Cost
Fair Value
Repurchase
Agreements(1)
Amortized
Cost
(In millions)
Overnight maturity
$
4,490
$
4,491
$
4,400
(1) Collateralized by investment securities.
We maintain 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 the clearing organization. As a
result of this netting, the average balances of
securities purchased under resale agreements and
securities sold under repurchase agreements were
reduced by $30.86 billion for 2016 and $30.30 billion
for 2015.
State Street Bank currently maintains a line of
credit of CAD 1.40 billion, or approximately $1.04
billion as of December 31, 2016, 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, 2016 and 2015, there was no balance
outstanding on this line of credit.
State Street Corporation | 158
STATE STREET CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Note 9. Long-Term Debt
(Dollars in millions)
Issuance Date
Maturity Date
Coupon Rate
Seniority
Statutory business trusts(5):
Interest Due
Dates
As of December 31,
2016
2015(6)
April 30, 2007
June 15, 2037
Floating-rate
May 15, 1998
May 15, 2028
Floating-rate
Parent company and non-banking subsidiary issuances:
Junior subordinated
debentures
Junior subordinated
debentures
3/15; 6/15; 9/15;
12/15
2/15; 5/15; 8/15;
11/15
August 18, 2015
August 18, 2015
August 18, 2025
August 18, 2020
November 19, 2013
November 20, 2023
December 15, 2014
December 16, 2024
May 15, 2013
April 30, 2007(5)
March 7, 2011
May 19, 2016
May 19, 2016
May 15, 2023(2)
June 15, 2037
March 7, 2021
May 19, 2021
May 19, 2026
February 11, 2011
March 15, 2018(3)
3.55%
2.55%
3.7%
3.3%
3.1%
Floating-rate
Senior notes
Senior notes
Senior notes
Senior notes
Subordinated notes
Junior subordinated
debentures
4.375%
Senior notes
1.95%
2.65%
4.956%
Senior notes
Senior notes
Junior subordinated
debentures
August 18, 2015
August 18, 2020
Floating-rate
2/18; 8/18(1)
2/18; 8/18(1)
5/20; 11/20(1)
6/16; 12/16(1)
5/15; 11/15(1)
3/15; 6/15; 9/15;
12/15
3/7; 9/7(1)
5/19; 11/19(1)
5/19; 11/19(1)
3/15; 9/15(1)
2/18; 5/18; 8/18;
11/18
5/15; 11/15(1)
Senior notes
Senior notes
1.35%
5.375%
Senior notes
4/30; 10/30
Floating-rate
Junior subordinated
debentures
2/15; 5/15; 8/15;
11/15
7.35%
2.875%
Senior notes
6/15; 12/15
Senior notes
3/7
May 15, 2013
April 30, 2007
May 15, 1998(5)
June 21, 1996
March 7, 2011
May 15, 2018
April 30, 2017
May 15, 2028
June 15, 2026(4)
March 7, 2016
Parent company:
Long-term capital leases
State Street Bank issuances:
$
— $
—
1,293
1,192
1,033
999
987
793
738
726
704
511
499
497
450
150
150
—
293
415
—
793
155
1,301
1,194
1,046
1,007
993
—
738
—
—
519
498
495
449
—
150
1,001
334
424
400
September 24, 2003
October 15, 2018(2)
5.25%
Subordinated notes
4/15; 10/15
December 8, 2005
January 15, 2016
5.3%
Subordinated notes
1/15
Total long-term debt
$
11,430
$
11,497
(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, 2016, the carrying value of long-term debt associated with these fair value hedges decreased $15 million. As of
December 31, 2015, the carrying value of long-term debt associated with these fair value hedges increased $105 million. Refer to Note 10 for additional
information about fair value hedges.
(2) The subordinated notes qualify for inclusion in tier 2 regulatory capital under current federal regulatory capital guidelines.
(3) We do not have the right to redeem the debenture prior to maturity other than upon the occurrence of specified events. Such redemption is subject to federal
regulatory approval. The junior subordinated debenture qualify for inclusion in tier 2 regulatory capital under current federal regulatory capital guidelines.
(4) We may not redeem the note prior to their maturity.
(5) On December 21, 2016, the statutory business trusts were liquidated and the floating-rate junior subordinated debentures issuances of the statutory business
trusts were exchanged for a like principal amount of State Street Corporation's floating-rate junior subordinated debentures with the same maturity dates.
(6) Refer to Note 1 regarding the retrospective application of ASU 2015-03, which resulted in the netting of debt issuance costs within long-term debt.
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, 2016, 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, 2016, $4 billion was
available for issuance pursuant to this authority. As of
December 31, 2016, State Street Bank also had
Board authority to issue an additional $500 million of
subordinated debt.
State Street Corporation | 159
STATE STREET CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Statutory Business Trusts:
As of December 31, 2015, we had two statutory
business trusts, State Street Capital Trusts I and IV,
which as of December 31, 2015 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 were invested in junior
subordinated debentures issued by the parent
company. The junior subordinated debentures were
the sole assets of Capital Trusts I and IV. Each of the
trusts was wholly-owned by us; however, in
conformity with U.S. GAAP, we did not record the
trusts in our consolidated financial statements.
Payments made by the trusts to holders of the
capital securities were dependent on our payments
made to the trusts on the junior subordinated
debentures. Our fulfillment of these commitments had
the effect of providing a full, irrevocable and
unconditional guarantee of the trusts’ obligations
under the capital securities. While the capital
securities issued by the trusts were not recorded in
our consolidated statement of condition, a portion of
the junior subordinated debentures qualified for
inclusion in tier 1 regulatory capital with the remainder
qualifying for inclusion in tier 2 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
16.
Interest paid by the parent company on the
debentures was recorded in interest expense.
Distributions to holders of the capital securities by the
trusts were payable from interest payments received
on the debentures and were due quarterly by State
Street Capital Trusts I and IV, subject to deferral for
up to five years under certain conditions. The capital
securities were 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
was subject to federal regulatory approval.
Effective December 21, 2016, the liquidation
date, State Street Capital Trusts I and IV were
dissolved in accordance with the terms of State Street
Capital Trusts I and IV, and we exchanged the
floating-rate capital securities of State Street Capital
Trust I due in 2028 for a like principal amount of State
Street Corporation floating-rate junior subordinated
debentures due in 2028, and we exchanged the
floating-rate capital securities of State Street Capital
Trust IV due in 2037 for a like principal amount of
State Street Corporation floating-rate junior
subordinated debentures due in 2037.
The next scheduled interest payment on the
State Street Corporation floating-rate junior
subordinated debentures due in 2028 and 2037 will
include any accrued and unpaid distributions on the
floating rate capital securities of State Street Capital
Trust I due in 2028 and State Street Capital Trust IV
due in 2037, respectively.
Parent Company:
As of December 31, 2016 and 2015, long-term
capital leases included $278 million and $308 million,
respectively, related to our One Lincoln Street
headquarters building and related underground
parking garage. Refer to Note 20 for additional
information.
Note 10. 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.
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 options and interest-rate
contracts. Our derivative positions include derivative
contracts held by a consolidated sponsored
investment fund (refer to Note 14). We record
derivatives in our consolidated statement of condition
at their fair value on a recurring basis.
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
State Street Corporation | 160
STATE STREET CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
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 include
our use of derivative financial instruments. One such
risk-management measure is 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 requirements.
Derivative financial instruments are also subject
to credit and counterparty risk, which we manage by
performing credit reviews, maintaining individual
counterparty limits, entering into netting
arrangements and requiring the receipt of collateral.
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, 2016 and 2015, we had recorded
approximately $1.99 billion and $1.40 billion,
respectively, of cash collateral received from
counterparties and approximately $4.39 billion and
$1.65 billion, respectively, of cash collateral provided
to counterparties in connection with derivative
financial instruments in our consolidated statement of
condition.
Certain of our derivative assets and liabilities as
of December 31, 2016 and 2015 are subject to
master netting agreements with our derivative
counterparties. Certain of these agreements contain
credit risk-related contingent features in which the
counterparty has the right to declare us 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, 2016 totaled
approximately $1.19 billion, against which we
provided $92 million of underlying collateral. If our
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, assuming no change in fair value, as of
December 31, 2016 was approximately $1.10 billion.
Such accelerated settlement would be at fair value
and therefore not affect our consolidated results of
operations.
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.
At both the inception of the hedge and on an
ongoing basis, we formally assess and document the
effectiveness of a derivative designated in a hedging
relationship 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, respectively, on a gross
basis, except where such gains and losses arise from
contracts covered by qualifying master netting
agreements.
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
State Street Corporation | 161
STATE STREET CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
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 also use foreign currency swap contracts to
manage the foreign exchange risk associated with
certain foreign currency-denominated liabilities. The
foreign exchange swap contracts are entered into for
periods generally consistent with foreign currency
exposure of the underlying transactions.
The entire changes in the fair value of the
derivatives utilized in our trading activities are
recorded in trading services revenue, and the entire
changes in fair value of derivatives utilized in our
asset-and-liability management activities are
recorded in processing fees and other revenue.
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 12, 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.
We grant deferred cash awards to certain of our
employees as part of our employee incentive
compensation plans. We account for these awards
as derivative financial instruments, as the underlying
referenced shares are not equity instruments of State
Street. The fair value of these derivatives is
referenced to the value of units in State Street-
sponsored investment funds or funds sponsored by
other unrelated entities. We re-measure these
derivatives to fair value quarterly, and record the
change in value in compensation and employee
benefits 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 and
foreign currency 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. We manage our 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. Interest rate swap agreements
alter the interest-rate characteristics of specific
balance sheet assets or liabilities. We use foreign
exchange forward and swap contracts to hedge
foreign exchange exposure to various foreign
currencies with respect to certain assets and
liabilities. Our hedging relationships are formally
designated, and qualify for hedge accounting, as fair
value, cash flow or net investment hedges.
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 the
hedging derivative and the gains and losses on the
hedged 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. 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 in processing fees and other revenue, along
with the changes in fair value of the hedged asset or
liability attributable to the hedged risk.
We have entered into interest rate swap
agreements to modify our interest revenue from
certain AFS investment securities from a fixed rate to
a floating rate. The hedged AFS investment
securities included hedged trusts that had a
weighted-average life of approximately 4.5 years as
of December 31, 2016, compared to 5.4 years as of
December 31, 2015. These trusts are hedged with
interest rate swap contracts of similar maturity,
repricing frequency and fixed-rate coupons. The
State Street Corporation | 162
STATE STREET CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
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 eight
senior notes and two subordinated notes from fixed
rates to floating rates. The senior and subordinated
notes are hedged with interest rate swap contracts
with notional amounts, maturities and fixed-rate
coupon terms that effectively hedge the fixed-rate
notes. The interest rate swap contracts convert the
fixed-rate coupons to floating rates indexed to LIBOR,
thereby mitigating our exposure to fluctuations in the
fair values of the senior and subordinated notes
stemming from changes in the benchmark interest
rates. The table below summarizes the maturities
and the paid fixed interest rates for the hedged senior
and subordinated notes:
December 31, 2016
Senior Notes
Maturity
Paid Fixed
Interest Rate
2018
2020
2021
2021
2023
2024
2025
2026
2018
2023
1.35%
2.55
1.95
4.38
3.70
3.30
3.55
2.65
4.96
3.10
Subordinated Notes
We have entered into foreign exchange swap
contracts to hedge the change in fair value
attributable to foreign exchange movements in our
foreign currency denominated investment securities
and deposits. 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 and deposits 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 and
deposits. 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. Changes in the fair value of a derivative
that are highly effective, and that are designated and
qualify as a foreign currency hedge, are recorded in
processing fees and other 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 changes in the
present value of the forecasted cash flows
attributable to the forecasted transaction.
We have entered into foreign exchange
contracts to hedge the change in cash flows
attributable to foreign exchange movements in foreign
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.
Changes in the fair value of the derivative that are
highly effective, and that are designated and qualify
as a foreign currency hedge, are recorded in other
comprehensive income.
Net Investment Hedges
We have entered into foreign exchange
contracts to protect the net investment in our foreign
operations against adverse changes in exchange
rates. These forward contracts convert the foreign
currency risk to U.S. dollars, thereby mitigating our
exposure to fluctuations in the fair value of our net
investments in our foreign operations attributable to
changes in foreign exchange rates. The changes in
fair value of the foreign exchange forward contracts
are recorded, net of taxes, in the foreign currency
translation component of other comprehensive
income. Effectiveness of net investment hedges is
based on the overall changes in the fair value of the
forward contracts and we measure the
ineffectiveness of net investment hedge based on
changes in forward foreign currency rates. There
was no ineffectiveness for our net investment hedge
during 2016.
State Street Corporation | 163
STATE STREET CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The following table presents the aggregate
In connection with our asset-and-liability
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:
December 31,
2016
December 31,
2015
Swap agreements and forwards $
— $
Futures
13,455
336
2,621
Foreign exchange contracts:
Forward, swap and spot
1,414,765
1,274,277
Options purchased
Options written
Credit derivative contracts:
Credit swap agreements(1)
Commodity and equity contracts:
Commodity(1)
Equity(1)
Other:
Stable value contracts
Deferred value awards(2)(3)
Derivatives designated as
hedging instruments:
Interest-rate contracts:
Swap agreements
Foreign exchange contracts:
337
202
—
—
—
403
404
141
113
87
27,182
409
24,583
320
10,169
9,398
Forward and swap
8,564
4,515
(1) Primarily composed of positions held by a consolidated sponsored investment
fund, more fully described in Note 14.
(2) Represents grants of deferred value awards to employees; refer to discussion in
this note under "Derivatives Not Designated as Hedging Instruments."
(3) Amount as of December 31, 2016 reflects $249 million related to the
acceleration of expense associated with certain cash settled deferred incentive
compensation awards.
management activities, we have entered into interest-
rate contracts designated as fair value hedges to
manage our interest rate risk. The following tables
present 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(2)
Total
(In millions)
Investment securities available-for-sale
Long-term debt(2)
Total
December 31,
2016(1)
Fair Value Hedges
$
$
1,444
8,725
10,169
December 31,
2015(1)
Fair Value Hedges
$
$
1,698
7,700
9,398
(1) As of December 31, 2016 and 2015, there were no interest-rate contracts
designated as cash flow hedges.
(2) As of December 31, 2016, these fair value hedges decreased the carrying
value of long-term debt presented in our consolidated statement of condition by
$15 million. As of December 31, 2015, these fair value hedges increased the
carrying value of long-term debt presented in our consolidated statement of
condition by $105 million.
Notional amounts of derivative financial
instruments are not recorded in the consolidated
statement of condition. They are provided here as an
indication of the volume of our derivative activity and
do not represent a measure of our potential gains or
losses. The notional amounts are not required to be
exchanged for most of our derivative contracts and
they generally serve as a reference to calculate the
fair values of the derivatives.
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,
2016
2015
Contractual
Rates
Rate
Including
Impact of
Hedges
Contractual
Rates
Rate
Including
Impact of
Hedges
Long-term debt
3.40%
2.29%
3.57%
2.42%
State Street Corporation | 164
STATE STREET CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
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 11.
(In millions)
Derivatives not designated as hedging instruments:
Foreign exchange contracts
Interest-rate contracts
Other derivative contracts
Total
Derivatives designated as hedging instruments:
Foreign exchange contracts
Interest-rate contracts
Total
(1) Derivative assets are included within other assets in our consolidated statement of condition.
(In millions)
Derivatives not designated as hedging instruments:
Foreign exchange contracts
Other derivative contracts
Interest-rate contracts
Total
Derivatives designated as hedging instruments:
Foreign exchange contracts
Interest-rate contracts
Total
Derivative Assets(1)
Fair Value
December 31, 2016
December 31, 2015
15,982
$
—
—
15,982
$
502
68
570
$
$
10,799
2
5
10,806
517
133
650
Derivative Liabilities(1)
Fair Value
December 31, 2016
December 31, 2015
15,881
$
380
—
16,261
$
75
348
423
$
$
10,795
103
2
10,900
73
180
253
$
$
$
$
$
$
$
$
(1) Derivative liabilities are included within other liabilities in our consolidated statement of condition.
The following tables present the impact of our use of derivative financial instruments on our consolidated
statement of income for the periods indicated:
Location of Gain (Loss) on
Derivative in Consolidated
Statement of Income
(In millions)
Derivatives not designated as hedging instruments:
Foreign exchange contracts
Trading services revenue
Interest-rate contracts
Interest-rate contracts
Credit derivative contracts
Credit derivative contracts
Other derivative contracts
Other derivative contracts(1)
Total
Processing fees and other revenue
Trading services revenue
Trading services revenue
Processing fees and other revenue
Trading services revenue
Compensation and employee benefits
Amount of Gain (Loss) on Derivative Recognized in
Consolidated Statement of Income
Years Ended December 31,
2016
2015
2014
$
$
662
$
686
$
1
(7)
(1)
—
(2)
—
(2)
(1)
—
8
(448)
205
$
(149)
542
$
612
—
1
1
(1)
(2)
(106)
505
(1) Amount in 2016 reflects $249 million related to the acceleration of expense associated with certain cash settled deferred incentive compensation awards.
State Street Corporation | 165
STATE STREET CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
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
(In millions)
Derivatives designated as fair value hedges:
Foreign exchange
contracts
Foreign exchange
contracts
Interest-rate contracts
Interest-rate contracts
Total
Processing fees and
other revenue
Processing fees and
other revenue
Processing fees and
other revenue
Processing fees and
other revenue
Years Ended December 31,
2016
2015
2014
Years Ended December 31,
2016
2015
2014
$
(6) $
(101) $
(92)
Investment
securities
221
43
(98)
(241)
— FX deposit
16
61
(44)
Available-for-sale
securities
150
Long-term debt
Processing fees and
other revenue
Processing fees and
other revenue
Processing fees and
other revenue(1)
Processing fees and
other revenue
$
6
$
101
$
(221)
241
(40)
100
(17)
(54)
92
—
39
(138)
$
160
$
(265) $
14
$
(155) $
271
$
(7)
(1) In 2016, 2015 and 2014, $23 million of net unrealized gains, $12 million of net unrealized gains and $24 million net unrealized losses, respectively, on AFS
investment securities designated in fair value hedges were recognized in OCI.
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
Location of
Gain (Loss)
Reclassified
from OCI to
Consolidated
Statement of
Income
Amount of Gain
(Loss) Reclassified
from OCI to
Consolidated
Statement of Income
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,
Years Ended December 31,
Years Ended December 31,
(In millions)
2016
2015
2014
2016
2015
2014
2016
2015
2014
Derivatives designated as
cash flow hedges:
Interest-rate contracts
$ — $ — $
(2)
Foreign exchange contracts
(39)
Total
$
(39) $
55
55
126
$
124
Net interest
revenue
Net interest
revenue
$ — $
(4) $
(4)
—
—
$ — $
(4) $
—
(4)
Net interest
revenue
Net interest
revenue
$ — $ — $
24
24
$
10
10
$
$
3
6
9
Derivatives designated as
net investment hedges:
Foreign exchange contracts $
Total
$
109
109
$ — $ —
$ — $ —
Gains (Losses)
related to
investment
securities, net
$ — $ — $ —
$ — $ — $ —
Gains (Losses)
related to
investment
securities, net
$ — $ — $ —
$ — $ — $ —
Note 11. Offsetting Arrangements
We manage credit and counterparty risk by
entering into enforceable netting agreements and
other collateral arrangements with counterparties to
derivative contracts 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 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 secured financing
transactions, we enter into netting agreements and
State Street Corporation | 166
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
other collateral arrangements with counterparties,
which provide for the right to liquidate collateral in the
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 reasonable 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 legally enforceable netting
arrangement 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 transactions 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.
Collateral that we receive in the form of
securities in connection with secured financing
transactions and derivative contracts can be
transferred or re-pledged as collateral in many
instances to enter into repurchase agreements or
securities finance or derivative transactions. The
securities collateral received in connection with our
securities finance activities is recorded at fair value in
other assets in our consolidated statement of
condition, with a related liability to return the
collateral, if we have the right to transfer or re-pledge
the collateral. As of December 31, 2016 and
December 31, 2015, the fair value of securities
received as collateral from third parties where we are
permitted to transfer or re-pledge the securities
totaled $1.77 billion and $3.05 billion, respectively,
and the fair value of the portion that had been
transferred or re-pledged as of the same date was
$166 million and $262 million, respectively.
State Street Corporation | 167
STATE STREET CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The following tables present information about the offsetting of assets related to derivative contracts and
secured financing transactions, as of the dates indicated:
Assets:
(In millions)
Derivatives:
December 31, 2016
Gross Amounts Not Offset in
Statement of Condition
Gross Amounts
of Recognized
Assets(1)(2)
Gross Amounts
Offset in Statement
of Condition(3)
Net Amounts of Assets
Presented in
Statement of Condition
Cash and
Securities
Received(5)
Net Amount(6)
Foreign exchange contracts
$
16,484
$
68
NA
16,552
(8,257) $
(68)
(906)
(9,231)
8,227
—
(906) $
7,321
$
(247)
(247)
8,227
—
(1,153)
7,074
58,677
(35,517)
23,160
(22,939)
221
$
75,229
$
(44,748) $
30,481
$
(23,186) $
7,295
December 31, 2015
Gross Amounts Not Offset in
Statement of Condition
Gross Amounts
of Recognized
Assets(1)(2)
Gross Amounts
Offset in Statement
of Condition(3)
Net Amounts of Assets
Presented in
Statement of Condition
Cash and
Securities
Received(5)
Foreign exchange contracts
$
11,316
$
(5,896) $
135
5
NA
11,456
(5)
(2)
(776)
(6,679)
5,420
130
3
(776) $
4,777
(405)
(405)
Net Amount(6)
$
5,420
130
3
(1,181)
4,372
Interest-rate contracts
Cash collateral and securities
netting
Total derivatives
Other financial instruments:
Resale agreements and securities
borrowing(4)
Total derivatives and other
financial instruments
Assets:
(In millions)
Derivatives:
Interest-rate contracts
Other derivative contracts
Cash collateral and securities
netting
Total derivatives
Other financial instruments:
Resale agreements and securities
borrowing(4)
Total derivatives and other
financial instruments
62,522
(38,997)
23,525
(22,875)
650
$
73,978
$
(45,676) $
28,302
$
(23,280) $
5,022
NA: Not applicable.
(1) Amounts include all transactions regardless of whether or not they are subject to an enforceable netting arrangement.
(2) Derivative amounts are carried at fair value and securities financing amounts are carried at amortized cost, except for securities collateral which is also carried at
fair value. Refer to Note 1 and Note 2 for additional information on the measurement basis of these instruments.
(3) Amounts subject to netting arrangements which have been determined to be legally enforceable and eligible for netting in the consolidated statement of condition.
(4) Included in the $23,160 million as of December 31, 2016 were $1,956 million of resale agreements and $21,204 million of collateral provided related to securities
borrowing. Included in the $23,525 million as of December 31, 2015 were $3,404 million of resale agreements and $20,121 million of collateral provided related to
securities borrowing. Resale agreements and collateral provided 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 12 for additional information with respect to principal securities finance
transactions.
(5) Includes securities in connection with our securities borrowing transactions.
(6) Includes amounts secured by collateral not determined to be subject to enforceable netting arrangements.
State Street Corporation | 168
STATE STREET CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The following tables present information about the offsetting of liabilities related to derivative contracts and
secured financing transactions, as of the dates indicated:
Foreign exchange contracts
$
15,956
$
(8,253) $
Liabilities:
(In millions)
Derivatives:
Interest-rate contracts
Other derivative contracts
Cash collateral and securities
netting
Total derivatives
Other financial instruments:
Repurchase agreements and
securities lending(4)
Total derivatives and other
financial instruments
Liabilities:
(In millions)
Derivatives:
Interest-rate contracts
Other derivative contracts
Cash collateral and securities
netting
Total derivatives
Other financial instruments:
Resale agreements and securities
lending(4)
Total derivatives and other
financial instruments
December 31, 2016
Gross Amounts Not Offset in
Statement of Condition
Gross Amounts
of Recognized
Liabilities(1)(2)
Gross Amounts
Offset in Statement
of Condition(3)
Net Amounts of
Liabilities Presented in
Statement of Condition
Cash and
Securities
Provided(5)
348
380
NA
16,684
(73)
—
(2,356)
(10,682)
7,703
275
380
(2,356) $
6,002
(180)
(180)
Net Amount(6)
$
7,703
275
380
(2,536)
5,822
44,933
(35,517)
9,416
(7,059)
2,357
$
61,617
$
(46,199) $
15,418
$
(7,239) $
8,179
December 31, 2015
Gross Amounts Not Offset in
Statement of Condition
Gross Amounts
of Recognized
Liabilities(1)(2)
Gross Amounts
Offset in Statement
of Condition(3)
Net Amounts of
Liabilities Presented in
Statement of Condition
Cash and
Securities
Provided(5)
182
103
NA
11,153
(5)
(2)
(1,118)
(7,021)
4,972
177
101
(1,118) $
4,132
Net Amount(6)
$
4,972
177
101
(1,182)
4,068
(64)
(64)
46,766
(38,997)
7,769
(5,350)
2,419
$
57,919
$
(46,018) $
11,901
$
(5,414) $
6,487
Foreign exchange contracts
$
10,868
$
(5,896) $
NA: Not applicable.
(1) Amounts include all transactions regardless of whether or not they are subject to an enforceable netting arrangement.
(2) Derivative amounts are carried at fair value and securities financing amounts are carried at amortized cost, except for securities collateral which is also carried at
fair value. Refer to Note 1 and Note 2 for additional information on the measurement basis of these instruments.
(3) Amounts subject to netting arrangements which have been determined to be legally enforceable and eligible for netting in the consolidated statement of condition.
(4) Included in the $9,416 million as of December 31, 2016 were $4,400 million of repurchase agreements and $5,016 million of collateral received related to securities
lending. Included in the $7,769 million as of December 31, 2015 were $4,499 million of repurchase agreements and $3,270 million of collateral received related to
securities lending. Repurchase agreements and collateral received 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 12 for additional information with respect to principal
securities finance transactions.
(5) Includes securities provided in connection with our securities lending transactions.
(6) Includes amounts secured by collateral not determined to be subject to enforceable netting arrangements.
State Street Corporation | 169
STATE STREET CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The securities transferred under resale and
repurchase agreements typically are U.S. Treasury,
agency and agency mortgage-backed securities. In
our principal securities borrowing and lending
arrangements, the securities transferred are
predominantly equity securities and some corporate
debt securities. The fair value of the securities
transferred may increase in value to an amount
greater than the amount received under our
repurchase and securities lending arrangements,
which exposes the Company with counterparty risk.
We require the review of the price of the underlying
securities in relation to the carrying value of the
repurchase agreements and securities lending
arrangements on a daily basis and when appropriate,
adjust the cash or security to be obtained or returned
to counterparties that is reflective of the required
collateral levels.
The following tables summarize our repurchase
agreements and securities lending transactions by
category of collateral pledged and remaining maturity
of these agreements as of the periods indicated:
(In millions)
Repurchase agreements:
Remaining Contractual Maturity of the Agreements
As of December 31, 2016
Overnight and
Continuous
Up to 30 days
30 – 90 days
Total
U.S. Treasury and agency securities
$
35,509
$
— $
— $
Total
Securities lending transactions:
Corporate debt securities
Equity securities
Total
35,509
53
8,337
8,390
—
—
—
—
—
—
1,034
1,034
35,509
35,509
53
9,371
9,424
Gross amount of recognized liabilities for repurchase agreements
and securities lending
$
43,899
$
— $
1,034
$
44,933
(In millions)
Repurchase agreements:
Remaining Contractual Maturity of the Agreements
As of December 31, 2015
Overnight and
Continuous
Up to 30 days
30 – 90 days
Total
U.S. Treasury and agency securities
$
37,157
$
5
$
— $
37,162
Non-U.S. sovereign debt
Total
Securities lending transactions:
Corporate debt securities
Equity securities
Non-U.S. sovereign debt
Total
—
37,157
1
8,502
2
8,505
97
102
—
—
—
—
—
—
—
1,002
—
1,002
97
37,259
1
9,504
2
9,507
Gross amount of recognized liabilities for repurchase agreements
and securities lending
$
45,662
$
102
$
1,002
$
46,766
State Street Corporation | 170
STATE STREET CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Note 12. Commitments and Guarantees
The following table presents the aggregate
gross contractual amounts of our off-balance sheet
commitments and off-balance sheet guarantees as of
the dates indicated.
(In millions)
Commitments(1):
December 31,
2016
December 31,
2015
Unfunded credit facilities
$
28,154
$
26,570
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.
The following table summarizes the aggregate
fair values of indemnified securities financing and
related collateral, as well as collateral invested in
indemnified repurchase agreements, as of the dates
indicated:
Guarantees(2):
Indemnified securities financing
$
360,452
$
320,436
Stable value protection
Standby letters of credit
27,182
3,459
24,583
4,700
(1) The potential losses associated with these commitments equal the gross
contractual amounts, and do not consider the value of any collateral.
(2) The potential losses associated with these guarantees equal the gross
contractual amounts and do not consider the value of any collateral or reflect
any participations to independent third parties.
Unfunded Credit Facilities
Unfunded credit facilities consist of liquidity
facilities for our fund and municipal lending clients
and undrawn lines of credit related to senior secured
bank loans.
As of December 31, 2016, approximately 73% of
our unfunded commitments to extend credit expire
within one year. 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.
Indemnified Securities Financing
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 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 in
excess of 100% of the amount of the repurchase
(In millions)
Fair value of indemnified
securities financing
Fair value of cash and
securities held by us, as agent,
as collateral for indemnified
securities financing
Fair value of collateral for
indemnified securities
financing invested in
indemnified repurchase
agreements
Fair value of cash and
securities held by us or our
agents as collateral for
investments in indemnified
repurchase agreements
December 31,
2016
December 31,
2015
$
360,452
$
320,436
377,919
335,420
60,003
63,055
63,959
67,016
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, 2016 and December 31, 2015, we had
approximately $21.20 billion and $20.12 billion,
respectively, of collateral provided and approximately
$5.02 billion and $3.27 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
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
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 10. 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.
Standby Letters of Credit
Standby letters of credit provide credit
enhancement to our municipal clients to support the
issuance of capital markets financing.
Note 13. Contingencies
Legal and Regulatory Matters:
In the ordinary course of business, we and our
subsidiaries are involved in disputes, litigation, and
governmental or 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 that we deem can be reasonably
estimated as of the date of our consolidated financial
statements, we accrue for our estimate of the loss.
We also 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, 2016, our aggregate
accruals for legal loss contingencies and regulatory
matters totaled approximately $90 million (excluding
amounts relating to client reimbursements in
connection with errors in invoicing certain of our
Investment Servicing clients, described below). 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.
Foreign Exchange
In 2016, we settled our previously disclosed
litigation and governmental investigations regarding
our FX execution service that we refer to as indirect
FX. Such settlements were satisfied from the
previously established reserves.
Transition Management
In January 2014, we entered into a settlement
with the FCA, pursuant to which we paid a fine of
£22.9 million (approximately $37.8 million), 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. The SEC
and the DOJ opened separate investigations into this
matter. In April 2016, the U.S. Attorney’s office in
Boston charged two former employees in our
transition management business with criminal fraud in
connection with their alleged role in this matter, and,
in May 2016, the SEC commenced a parallel civil
enforcement proceeding against one of these
individuals.
On January 18, 2017, we announced that we
had entered into a settlement agreement with the
DOJ and the United States Attorney for the District of
Massachusetts to resolve their investigation. Under
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STATE STREET CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
the terms of the agreement, we, among other things,
paid a fine of $32.3 million and entered into a
deferred prosecution agreement. Under the deferred
prosecution agreement, we agreed to retain an
independent compliance consultant and compliance
monitor for a term of three years (subject to
extension) which will, among other things, evaluate
the effectiveness of our compliance controls and
business ethics and make related recommendations.
As previously disclosed, we are also in
discussions with the SEC Staff regarding a resolution
of their investigation, and have reached an
agreement in principle with the Staff of the SEC to
pay a penalty of $32.3 million (equal to the fine being
paid to the DOJ). Resolution of the matter is subject
to completion of negotiations with the SEC Staff on
other terms of the settlement, followed by review and
consideration by the SEC.
As of December 31, 2016 we had accrued $65
million with respect to the DOJ and the SEC
investigations, which includes $23 million accrued in
the fourth quarter.
GovEx
We are cooperating in an ongoing inquiry by the
SEC relating to the GovEx electronic trading platform,
which was offered and operated by State Street
Global Markets, LLC from September 2009 to July
2015. The subjects of the inquiry are our
communications related to volume, pricing and
functionalities of the platform. We are currently
engaged in discussions with the Staff of the SEC
concerning a possible resolution of this matter, and
have reached an agreement in principle with the Staff
to pay a penalty of $3 million. Resolution of the
matter is subject to completion of negotiations with
the SEC Staff on other terms of the settlement,
followed by review and consideration by the SEC. As
of December 31, 2016, we had accrued $3 million for
this matter.
Federal Reserve/Massachusetts Division of Banks
Written Agreement
On June 1, 2015, we entered into a written
agreement with the Federal Reserve and the
Massachusetts Division of Banks relating to
deficiencies identified in our compliance programs
with the requirements of the Bank Secrecy Act, AML
regulations and U.S. economic sanctions regulations
promulgated by OFAC. As part of this enforcement
action, we are required to, among other things,
implement improvements to our compliance programs
and to retain an independent firm to conduct a review
of account and transaction activity covering a prior
three-month period to evaluate whether any
suspicious activity not previously reported should
have been identified and reported in accordance with
applicable regulatory requirements. To the extent
deficiencies in our historical reporting are identified as
a result of the transaction review or if we fail to
comply with the terms of the written agreement, we
may become subject to fines and other regulatory
sanctions, which may have a material adverse effect
on us.
Invoicing Matter
In December 2015, we announced a review of
the manner in which we invoiced certain expenses to
some of our Investment Servicing clients, primarily in
the United States, during an 18-year period going
back to 1998, and our determination that we had
incorrectly invoiced clients for certain expenses. We
informed our clients in December 2015 that we will
pay to them the amounts we concluded were
incorrectly invoiced to them, plus interest. We
currently expect to pay at least $340 million (including
interest), in connection with that review, which is
ongoing. We are implementing enhancements to our
billing processes, and we are reviewing the conduct
of our employees and have taken appropriate steps
to address conduct inconsistent with our standards,
including, in some cases, termination of employment.
We are also evaluating other billing practices relating
to our Investment Servicing clients, including
calculation of asset-based fees.
We have received a purported class action
demand letter alleging that our invoicing practices
were unfair and deceptive under Massachusetts law.
A class of customers, or particular customers, may
assert that we have not paid to them all amounts
incorrectly invoiced, and may seek double or treble
damages under Massachusetts law. We are also
responding to requests for information from, and are
cooperating with investigations by, governmental
authorities on these matters, including the civil and
criminal divisions of the DOJ, the SEC, the
Department of Labor and the Massachusetts Attorney
General, which could result in significant fines or
other sanctions, civil and criminal, against us. The
severity of such fines or other sanctions could take
into account factors such as the amount and duration
of our incorrect invoicing, the government’s
assessment of the conduct of our employees, as well
as prior conduct such as that which resulted in our
recent deferred prosecution agreement in connection
with transition management services and our recent
settlement of civil claims regarding our indirect foreign
exchange business. Any of the foregoing could have
a material adverse effect on our reputation or
business, including the imposition of restrictions on
the operation of our business or a reduction in client
demand. Resolution of these matters could also have
State Street Corporation | 173
STATE STREET CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
a material adverse effect on our consolidated results
of operations for the period or periods in which such
matters are resolved or an accrual is determined to
be required. No accrual, other than a reserve for
client reimbursement, is reflected on our consolidated
statement of condition as of December 31, 2016.
In April 2016, the Massachusetts Secretary of
State commenced an administrative enforcement
proceeding against State Street Global Markets, LLC,
alleging that our conduct concerning expense
invoices caused State Street Global Markets, LLC to
violate state law governing the securities industry by
virtue of our alleged control of State Street Global
Markets, LLC. The complaint sought to impose a
censure, a fine and to provide for reimbursement or
other relief. In December 2016, the proceeding was
concluded pursuant to an agreement with the
Secretary of State.
Shareholder Litigation
In January 2017, a State Street shareholder filed
a purported class action complaint against the
Company alleging that statements made by the
Company in its annual reports for the 2011-15 period
regarding its internal controls and procedures were
misleading due to the omission of information
regarding the Transition Management and Invoicing
Matters discussed above.
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 provision for income
taxes and tax benefits, including unrecognized tax
benefits, is provided in Note 22.
We are presently under audit by a number of tax
authorities, including the Internal Revenue Service,
which completed their field audit procedures on our
U.S. income tax returns for the tax years 2012 and
2013. The earliest tax year open to examination in
jurisdictions where we have material operations is
2010. Management believes that we have sufficiently
accrued liabilities as of December 31, 2016 for tax
exposures.
Note 14. 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 VIEs.
When evaluating a VIE for consolidation, we must
determine whether or not we have a variable interest
in the entity. Variable interests are investments or
other interests that absorb portions of an entity’s
expected losses or receive portions of the entity’s
expected returns. If it is determined that State Street
does not have a variable interest in the VIE, no
further analysis is required and State Street does not
consolidate the VIE. If State Street holds a variable
interest in a VIE, we are required by U.S. GAAP to
consolidate that VIE when we have a controlling
financial interest in the VIE and therefore are deemed
to be the primary beneficiary. State Street is
determined to have a controlling financial interest in a
VIE when it has both the power to direct the activities
of the VIE that most significantly impact the VIE’s
economic performance and the obligation to absorb
losses or the right to receive benefits of the VIE that
could potentially be significant to that VIE. This
determination is evaluated periodically as facts and
circumstances change.
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
U.S. GAAP definition of asset securitization entities,
which are considered to be VIEs. We are not
considered to be the primary beneficiary of these
VIEs since we do not have control over their
activities. Additional information about our asset-
backed securities is provided in Note 3.
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 AFS investment securities and other
short-term borrowings. As of December 31, 2016 and
December 31, 2015, we carried AFS investment
securities, composed of securities related to state and
political subdivisions, with a fair value of $1.35 billion
and $2.10 billion, respectively, and other short-term
borrowings of $1.16 billion and $1.75 billion,
respectively, in our consolidated statement of
condition in connection with these trusts. The interest
revenue and interest expense generated by the
investments and certificated interests, respectively,
are recorded as components of net interest revenue
when earned or incurred.
State Street Corporation | 174
STATE STREET CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
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 U.S. GAAP, and
therefore, the assets continue to be recorded in our
consolidated financial statements. The trusts had a
weighted-average life of approximately 4.5 years as
of December 31, 2016, compared to approximately
5.4 years as of December 31, 2015.
Under separate legal agreements, we provide
liquidity facilities to these trusts and, with respect to
certain securities, letters of credit. As of
December 31, 2016, our commitments to the trusts
under these liquidity facilities and letters of credit
totaled $1.16 billion and $351 million, respectively,
and none of the liquidity facilities were utilized. In the
event that our obligations under these liquidity
facilities 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. In addition, neither creditors
nor third-party investors in the trusts have any
recourse to State Street’s general credit other than
through the liquidity facilities and letters of credit
noted above.
Interests in Investment Funds:
In the normal course of business, we manage
various types of investment funds through SSGA in
which our clients are investors, including sponsored
investment funds and other similar investment
structures. Substantially all of our assets under
management are contained within such funds. The
services we provide to these funds generate
management fee revenue. From time to time, we
may invest cash in the funds in order for the funds to
establish a performance history for newly-launched
strategies, referred to as seed capital, or for other
purposes.
With respect to our interests in funds that meet
the definition of a VIE, a primary beneficiary
assessment is performed to determine if we have a
controlling financial interest. 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 funds, we retain the
specialized investment company accounting rules
followed by the underlying funds.
All of the underlying investments held by such
consolidated 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
investments in the funds.
As of December 31, 2016, we have no
consolidated funds. As of December 31, 2015, the
aggregate assets and liabilities of our consolidated
funds totaled $321 million and $228 million,
respectively.
Our conclusion to consolidate a 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 funds. In addition, neither creditors nor
equity investors in the funds have any recourse to
State Street’s general credit.
As of December 31, 2016 and December 31,
2015, we managed certain funds, considered 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 $121 million and $93
million as of December 31, 2016 and December 31,
2015, respectively, and represented the carrying
value of our investments, which are recorded in either
AFS investment securities 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 investments in the
unconsolidated funds.
State Street Corporation | 175
STATE STREET CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Note 15. Shareholders' Equity
Preferred Stock:
The following table summarizes selected terms of each of the series of the preferred stock issued and
outstanding as of December 31, 2016:
Issuance Date
Preferred Stock(2):
Depositary
Shares
Issued
Ownership
Interest per
Depositary
Share
Liquidation
Preference
Per Share
Liquidation
Preference Per
Depositary Share
Net Proceeds
of Offering
(In millions)
Redemption Date(1)
Series C
August 2012
20,000,000
1/4,000th
$
100,000
$
Series D
February 2014
30,000,000
1/4,000th
Series E
November 2014
30,000,000
1/4,000th
Series F
May 2015
750,000
1/100th
Series G
April 2016
20,000,000
1/4,000th
100,000
100,000
100,000
100,000
25
25
25
1,000
25
$
488 September 15, 2017
742 March 15, 2024
728 December 15, 2019
742 September 15, 2020
493 March 15, 2026
(1) On the redemption date, or any dividend declaration date thereafter, the preferred stock and corresponding depositary shares may be redeemed by us, in whole or
in part, at the liquidation price per share and liquidation price per depositary share plus any declared and unpaid dividends, without accumulation of any undeclared
dividends.
(2) The preferred stock and corresponding depositary shares may be redeemed at our option in whole, but not in part, prior to the redemption date upon the
occurrence of a regulatory capital treatment event, as defined in the certificate of designation, at a redemption price equal to the liquidation price per share and
liquidation price per depositary share plus any declared and unpaid dividends, without accumulation of any undeclared dividends.
The following table presents the dividends declared for each of the series of preferred stock issued and
outstanding for the periods indicated:
Dividends
Declared per
Share
$
5,250
$
5,900
6,000
5,250
3,626
Preferred Stock:
Series C
Series D
Series E
Series F
Series G
Total
2016
Dividends
Declared per
Depositary
Share
Years Ended December 31,
Total
(In millions)
Dividends
Declared per
Share
2015
Dividends
Declared per
Depositary
Share
Total
(In millions)
1.32
1.48
1.52
52.50
0.90
$
$
26
44
45
40
18
173
$
5,250
$
5,900
6,333
1,663
—
1.32
1.48
1.60
16.63
—
$
$
26
44
48
12
—
130
In January 2017, we declared dividends on our Series C, D, E, F and G preferred stock of approximately
$1,313, $1,475, $1,500, $2,625 and $1,338, respectively, per share, or approximately $0.33, $0.37, $0.38, $26.26
and $0.33, respectively, per depositary share. These dividends total approximately $6 million, $11 million, $11
million, $20 million and $7 million on our Series C, D, E, F and G preferred stock, respectively, which will be paid in
March 2017.
Common Stock:
In July 2016, our Board approved a common stock purchase program authorizing the purchase of up to $1.4
billion of our common stock through June 30, 2017 (the 2016 Program). In March 2015, our Board approved a
common stock purchase program authorizing the purchase of up to $1.8 billion of our common stock through
June 30, 2016 (the 2015 Program). The table below presents the activity under both the 2016 Program and the
2015 Program during the year ended December 31, 2016.
2016 Program
2015 Program
Total
Shares Purchased
(In millions)
Average Cost per Share
Total Purchased
(In millions)
9.0
$
12.1
21.1
$
72.66
$
58.83
64.70
$
650
715
1,365
State Street Corporation | 176
STATE STREET CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The table below presents the dividends declared on common stock for the periods indicated:
Dividends Declared
per Share
Total
(In millions)
Dividends Declared
per Share
Total
(In millions)
Years Ended December 31,
Common Stock
$
2016
1.44
$
559
$
2015
1.32
$
Accumulated Other Comprehensive Income (Loss):
The following table presents the after-tax components of AOCI as of December 31:
(In millions)
Net unrealized gains on cash flow hedges
2016
2015
2014
$
229
$
293
$
Net unrealized gains (losses) on available-for-sale securities portfolio
Net unrealized gains (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 gains (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
(225)
25
(200)
(86)
—
95
(9)
(194)
(1,875)
9
(28)
(19)
(109)
—
(14)
(16)
(183)
(1,394)
$
(2,040) $
(1,442) $
536
276
273
39
312
(121)
1
(14)
(29)
(272)
(660)
(507)
The following table presents changes in AOCI by component, net of related taxes, for the periods indicated:
(In millions)
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
Balance as of December 31, 2014
$
276
$
192
$
(14) $
(29) $
(272) $
(660) $
(507)
Other comprehensive income (loss) before
reclassifications
Amounts reclassified into (out of) earnings
Other comprehensive income (loss)
20
(3)
17
(314)
(6)
(320)
—
—
—
15
(2)
13
1
88
89
(734)
(1,012)
—
(734)
77
(935)
Balance as of December 31, 2015
$
293
$
(128) $
(14) $
(16) $
(183) $
(1,394) $ (1,442)
Other comprehensive income (loss) before
reclassifications
Amounts reclassified into (out of) earnings
Other comprehensive income (loss)
(64)
—
(64)
(164)
6
(158)
109
—
109
8
(1)
7
—
(11)
(11)
(478)
(3)
(481)
(589)
(9)
(598)
Balance as of December 31, 2016
$
229
$
(286) $
95
$
(9) $
(194) $
(1,875) $ (2,040)
State Street Corporation | 177
STATE STREET CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The following table presents after-tax reclassifications into earnings for the periods indicated:
(In millions)
Cash flow hedges:
Years Ended December 31,
2016
2015
Amounts Reclassified into
(out of) Earnings
Affected Line Item in
Consolidated Statement of
Income
Interest-rate contracts, net of related taxes of $0 and $2, respectively
$
— $
(3) Net interest revenue
Available-for-sale securities:
Net realized gains from sales of available-for-sale securities, net of related
taxes of ($4) and $1, respectively
Held-to-maturity securities:
Other-than-temporary impairment on held-to-maturity securities related to
factors other than credit, net of related taxes of $1 and $0, respectively
Retirement plans:
Amortization of actuarial losses, net of related taxes of ($1) and ($51),
respectively
Foreign currency translation:
6
(1)
(11)
Sales of non-U.S. entities, net of related taxes of ($2) and $0, respectively
Total reclassifications into (out of) AOCI
$
(3)
(9) $
(6)
Net gains (losses) from sales of
available-for-sale securities
(2)
Losses reclassified (from) to
other comprehensive income
Compensation and employee
benefits expenses
Processing fees and other
revenue
88
—
77
State Street Corporation | 178
STATE STREET CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Note 16. 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.
As required by the Dodd-Frank Act, State Street
and State Street Bank, as advanced approaches
banking organizations, are subject to a permanent
"capital floor" in the calculation and assessment of
their regulatory capital adequacy by U.S. banking
regulators. Beginning on January 1, 2015, we were
required to calculate our risk-based capital ratios
using both the advanced approaches and the
standardized approach. As a result, from January 1,
2015 going forward, our risk-based capital ratios for
regulatory assessment purposes are the lower of
each ratio calculated under the standardized
approach and the advanced approaches.
The methods for the calculation of our and State
Street Bank's risk-based capital ratios will change as
the provisions of the Basel III final rule related to the
numerator (capital) and denominator (risk-weighted
assets) are phased in, and as we begin calculating
our risk-weighted assets using the advanced
approaches. These ongoing methodological changes
will result in differences in our reported capital ratios
from one reporting period to the next that are
independent of applicable changes to our capital
base, our asset composition, our off-balance sheet
exposures or our risk profile.
As of December 31, 2016, State Street and
State Street Bank exceeded all regulatory capital
adequacy requirements to which they were subject.
As of December 31, 2016, State Street Bank was
categorized as “well capitalized” under the applicable
regulatory capital adequacy framework, and
exceeded all “well capitalized” ratio guidelines to
which it was subject. Management believes that no
conditions or events have occurred since December
31, 2016 that have changed the capital categorization
of State Street Bank.
The following table presents the regulatory
capital structure, total risk-weighted assets, related
regulatory capital ratios and the minimum required
regulatory capital ratios for State Street and State
Street Bank as of the dates indicated. As a result of
changes in the methodologies used to calculate our
regulatory capital ratios from period to period as the
provisions of the Basel III final rule are phased in, the
ratios presented in the table for each period-end are
not directly comparable. Refer to the footnotes
following the table.
State Street Corporation | 179
STATE STREET CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(In millions)
Common shareholders' equity:
State Street
State Street Bank
Basel III
Advanced
Approaches
December 31,
2016(1)
Basel III
Standardized
Approach
December 31,
2016(2)
Basel III
Advanced
Approaches
December 31,
2015(1)
Basel III
Standardized
Approach
December 31,
2015(2)
Basel III
Advanced
Approaches
December 31,
2016(1)
Basel III
Standardized
Approach
December 31,
2016(2)
Basel III
Advanced
Approaches
December 31,
2015(1)
Basel III
Standardized
Approach
December 31,
2015(2)
Common stock and related surplus
$
10,286
$
10,286
$
10,250
$
10,250
$
11,376
$
11,376
$
10,938
$
10,938
Retained earnings
17,459
17,459
16,049
16,049
12,285
12,285
10,655
10,655
Accumulated other comprehensive income
(loss)
Treasury stock, at cost
Total
Regulatory capital adjustments:
Goodwill and other intangible assets, net of
associated deferred tax liabilities(3)
Other adjustments
Common equity tier 1 capital
Preferred stock
Trust preferred capital securities subject to
phase-out from tier 1 capital
Other adjustments
Tier 1 capital
Qualifying subordinated long-term debt
Trust preferred capital securities phased out
of tier 1 capital
ALLL and other
Other adjustments
Total capital
Risk-weighted assets:
Credit risk
Operational risk(4)
Market risk(5)
(1,936)
(7,682)
18,127
(6,348)
(155)
11,624
3,196
—
(103)
14,717
1,172
—
19
1
(1,936)
(7,682)
18,127
(6,348)
(155)
11,624
3,196
—
(103)
14,717
1,172
—
77
1
(1,422)
(6,457)
18,420
(1,422)
(6,457)
18,420
(1,648)
(1,648)
(1,230)
(1,230)
—
—
—
—
22,013
22,013
20,363
20,363
(5,927)
(5,927)
(60)
(60)
12,433
2,703
237
(109)
15,264
1,358
713
12
2
12,433
2,703
237
(109)
15,264
1,358
713
66
2
(6,060)
(148)
15,805
—
—
—
(6,060)
(148)
15,805
—
—
—
(5,631)
(5,631)
(85)
(85)
14,647
14,647
—
—
—
—
—
—
15,805
1,179
15,805
1,179
14,647
1,371
14,647
1,371
—
15
—
—
77
—
—
8
—
—
66
—
$
15,909
$
15,967
$
17,349
$
17,403
$
16,999
$
17,061
$
16,026
$
16,084
$
50,900
$
98,125
$
51,733
$
93,515
$
47,383
$
94,413
$
47,677
$
89,164
44,579
3,822
NA
1,751
43,882
3,937
NA
2,378
44,043
3,822
NA
1,751
43,324
3,939
NA
2,378
Total risk-weighted assets
$
99,301
$
99,876
$
99,552
$
95,893
$
95,248
$
96,164
$
94,940
$
91,542
Adjusted quarterly average assets
$ 226,310
$ 226,310
$ 221,880
$ 221,880
$ 222,584
$ 222,584
$ 217,358
$ 217,358
2016 Minimum
Requirements
Including
Capital
Conservation
Buffer and
G-SIB
Surcharge(6)
2015 Minimum
Requirements(7)
5.5%
4.5%
11.7%
11.6%
12.5%
13.0%
16.6%
16.4%
15.4%
16.0%
7.0
9.0
4.0
6.0
8.0
4.0
14.8
16.0
6.5
14.7
16.0
6.5
15.3
17.4
6.9
15.9
18.1
6.9
16.6
17.8
7.1
16.4
17.7
7.1
15.4
16.9
6.7
16.0
17.6
6.7
Capital Ratios:
Common equity
tier 1 capital
Tier 1 capital
Total capital
Tier 1 leverage
NA: Not applicable.
(1) Common equity tier 1 capital, tier 1 capital and total capital ratios as of December 31, 2016 and December 31, 2015 were calculated in conformity with the advanced approaches provisions of
the Basel III final rule. Tier 1 leverage ratio as of December 31, 2016 and December 31, 2015 were calculated in conformity with the Basel III final rule.
(2) Common equity tier 1 capital, tier 1 capital and total capital ratios as of December 31, 2016 and December 31, 2015 were calculated in conformity with the standardized approach provisions
of the Basel III final rule. Tier 1 leverage ratio as of December 31, 2016 and December 31, 2015 were calculated in conformity with the Basel III final rule.
(3) Amounts for State Street and State Street Bank as of December 31, 2016 consisted of goodwill, net of associated deferred tax liabilities, and 60% of other intangible assets, net of associated
deferred tax liabilities. Amounts for State Street and State Street Bank as of December 31, 2015 consisted of goodwill, net of deferred tax liabilities and 40% of other intangible assets, net of
associated deferred tax liabilities. Intangible assets, net of associated deferred tax liabilities is phased in as a deduction from capital, in conformity with the Basel III final rule.
(4) Under the current advanced approaches rules and regulatory guidance concerning operational risk models, RWA attributable to operational risk can vary substantially from period-to-period,
without direct correlation to the effects of a particular loss event on our results of operations and financial condition and impacting dates and periods that may differ from the dates and periods as
of and during which the loss event is reflected in our financial statements, with the timing and categorization dependent on the processes for model updates and, if applicable, model revalidation
and regulatory review and related supervisory processes. An individual loss event can have a significant effect on the output of our operational risk RWA under the advanced approaches
depending on the severity of the loss event and its categorization among the seven Basel-defined UOMs.
(5) Market risk risk-weighted assets reported in conformity with the Basel III advanced approaches included a CVA which reflected the risk of potential fair-value adjustments for credit risk
reflected in our valuation of over-the-counter derivative contracts. The CVA was not provided for in the final market risk capital rule; however, it was required by the advanced approaches
provisions of the Basel III final rule. We used a simple CVA approach in conformity with the Basel III advanced approaches.
(6) Minimum requirements will be phased in up to full implementation beginning on January 1, 2019; minimum requirements listed are as of December 31, 2016.
(7) Minimum requirements will be phased in up to full implementation beginning on January 1, 2019; minimum requirements listed are as of December 31, 2015.
State Street Corporation | 180
STATE STREET CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Note 17. Net Interest Revenue
The following table presents the components of
interest revenue and interest expense, and related
net interest revenue, for the periods indicated:
(In millions)
Interest revenue:
Deposits with banks
Investment securities:
Years Ended December 31,
2016
2015
2014
$
126
$
208
$
196
U.S. Treasury and federal
agencies
State and political subdivisions
Other investments
Securities purchased under resale
agreements
Loans and leases
Other interest-earning assets
821
224
756
146
378
61
735
227
934
62
311
11
672
231
1,241
38
266
8
Total interest revenue
2,512
2,488
2,652
Interest expense:
Deposits
Securities sold under repurchase
agreements
Short-term borrowings
Long-term debt
Other interest-bearing liabilities
Total interest expense
85
1
7
260
75
428
97
—
7
250
46
400
99
—
5
245
43
392
Net interest revenue
$ 2,084
$ 2,088
$ 2,260
Note 18. Equity-Based Compensation
We record compensation expense for equity-
based awards, such as restricted stock, deferred
stock and performance awards, based on the closing
price of our common stock on the date of grant,
adjusted if appropriate based on the award’s 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.
Compensation expense for common stock awards
granted to employees meeting early retirement
eligibility criteria is fully expensed on the grant date.
Dividend equivalents for certain equity-based
awards are paid on stock units on a current basis
prior to vesting and distribution.
As of December 31, 2016, a cumulative total of
65.7 million shares had been awarded under the
2006 Equity Incentive Plan, or 2006 Plan, compared
with cumulative totals of 60.9 million shares and 56.9
million shares as of December 31, 2015 and 2014,
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. From inception to December 31, 2016, 23.7
million shares had been awarded under the 2006
Plan but not delivered, and have become available for
reissue. A total of 18.5 million shares are available
for future issuance under the 2006 Plan.
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 Equity Incentive Plan, or
1997 Plan, and the 2006 Plan, collectively the Plans,
generally vest over four years and expire no later
than ten years from the date of grant. No common
stock options or stock appreciation rights have been
granted since 2009. 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. As of December 31, 2016 there are no
outstanding stock options or restricted stock awards.
For deferred stock awards granted under the
Plans, no common stock is issued at the time of grant
and the award does not possess dividend and voting
rights. Generally, these grants vest over one to four
years. Performance awards granted are earned over
a performance period based on the achievement of
defined goals, generally over three years. Payment
for performance awards is made in shares of our
common stock equal to its fair market value per
share, based on the performance of certain financial
ratios, after the conclusion of each performance
period.
Beginning with 2012, malus-based forfeiture
provisions were included in deferred stock awards
granted to employees identified as “material risk-
takers,” as defined by management. These malus-
based forfeiture provisions provide for the reduction
or cancellation of unvested deferred compensation,
such as deferred stock awards and performance
based awards, if it is determined that a material risk-
State Street Corporation | 181
STATE STREET CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
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. In addition, awards granted to
certain of our senior executives, as well as awards
granted to individuals in certain jurisdictions, may be
subject to recoupment after vesting (if applicable) and
delivery to the individual in specified circumstances
generally relating to fraud or willful misconduct by the
individual that results in material harm to us or a
material financial restatement.
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 $268 million,
$319 million and $329 million for the years ended
December 31, 2016, 2015 and 2014, respectively.
Such expense for 2016, 2015 and 2014 excluded $9
million, $10 million and $20 million, respectively,
associated with acceleration of expense in connection
with targeted staff reductions. This expense was
included in the severance-related portion of the
associated restructuring charges recorded in each
respective year.
The following table presents information about
the Plans as of December 31, 2016, 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, 2014
Exercised
Forfeited or expired
Outstanding as of December 31, 2015
Exercised
Forfeited or expired
Outstanding and exercisable as of December 31, 2016(1)
1,861
$
(398)
(257)
1,206
(227)
(24)
955
$
74.12
62.63
81.71
76.29
70.59
81.71
77.52
(1) Consists of zero shares subject to stock options and 955 thousand stock appreciation rights.
0.7
$
2.6
The total intrinsic value of options and stock
appreciation rights exercised during the years ended
December 31, 2016, 2015 and 2014 was $1 million,
$5 million and $14 million, respectively. As of
December 31, 2016, there was no unrecognized
compensation cost related to stock options and stock
appreciation rights.
The following tables present activity related to
other common stock awards during the years
indicated:
Shares
(In thousands)
Weighted-Average
Grant Date Fair
Value
Restricted Stock Awards:
Outstanding as of
December 31, 2014
Vested
Forfeited
Outstanding as of
December 31, 2015(1)
31
$
(31)
—
— $
41.27
41.22
—
—
(1) No restricted stock awards were issued or outstanding in 2016.
The total fair value of restricted stock awards
vested for the years ended December 31, 2015 and
2014, based on the weighted average grant date fair
value in each respective year, was $1 million and $54
million, respectively. As of December 31, 2015, all
restricted stock awards had vested, and no new
restricted stock awards were granted in 2016.
Shares
(In thousands)
Weighted-Average
Grant Date Fair
Value
Deferred Stock Awards:
Outstanding as of
December 31, 2014
Granted
Vested
Forfeited
Outstanding as of
December 31, 2015
Granted
Vested
Forfeited
Outstanding as of
December 31, 2016
12,431
$
3,461
(6,910)
(246)
8,736
4,336
(4,897)
(361)
7,814
$
51.47
72.98
49.17
59.22
61.59
52.49
56.18
60.12
60.01
State Street Corporation | 182
STATE STREET CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The total fair value of deferred stock awards
vested for the years ended December 31, 2016, 2015
and 2014, based on the weighted average grant date
fair value in each respective year, was $275 million,
$340 million and $310 million, respectively. As of
December 31, 2016, total unrecognized
compensation cost related to deferred stock awards,
net of estimated forfeitures, was $252 million, which
is expected to be recognized over a weighted-
average period of 2.4 years.
Shares
(In thousands)
Weighted-Average
Grant Date Fair
Value
Performance Awards:
Outstanding as of
December 31, 2014
Granted
Forfeited
Paid out
Outstanding as of
December 31, 2015
Granted
Forfeited
Paid out
Outstanding as of
December 31, 2016
1,627
$
400
(1)
(861)
1,165
506
—
(424)
1,247
$
49.46
72.24
41.02
45.09
60.45
50.81
—
49.27
60.37
The total fair value of performance awards paid
out for the years ended December 31, 2016, 2015
and 2014, based on the weighted average grant date
fair value in each respective year, was $21 million,
$39 million and $44 million, respectively. As of
December 31, 2016, total unrecognized
compensation cost related to performance awards,
net of estimated forfeitures, was $3.9 million, which is
expected to be recognized over a weighted-average
period of 2.1 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 and approvals or non-
objections, 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.
See Note 15 for further information on our common
stock purchase program
Note 19. Employee Benefits
Defined Benefit Pension and Other Post-
Retirement Benefit Plans:
State Street Bank and certain of its U.S.
subsidiaries participate in a non-contributory, tax-
qualified defined benefit pension plan. The U.S.
defined benefit pension plan was frozen as of
December 31, 2007 and no new employees were
eligible to participate after that date. State Street has
agreed to contribute sufficient amounts as necessary
to meet the benefits paid to plan participants and to
fund the plan’s service cost, plus interest. U.S.
employee account balances earn annual interest
credits until the employee begins receiving benefits.
Non-U.S. employees participate in local defined
benefit plans which are funded as required in each
local jurisdiction. In addition to the defined benefit
pension plans, we have non-qualified unfunded
SERPs that provide certain officers with defined
pension benefits in excess of allowable qualified plan
limits. State Street Bank and certain of its U.S.
subsidiaries also participate in a post-retirement plan
that provides health care benefits for certain retired
employees. The total expense for these tax-qualified
and non-qualified plans was $16 million, $46 million
and $32 million in 2016, 2015 and 2014, respectively.
We recognize the funded status of our defined
benefit pension plans and other post-retirement
benefit plans, measured as the difference between
the fair value of the plan assets and the projected
benefit obligation, in the consolidated statement of
position. The assets held by the defined benefit
pension plans are largely made up of common,
collective funds that are liquid and invest principally in
U.S. equities and high-quality fixed income
investments. The majority of these assets fall within
Level 2 of the fair value hierarchy. The benefit
obligations associated with our primary U.S. and non-
U.S. defined benefit plans, non-qualified unfunded
supplemental retirement plans and post-retirement
plans were $1.23 billion, $136 million and $21 million,
respectively, as of December 31, 2016 and $1.18
billion, $155 million and $30 million, respectively, as
of December 31, 2015. As the primary defined
benefit plans are frozen, the benefit obligation will
only vary over time as a result of changes in market
interest rates, the life expectancy of the plan
participants and payments made from the plans. The
primary U.S. and non-U.S. defined benefit pension
plans were underfunded by $32 million and $16
million as of December 31, 2016 and 2015,
respectively. The non-qualified supplemental
retirement plans were underfunded by $136 million
and $155 million as of December 31, 2016 and 2015,
respectively. The other post-retirement benefit plans
State Street Corporation | 183
STATE STREET CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
were underfunded by $21 million and $30 million as
of December 31, 2016 and 2015, respectively. The
underfunded status is included in other liabilities.
Defined Contribution Retirement Plans:
We contribute to employer-sponsored U.S. and
non-U.S. defined contribution plans. Our contribution
to these plans was $132 million, $130 million, and
$147 million in 2016, 2015 and 2014, respectively.
Note 20. Occupancy Expense and Information
Systems and Communications Expense
Occupancy expense and information systems
and communications expense include depreciation of
buildings, leasehold improvements, computer
hardware and software, equipment, and furniture and
fixtures. Total depreciation expense in 2016, 2015
and 2014 was $472 million, $443 million and $417
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
127,000 square feet of the building. As of
December 31, 2016 and 2015, an aggregate net book
value of $194 million and $231 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 on a straight-line basis 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. In 2016, 2015 and 2014,
interest expense related to these capital lease
obligations, reflected in net interest revenue, was $22
million, $32 million and $38 million, respectively. As
of December 31, 2016 and 2015, accumulated
amortization of capital lease assets was $365 million
and $334 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. Both are
recorded on a straight-line basis.
Total rental expense net of sublease revenue in
2016, 2015 and 2014 amounted to $194 million, $190
million and $204 million, respectively. Total rental
expense was reduced by sublease revenue of $4
million in both 2016 and 2015, and $6 million in 2014.
The following table presents a summary of future minimum lease payments under non-cancelable capital and
operating leases as of December 31, 2016. Aggregate future minimum rental commitments have been reduced by
aggregate sublease rental commitments of $43 million for capital leases and $16 million for operating leases.
(In millions)
2017
2018
2019
2020
2021
Thereafter
Total minimum lease payments
Less amount representing interest payments
Present value of minimum lease payments
Capital
Leases
Operating
Leases
Total
$
$
57
53
46
45
45
79
$
205
$
185
138
123
118
380
262
238
184
168
163
459
325
$
1,149
$
1,474
(76)
249
State Street Corporation | 184
STATE STREET CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Note 21. Expenses
Note 22. Income Taxes
The following table presents the components of
We use an asset-and-liability approach to
other expenses for the periods indicated:
(In millions)
Insurance
Regulatory fees and
assessments
Litigation
Securities processing
Other
Total other expenses
$
Acquisition Costs
Years Ended December 31,
2016
2015
2014
$
93
$
126
$
82
50
42
317
584
115
422
79
276
$
1,018
$
80
74
173
68
356
751
We recorded acquisition costs of $69 million,
$20 million and $58 million in 2016, 2015 and 2014,
respectively. Costs incurred in 2016 include
approximately $53 million related to our acquisition of
GEAM on July 1, 2016. For further information on the
GEAM acquisition, refer to Note 1.
Restructuring Charges
In the year ended December 31, 2016, we
recorded restructuring charges of $142 million related
to State Street Beacon.
The following table presents aggregate
restructuring activity for the periods indicated.
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 liabilities for future tax consequences of
temporary differences between 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 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 liabilities
recorded in our consolidated statement of condition
are netted within the same tax jurisdiction.
The following table presents the components of
income tax expense (benefit) for the years ended
December 31:
(In millions)
2016
2015
2014
Employee
Related
Costs
Real Estate
Consolidation
Asset
and
Other
Write-offs
Total
$
52
$
47
$
7
$
106
32
(45)
22
(46)
21
75
(21)
(112)
$
39
$
23
$
7
$
69
Current:
Federal
State
Non-U.S.
Total current expense
Deferred:
Federal
State
Non-U.S.
(5)
(25)
(3)
(9)
13
(17)
5
(51)
Total deferred (benefit) expense
Total income tax expense
(benefit)
$
9
$
11
$
3
$
23
(2)
94
(64)
—
18
—
30
(2)
142
(12)
(31)
(107)
(In millions)
Balance at December 31,
2013
Accruals for Business
Operations and IT
Payments and other
adjustments
Balance at December 31,
2014
Accruals for Business
Operations and IT
Payments and other
adjustments
Balance at December 31,
2015
Accruals for Business
Operations and IT
Accruals for State Street
Beacon
Payments and other
adjustments
Balance at December 31,
2016
$
37
$
17
$
2
$
56
$
(14) $
30
320
336
(311)
38
(85)
(358)
$
52
92
342
486
(39)
40
(169)
(168)
59
39
257
355
38
10
12
60
$
(22) $
318
$
415
State Street Corporation | 185
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:
The following table presents significant
components of our gross deferred tax assets and
gross deferred tax liabilities as of December 31:
(In millions)
2016
2015
2016
2015
2014
Deferred tax assets:
U.S. federal income tax rate
35.0 %
35.0%
35.0%
Changes from statutory rate:
State taxes, net of federal benefit
Tax-exempt income
Business tax credits(1)
Foreign tax differential
Foreign designated earnings
Foreign capital transactions
Tax refund
Litigation expense
Other, net
Effective tax rate
2.0
(6.1)
(13.6)
(7.7)
(6.8)
(4.3)
—
1.4
(0.9)
4.2
(5.6)
(9.4)
(9.6)
—
—
(2.8)
2.7
(0.7)
1.5
(5.1)
(6.8)
(8.5)
—
—
—
1.3
(0.3)
(1.0)%
13.8%
17.1%
(1) Business tax credits include low-income housing, production and
investment tax credits.
The 2016 foreign designated earnings include
the benefits attributable to the change in designation
of certain of our foreign earnings as indefinitely
invested overseas. The foreign capital transactions
include the tax benefits from incremental foreign tax
credits and a foreign affiliate tax loss. The increase in
business tax credits is attributable to an increase in
alternative energy investments.
In 2015 we recognized benefits associated with
the reduction of an Italian deferred tax liability and the
approval of a tax refund for prior years, partially offset
by a change in New York tax law.
The amount of income tax expense (benefit)
related to net gains (losses) from sales of investment
securities was $4 million, $(3) million and $5 million in
2016, 2015 and 2014, respectively. Pre-tax income
attributable to our operations located outside the U.S.
was approximately $1.22 billion, $1.30 billion and
$1.33 billion for 2016, 2015 and 2014, respectively.
Pre-tax earnings of our non-U.S. subsidiaries
are subject to U.S. income tax when effectively
repatriated. As of December 31, 2016, we have
chosen to indefinitely reinvest approximately $5.5
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, 2016, if such
earnings had been repatriated to the U.S., we would
have provided for approximately $1.1 billion of
additional income tax expense.
Unrealized losses on investment
securities, net
$
Deferred compensation
Defined benefit pension plan
Restructuring charges and other reserves
Foreign currency translation
Tax credit carryforwards
Other
Total deferred tax assets
Valuation allowance for deferred tax assets
$
157
285
116
199
225
425
105
1,512
(66)
57
167
143
383
155
—
32
937
(27)
Deferred tax assets, net of valuation
allowance
$ 1,446
$
910
Deferred tax liabilities:
Leveraged lease financing
Fixed and intangible assets
Non-U.S. earnings
Other
$
$
313
886
164
120
334
804
265
121
Total deferred tax liabilities
$ 1,483
$ 1,524
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, 2016, we had deferred tax
assets associated with tax credit carryforwards of
$425 million. Of the total tax credit carryforwards,
$406 million expire through 2036 and the remaining
do not expire. As of December 31, 2016 and 2015,
we had deferred tax assets associated with non-U.S.
and state loss carryforwards of $46 million and $26
million, respectively, included in “other” in the table
above. Of the total loss carryforwards of $46 million
as of December 31, 2016, $31 million do not expire,
and the remaining $15 million expire through 2035.
The loss carryforwards have a valuation allowance of
$38 million and $22 million for 2016 and 2015.
State Street Corporation | 186
STATE STREET CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The following table presents activity related to
unrecognized tax benefits as of December 31:
(In millions)
Beginning balance
2016
2015
$
63
$
163
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
$
(13)
(122)
7
14
71
$
8
14
63
The amount of unrecognized tax benefits that, if
recognized, would reduce income tax expense and
our effective tax rate was $63 million as of
December 31, 2016. Unrecognized tax benefits do
not include accrued interest of approximately $5
million and $3 million as of December 31, 2016 and
2015.
It is reasonably possible that the unrecognized
tax benefits could decrease by up to $14 million
within the next 12 months due to the resolution of
various audits, of which $5 million would reduce our
income tax expense and our effective tax rate.
Management believes that we have sufficient accrued
liabilities as of December 31, 2016 for tax exposures
and related interest expense.
We recorded interest and penalties related to
income taxes as a component of income tax expense.
Income tax expense included related interest and
penalties of approximately $2 million and $5 million in
2016 and 2015, respectively.
Note 23. Earnings Per Common Share
Basic EPS is calculated pursuant to the “two-
class” method, by dividing net income available to
common shareholders by the weighted-average
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 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, unvested and fully vested SERP
shares and fully vested deferred director stock
awards, which are equity-based awards that contain
non-forfeitable rights to dividends, and are considered
to participate with the common stock in undistributed
earnings.
The following table presents the computation of
basic and diluted earnings per common share for the
years indicated:
(Dollars in millions, except per
share amounts)
Net income
Less:
Years Ended December 31,
2016
2015
2014
$
2,143
$
1,980
$
2,022
Preferred stock dividends
(173)
(130)
(61)
Dividends and undistributed
earnings allocated to participating
securities(1)
Net income available to common
shareholders
Average common shares
outstanding (In thousands):
(2)
(2)
(3)
$
1,968
$
1,848
$
1,958
Basic average common shares
391,485
407,856
424,223
Effect of dilutive securities: common
stock options and common stock
awards
4,605
5,782
7,784
Diluted average common shares
396,090
413,638
432,007
Anti-dilutive securities(2)
2,143
661
1,498
Earnings per Common Share:
Basic
Diluted(3)
$
5.03
$
4.53
$
4.97
4.47
4.62
4.53
(1) Represents the portion of net income available to common equity
allocated to participating securities, composed of fully vested deferred
director stock and unvested restricted stock that contain non-forfeitable
rights to dividends during the vesting period on a basis equivalent to
dividends paid to common shareholders.
(2) Represents common stock options and other equity-based awards
outstanding but not included in the computation of diluted average common
shares, because their effect was anti-dilutive. Refer to Note 18 for additional
information about equity-based awards.
(3) Calculations reflect allocation of earnings to participating securities using
the two-class method, as this computation is more dilutive than the treasury
stock method.
State Street Corporation | 187
STATE STREET CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Note 24. Line of Business Information
Our operations are organized into two lines of
business: Investment Servicing and Investment
Management, which are defined based on products
and services provided. 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; our enhanced custody product,
which integrates principal securities lending and
custody; 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 passive and
active asset management strategies across equity,
fixed-income, alternative, multi-asset solutions
(including OCIO) and cash asset classes. Products
are distributed directly and through intermediaries
using a variety of investment vehicles, including
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 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.
Our servicing and management fee revenue
from the investment servicing and investment
management business lines, including trading
services and securities finance activities, represents
approximately 75% to 80% of our consolidated total
revenue. The remaining 20% to 25% is composed of
processing fees and other revenue as well as 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 is a summary of our line-of-
business results for the periods indicated.
The “Other” column for the year ended
December 31, 2016 included net costs of $199 million
composed of the following -
• Net acquisition and restructuring costs of
$209 million; and
• Net severance cost adjustments associated
with staffing realignment of $(10) million.
The “Other” column for the year ended
December 31, 2015 included net costs of $98 million
composed of the following -
• Net acquisition and restructuring costs of $25
million; and
• Net severance costs associated with staffing
realignment of $73 million.
The “Other” column for the year ended
December 31, 2014 included net costs of $219 million
composed of the following -
• Net acquisition and restructuring costs of
$133 million;
• Net severance costs associated with staffing
realignment of $84 million; and
• Net provisions for litigation exposure and
other costs of $2 million.
State Street Corporation | 188
STATE STREET CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The amounts in the “Other” columns were not allocated to State Street's business lines. Prior reported results
reflect reclassifications, for comparative purposes, related to management changes in methodologies associated
with allocations of revenue and expenses to lines-of-business in 2016.
Investment
Servicing
Investment
Management
Other
Total
Years Ended December 31,
(Dollars in millions,
except where otherwise
noted)
2016
2015
2014
2016
2015
2014
2016
2015
2014
2016
2015
2014
Servicing fees
$ 5,073
$ 5,153
$ 5,108
$ — $ — $ — $ — $ — $ — $ 5,073
$ 5,153
$ 5,108
Management fees
—
—
—
1,292
1,174
1,207
Trading services
1,052
1,108
1,039
Securities finance
Processing fees and
other
Total fee revenue
Net interest revenue
562
105
6,792
2,081
496
325
7,082
2,086
437
179
6,763
2,245
Gains (losses) related to
investment securities, net
7
(6)
4
47
—
38
—
(15)
(16)
45
—
(5)
1,324
1,196
1,247
3
—
2
—
15
—
Total revenue
8,880
9,162
9,012
1,327
1,198
1,262
Provision for loan losses
10
12
10
—
Total expenses
6,660
6,990
6,648
1,218
—
962
—
960
—
—
—
—
—
—
—
—
—
199
—
—
—
—
—
—
—
—
—
98
—
—
—
—
—
—
—
—
—
1,292
1,099
562
90
8,116
2,084
1,174
1,146
496
309
8,278
2,088
1,207
1,084
437
174
8,010
2,260
7
(6)
4
10,207
10,360
10,274
10
12
10
219
8,077
8,050
7,827
Income before income
tax expense
$ 2,210
$ 2,160
$ 2,354
$ 109
$ 236
$ 302
$ (199)
$
(98)
$ (219)
$ 2,120
$ 2,298
$ 2,437
Pre-tax margin
25%
24%
26%
8%
20%
24%
21%
22%
24%
Average assets (in
billions)
$ 225.3
$ 246.6
$ 234.2
$
4.4
$
3.9
$
3.9
$ 229.7
$ 250.5
$ 238.1
State Street Corporation | 189
STATE STREET CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Note 25. Non-U.S. Activities
We define our non-U.S. activities as those
revenue-producing business activities that arise from
clients which are generally serviced or managed
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,
assumptions and other judgments are applied to
quantify 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. Management periodically
reviews and updates its processes for quantifying the
financial results and assets related to our non-U.S.
activities.
Non-U.S. revenue in 2016, 2015 and 2014
included $1.05 billion, $938 million and $1.02 billion,
respectively, in the U.K., primarily from our London
operations.
The following table presents our U.S. and non-U.S. financial results for the periods indicated:
(In millions)
Total revenue
Income before income
taxes
Non-U.S.
2016
U.S.
Total
Non-U.S.
2015
U.S.
Total
Non-U.S.
2014
U.S.
Total
$
4,419
$
5,788
$
10,207
$
4,428
$
5,932
$
10,360
$
4,644
$
5,630
$
10,274
1,047
1,073
2,120
1,193
1,105
2,298
1,343
1,094
2,437
Non-U.S. assets were $79.1 billion and $78.1 billion as of December 31, 2016 and 2015, respectively.
Note 26. 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 indicated:
STATEMENT OF INCOME - PARENT COMPANY
(In millions)
Years Ended December 31,
2016
2015
2014
Cash dividends from consolidated banking subsidiary
$
640
$
585
$
Cash dividends from consolidated non-banking subsidiaries and unconsolidated
entities
Other, net
Total revenue
Interest expense
Other expenses
Total expenses
Income tax benefit
Income 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
75
92
807
249
107
356
(47)
498
1,629
16
171
73
829
209
310
519
(186)
496
1,384
100
Net income
$
2,143
$
1,980
$
1,470
138
63
1,671
193
55
248
(83)
1,506
360
156
2,022
State Street Corporation | 190
STATE STREET CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
STATEMENT OF CONDITION - PARENT COMPANY
(In millions)
Assets:
December 31,
2016
2015
Interest-bearing deposits with consolidated banking subsidiary
$
3,635
$
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:
Accrued expenses and other liabilities
Long-term debt
Total liabilities
Shareholders’ equity
Total liabilities and shareholders’ equity
325
39
22,147
2,687
297
2,743
126
461
5,735
308
35
20,584
2,816
315
1,558
275
478
$
$
$
32,460
$
32,104
514
$
10,727
11,241
21,219
32,460
$
643
10,326
10,969
21,135
32,104
State Street Corporation | 191
STATE STREET CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
STATEMENT OF CASH FLOWS - PARENT COMPANY
(In millions)
Net cash provided by operating activities
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
Net cash provided by (used in) investing activities
Financing Activities:
Net increase (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 used in financing activities
Net change
Cash and due from banks at beginning of year
Cash and due from banks at end of year
Years Ended December 31,
2016
2015
2014
$
417
$
926
$
1,767
2,100
(7,600)
6,703
(395)
808
—
1,492
(1,000)
493
—
(1,365)
(122)
(723)
(1,225)
—
—
295
(7,959)
7,891
—
227
(2,485)
2,983
—
742
4
(1,520)
(222)
(655)
(1,153)
—
—
$
— $
— $
(1,610)
(1,142)
1,011
—
(1,741)
667
994
(750)
1,470
14
(1,650)
(232)
(539)
(26)
—
—
—
State Street Corporation | 192
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.
(Dollars in millions; fully
taxable-equivalent basis)
Assets:
Average
Balance
2016
Interest
Years Ended December 31,
2015
2014
Average
Rate
Average
Balance
Interest
Average
Rate
Average
Balance
Interest
Average
Rate
Interest-bearing deposits with U.S. banks
$ 19,639
$
Interest-bearing deposits with non-U.S. banks
33,452
.52% $ 52,135
$
136
.26% $ 45,158
$
115
.25%
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
Total interest-bearing liabilities
Non-interest-bearing deposits:
Special time
Demand
Non-U.S.(2)
Other liabilities
Shareholders’ equity
102
24
146
—
821
385
756
354
30
61
2,679
.07
5.70
—
1.76
3.73
1.72
1.95
3.44
.27
1.34
17,618
3,233
1,194
40,056
10,481
55,074
17,007
941
22,717
220,456
2,460
27,516
2,558
921
46,551
10,326
43,861
18,136
877
22,863
199,184
3,157
27,386
$ 229,727
$ 250,432
$ 19,223
$
125
.65% $ 20,758
$
10,884
95,551
125,658
4,113
31
1,666
11,401
5,394
148,263
32,589
12,107
131
14,742
21,895
7
(47)
85
1
—
7
260
75
428
.06
(.05)
.07
.02
—
.40
2.29
1.39
.29
10,061
102,491
133,310
8,875
21
3,826
10,301
6,471
162,804
34,774
16,746
155
14,626
21,327
.80
.94
.13
2.07
3.81
1.68
1.56
3.26
.05
1.36
.20%
.04
.07
.08
—
—
.12
2.64
.59
.25
72
62
1
735
399
935
276
35
10
2,661
44
7
46
97
1
—
6
250
46
400
.41
1.92
.08
1.84
3.81
1.70
1.62
3.74
.04
1.21
10,195
4,077
959
32,481
10,619
73,709
14,838
1,074
15,944
81
38
1
672
404
1,241
231
35
7
209,054
2,825
4,139
24,908
$ 238,101
15
6
78
99
—
—
5
245
43
392
.21% $
7,254
$
.07
.05
.07
.01
—
.15
2.43
.71
.25
14,042
109,003
130,299
8,817
20
4,177
9,282
7,351
159,946
5,862
37,900
279
12,935
21,179
Total liabilities and shareholders’ equity
$ 229,727
$ 250,432
$ 238,101
Net interest revenue, fully taxable-equivalent
basis
Excess of rate earned over rate paid
Net interest margin(3)
$
2,251
$
2,261
$
2,433
1.05%
1.13
.96%
1.03
1.11%
1.16
(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 $167 million, $173 million and $173 million for the years ended December 31,
2016, 2015 and 2014, respectively, and were substantially related to tax-exempt securities (state and political subdivisions).
(2) Non-U.S. non-interest-bearing deposits were $337 million, $95 million and $180 million as of December 31, 2016, 2015 and 2014, respectively.
(3) Net interest margin is calculated by dividing fully taxable-equivalent net interest revenue by average total interest-earning assets.
State Street Corporation | 193
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.
Years Ended December 31,
(In millions; fully
taxable-equivalent basis)
Interest revenue related to:
2016 Compared to 2015
2015 Compared to 2014
Change in
Volume
Change in
Rate
Net (Decrease)
Increase
Change in
Volume
Change in
Rate
Net (Decrease)
Increase
Interest-bearing deposits with U.S. banks
$
(84) $
50
$
(34) $
Interest-bearing deposits with non-U.S. banks
Securities purchased under resale agreements
Trading account assets
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
65
(13)
—
120
(6)
(191)
18
(2)
—
(93)
(3)
1
(3)
—
—
(3)
27
(8)
11
Net interest revenue
$
(104) $
(113)
97
(1)
(34)
(8)
12
60
(3)
51
111
84
(1)
(90)
—
—
4
(17)
37
17
94
(48)
84
(1)
86
(14)
(179)
78
(5)
51
18
81
—
(93)
—
—
1
10
29
28
17
59
(8)
—
157
(5)
(313)
34
(4)
3
(60)
27
(2)
(5)
—
—
—
27
(5)
42
$
4
$
(68)
32
—
(94)
—
7
11
4
—
21
(9)
24
—
63
(5)
(306)
45
—
3
(104)
(164)
2
3
(27)
1
—
1
(22)
8
(34)
29
1
(32)
1
—
1
5
3
8
$
(10) $
(102) $
(70) $
(172)
State Street Corporation | 194
Quarterly Summarized Financial Information (Unaudited)
(Dollars in millions,
except per share amounts; shares in thousands)
Total fee revenue
Interest revenue
Interest expense
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
Net income (loss) from minority interest
Net income
Net income available to common shareholders
Earnings per common share(1):
Basic
Diluted
Average common shares outstanding:
Basic
Diluted
Dividends per common share
Common stock price:
High
Low
Closing
2016 Quarters
2015 Quarters
Fourth
Third
Second
First
Fourth
Third
Second
First
$
2,014
$
2,079
$
2,053
$
1,970
$
2,044
$
2,103
$
2,076
$
2,055
616
102
514
2
2,530
2
2,183
345
(248)
—
593
557
$
$
647
110
537
4
2,620
—
1,984
636
72
(1)
563
507
$
$
620
99
521
(1)
629
117
512
2
603
109
494
—
614
101
513
(2)
629
94
535
(3)
2,573
2,484
2,538
2,614
2,608
4
1,860
709
92
2
619
585
$
$
4
2,050
430
62
—
368
319
.80
.79
$
$
$
1
1,857
680
103
(1)
576
547
$
$
5
1,962
647
67
1
581
539
$
$
1.36
$
1.33
$
1.34
1.31
2
2,134
472
54
—
418
389
.95
.93
$
$
$
642
96
546
(1)
2,600
4
2,097
499
94
—
405
373
.90
.89
1.45
$
1.31
$
1.48
$
1.43
1.29
1.47
384,115
388,358
394,160
399,421
402,041
406,612
389,046
393,212
398,847
403,615
407,012
412,167
410,674
416,712
412,225
418,750
.38
$
.38
$
.34
$
.34
81.91
$
71.62
$
64.69
$
65.65
$
$
.34
$
.34
$
.34
$
.30
75.40
$
81.26
$
81.20
$
79.31
68.16
77.72
51.22
69.63
50.60
53.92
50.73
58.52
63.97
66.36
65.76
67.21
72.56
77.00
70.50
73.53
$
$
$
$
$
(1) Basic and diluted earnings per common share for full-year 2016 and basic earnings per common share for full-year 2015 do not equal the sum of the four quarters
for the year.
State Street Corporation | 195
ABS
AFS
AIRB(1)
AIFMD
ALCO
ALLL
AML
AOCI
ASU
AUCA
AUM
BCBS
Board
BOC
BCRC
BRRD
CAP
CCAR
CD
CEO
CET1(1)
CFO
CFP
CFTC
CIS
CLO
COSO
CRE
CRO
CRPC
CVA
DIF
ACRONYMS
Asset-backed securities
Available-for-sale
Advanced Internal Ratings-Based Approach
Alternative Investment Fund Managers Directive
Asset-Liability Committee
Allowance for loan and lease losses
Anti-money laundering
Accumulated other comprehensive income (loss)
Accounting Standards Update
Assets under custody and administration
Assets under management
FX
GAAP
GCR
GDPR
GEAM
G-SIB
HQLA(1)
HTM
IDI
ISDA
LCR(1)
Foreign exchange
Generally accepted accounting principles
Global credit review
General Data Protection Regulation
General Electric Asset Management
Global systemically important bank
High-quality liquid assets
Held-to-maturity
Insured depository institution
International Swaps and Derivatives Association
Liquidity coverage ratio
Basel Committee on Banking Supervision
LDA model
Loss distribution approach model
Board of Directors
Basel Oversight Committee
Business Conduct Risk Committee
Bank Recovery and Resolution Directive
Capital adequacy process
Comprehensive Capital Analysis and Review
Certificates of deposit
Chief Executive Officer
Common equity tier 1
Chief Financial Officer
Contingency funding plan
Commodity Futures Trading Commission
Corporate Information Security
Collateralized loan obligations
Committee of Sponsoring Organizations of the
Treadway Commission
Commercial real estate
Chief Risk Officer
Credit Risk & Policy Committee
Credit valuation adjustment
Deposit Insurance Fund
Dodd-Frank Act
Dodd-Frank Wall Street Reform and Consumer
Protection Act
DOJ
DPD
E&A Committee
EAD(1)
ECB
ECC
EMIR
EPS
ERISA
ERM
ETF
EVE
FASB
FCA
FDIC
Department of Justice
Data Protection Directive
Examining and Audit Committee
Exposure-at-default
European Central Bank
Executive Compensation Committee
European Market Infrastructure Resolution
Earnings per share
Employee Retirement Income Security Act
Enterprise Risk Management
Exchange-Traded Fund
Economic value of equity
Financial Accounting Standards Board
Financial Conduct Authority
Federal Deposit Insurance Corporation
Federal Reserve
Board of Governors of the Federal Reserve System
FFELP
FFIEC
FHLB
FRBB
FSB
FSOC
Federal Family Education Loan Program
Federal Financial Institution Examination Council
Federal Home Loan Bank of Boston
Federal Reserve Bank of Boston
Financial Stability Board
Financial Stability Oversight Council
(1) As defined by the applicable U.S. regulations.
LEDR
LTD
MiFID
MiFID II
MiFIR
MRAC
MRC
MVG
NIR
NSFR(1)
NYSE
OCC
OFAC
ORM
OCI
OCIO
OFAC
OTC
OTTI
Loss Event Data Repository
Long term debt
Markets in Financial Instruments Directive
Markets in Financial Instruments Directive II
Markets in Financial Instruments Regulation
Management Risk and Capital Committee
Model Risk Committee
Model Validation Group
Net interest revenue
Net stable funding ratio
New York Stock Exchange
Office of the Comptroller of the Currency
Office of Foreign Assets Control
Operational risk management
Other comprehensive income (loss)
Outsourced Chief Investment Officer
Office of Foreign Assets Control
Over-the-counter
Other-than-temporary-impairment
Parent Company
State Street Corporation
PCA
PD(1)
PUA
P&L
RC
RCSA
RWA(1)
SEC
SERP
SIFI
SLR(1)
SOX
SSGA
Prompt corrective action
Probability-of-default
Purchase undertaking agreement
Profit-and-loss
Risk Committee
Risk and control self-assessment
Risk-weighted assets
Securities and Exchange Commission
Supplemental executive retirement plans
Systemically important financial institutions
Supplementary leverage ratio
Sarbanes-Oxley Act of 2002
State Street Global Advisors
SSGA FM
SSGA Ltd.
State Street Bank
TLAC(1)
TMRC
TORC
UCITS
UOM
VaR
VIE
State Street Global Advisors Funds Management, Inc.
State Street Global Advisors Limited
State Street Bank and Trust Company
Total loss-absorbing capacity
Trading and Markets Risk Committee
Technology and Operational Risk Committee
Undertakings for Collective Investments in
Transferable Securities
Unit of measure
Value-at-risk
Variable interest entity
State Street Corporation | 196
GLOSSARY
Asset-backed securities: A financial security backed by collateralized
assets, other than real estate or mortgage backed securities.
Assets under custody and administration: Assets that we hold
directly or indirectly on behalf of clients under a safekeeping or
custody arrangement or for which we provide administrative services
for clients. To the extent that we provide more than one AUCA service
for a client’s assets, the value of the asset is only counted once in the
total amount of AUCA.
Assets under management: The total market value of client assets
for which we provide investment management strategy services,
advisory services and/or distribution services generating management
fees based on a percentage of the assets’ market values. These client
assets are not included on our balance sheet.
Certificates of deposit: A savings certificate with a fixed maturity
date, specified fixed interest rate and can be issued in any
denomination aside from minimum investment requirements. A CD
restricts access to the funds until the maturity date of the investment.
Collateralized loan obligations: A security backed by a pool of debt,
primarily senior secured leveraged loans. CLOs are similar to
collateralized mortgage obligations, except for the different type of
underlying loan. With a CLO, the investor receives scheduled debt
payments from the underlying loans, assuming most of the risk in the
event borrowers default, but is offered greater diversity and the
potential for higher-than-average returns.
Liquidity coverage ratio: A Basel III framework requirement for banks
and bank holding companies to measure liquidity. It is designed to
ensure that certain banking institutions, including us, maintain a
minimum amount of unencumbered HQLA sufficient to withstand the
net cash outflow under a hypothetical standardized acute liquidity
stress scenario for a 30-day stress period. The ratio of our
encumbered high-quality liquid assets divided by our total net cash
outflows over a 30-day stress period.
Net asset value: The amount of net assets attributable to each share
of capital stock (other than senior securities, such as, preferred stock)
outstanding at the close of the period.
Net stable funding ratio: The ratio of 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.
Other-than-temporary-impairment: Impairment charge taken on a
security whose fair value has fallen below its carrying value on balance
sheet and its value is not expected to recover through the holding
period of the security.
Probability-of-default: An internal risk rating that indicates the
likelihood that a credit obligor will enter into default status.
Qualified financial contracts: Securities contracts, commodity
contracts, forward contracts, repurchase agreements, swap
agreements and any other contract determined by the FDIC to be a
qualified financial contract.
Commercial real estate: Property intended to generate profit from
capital gains or rental income. Our CRE loans are composed of loans
acquired in 2008 pursuant to indemnified repurchase agreements with
an affiliate of Lehman Brothers.
Risk-weighted assets: A measurement used to quantify risk inherent
in our on and off-balance sheet assets by adjusting the asset value for
risk. RWA is used in the calculation of our risk-based capital ratios.
Economic value of equity: Long-term interest rate risk measure
designed to estimate the fair value of assets, liabilities and off-balance
sheet instruments based on a discounted cash flow model.
Supplementary leverage ratio: The ratio of our tier 1 capital to our
total leverage exposure, which measures our capital adequacy relative
to our on and off-balance sheet assets.
Total loss-absorbing capacity: The sum of our tier 1 regulatory
capital plus eligible external long-term debt issued by us.
Value-at-Risk: Statistical model used to measure the potential loss in
value of a portfolio that could occur in normal markets condition, over a
defined holding period, within a certain confidence level.
Variable interest entity: An entity that: (1) lacks enough equity
investment at risk to permit the entity to finance its activities without
additional financial support from other parties; (2) has equity owners
that lack the right to make significant decisions affecting the entity’s
operations; and/or (3) has equity owners that do not have an obligation
to absorb or the right to receive the entity’s losses or return.
Exchange-Traded Fund: A type of exchange-traded investment
product that offer investors a way to pool their money in a fund that
makes investments in stocks, bonds, or other assets and, in return, to
receive an interest in that investment pool. ETF shares are traded on
a national stock exchange and at market prices that may or may not
be the same as the net asset value.
Exposure-at-default: A parameter used in the calculation of
regulatory capital under Basel III. It can be defined as the expected
amount of loss a bank may be exposed to upon default of an obligor.
Global systemically important bank: A financial institution whose
distress or disorderly failure, because of its size, complexity and
systemic interconnectedness, would cause significant disruption to the
wider financial system and economic activity, which will be subject to
additional capital requirements.
Held-to-maturity investment securities: We classify investments in
debt securities as held-to-maturity only if we have the positive intent
and ability to hold those securities to maturity. Investments in debt
securities classified as held-to-maturity are measured subsequently at
amortized cost in the statement of financial position.
High-quality liquid assets: Cash or assets that can be converted into
cash at little or no loss of value in private markets and are considered
unencumbered.
State Street Corporation | 197
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, 2016,
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, 2016.
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,
2016, 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.
State Street Corporation | 198
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 and Audit
Committee.
Management has made a comprehensive review, evaluation and assessment of State Street's internal control
over financial reporting as of December 31, 2016. 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 (2013 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, 2016, 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.
State Street Corporation | 199
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, 2016, based on criteria established in Internal Control - Integrated Framework issued by the
Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) (the “COSO criteria”).
State Street Corporation 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, 2016, 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 statements of condition of State Street Corporation as of December 31, 2016 and
2015, 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, 2016 and our report dated
February 16, 2017 expressed an unqualified opinion thereon.
/s/ Ernst & Young LLP
Boston, Massachusetts
February 16, 2017
State Street Corporation | 200
ITEM 9B. OTHER INFORMATION
On February 16, 2017 Thomas J. Wilson
informed the parent company that he has decided not
to stand for re-election as a director of the parent
company at the 2017 annual meeting of
shareholders.
PART III
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS
AND CORPORATE GOVERNANCE
Information concerning our directors will appear
in our Proxy Statement for the 2017 Annual Meeting
of Shareholders, to be filed pursuant to
Regulation 14A on or before May 1, 2017, referred to
as the 2017 Proxy Statement, under the caption
“Election of Directors.” Information concerning
compliance with Section 16(a) of the Exchange Act
will appear in our 2017 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 and Audit Committee will appear in our
2017 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 2017 Proxy Statement under the caption
“Executive Compensation.” Such information is
incorporated herein by reference.
State Street Corporation | 201
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 2017 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, 2016. 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:
(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))
Equity compensation plans approved by shareholders
10,016 (2) $
77.52
Equity compensation plans not approved by
shareholders
Total
24 (3)
10,040
18,491
—
18,491
(1) Excludes deferred stock awards and performance awards for which there is no exercise price.
(2) Consists of 7,814 thousand shares subject to deferred stock awards, zero shares subject to stock options, 955 thousand stock appreciation rights and 1,247
thousand shares subject to performance awards (assuming payout at 100% for all awards, including awards for which performance is uncertain).
(3) Consists of shares subject to deferred stock awards.
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 or date of
grant, if different. 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 230,915
shares of common stock were outstanding as of
December 31, 2016; awards made through June 30,
2003, totaling 23,606 shares outstanding as of
December 31, 2016, 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 2017 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 and Audit
Committee's pre-approval policies and procedures
will appear in our 2017 Proxy Statement under the
caption “Examining and Audit Committee Matters.”
Such information is incorporated herein by reference.
State Street Corporation | 202
PART IV OTHER INFORMATION
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, 2016, 2015 and 2014
Consolidated Statement of Comprehensive Income - Years ended December 31, 2016, 2015 and 2014
Consolidated Statement of Condition - As of December 31, 2016 and 2015
Consolidated Statement of Changes in Shareholders' Equity - Years ended December 31, 2016, 2015 and
2014
Consolidated Statement of Cash Flows - Years ended December 31, 2016, 2015 and 2014
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.
ITEM 16. FORM 10-K SUMMARY
Not applicable.
State Street Corporation | 203
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 16, 2017, hereunto duly
authorized.
SIGNATURES
STATE STREET CORPORATION
By /s/ MICHAEL W. BELL
MICHAEL W. BELL,
Executive Vice President and
Chief Financial Officer
By /s/ SEAN P. NEWTH
SEAN P. NEWTH
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below on
February 16, 2017 by the following persons on behalf of the registrant and in the capacities indicated.
Senior Vice President, Chief Accounting Officer and
Controller
OFFICERS:
/s/ JOSEPH L. HOOLEY
JOSEPH L. HOOLEY,
Chairman and Chief Executive Officer;
Director
/s/ MICHAEL W. BELL
MICHAEL W. BELL,
Executive Vice President and
Chief Financial Officer
/s/ SEAN P. NEWTH
SEAN P. NEWTH
Senior Vice President, Chief Accounting Officer and
Controller
DIRECTORS:
/s/ JOSEPH L. HOOLEY
JOSEPH L. HOOLEY
/s/ KENNETT F. BURNES
KENNETT F. BURNES
/s/ PATRICK de SAINT-AIGNAN
PATRICK de SAINT-AIGNAN
/s/ Lynn A. Dugle
LYNN A. DUGLE
/s/ AMELIA C. FAWCETT
AMELIA C. FAWCETT
/s/ WILLIAM C. FREDA
WILLIAM C. FREDA
/s/ LINDA A. HILL
LINDA A. HILL
/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
State Street Corporation | 204
3.1*
3.2*
4.1*
4.2*
4.3*
4.4*
4.5*
4.6*
10.1†*
10.2†*
10.3†*
10.4†*
EXHIBIT INDEX
Restated Articles of Organization, as amended
By-Laws, as amended (filed as Exhibit 3.1 to State Street's Current Report on Form 8-K (File No.
001-07511) filed on October 20, 2015 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 (File No. 001-07511), 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 (as depositary), 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 (File No. 001-07511)
filed with the SEC on August 21, 2012 and incorporated herein by reference)
Deposit Agreement, dated March 4, 2014, among State Street Corporation, American Stock
Transfer & Trust Company, LLC (as depositary), 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 (File No. 001-07511)
dated March 4, 2014 filed with the SEC on March 4, 2014 and incorporated herein by reference)
Deposit Agreement, dated November 25, 2014, among State Street Corporation, American Stock
Transfer & Trust Company, LLC (as depositary) 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 (File No. 001-07511)
dated November 25, 2014 filed with the SEC on November 25, 2014 and incorporated herein by
reference)
Deposit Agreement dated May 21, 2015, among State Street Corporation, American Stock
Transfer & Trust Company, LLC (as depositary) 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 (File No. 001-7511)
dated May 21, 2015 filed with the SEC on May 21, 2015 and incorporated herein by reference)
Deposit Agreement dated April 11, 2016, among State Street Corporation, American Stock
Transfer & Trust Company, LLC (as depositary) 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 (File No. 001-7511)
dated April 11, 2016 filed with the SEC on April 11, 2016 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 (File No. 001-07511) 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, and form of award and agreement thereunder
(filed as Exhibit 10.3 to State Street's Annual Report on Form 10-K (File No. 001-07511) for the
year ended December 31, 2014 filed with the SEC on February 21, 2015 and incorporated herein
by reference)
Form of Amended and Restated Employment Agreement entered into with each of Joseph L.
Hooley, James S. Phalen and Michael Rogers (filed as Exhibit 10.3 to State Street's Annual
Report on Form 10-K (File No. 001-07511) for the year ended December 31, 2009 filed with the
SEC on February 22, 2010 and incorporated herein by reference) and Form of Amendment dated
March 26, 2014 to Employment Agreement (filed as Exhibit 99.1 to State Street's Current Report
on Form 8-K (File No. 001-07511) dated March 26, 2014 filed with the SEC on March 31, 2014
and incorporated herein by reference)
State Street Corporation | 205
10.5†*
10.6†*
10.7†*
10.8†*
10.9†*
Employment Agreement entered into with Michael W. Bell dated June 17, 2013 (filed as Exhibit
10.5 to State Street's Annual Report on Form 10-K (File No. 001-07511) for the year ended
December 31, 2013 filed with the SEC on February 21, 2014 and incorporated herein by
reference) and Form of Amendment dated March 26, 2014 to Employment Agreement (filed as
Exhibit 99.1 to State Street's Current Report on Form 8-K (File No. 001-07511) dated March 26,
2014 filed with the SEC on March 31, 2014 and incorporated herein by reference)
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 (File No. 001-07511) 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 award agreements
thereunder (filed as Exhibit 10.6 to State Street's Annual Report on Form 10-K (File No.
001-07511) 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 (filed as Exhibit 10.8 to State Street's Annual Report on Form 10-K (File No.
001-07511) for the year ended December 31, 2014 and filed with the SEC on February 20, 2015
and incorporated herein by reference)
Terms of Employment for Jeffrey N. Carp dated November 11, 2005, as amended (filed as Exhibit
10.9 to State Street's Annual Report on Form 10-K (File No. 001-07511) for the year ended
December 31, 2015 and filed with the SEC on February 19, 2016 and incorporated herein by
reference)
10.10†*
State Street’s Management Supplemental Savings Plan, Amended and Restated, as amended
10.11†*
10.12†*
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 (File No.
001-07511) 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, 2007,
as amended (filed as Exhibit 10.12 to State Street's Annual Report on Form 10-K (File No.
001-07511) 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*
Deferred Prosecution Agreement dated January 17, 2017 between State Street Corporation and
the U.S. Department of Justice and United States Attorney for the District of Massachusetts
10.15†*
10.16†*
10.17A†*
10.17B†*
10.17C†*
Employment Letter Agreement entered into with Eric Aboaf dated September 22, 2016 (filed as
Exhibit 10.1 to State Street's Current Report on Form 8-K (File No. 001-07511) dated September
28, 2016 filed with the SEC on September 28, 2016 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 (File No. 001-07511) for the quarter ended June 30, 2013 filed
with the SEC on August 6, 2013 and incorporated herein by reference)
Form of Indemnification Agreement between State Street Corporation and each of its directors
(filed as Exhibit 10.18A to State Street's Annual Report on Form 10-K (File No. 001-07511) for the
year ended December 31, 2013 filed with the SEC on February 21, 2014 and incorporated herein
by reference)
Form of Indemnification Agreement between State Street Corporation and each of its executive
officers (filed as Exhibit 10.18B to State Street's Annual Report on Form 10-K (File No.
001-07511) for the year ended December 31, 2013 filed with the SEC on February 21, 2014 and
incorporated herein by reference)
Form of Indemnification Agreement between State Street Bank and Trust Company and each of
its directors (filed as Exhibit 10.18C to State Street's Annual Report on Form 10-K (File No.
001-07511) for the year ended December 31, 2013 filed with the SEC on February 21, 2014 and
incorporated herein by reference)
State Street Corporation | 206
10.17D†*
10.18†*
Form of Indemnification Agreement between State Street Bank and Trust Company and each of
its executive officers (filed as Exhibit 10.18D to State Street's Annual Report on Form 10-K (File
No. 001-07511) for the year ended December 31, 2013 filed with the SEC on February 21, 2014
and incorporated herein by reference)
2011 Senior Executive Annual Incentive Plan (filed as Exhibit 99.2 to State Street's Current
Report on Form 8-K (File No. 001-07511) filed with the SEC on May 24, 2011 and incorporated
herein by reference)
10.19†*
2016 State Street Corporation Senior Executive Annual Incentive Plan
10.20†*
Transition Agreement dated April 15, 2016 between State Street Bank and Trust Company and
Michael W. Bell (filed as Exhibit 10.1 State Street's Form 10-Q (File No. 001-07511) for the
quarter ended March 31, 2016 filed with the SEC on May 6, 2016 and incorporated herein by
reference)
12*
21*
23.1*
23.2*
31.1*
31.2*
31.3
31.4
32.1*
32.2
Statement of Ratios of Earnings to Fixed Charges
Subsidiaries of State Street Corporation
Consent of Independent Registered Public Accounting Firm
Consent of Independent Registered Public Accounting Firm
Rule 13a-14(a)/15d-14(a) Certification of Chairman and Chief Executive Officer
Rule 13a-14(a)/15d-14(a) Certification of Chief Financial Officer
Rule 13a-14(a)/15d-14(a) Certification of Chairman and Chief Executive Officer
Rule 13a-14(a)/15d-14(a) Certification of Chief Financial Officer
Section 1350 Certifications
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
† Denotes management contract or compensatory plan or arrangement
* Exhibit filed with the SEC, but not printed herein
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, 2016, 2015 and 2014, (ii)
consolidated statement of comprehensive income for the years ended December 31, 2016, 2015 and 2014,
(iii) consolidated statement of condition as of December 31, 2016 and December 31, 2015, (iv) consolidated
statement of changes in shareholders' equity for the years ended December 31, 2016, 2015 and 2014,
(v) consolidated statement of cash flows for the years ended December 31, 2016, 2015 and 2014, and (vi) notes to
consolidated financial statements.
State Street Corporation | 207
EXHIBIT 31.3
I, Joseph L. Hooley, certify that:
RULE 13a-14(a)/15d-14(a) CERTIFICATION
1.
I have reviewed this Amendment No. 1 to the Annual Report on Form 10-K/A of State Street Corporation;
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: March 27, 2017
By:
/s/ JOSEPH L. HOOLEY
Joseph L. Hooley,
Chairman and Chief Executive Officer
EXHIBIT 31.4
I, Eric Aboaf, certify that:
RULE 13a-14(a)/15d-14(a) CERTIFICATION
1.
I have reviewed this Amendment No. 1 to the Annual Report on Form 10-K/A of State Street Corporation;
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: March 27, 2017
By:
/s/ ERIC ABOAF
Eric Aboaf
Executive Vice President and
Chief Financial Officer
SECTION 1350 CERTIFICATIONS
EXHIBIT 32.2
To my knowledge, this Report on Form 10-K/A for the period ended December 31, 2016 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: March 27, 2017
By:
Date: March 27, 2017
By:
/s/ JOSEPH L. HOOLEY
Joseph L. Hooley,
Chairman and Chief Executive Officer
/s/ ERIC ABOAF
Eric Aboaf
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,
or GAAP, management also presents results on a non-GAAP, or "operating" basis, as it believes that this presentation
supports meaningful analysis and comparisons of trends with respect to State Street's normal ongoing business operations
from period to period, as well as additional information (such as capital ratios calculated under regulatory standards
scheduled to be effective in the future or other standards) that management uses in evaluating State Street’s business and
activities.
Management believes that operating-basis financial information, which excludes the impact of revenue and expenses
outside of State Street's normal course of business (such as acquisitions and restructuring charges), 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. Excluding the impact of revenue and expenses outside of State Street's
normal course of business (such as acquisition and restructuring charges) provides additional insight into our underlying
margin and profitability. Our operating-basis presentation also 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. Taxable-equivalent revenue allows management to provide more
meaningful comparisons of yields and margins on assets and to evaluate investment opportunities with different tax profiles.
Management also believes that the use of other non-GAAP financial measures in the calculation of identified capital ratios is
useful to understanding State Street's capital position and is of interest to investors. 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 2016 Annual Report on Form 10-K.
(Dollars in millions)
Total Revenue:
Total revenue, GAAP-basis
Years Ended
December 31,
2016
December 31,
2015
% Change
2016
vs.
2015
$
10,207
$
10,360
(1.5)%
Tax-equivalent adjustment associated with tax-advantaged
investments
Tax-equivalent adjustment associated with tax-exempt investment
securities
Expense billing matter, net
Gain on sale of CRE and CRE loan extinguishment / paydown
Gain on sale of WM/Reuters Business
Discount accretion related to former conduit securities
$
$
Total revenue, operating-basis
Total Expenses:
Total expenses, GAAP-basis
Severance costs associated with staffing realignment
Provisions for legal contingencies
Expense billing matter, net
Acquisition costs
Restructuring charges, net
Total expenses, operating-basis
Impact of accelerated compensation expense
470
167
43
—
(53)
(82)
359
173
—
(165)
—
(98)
10,752
$
10,629
1.2
8,077
$
11
(41)
(15)
(69)
(140)
7,823
(249)
8,050
(73)
(415)
(17)
(20)
(5)
7,520
—
7,520
0.3
4.0
0.7
Total expenses, operating-basis excluding accelerated compensation
expense
$
7,574
$
RECONCILIATION OF OPERATING-BASIS (NON-GAAP) FINANCIAL RESULTS (Continued)
Years Ended
(Dollars in millions, except per share amounts, or where otherwise
noted)
December 31,
2016
December 31,
2015
Diluted Earnings per Common Share:
% Change
2016
vs.
2015
Diluted earnings per common share, GAAP-basis
$
4.97
$
4.47
11.2%
Severance costs associated with staffing realignment
Provisions for legal contingencies
Expense billing matter, net
Acquisition costs
Restructuring charges, net
Discount accretion associated with former conduit securities
Gain on sale of CRE and CRE loan extinguishment / paydown
Italian deferred tax liability
Gain on sale of WM/Reuters Business
(.02)
.13
.10
.11
.21
(.13)
—
—
(.10)
Diluted earnings per common share, operating-basis
$
5.27
$
.11
.76
.03
.03
.01
(.14)
(.24)
(.14)
—
4.89
7.8
Return on Average Common Equity:
Return on average common equity, GAAP-basis
10.5%
9.8%
70 bps
Severance costs associated with staffing realignment
Provisions for legal contingencies
Expense billing matter, net
Acquisition costs
Restructuring charges, net
Discount accretion associated with former conduit securities
Gain on sale of CRE and CRE loan extinguishment / paydown
Italian deferred tax liability
Gain on sale of WM/Reuters Business
—
.3
.2
.2
.4
(.3)
—
—
(.2)
.2
1.6
.1
.1
—
(.3)
(.5)
(.3)
—
Return on average common equity, operating-basis
11.1%
10.7%
40
BOARD OF DIRECTORS
February 16, 2017
Joseph L. Hooley
Chairman and Chief Executive Officer,
State Street Corporation
Linda A. Hill
Wallace Brett Donham Professor of Business
Administration, Harvard Business School
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
Patrick de Saint-Aignan
Retired Managing Director and Advisory Director for
Morgan Stanley, global financial services
Ronald L. Skates
Former Chief Executive Officer and President,
Data General Corp., manufacturer of multi-user
computer systems; private investor
Lynn A. Dugle
Chief Executive Officer and Director, Engility Holdings,
Inc., technology consulting company
Gregory L. Summe
Managing Partner and Founder, Glen Capital Partners,
LLC, an investment fund
Amelia C. Fawcett
Deputy Chairman, Kinnevik AB, a long-term oriented
investment company based in Sweden
Thomas J. Wilson
Chairman and Chief Executive Officer,
Allstate Corporation, property and casualty insurance
William C. Freda
Retired Senior Partner and Vice Chairman, Deloitte LLP,
a global consulting firm
EXECUTIVE LEADERSHIP
February 16, 2017
Joseph L. Hooley(1)(2)
Chairman and Chief Executive Officer
Eric W. Aboaf(1)(2)
Executive Vice President
Daniel P. Farley
Executive Vice President
Scott R. FitzGerald
Executive Vice President
Ivan Matviak
Executive Vice President
Steven R. Meier
Executive Vice President
Joerg Ambrosius
Executive Vice President
Paul J. Fleming
Stephen F. Nazzaro
Executive Vice President
Executive Vice President
Tracy Atkinson
Executive Vice President
Aunoy Banerjee
Executive Vice President
Michael Fontaine
Executive Vice President
Kimberly Newell
Executive Vice President
Elizabeth Franson
Executive Vice President
Elizabeth Nolan
Executive Vice President
Michael W. Bell(1)(2)
Executive Vice President and
Chief Financial Officer
Stefan M. Gavell
Executive Vice President
Ronald P. O'Hanley(1)(2)
Vice Chairman and President and Chief
Executive Officer of State Street Global
Advisors
Anthony C. Bisegna
Executive Vice President
Todd Gershkowitz
Executive Vice President
David C. Phelan
Executive Vice President, General
Counsel and Assistant Secretary
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
Maria Cantillon
Executive Vice President
Anthony M. Carey
Executive Vice President
Jeffrey N. Carp(1)(2)
Executive Vice President,
Chief Legal Officer and Secretary
Paul M. Colonna
Executive Vice President
Jeff D. Conway(1)(2)
Executive Vice President
Phillip S. Gillespie
Executive Vice President
Stefan Gmür
Executive Vice President
Michael T. Goonan
Executive Vice President
John H. Griffin
Executive Vice President
Hannah M. Grove
Executive Vice President
James A. Hardy
Executive Vice President
Lori Heinel
Executive Vice President
Kathryn M. Horgan(1)(2)
Executive Vice President
Robert Kaplan
Executive Vice President
Michael Karpik
Executive Vice President
John Plansky
Executive Vice President
Alison A. Quirk(1)(2)
Executive Vice President
Michael Richards
Executive Vice President and
General Auditor
Michael F. Rogers(1)(2)
President and Chief Operating Officer
Dennis E. Ross
Executive Vice President
James E. Ross
Executive Vice President
Wai-Kwong Seck(1)(2)
Executive Vice President
Paul J. Selian
Executive Vice President
Antoine Shagoury(1)(2)
Executive Vice President
Rajen Shah
Executive Vice President
Cuan Coulter
Executive Vice President and
Chief Compliance Officer
Mark R. Keating
Executive Vice President
John J. Slyconish
Executive Vice President and Treasurer
Lochiel Crafter
Executive Vice President
David C. Crawford
Executive Vice President
Albert J. Cristoforo
Executive Vice President
Susan Dargan
Executive Vice President
Jessica Donohue
Executive Vice President
Sharon E. Donovan Hart
Executive Vice President
Maria Dwyer
Executive Vice President
Ali M. El-Abboud
Executive Vice President
Andrew James Erickson(1)(2)
Executive Vice President
(1) Designated as executive officer for SEC purposes
(2) Member of State Street Management Committee
Karen C. Keenan(1)(2)
Executive Vice President and Chief
Administrative Officer
Pinar Kip
Executive Vice President
David Suetens
Executive Vice President
George E. Sullivan(1)(2)
Executive Vice President
Andrew Kuritzkes(1)(2)
Executive Vice President and
Chief Risk Officer
Richard Taggart
Executive Vice President
Richard F. Lacaille
Executive Vice President
Cyrus Taraporevala
Executive Vice President
Ralph R. Layman
Executive Vice President
Rory Tobin
Executive Vice President
John Lehner
Executive Vice President
Donald W. Torey
Executive Vice President
Brenda Lyons
Executive Vice President
Louis D. Maiuri(1)(2)
Executive Vice President
Ian Martin
Executive Vice President
David Wiederecht
Executive Vice President
Ronald B. Woodard
Executive Vice President
Australia
Melbourne
Sydney
Austria
Vienna
Belgium
Brussels
Brunei Darussalam
Jerudong
Canada
Montreal
Toronto
Vancouver
Cayman Islands
George Town, Grand Cayman
Channel Islands
Guernsey
Saint Peter Port
Jersey
Saint Helier
Denmark
Copenhagen
France
Paris
Germany
Frankfurt
Munich
India
Bangalore
Chennai
Coimbatore
Mumbai
Pune
Ireland
Carrickmines
Drogheda
Dublin
Kilkenny
Naas
STATE STREET WORLDWIDE
Italy
Milan
Turin
Japan
Fukuoka
Tokyo
Luxembourg
Luxembourg
Malaysia
Kuala Lumpur
Netherlands
Amsterdam
People's Republic of China
Beijing
Hangzhou
Hong Kong
Poland
Gdansk
Krakow
Singapore
Singapore
South Africa
Cape Town
South Korea
Seoul
Switzerland
Zurich
Taiwan
Taipei City
United Arab Emirates
Dubai
United Kingdom
England
London
Scotland
Edinburgh
United States
California
Irvine
Los Angeles
Redwood City
Sacramento
San Francisco
Connecticut
Stamford
Florida
Jacksonville
Georgia
Atlanta
Illinois
Chicago
Massachusetts
Boston
Cambridge
Grafton
Hadley
Quincy
Westborough
Missouri
Kansas City
New Jersey
Clifton
Princeton
New York
New York
North Carolina
Charlotte
Pennsylvania
Berwyn
Texas
Austin
2016 Annual Report
to Shareholders
State Street Corporation
State Street Financial Center
One Lincoln Street
Boston, MA 02111
www.statestreet.com
©2017 STATE STREET CORPORATION 17-30278-0317