Joseph L. Hooley
Chairman and
Chief Executive Officer
We maintained
a strong capital
position and a
high-quality
balance sheet,
which allowed us
to deliver strong
capital returns
to shareholders
throughout 2017.
To Our Shareholders
In 2017, our 225th anniversary year, we honored State Street’s
heritage of stewardship and innovation by continuing to invest in,
strengthen and evolve our business to meet our clients’
ever-changing needs.
We achieved our 2017 financial targets
for the year while advancing our digital
strategy, developing new solutions to
support our clients and positioning
State Street for continued growth.
Our results reflect strength across our
asset servicing and asset management
businesses, increased client demand for
our products and services, disciplined
expense control, and the hard work and
outstanding contributions of our nearly
37,000 employees. Strong global equity
markets and rising interest rates also
created a favorable environment for
revenue growth.
Summary Financial Results
On a GAAP basis, our 2017 diluted
earnings per common share were
$5.24, up 5% compared with $4.97 in
2016. Total revenue increased 9% to
$11.2 billion for the year, while total
expenses increased 2% to $8.3 billion.
Fee revenue rose 10% to $8.9 billion,
while net interest income rose 11% to
$2.3 billion. Our 2017 GAAP-basis return
on average common shareholders’
equity was 10.6%, compared with
10.5% in 2016.
On an operating basis1, our 2017 diluted
earnings per common share were
$6.41, up 25% from $5.14 in 2016.
Revenue rose 9% on an operating
basis to $11.7 billion for the year,
while expenses rose 6% to $8.0 billion.
Operating-basis fee revenue rose
8% year over year, driven by market
appreciation and new client business.
This combination of higher operating-
basis fee revenue growth and disciplined
expense management resulted in
positive fee operating leverage2 of
2.1% for the year. In addition, higher
US market interest rates and effective
balance sheet management resulted in
a 14% improvement in operating-basis
net interest income to $2.5 billion for
the year. Our operating-basis return on
average common shareholders’ equity
was 12.9%, compared with 10.8% in 2016.
We also maintained a strong capital
position and a high-quality balance
sheet, which allowed us to deliver
strong capital returns to shareholders
throughout 2017. This supported the
performance of our common stock,
which generated a total shareholder
return of 28% for the year.
We achieved
excellent progress
during the year
advancing our
multiyear initiative
to digitize
our business,
leverage our
global scale
to enhance
efficiencies,
and deliver new
capabilities to
support our
clients’ business.
Growing our Core Business
Our asset servicing business continued
to see strong client demand in 2017,
as evidenced by new mandates of
approximately $800 billion for the
year. We benefited from broad-based
new business activity across mutual
fund, exchange-traded fund (ETF) and
alternative products, and expanded
many of our client relationships.
Assets under custody and administration
ended the year at a record $33.1 trillion,
up 15% since the end of 2016.
Servicing fees rose 6% year over
year, largely due to higher global
equity markets, new business and
the impact of a weaker US dollar,
partially offset by hedge fund outflows.
State Street Global Advisors, our asset
management business, ended 2017
with a record $2.8 trillion in total assets
under management, up 13% compared
with 2016’s ending level. Management
fee revenue rose 25% year over year,
reflecting higher global equity markets,
the impact of our acquisition of GE Asset
Management, and higher-yielding
ETF inflows.
State Street Beacon
We achieved excellent progress during
the year advancing our multiyear
initiative to digitize our business,
leverage our global scale to enhance
efficiencies, and deliver new capabilities
to support our clients’ business.
Improving our clients’ experience is
at the center of our digital strategy.
Beacon is enabling us to streamline
how we receive and process data
and integrate it with our systems —
whether it comes to us from clients,
other institutions or markets.
Beacon-driven process and technology
enhancements are also allowing
us to deliver greater speed, quality,
transparency and value for clients.
As a result, clients can gain near
real-time access to a range of data,
analytics and solutions to address
their needs. This represents the
ultimate value of Beacon, as we deploy
advanced technologies to provide
clients an information advantage.
When we announced Beacon in
October 2015, we set a target to
generate annual pre-tax net run-rate
expense savings of $550 million by the
end of 2020, compared with our 2015
expenses, all else equal3. Due to the
substantial progress we’ve made with
Beacon thus far, we now expect to
realize our aggregate savings target
by the middle of 2019, 18 months
ahead of schedule.
Strengthening our Solutions
We made significant investments in
technology, products and solutions to
strengthen our capabilities and support
our evolving client needs.
State Street Global Exchange,
the data and analytics business we
established in 2013, continued to advance
its cloud-based “data-as-a-service”
platform, DataGX, as a flexible and
scalable front-office solution.
As clients look to outsource their costly
and complex data needs to a trusted
partner, DataGX can streamline data
management and enable efficient
investment and risk management
decision-making, as well as help clients
keep their data secure, organized,
current and accurate. In addition,
to help clients better understand
non-financial risks in their portfolio,
Global Exchange launched ESGXSM,
an analytics tool designed to identify
and highlight potential sources of
environmental, social and governance
(ESG) risk that may be overlooked by
traditional financial analysis.
Keeping pace with evolving regulations
remains a significant challenge for
our clients and a major focus for us.
In 2017, we began rolling out our
proprietary technology solution to
help clients meet new Securities and
Exchange Commission (SEC) rules
regulating the reporting and disclosure
of information by registered investment
companies. Our SEC Reporting
Modernization solution normalizes
and stores data from different sources
quickly and efficiently, performs complex
calculations, and allows clients to
check the status of their funds at any
point in the reporting cycle and easily
deliver reporting results to the SEC.
State Street Global Advisors expanded
its exchange-traded fund (ETF) solutions
by launching a range of 15 ultra-low-
cost SPDR® Portfolio ETFs that provide
investors access to a wide range of
equity and fixed income asset classes.
These new ETFs had $4.5 billion in
inflows from their October launch
through the end of 2017, contributing to
total ETF net inflows of $37 billion for the
year. Global AUM for SPDR ETFs totaled
$644 billion at year-end, an increase of
$123 billion for the year.
Corporate Responsibility
Corporate responsibility is deeply
ingrained in our culture. We believe
the strength of our business is
directly linked to the well-being of the
communities in which we operate.
We focus our charitable efforts on
education and workforce development
because providing people with the
knowledge and skills they need to find
sustainable work is essential to building
strong communities and economic
prosperity over the long term.
We made
significant
investments
in technology,
products and
solutions to
strengthen our
capabilities
and support
our evolving
client needs.
In 2017, more
than a fifth of
our employees
participated
in community
volunteer
activities,
devoting more
than 123,000
hours of
their time to
charitable causes.
Our State Street Foundation, which
marked its 40th anniversary in 2017,
has expanded its reach as State Street
has grown globally over the past
four decades. In 2017, the Foundation
provided $20.3 million in grants
to charitable organizations around
the world.
Key to our social impact is the
generosity of our employees,
who are passionate about supporting
the communities in which they live
and work. In 2017, more than a fifth
of our employees participated in
community volunteer activities,
devoting more than 123,000 hours of
their time to charitable causes.
In my past two shareholder letters,
I discussed the Boston Workforce
Investment Network (Boston WINs),
a multiyear, $20 million venture
philanthropy initiative launched in
2015 by our Foundation in partnership
with five nonprofit organizations
working to increase education and
job readiness for young people.
Since 2015, Boston WINs has
coordinated efforts among its partners,
allowing them to complement each
other’s core competencies and
dramatically increase the collective
impact of their service delivery in
the city that’s been State Street’s
headquarters since 1792.
At year-end, these nonprofits were
working with 26 Boston public high
schools and together had served over
50% more students than at the start of
the program. In addition, State Street
has hired approximately 450 aspiring
professionals who worked with one
of more of our Boston WINs partners,
achieving good progress toward
our goal of 1,000 hires.
Our efforts to be a responsible
corporate citizen received recognition
in 2017. Corporate Responsibility Magazine
named us to its list of the
100 Best Corporate Citizens for the
11th consecutive year, and we also were
named to the North America Dow Jones
Sustainability Index, the gold standard
for corporate sustainability, based on
analysis of financially relevant ESG
factors. We also were included on the
Bloomberg 2017 Financial Services
Gender Equality Index, The (London)
Times 2017 list of Top 50 Employers for
Women, and Working Mother magazine’s
“100 Best Companies” lists in the US
and India. In addition, we earned a
100% rating for the fourth consecutive
year in the Human Rights Campaign’s
2017 Corporate Equality Index, a national
benchmarking survey and report on
corporate policies and practices related
to LGBTQ workplace equality.
r
Fearless Girl
demonstrates
our belief
that including
more women
on corporate
boards and senior
leadership teams
makes good
business sense —
and is simply the
right thing to do.
Fearless Girl
One of the most gratifying developments
of the year was the incredible public
response to Fearless Girl, a 50-inch
bronze statue of a young girl standing
confidently as a symbol of the power
and potential of women in leadership.
State Street Global Advisors placed the
statue in the heart of New York’s financial
district on the eve of International
Women’s Day to spark a conversation
about the importance of gender diversity
in corporate leadership. On the day
that Fearless Girl took her stand,
State Street Global Advisors called
on companies with no women on their
boards to add at least one, and well over
100 had done so by the end of the year.
Fearless Girl demonstrates our belief
that including more women on corporate
boards and senior leadership teams
makes good business sense — and is
simply the right thing to do. This reflects
extensive research showing that
companies that draw from a diversity of
views and backgrounds achieve better
performance and shareholder outcomes
than those that don’t.
At State Street, we’re taking a stand for
diversity even as we focus on our own
organization. We have made substantial
progress building a more diverse and
inclusive company in recent years and
are proud that 30% of our Board of
Directors and 28% of our employees at
the level of senior vice president and
above are female. We recognize
however that we have much more
work to do, which is why we’re making
a concerted effort to increase the
representation of women, employees of
color and other minority groups across
our workforce and leadership ranks.
Fearless Girl was never meant to
be a statement of accomplishment;
her purpose is aspirational and
inspirational. By helping to raise
awareness of the diversity challenge,
our hope is that Fearless Girl will
inspire a new generation of leaders
to take a bold stand for change.
Leadership Transition
Managing for the future is one of my
most important responsibilities as
CEO, and that includes working with
our Board of Directors on succession
planning. Early in 2017, the Board
and I began discussing plans for my
retirement. In November, we announced
a leadership transition for me to
retire as CEO by the end of 2018,
while continuing to serve as chairman
of the Board through the end of 2019.
Succeeding me as CEO will be Ron
O’Hanley, who joined State Street in
2015 to lead our asset management
business and was appointed as our
vice chairman at the beginning of 2017.
As part of the transition, Ron was
appointed president and chief
operating officer.
The Board and I have complete
confidence that Ron has the right
leadership qualities, expertise and
vision to lead the next phase of
our evolution. He brings a unique
perspective having been a State Street
client in his previous roles leading major
asset management firms. This will
serve us well as we work to deepen our
client relationships and make it easier
for them to partner with us.
Also as part of the leadership changes
announced in November, a number of
our senior executives took on new or
expanded roles:
• Eric Aboaf, our chief financial officer,
assumed additional responsibility for
corporate strategy;
These moves highlight the strength and
diversity of experiences and backgrounds
of our executive leadership team, as well
as our commitment to leadership
development and succession planning.
On a personal note, leading our
outstanding team of talented and
dedicated employees is a tremendous
honor and source of pride. When I became
CEO in March 2010, we were emerging
from the financial crisis and adjusting to
a new market landscape and regulatory
environment. I committed at that time to
leaving State Street a stronger company
for all our stakeholders. I look forward
to working with the Board, Ron and
the rest of our management team to
keep that promise.
• Jeff Conway was named to lead
The Way Ahead
our operations, infrastructure and
business transformation globally,
including Beacon;
• Andrew Erickson became head of our
Global Services business worldwide;
• Liz Nolan was tapped to be CEO of our
business in Europe, the Middle East and
Africa (EMEA); and
• Cyrus Taraporevala became president
and CEO of State Street Global Advisors.
The world has changed immensely
over the past 225 years, and so has
State Street. This is an exciting time
to work in financial services. Digital
advances and emerging technologies —
including artificial intelligence,
machine learning, and advanced data
analytics — are creating significant
opportunities for service providers to
reinvent the way they serve the financial
needs of people around the world.
At the same time, those that fail to
embrace digital transformation
risk eventual obsolescence.
At State Street, we’ve moved
aggressively to position our company
as the digital leader in financial
services and help our clients
successfully navigate the changes
that are transforming our industry.
While moving swiftly to enhance
our capabilities and leadership,
we never lose sight of the personal
commitments we make — to our clients,
our shareholders, our employees and
our communities. We know that millions
of people around the world count on us
to safeguard their savings and
investments, and we take that
responsibility very seriously.
As always, I am grateful to our
shareholders for your trust in State
Street and to our employees for all they
do to help us earn that trust every day.
Sincerely,
Joseph L. Hooley
Chairman and Chief Executive Officer
March 16, 2018
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 Fee operating leverage reflects the rate of growth of total fee revenue less the rate of growth of expenses, relative to
the successive prior year period, as applicable.
3 Estimated pre-tax 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 US securities laws.
Refer to Item 1A of the Form 10-K included within this annual report for details.
2017
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 16, 2018, 9:00 a.m. at Corporate Headquarters
TRANSFER AGENT
Registered shareholders wishing to change name or address information on their shares, transfer ownership
of stock, deposit certificates, report lost certificates, consolidate accounts, authorize direct deposit of dividends, or
receive information on our dividend reinvestment plan should contact:
American Stock Transfer & Trust Co., LLC
Operations Center
6201 15th Avenue
Brooklyn, NY 11219
Phone: +1 866/714-7293
Website: www.astfinancial.com
E-mail: info@amstock.com
STOCK LISTINGS
State Street’s common stock is listed on the New York Stock Exchange under the ticker symbol STT.
SHAREHOLDER INFORMATION
For timely information about State Street’s consolidated financial results and other matters of interest to
shareholders, and to request copies of our news releases and financial reports by fax or mail, please visit our web-
site at:
www.statestreet.com/stockholder
or call +1 877/639-7788 [NEWS STT] toll-free in the United States and Canada, or +1 678/999-4577 outside
those countries. These services are available 24 hours a day, seven days a week.
For copies of our Forms 10-Q, quarterly earnings press releases, Forms 8-K or additional copies of this
Annual Report, please visit our website, call our shareholder services telephone line described above, or write to
Investor Relations at Corporate Headquarters. Copies are provided without charge.
Investors and analysts interested in additional financial information may contact our Investor Relations
department at Corporate Headquarters, telephone +1 617/664-3477.
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
Form 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2017
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
(Name of each exchange on which registered)
New York Stock Exchange
Depositary Shares, each representing a 1/4,000th ownership interest in a share
of Non-Cumulative Perpetual Preferred Stock, Series C, without par value per
share
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
New York Stock Exchange
New York Stock Exchange
New York Stock Exchange
New York Stock Exchange
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
Securities registered pursuant to Section 12(g) of the Act:
None
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, a smaller reporting company, or emerging growth
company. See the definitions of "large accelerated filer", "accelerated filer", "smaller reporting company", and "emerging growth company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer
Accelerated filer
Non-accelerated filer
Smaller reporting company
Emerging growth company
(Do not check if a smaller reporting company)
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial
accounting standards provided pursuant to Section 13(a) of the Exchange Act.
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).
The aggregate market value of the voting and non-voting common equity held by non-affiliates computed by reference to the per share price ($89.73) 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, 2017) was approximately $33.38 billion.
The number of shares of the registrant’s common stock outstanding as of January 31, 2018 was 367,653,199.
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 2018 Annual Meeting of Shareholders to be filed pursuant to Regulation 14A on or before April 30, 2018 (Part III).
STATE STREET CORPORATION
ANNUAL REPORT ON FORM 10-K FOR THE YEAR ENDED
December 31, 2017
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
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
Item 7A
Quantitative and Qualitative Disclosures About Market Risk
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
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
EXHIBIT INDEX
SIGNATURES
5
19
46
46
46
46
47
50
53
55
121
121
192
192
195
195
195
196
196
196
197
197
198
201
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 $33.12 trillion of
AUCA and $2.78 trillion of AUM as of December 31,
2017.
As of December 31, 2017, we had consolidated
total assets of $238.43 billion, consolidated total
deposits of $184.90 billion, consolidated total
shareholders' equity of $22.32 billion and 36,643
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) and the
liquidity coverage ratio, 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 available 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 | 5
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; depotbank services (a fund
oversight role created by regulation); 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; performance, risk
and compliance analytics; and financial data
management to support institutional investors.
We provide some or all of these integrated
products and services to clients in the U.S. and in
many other markets, including, among others,
Australia, Cayman Islands, France, Germany, Ireland,
Italy, Japan, Luxembourg and the U.K. As of
December 31, 2017, we serviced AUCA of
approximately $24.42 trillion in the Americas,
approximately $7.03 trillion in Europe and the Middle
East and approximately $1.67 trillion in the Asia-
Pacific region.
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. As of
December 31, 2017, SSGA had AUM of
approximately $2.78 trillion.
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, investment analytic
businesses, 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, technological
expertise, economies of scale, quality and scope of
services, 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 to expand our
relationships with existing clients, and to attract new
clients.
We are a systemically important financial
institution and are subject to extensive regulation and
supervision with respect to our operations and
activities. Not all of our competitors have similarly
been designated as systemically important nor are all
of them subject to the same degree of regulation as a
bank or financial holding company, and therefore
some of our competitors may not be subject to the
same limitations, requirements and standards with
respect to their operations and activities. See
"Supervision and Regulation" in this Item for more
information.
State Street Corporation | 6
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 bank holding companies and their 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, such as the Parent
Company, 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.
In response to the financial crisis, as well as
other factors such as technological and market
changes, both the scope of the laws and regulations
and the intensity of the supervision to which our
business is subject have increased in recent years.
Regulatory enforcement and fines have also
increased across the banking and financial services
sector. Many of these changes have occurred as a
result of the Dodd-Frank Act and its implementing
regulations, most of which are now in place. The
U.S. President has issued an executive order that
sets forth principles for the reform of the federal
financial regulatory framework, and the Republican
majority in Congress has also suggested an agenda
for financial regulatory reform. The implementation of
any such reforms, or if implemented whether they
would be beneficial to State Street, is uncertain.
Irrespective of any regulatory change, we expect that
our business will remain subject to extensive
regulation and supervision.
In addition, increased regulatory requirements
have been and are 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), the Alternative Investment Fund Managers
Directive (AIFMD), the Bank Recovery and
Resolution Directive (BRRD), the European Market
Infrastructure Regulation (EMIR), the Undertakings
for Collective Investment 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. General
Data Protection Regulation (GDPR).
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 | 7
Regulatory Capital Adequacy and Liquidity
Standards
Basel III Final Rule
We are subject to the Basel III framework in the
U.S. Provisions of the Basel III final rule become
effective under a transition timetable which began in
January 2014, with full implementation required
beginning on January 1, 2019. U.S. banking
regulators have also 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 in January 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 standardized risk weights for
certain on- and off-balance sheet exposures.
Among other things, the Basel III final rule does
the following:
• Adds 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 approaches 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 introduced 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 (the
Parent Company) in order to avoid any limitations on
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 a quarterly average of on-
balance sheet assets and does not include any off-
balance sheet exposures. The Parent Company is
required to include SLR disclosures, calculated on a
transitional basis, with its other Basel disclosures.
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 common equity tier 1 capital and 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.
State Street Corporation | 8
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 the capital conservation buffer and
countercyclical capital buffer described above in this
"Supervision and Regulation" section). Since 2015,
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, we are
subject to the Federal Reserve's final rule imposing a
capital surcharge on U.S. G-SIBs. The surcharge
requirements within the final rule began to phase-in
on January 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
Method 2 is identified as the binding
methodology for State Street and the applicable
surcharge on January 1, 2017 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 8.5% for common equity tier
1 capital, 10.0% for tier 1 risk-based capital and
12.0% for total risk-based capital, in order for State
Street to make capital distributions and discretionary
bonus payments without limitation. Further, State
Street, like all other U.S. G-SIBs, is also subject to a
2% leverage buffer under the Basel III final rule. If
State Street fails to exceed the 2% leverage buffer, 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 nor are all
of them subject to the same degree of regulation as a
bank or financial holding company, and therefore
some of our competitors may not be subject to the
same additional capital requirements.
Total Loss-Absorbing Capacity (TLAC)
In December 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 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.
Based upon current estimates, assumptions and
guidance, we project that compliance with TLAC and
LTD will result in increasing our outstanding LTD by
approximately $1.5 billion at December 31, 2018
compared to debt outstanding at December 31, 2017.
Our estimates regarding TLAC and LTD are subject
to additional regulatory guidance and interpretation.
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.
We are subject to the final rule issued by the
U.S. banking regulators implementing the BCBS' LCR
in the U.S. 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. We report LCR to the
Federal Reserve daily. As of December 31, 2017, our
LCR was in excess of the requirement of 100%. In
addition, we publicly disclose certain qualitative and
quantitative information about our LCR consistent
State Street Corporation | 9
with the requirements of the Federal Reserve's
December 2016 final rule.
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 NII and our NIM. 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. Deposits resulting from certain services
provided (“operational deposits”) are treated as more
resilient during periods of stress than other deposits.
As a result, if balances of operational deposits
increased relative to our total client deposit base, we
would expect to require less HQLA in order to
maintain our LCR. Conversely, if balances of
operational deposits decreased relative to our total
client deposit base, we would expect to require more
HQLA.
The BCBS has also 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.
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.
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 the Parent
Company and State Street Bank, if, in the Federal
Reserve’s opinion, the payment of a dividend would
constitute an unsafe or unsound practice in light of
the financial condition of the banking organization. All
of these policies and other requirements could affect
our ability to pay dividends and purchase our stock,
or require us to provide capital assistance to State
Street Bank and any other banking subsidiary.
In June 2017, we received the results of the
Federal Reserve’s review of our 2017 capital plan in
connection with its 2017 annual CCAR process. The
Federal Reserve did not object to the capital actions
we proposed in our 2017 capital plan and, in June
2017, our Board approved a new common stock
State Street Corporation | 10
purchase program authorizing the purchase of up to
$1.4 billion of our common stock from July 1, 2017
through June 30, 2018. As of December 31, 2017,
we purchased approximately 7.4 million shares of our
common stock at an average per-share cost of
$94.54 and an aggregate cost of approximately $700
million under this program. Our 2017 capital plan
included an increase, subject to approval by our
Board, to our quarterly stock dividend to $0.42 per
share from $0.38 per share, beginning in the third
quarter of 2017. Our common stock and other stock
dividends, including the declaration, timing and
amount thereof, remain subject to consideration and
approval by our Board of Directors at the relevant
times.
The Federal Reserve, under the Dodd-Frank
Act, requires us to conduct semi-annual State Street-
run stress tests and to publicly disclose the summary
results of our State Street-run stress tests under the
severely adverse economic scenario. In October
2017, we provided summary results of our 2017 mid-
cycle State Street-run stress tests on the “Investor
Relations” section of our corporate website. We are
also required to undergo 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 2018 annual State Street Bank-
run stress test to the Federal Reserve by April 5,
2018.
In January 2017, the Federal Reserve adopted
revisions to the capital plan and stress test
requirements that, 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 final rule also establishes a one-quarter “blackout
period” while the Federal Reserve is conducting
CCAR during which firms are not permitted to submit
de minimis exception notices or prior approval
requests for additional capital distributions. The
Federal Reserve is currently considering making
further changes to CCAR requirements, which may
change our minimum capital requirements.
The Volcker Rule
We are subject to the Volcker rule and
implementing regulations. 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 final Volcker rule regulations 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
As a SIFI, we are subject 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
Office of Financial Research within the U.S.
Department of the Treasury can gather data and
reports from financial institutions, including us.
Under the Federal Reserve's final rule
implementing certain enhanced prudential standards
for large bank holding companies, 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 standards in January 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
State Street Corporation | 11
Federal Reserve) and to a limit of 25% of tier 1 capital
for credit exposures to any other unaffiliated
counterparty.
In September 2017, the Federal Reserve issued
a final rule that imposes contractual requirements on
certain “qualified financial contracts” to which U.S. G-
SIBs, including us, and their subsidiaries are parties.
Under the final rule, certain qualified financial
contracts generally 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 they would be 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, among
other things, permit the exercise of any cross-default
right 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, subject to certain
creditor protections. There is a phased-in compliance
schedule based on counterparty type, with a first
compliance date of January 1, 2019.
In addition, the final rules create an early-
remediation regime to address financial distress or
material management weaknesses determined with
reference to four levels of early remediation, including
heightened supervisory review, initial remediation,
recovery, and resolution assessment, with specific
limitations and requirements tied to each level.
The systemic-risk regime also provides that, for
institutions deemed to pose a grave threat to U.S.
financial stability, the Federal Reserve, upon an
FSOC vote, must limit that institution’s ability to
merge, restrict its ability to offer financial products,
require it to terminate activities, impose conditions on
activities or, as a last resort, require it to dispose of
assets. Upon a grave-threat determination by the
FSOC, the Federal Reserve must issue rules that
require financial institutions subject to the systemic-
risk regime to maintain a debt-to-equity ratio of no
more than 15 to 1 if the FSOC considers it necessary
to mitigate the risk 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 rapid and orderly
resolution 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
the insolvency of State Street, 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.
We submitted our 2017 resolution plan
describing our preferred resolution strategy to the
Federal Reserve and FDIC on June 30, 2017. On
December 19, 2017, the Federal Reserve and FDIC
announced that they had completed their review and
had not identified deficiencies or specific
shortcomings. Nonetheless, the agencies identified
four common areas in which more work may need to
be done by all firms, including State Street, to
continue to improve resolvability: intra-group liquidity;
internal loss-absorbing capacity; derivatives; and
payment, clearing and settlement activities. State
Street’s next resolution plan is due July 1, 2019.
In the event of material financial distress or
failure, our preferred resolution strategy is the SPOE
Strategy. The SPOE Strategy provides that prior to
the bankruptcy of the Parent Company and pursuant
to a support agreement among the Parent Company,
SSIF (a direct subsidiary of the Parent Company),
State Street’s Beneficiary Entities (as defined below)
and certain other State Street entities, SSIF is
obligated, up to its available resources, to recapitalize
and/or provide liquidity to State Street Bank and the
other State Street entities benefiting from such capital
and/or liquidity support (collectively with State Street
Bank, “Beneficiary Entities”), in amounts designed to
prevent the Beneficiary Entities from themselves
entering into resolution proceedings. Following the
recapitalization of, or provision of liquidity to the
Beneficiary Entities, the Parent Company would enter
into a bankruptcy proceeding under the U.S.
Bankruptcy Code. The Beneficiary Entities and other
State Street subsidiaries would be transferred to a
newly organized holding company held by a
reorganization trust for the benefit of the Parent
Company’s claimants.
Under the support agreement, the Parent
Company has pre-funded SSIF by contributing certain
of its assets (primarily its liquid assets, cash deposits,
investments in intercompany debt, investments in
marketable securities and other cash and non-cash
equivalent investments) to SSIF contemporaneous
with entering into the support agreement and will
continue to contribute such assets, to the extent
available, on an on-going basis. In consideration for
these contributions, SSIF has agreed in the support
agreement to provide capital and liquidity support to
the Parent Company and all of the Beneficiary
Entities in accordance with the Parent Company’s
capital and liquidity policies. Under the support
agreement, the Parent Company is only permitted to
State Street Corporation | 12
retain cash needed to meet its upcoming obligations
and to fund expected expenses during a potential
bankruptcy proceeding. SSIF has provided the
Parent Company with a committed credit line and
issued (and may issue) one or more promissory notes
to the Parent Company (the "Parent Company
Funding Notes") that together are intended to allow
the Parent Company to continue to meet its
obligations throughout the period prior to the
occurrence of a "Recapitalization Event" (as defined
below). The support agreement does not
contemplate that SSIF is obligated to maintain any
specific level of resources and SSIF may not have
sufficient resources to implement the SPOE Strategy.
In the event a Recapitalization Event occurs, the
obligations outstanding under the Parent Company
Funding Notes would automatically convert into or be
exchanged for capital contributed to SSIF. The
obligations of the Parent Company and SSIF under
the support agreement are secured through a security
agreement that grants a lien on the assets that the
Parent Company and SSIF would use to fulfill their
obligations under the support agreement to the
Beneficiary Entities. SSIF is a distinct legal entity
separate from the Parent Company and the Parent
Company’s other affiliates.
In accordance with its policies, State Street is
required to monitor, on an ongoing basis, the capital
and liquidity needs of State Street Bank and the other
Beneficiary Entities. To support this process, State
Street has established a trigger framework that
identifies key actions that would need to be taken or
decisions that would need to be made if certain
events tied to State Street’s financial condition occur.
In the event that State Street experiences material
financial distress, the support agreement requires
State Street to model and calculate certain capital
and liquidity triggers on a regular basis to determine
whether or not the Parent Company should
commence preparations for a bankruptcy filing and
whether or not a Recapitalization Event has occurred.
Upon the occurrence of a Recapitalization
Event: (1) SSIF would not be authorized to provide
any further liquidity to the Parent Company; (2) the
Parent Company would be required to contribute to
SSIF any remaining assets it is required to contribute
to SSIF under the support agreement (which
specifically exclude amounts designated to fund
expected expenses during a potential bankruptcy
proceeding); (3) SSIF would be required to provide
capital and liquidity support to the Beneficiary Entities
to support such entities’ continued operation to the
extent of its available resources and consistent with
the support agreement; and (4) the Parent Company
would be expected to commence Chapter 11
proceedings under the U.S. Bankruptcy Code. No
person or entity, other than a party to the support
agreement, should rely, including in evaluating any
State Street entity from a creditor's perspective or
determining whether to enter into a contractual
relationship with any State Street entity, on any State
Street affiliate being or remaining a Beneficiary Entity
or receiving capital or liquidity support pursuant to the
support agreement.
A “Recapitalization Event” is defined under the
support agreement as the earlier occurrence of one
or more capital and liquidity thresholds being
breached or the authorization by the Parent
Company's Board of Directors for the Parent
Company to commence bankruptcy proceedings.
These thresholds are set at levels intended to provide
for the availability of sufficient capital and liquidity to
enable an orderly resolution without extraordinary
government support. The SPOE 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. An expected effect of the SPOE Strategy
and applicable TLAC regulatory requirements is that
State Street’s losses will be imposed on the Parent
Company shareholders and the holders of long-term
debt and other forms of TLAC securities currently
outstanding or issued in the future 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 of their
depositors or creditors, or before U.S. taxpayers are
put at risk.
There can be no assurance that credit rating
agencies, in response to our resolution plan or the
support agreement, will not downgrade, place on
negative watch or change their outlook on our debt
credit ratings, generally or on specific debt securities.
Any such downgrade, placement on negative watch
or change in outlook could adversely affect our cost
of borrowing, limit our access to the capital markets
or result in restrictive covenants in future debt
agreements and could also adversely impact the
trading prices, or the liquidity, of our outstanding debt
securities.
State Street Bank is also required to submit
periodically to the FDIC a plan for resolution in the
event of its failure, referred to as an IDI plan. Under
the IDI plan rule, submission of the IDI plan is
scheduled for July 1, 2018.
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 the orderly liquidation authority. The
U.S. Treasury Secretary, in consultation with the U.S.
President, must first make certain extraordinary
State Street Corporation | 13
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 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 the receiver of State Street Bank, 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 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 imposed a
comprehensive regulatory structure on the OTC
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
largely implemented key provisions of Title VII,
although certain final regulations have only been in
place a short period of time and others have not been
finalized. 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. The CFTC has 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
The SEC has 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 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 introduced
in Europe in 2018 and 2019. The SEC's 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.
State Street Corporation | 14
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.
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. Derivatives, securities borrowing and
securities lending transactions between State Street
Bank and its affiliates became subject to these
restrictions pursuant to the Dodd-Frank Act. 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 by a bank with affiliates be on terms and
under circumstances, including credit standards, that
are substantially the same, or at least as favorable to
the bank, 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. Our subsidiary, State Street Global Advisors
Asia Limited (SSGA Asia), a Hong Kong incorporated
company, is registered as an investment adviser with
the SEC and additionally is licensed by the Securities
and Futures Commission of Hong Kong to perform a
variety of activities, including asset management.
SSGA Asia also holds permits as a qualified foreign
institutional Investor (QFII) and a renminbi qualified
foreign institutional investor (RQFII), approved by the
Securities Regulatory Commission in the People’s
Republic of China, and in Korea is registered with the
Financial Services Commission as a cross-border
investment advisory company and a cross-border
discretionary investment management company. In
addition, a major portion of our investment
management activities are conducted by State Street
Global Advisors Trust Company, which is a subsidiary
of State Street Bank and a Massachusetts chartered
trust company subject to the supervision of the
Massachusetts Commissioner of Banks and the
Federal Reserve with respect to these activities.
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.
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. DOL.
State Street Corporation | 15
State Street has two subsidiaries that operate as
a U.S. broker/dealer and are registered as such with
the SEC, are subject to regulation by the SEC
(including the SEC's net capital rule) and are
members of the Financial Industry Regulatory
Authority, a self-regulatory organization. State Street
Global Advisors Funds Distributors LLC, (SSGAFD)
operates as a limited purpose broker/dealer
distributing and related marketing activities for
SSGA's U.S. mutual funds and ETFs. SSGAFD also
acts as a placement agent for certain private funds
advised by SSGA FM. Our other U.S. broker/dealer
is State Street Global Markets LLC (SSGM LLC)
which provides agency execution services.
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, and is 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.
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.
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
is also subject to direct supervision by the European
Central Bank under the ECB Single Supervisory
Mechanism; the Securities and Futures Commission
regulates our asset management activities in Hong
Kong; 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, costs and risks 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 applicable AML laws and
regulations. AML laws and regulations applicable to
our operations may be more stringent than similar
requirements applicable to our non-regulated
competitors or financial institutions principally
operating in other jurisdictions. 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
State Street Corporation | 16
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 agreement, we
have been required to, among other things,
implement improvements to our compliance programs
and retain an independent firm to conduct a review of
account and transaction activity to evaluate whether
any suspicious activity was not previously reported. 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 FDIC is required to determine whether and
to what extent adjustments to the assessment base
are appropriate for “custody banks" that satisfy
specified institutional eligibility criteria. The FDIC has
concluded that certain liquid assets could be
excluded from the deposit insurance assessment
base of custody banks. 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.
In March 2016, the FDIC issued a final rule that
imposes on IDIs with at least $10 billion in assets,
which includes State Street Bank, 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 will occur in 2018. The surcharge
took effect for the assessment period beginning July
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 a 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. This means
that we have a statutory obligation 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. branches and 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.
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
State Street Corporation | 17
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 income 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 | 18
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, cost
savings and transformation initiatives, investment
portfolio performance, dividend and stock purchase
programs, outcomes of legal proceedings, market
growth, acquisitions, joint ventures and divestitures,
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 of the counterparties with
which we or our clients do business and to which
we have investment, credit or financial
exposures that our clients have as a result of our
acts as their agent, including an asset manager;
increases in the volatility of, or declines in the
level of, our NII, changes in the composition or
valuation of the assets recorded in our
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consolidated statement of condition (and our
ability to measure the fair value of investment
securities) and changes in 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;
the liquidity of the assets on our balance sheet
and changes or volatility in the sources of such
funding, particularly the deposits of our clients;
and demands upon our liquidity, including the
liquidity demands and 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 U.S. 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 the
level and pricing 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 the regulatory
framework applicable to our operations (as well
as changes to that framework), including
implementation or modification of the Dodd-
Frank Act and related stress testing and
resolution planning requirements,
implementation of international standards
applicable to financial institutions, such as those
proposed by the Basel Committee and
European legislation (such as the AIFMD,
UCITS, the Money Market Funds Regulation
and MiFID II / MiFIR); among other
consequences, these regulatory changes impact
the levels of regulatory capital and liquidity we
must maintain, acceptable levels of credit
exposure to third parties, margin requirements
State Street Corporation | 19
applicable to derivatives, restrictions on banking
and financial activities and the manner in which
we structure and implement our global
operations and servicing relationships. 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
changes in governmental enforcement
approaches to perceived failures to comply with
regulatory or legal obligations;
adverse changes in the regulatory ratios that we
are, or will be, required to meet, whether arising
under the Dodd-Frank Act or implementation of
international standards applicable to financial
institutions, such as those proposed by the
Basel Committee, 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 or liquidity 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
financial markets or economic growth in Europe
or potential changes in bi-lateral and multi-
lateral trade agreements proposed by the U.S.;
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our ability to create cost efficiencies through
changes in our operational processes and to
further digitize our processes and interfaces with
our clients, 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 associated with the
appointment of a monitor under the deferred
prosecution agreement with the DOJ and
compliance consultant appointed under a
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 findings or amounts we may
be required to reimburse clients, as well as
potential consequences of such review,
including damage to our client relationships or
our reputation 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 have diverse investment activities,
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 AUCA or our AUM 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 changes its investment approach
or otherwise re-directs assets to lower- or
higher-fee asset classes;
State Street Corporation | 20
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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, the possibility of significant
reductions in the liquidity or valuation of assets
underlying those pools and the potential that
clients will seek to hold us liable for such losses;
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;
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
financial, operational and product innovation
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;
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 in accounting standards and practices;
and
the impact of the U.S. tax legislation enacted in
2017, 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 | 21
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, 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.
This was observed during the financial crisis,
when economic, market, political and other factors
contributed to the perception of many financial
institutions and sovereign issuers as being less credit
worthy. This led to credit downgrades of numerous
large U.S. and non-U.S. financial institutions and
several sovereign issuers (which exposure 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 sovereigns). These or
other factors could again contribute to similar
consequences 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. We also provide
committed lines of credit to support such
activity. 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
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
State Street Corporation | 22
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.
• 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, such
as the E.U.'s UCITS and AIFM directives,
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 extension of credit and
consequent 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 or with
respect to clients protected by sovereign
immunity. We are exposed to risk of short-
term credit or overdraft of our clients in
connection with the process to facilitate
settlement of trades and related foreign
exchange activities, particularly when
contractual settlement has been agreed with
our clients. The occurrence of overdrafts at
peak volatility could create significant credit
exposure to our clients depending upon the
value of such clients' collateral at the time.
• 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.
We also lend and borrow securities as
riskless principal, and in connection with
those transactions receive a security interest
in securities from the borrowers of securities
and advances as collateral to securities
lenders. 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 or collateral changes, additional
collateral is provided by the borrower or
collateral is returned to the borrower. In
addition, our agency securities lending 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.
State Street Corporation | 23
During the financial crisis, the book value of
obligations under many of these contracts
exceeded the market value of the underlying
portfolio holdings. Concerns regarding the
portfolio of investments protected by such
contracts, or regarding the investment
manager overseeing such an investment
option, may result in redemption demands
from stable value products covered by
benefit-responsive contracts at a time when
the portfolio's market value is less than its
book value, potentially exposing us to risk of
loss.
• 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, both in the U.S. and in
Europe. 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 this portfolio grows and
becomes more seasoned, our allowance for
loan losses related to these loans may
increase through additional provisions for
credit losses.
• 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.
Under evolving regulatory restrictions on credit
exposure we may be required to limit our exposures
to specific issuers or counterparties or groups of
counterparties, 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 and
counterparties, including issuers and counterparties
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 factors, several of our activities are particularly
sensitive to them, including our currency trading
business and our securities finance 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 41% of our total assets as of
December 31, 2017. The gross interest income
associated with our investment portfolio represented
approximately 15% of our total gross revenue for the
year ended December 31, 2017 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 (including risk of default), 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 U.S., the
continued low interest-rate environment that has
persisted since the financial crisis began in mid-2007
limits our ability to achieve a NIM consistent with our
historical averages. Any further increases in interest
rates in the U.S. have the potential to improve NII and
NIM over time. However, any such improvement
could be mitigated due to a greater disparity between
interest rates in the U.S. and international markets,
State Street Corporation | 24
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, which generally generate lower rates of
return than other investment assets. This has
resulted in increased levels of high quality liquid
assets as a percentage of our investment portfolio
and an associated negative impact on our NII and our
NIM. As a result of this we may not be able to attain
our historical levels of NII and NIM. 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 10% of our total
assets as of December 31, 2017), 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, such as those which
represent a majority of our investment portfolio, 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 MBS,
commercial MBS and other ABS, 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. MBS and
ABS with exposures to European countries,
whose sovereign-debt markets have
experienced increased stress at times 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 OTTI.
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
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
State Street Corporation | 25
policy, including negative interest rates in
some jurisdictions, with associated negative
effects on our investment portfolio
reinvestment, NII and NIM. The effect on our
NII has been exacerbated by the effects in
recent fiscal years, but not in 2017, of the
strong U.S. dollar relative to other currencies,
particularly the Euro. If European interest
rates remain low or decrease and the U.S.
dollar strengthens relative to the Euro, the
negative effects on our NII likely will continue
or increase. The overall level of NII 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 NII. 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 NII and NIM 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 and ECB,
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 NII and NIM.
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 NII. 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 investor services businesses; 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 NII but have
adversely affected our NIM.
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
State Street Corporation | 26
economic and regulatory objectives.
testing.
The Parent Company is a non-operating holding
company and generally maintains only limited cash
and other liquid resources at any time primarily to
meet anticipated near-term obligations. To effectively
manage our liquidity we routinely transfer assets
among affiliated entities, subsidiaries and branches.
Internal or external factors, such as regulatory
requirements and standards, including resolution
planning, 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 NII,
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
regulatory capital and liquidity standards that we
must meet or in the event our capital plan or post-
stress capital ratios are determined to be
insufficient as a result of regulatory capital stress
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 requirements,
such as the SLR, LCR and the proposed NSFR.
For example, the specification of the various
elements of the NSFR in the final rule could have a
material effect on our business activities, including
the management and composition of our investment
securities portfolio and our ability to extend credit
through committed facilities, loans to our clients or
our principal securities lending activities. In addition,
further capital and liquidity requirements are under
consideration by U.S. and international banking
regulators. Any of these rules could have a material
effect on our capital and liquidity planning and related
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 these rules, 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, we are subject to the Federal
Reserve's final rules on the implementation of capital
surcharges for U.S. G-SIBs, and on TLAC, LTD and
clean holding company requirements for U.S. G-SIBs
which we refer to as the "TLAC final rule". For
additional information on these requirements, refer to
the “Regulatory Capital Adequacy and Liquidity
State Street Corporation | 27
Standards” section under “Supervision and
Regulation” included under Item 1, Business. of this
Form 10-K.
Not all of our competitors have similarly been
designated as systemically important nor are all of
them subject to the same degree of regulation as a
bank or financial holding company, and therefore
some of our competitors are not subject to the same
additional capital requirements.
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 (CCAR) process. That process,
the severity and other characteristics of which may
evolve from year-to-year, is used by the Federal
Reserve to evaluate our management of capital, the
adequacy of our regulatory capital and the
requirement for us to maintain capital above our
minimum regulatory capital requirements under
stressed economic conditions. The results of the
CCAR process are difficult to predict due, among
other things, to the Federal Reserve's use of
proprietary stress models that differ from our internal
models. The amounts of the planned capital actions
in our capital plan in any year, including stock
purchases and dividends, may be substantially
reduced from the amounts included in prior capital
plans. These reductions may reflect changes in one
or more different factors, including but not limited to
our business prospects and related capital needs, our
capital position, proposed acquisitions or other uses
of capital, the models used in our capital planning
process, the supervisory models used by the Federal
Reserve to stress our balance sheet, the Federal
Reserve’s hypothetical economic scenarios for the
CCAR process, the Federal Reserve’s CCAR
instructions and the Federal Reserve’s supervisory
expectations for the capital planning process. The
Federal Reserve may object to our capital plan, or we
may decide that we need to adjust our capital plan to
avoid an objection by the Federal Reserve, potentially
requiring us, as applicable, 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
uses of capital could result in a change in our capital
plan and its associated capital actions, and may
require us to resubmit our 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 in the future we may be subject to similar reviews
and testing by other regulators.
Our implementation of 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 capital and liquidity
requirements under 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
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.
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 2017 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 AUCA
and our AUM, 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
State Street Corporation | 28
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.
While the European economy made some
progress towards recovery during 2017, concerns
remain with regard to sovereign debt sustainability,
interdependencies among financial institutions and
sovereigns, the impacts of the British exit or potential
other exits from the European Union, the planned
unwinding of European Central Bank quantitative
easing measures and political and other risks, such
as relating to populism, refugee migration or terrorist
threats, in one or more European nations. In
addition, both divergence between the pace of
monetary tightening in the U.S. and Europe and the
recent strength of the Euro have led to increased
uncertainty around the sustainability of the economic
progress made in 2017 in Europe. Given the scope
of our European operations, economic or market
uncertainty, volatility, illiquidity or disruption resulting
from these and related factors 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 in the wake of geopolitical
disruptions and 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
affect on our business, as well as the businesses of
our clients and our significant counterparties and
could 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. These risks could
be compounded by tighter monetary conditions,
restrictions on free trade and political uncertainty in
the U.S. and internationally.
Market disruptions can adversely affect our
consolidated results of operations if the value of
AUCA or AUM 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 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. 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.
State Street Corporation | 29
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. 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 and our efforts to maintain
regulatory compliance.
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, including regulatory
considerations such as resolution planning. 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
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 inside 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
State Street Corporation | 30
foreign regulatory agencies and officials.
with respect to resolution planning.
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 to 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 and some of our non-banking
subsidiaries may also engage in a broader range of
activities considered to be “financial in nature.”
Financial holding company status may be denied if
State Street and its banking subsidiaries do not
remain well capitalized and well managed or fail 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.
The U.S. President has issued an executive
order that sets forth principles for the reform of the
federal financial regulatory framework, and the
Republican majority in Congress has also suggested
an agenda for financial regulatory reform. It is too
early to assess whether there will be any major
changes in the regulatory environment or a
rebalancing of the post financial crisis framework and
what the impact will be on our 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. We expect that our
business will remain subject to extensive regulation
and supervision. 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.
Resolution Planning
State Street, like other bank holding companies
with total consolidated assets of $50 billion or more,
periodically submits a plan for rapid and orderly
resolution 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.
Significant management attention and resources are
required in an effort to meet regulatory expectations
In the event of material financial distress or
failure, our preferred resolution strategy is the SPOE
Strategy. Our resolution plan, including our
implementation of the SPOE strategy with a secured
support agreement, involves important risks, including
that: (1) the SPOE 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; (2) an expected effect of the SPOE Strategy,
together with applicable TLAC regulatory
requirements, is that State Street’s losses will be
imposed on Parent Company shareholders and the
holders of long-term debt and other forms of TLAC
securities currently outstanding or issued in the future
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
certain of the Parent Company’s operating
subsidiaries or any of their depositors or creditors or
before U.S. taxpayers are put at risk; (3) 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; and (4) there can be no
assurance that credit rating agencies, in response to
our resolution plan or the support agreement, will not
downgrade, place on negative watch or change their
outlook on our debt credit ratings, generally or on
specific debt securities. Additional information about
the SPOE Strategy, including related risks, is
provided under "Resolution Planning" included under
Item 1, Business, of this Form 10-K.
Systemic Importance
Our qualification 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 subjects 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
State Street Corporation | 31
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 across 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. Geopolitical events such as
the U.K.’s planned exit from the European Union also
have the potential to increase the complexity and cost
of regulatory compliance.
In addition to U.S. regulatory initiatives we are
further affected by non-U.S. regulatory initiatives,
including, but not limited to, the AIFMD, the BRRD,
the EMIR, GDPR, the UCITS directives, the Money
Market Funds Regulation, MiFID II and MiFIR and the
proposed E.U. risk reduction package. Recent,
proposed or potential 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
(including the exchange of margin) 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
Domestic and international regulatory reform
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, markets 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
State Street Corporation | 32
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
government 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 similar
information from other industry participants, market
volatility measures, interest rates and spreads, asset
valuations, credit exposures and the creditworthiness
of our counterparties. These calculations also involve
the use of quantitative formulae, statistical models,
historical correlations and significant assumptions.
We refer to the data, formulae, models, correlations
and assumptions, as well as our related internal
processes, as our “advanced systems.” While our
advanced systems are generally quantitative in
nature, significant components involve the exercise of
judgment 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. Collectively,
they represent only our estimate of associated risk.
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.
We are subject to enhanced external oversight as
a result of certain agreements entered into in
connection with the resolution of prior regulatory
or governmental matters.
In June 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 agreement, we
have been 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 to evaluate
whether any suspicious activity was not previously
reported.
Separately, in connection with the resolution of
certain proceedings relating to our having charged six
clients of our U.K. transition management business
during 2010 and 2011 amounts in excess of the
contractual terms, in January 2017, we entered into a
deferred prosecution agreement with the Department
of Justice and the United States Attorney for the
District of Massachusetts under which we agreed to
State Street Corporation | 33
retain an independent compliance and ethics monitor
for a term of three years (subject to extension) who
will, among other things, review and monitor the
effectiveness of our compliance controls and
business ethics and make related recommendations,
and in September 2017, we entered into a settlement
agreement with the SEC that also requires us to
retain an independent ethics and compliance
consultant for a one year period. We have retained a
monitor who is fulfilling our obligations under both the
deferred prosecution agreement and the SEC
settlement. Under the deferred prosecution
agreement we also have a heightened obligation
promptly to report issues involving potential or alleged
fraudulent activities to the Department of Justice.
As a result of the enhanced inspections and
monitoring activities to which we are subject under
these agreements, governmental authorities may
identify areas in which we may need 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.
These actions may be in addition to remedial
measures required by the Federal Reserve and other
financial regulators following examinations as a result
of increased prudential expectations regarding our
compliance programs, culture and risk management.
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. Moreover, the identification of new or
additional facts and circumstances suggesting
inappropriate or non-compliant conduct, whether
identified by the monitor or a regulatory authority, in
the course of an inspection, or independently by us
could lead to new governmental proceedings or the
re-opening of matters that were previously resolved.
The presence of the monitor, as well as governmental
programs rewarding whistleblowing, may also
increase the instances of current or former
employees alleging that certain practices are
inconsistent with our legal or regulatory obligations.
Our businesses may be adversely affected by
government enforcement and litigation.
The businesses in which we operate are highly-
regulated and subject to extensive external scrutiny
that may be directed generally to participants in the
businesses or markets in which we are involved or
may be specifically directed at us, including as a
result of whistleblower and qui tam claims. In the
course of our business, we are frequently subject to
various regulatory, governmental and law
enforcement inquiries, investigative demands and
subpoenas, and from time to time, our clients, or the
government on its own behalf or on behalf of our
clients or others, make claims and take legal action
relating to, among other things, our performance of
our fiduciary, contractual or regulatory responsibilities.
Often, the announcement of any such matters, or of
any settlement of a claim or action, whether it
involves us or others in our industry, may spur the
initiation of similar claims by other clients or
governmental parties. Regulatory authorities have,
and are likely to continue to, initiate cross industry
reviews when a material issue is identified at a
financial institution. Such inquiries involve costs and
management time and may lead to proceedings
relating to our own activities.
Regardless of the outcome of any governmental
enforcement or litigation matter, responding to such
matters is time-consuming and expensive and can
divert the attention of senior management.
Governmental enforcement and litigation matters can
involve claims for disgorgement, demands for
substantial monetary damages, the imposition of civil
or criminal penalties, and the imposition of remedial
sanctions or other required changes in our business
practices, any of which could result in increased
expenses, loss of client demand for our products or
services, or harm to our reputation. 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. For
example, in connection with the resolution of the U.K.
transition management matter, we agreed to pay a
fine of £22.9 million (approximately $37.8 million) to
the FCA in 2014 and fines of $32.3 million to each of
the Department of Justice and the SEC in 2017. As a
further example, we paid an aggregate of $575 million
in 2016 to resolve a series of investigations and
governmental and private claims alleging that our
indirect foreign exchange rates prior to 2008 were not
adequately disclosed or were otherwise improper.
These matters have also resulted in regulatory focus
on the manner in which we charge clients and related
disclosures. This focus may lead to increased and
prolonged governmental inquiries and client, qui tam
and whistleblower claims associated with the amount
and disclosure of compensation we receive for our
products and services.
Moreover, U.S and certain international
governmental authorities have increasingly brought
criminal actions against financial institutions, and
State Street Corporation | 34
criminal prosecutors have increasingly sought and
obtained criminal guilty pleas, deferred prosecution
agreements or other criminal sanctions from financial
institutions. For example, in 2017 we entered into a
deferred prosecution agreement with the U.S.
Department of Justice in connection with the
resolution of the U.K transition management matter,
and such agreement could increase the likelihood
that governmental authorities will seek criminal
sanctions against us in pending or future legal
proceedings. See “We are subject to various legal
proceedings relating to the manner in which we have
invoiced certain expenses, and the outcome of such
proceedings could materially adversely affect our
results of operations or harm our business or
reputation.”
In many cases, we are required or may choose
to 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
report a matter, we may nonetheless experience
regulatory fines, liabilities to clients, harm to our
reputation or other adverse effects. 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.
For more information about current
contingencies relating to legal proceedings, see Note
13 to the consolidated financial statements included
under Item 8, Financial Statements and
Supplementary Data, of this Form 10-K. 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.
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, involves the discretion of governmental
authorities in seeking sanctions or negotiated
resolution or is at a preliminary stage. We may be
unable to accurately estimate our exposure to the
risks of legal and regulatory contingencies when we
record reserves for probable and estimable loss
contingencies. As a result, any reserves we establish
may not be sufficient to cover our actual financial
exposure. Similarly, our estimates of the aggregate
range of reasonably possible loss for legal and
regulatory contingencies are based upon then-
available information and are subject to significant
judgment and a variety of assumptions and known
and unknown uncertainties. The matters underlying
the estimated range will change from time to time,
and actual results may vary significantly from the
estimate at any time.
We are subject to various legal proceedings
relating to the manner in which we have invoiced
certain expenses, and the outcome of such
proceedings could materially adversely affect our
results of operations, or harm our business or
reputation.
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 the cumulative total of our payments
to customers for these matters to be at least $360
million, in connection with that review, which is
ongoing. We are implementing enhancements to our
billing processes, see “Our efforts to improve our
billing processes and practices are ongoing and are
likely to result in the identification of additional billing
errors.” We are reviewing the conduct of our
employees with respect to billing matters and have
taken steps to address conduct with respect to such
matters that we believe is inconsistent with our
standards, including, in some cases, termination of
employment. We are also evaluating other billing
practices relating to our Investment Servicing clients.
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. In addition, in
March 2017, a purported class action was
commenced against us alleging that our invoicing
practices violated duties owed to retirement plan
customers under ERISA.
We are also responding to requests for
information from, and are cooperating with
investigations by, governmental and regulatory
authorities on these matters, including the civil and
criminal divisions of the DOJ, the SEC, the DOL, the
Massachusetts Attorney General, and the New
Hampshire Bureau of Securities Regulation, which
could result in significant fines or other sanctions, civil
and criminal, against us. If these governmental or
State Street Corporation | 35
regulatory authorities were to conclude that all or a
portion of the billing error merited civil or criminal
sanctions, any fine or other penalty could be a
significant percentage or a multiple of the portion of
the overcharging serving as the basis of such a claim
or of the full amount of the overcharging. The
governmental and regulatory authorities have
significant discretion in civil and criminal matters as to
the fines and other penalties they seek to impose.
The severity of such fines or other penalties could
take into account factors such as the amount and
duration of our incorrect invoicing, the government’s
or regulator's assessment of the conduct of our
employees, as well as prior conduct such as that
which resulted in our January 2017 deferred
prosecution agreement in connection with U.K.
transition management matter and our recent
settlement of civil claims regarding our indirect foreign
exchange business.
The outcome of any of these proceedings and,
in particular, any criminal sanction could materially
adversely affect our results of operations and could
have significant collateral consequences for our
business and reputation.
Our efforts to improve our billing processes and
practices are ongoing and are likely to result in
the identification of additional billing errors.
In 2015, we determined that we had made errors
in billing our asset servicing customers, principally in
the United States. In 2016, we began the process of
remediating these errors, improving our billing
processes and controls in the asset servicing
business and other businesses, and testing these
improved billing processes and controls. As a result
of such review, we may modify, enhance, and, where
necessary, replace our existing global billing
processes and implement and test controls for the
new system. The objectives of this billing
transformation process are to obtain greater billing
accuracy and consistency across business lines. Our
goal is for this billing transformation process to be
completed in 2019, but there can be no assurance as
to when we will complete this process or that it will
allow us to meet the objectives we have set for it.
Because of the scale of our business, implementing
enhanced billing controls will be expensive and time
consuming, may not succeed in identifying and
remediating all weaknesses and inefficiencies in our
billing processes and cannot be implemented in all
our business units concurrently. Accordingly, the
costs of the billing transformation process, and the
costs to remediate billing errors which may be
discovered in that process, would likely be incurred
over a period that we are now unable accurately to
determine. As we work through this process, we
have discovered and may continue to discover areas
where we believe our billing processes need
improvement, where we believe we have made billing
errors with respect to particular customers and
categories of fees and expenses, and where we
believe billing arrangements between ourselves and
particular customers should be clarified. Such
discoveries may lead to increased expense and
decreased revenues, the need to remediate prior
billing errors, government investigations, or litigation
that may materially impact our business, financial
results and 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 assets
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
AUCA or our AUM, as applicable, in the relevant
period. Loss of all or a portion of the servicing of a
client's assets can occur for a variety of reasons,
including client decision or diversification of service
providers or acquisition or restructuring activity
affecting a client. For example, as previously
reported, as a result of a decision to diversify
providers, one of our large clients will move a portion
of its assets, largely common trust funds, currently
with State Street to another provider. The transition
will principally occur in 2018 and beyond and
represents approximately $1 trillion in assets with
respect to which we will no longer derive revenue
post-transition. Our AUM or AUCA are also affected
by decisions by institutional owners to favor or
disfavor certain investment instruments or categories.
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 the U.S.), 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. For example, in 2017 several industry-
wide trends continued to impact AUCA and AUM
asset levels. Those trends included continued client
redemptions out of hedge funds, as to which fees are
generally higher, as well as strong retail flows from
State Street Corporation | 36
mutual funds into ETFs, as to which fees are
generally lower. As our fee revenue is largely reliant
on the levels of our AUCA and AUM, these changes
in levels of differing asset types could have a
corresponding significant effect on our results of
operations in the relevant period. 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 lines of business. 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 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 to
enhance existing and develop new information
technology and other systems, migrate from existing
systems and other infrastructure and to address
staffing needs, plans for entering or exiting business
lines or geographic markets and plans for acquiring or
disposing of businesses.
In late 2015, we announced 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.
We anticipate we will undertake additional strategic
initiatives of varying sizes, some of which may be
material. Operational process and information
technology transformations, such as Beacon and
future strategic initiatives we may undertake, entail
significant risks. The program, and any future
strategic initiatives we implement, may prove to be
inadequate to achieve its objectives, may not be
responsive to industry, technological 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 or meet
client expectations. In addition, our efforts to manage
expenses may be matched or exceeded by our
competitors. Any failure to implement Beacon or any
other strategic initiative we may undertake, 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 many initiatives include
investment in systems integration and new
technologies 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. In addition, the
relocation or expansion of servicing activities and
other operations to different geographic regions
requires that client, regulatory and other third party
data use, storage and security challenges, as well as
other regulatory compliance other considerations, be
resolved. As a result, we may not achieve some or all
of the cost savings or other benefits anticipated by
the relevant strategic initiative and may experience
unanticipated challenges from clients, regulators or
other parties or reputational harm. In addition, other
systems development initiatives, which are not
included in 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 Beacon and
any other strategic initiatives, 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.
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 manage expenses by migrating certain
business processes and business support functions
to lower-cost geographic locations, such as India,
State Street Corporation | 37
Poland and China, and by outsourcing to vendors
and joint ventures. We may accomplish this shift by
establishing or increasing our level of activity at
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 and/or business resiliency within these
operations during and after transition. These
migrations also involve 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. Diversification of our
geographic footprint also exposes us 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 and
business resiliency. 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, including with respect to data use, storage
and security. 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 U.S. or other jurisdictions impose tax and
other measures which seek to discourage the use of
lower cost jurisdictions.
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
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 and SEC settlement, these
effects have the potential to continue. The client
invoicing matter we announced in December 2015
has the potential to result in similar effects. For
additional information about the settlement, see the
risk factor "Our businesses may be adversely affected
by government enforcement and litigation".
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
State Street Corporation | 38
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,
which could have a material adverse effect on our
consolidated results of operations.
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
proceedings, subject us to fines, penalties or
judgments or harm our reputation.
State Street Corporation | 39
We may incur losses arising from our
investments in sponsored investment funds,
which could be material to our consolidated
results of operations in the periods incurred.
In the normal course of business, we manage
various types of sponsored investment funds through
SSGA. The services we provide to these sponsored
investment funds generate management fee revenue,
as well as servicing fees from our other businesses.
From time to time, we may invest 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 U.S. 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
U.S. 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. If in
the future we were 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, we could be exposed 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
State Street Corporation | 40
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.
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. 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 some cases, 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 and model 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, control and model
validation requirements, which 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 and are compliant with applicable regulations.
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, natural disasters,
cyber-attacks or employee or contractor error or
malfeasance.
The third parties with which we do business,
which facilitate our business activities or with whom
we otherwise engage or interact, including financial
State Street Corporation | 41
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 (1) as some of
our systems are approaching the end of their useful
life, are redundant or do not share data without
reconciliation; and (2) in order to be more efficient,
enhance resiliency, meet client expectations and
support opportunities of growth. Updating these
systems often involves implementation, integration
and security risks, including risks that we may not
adequately anticipate the market or technological
trends or client needs or experience unexpected
challenges 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, potentially 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,
including clients or service providers with whom we
may engage in the development or implementation of
other products, services or solutions. The risk of
such infringement is enhanced in the current
competitive “Fintech” environment, particularly with
respect to our development of new products and
services containing significant technology elements
and dependencies, any of which could become the
subject of an infringement claim. 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.
State Street Corporation | 42
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, strategic, 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 revenue growth or cost savings; or we
may otherwise be adversely affected by acquisition-
related charges. 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, that the
technology does not have the acceptance in the
marketplace that we anticipated or that the
technology requires significant investment to remain
competitive. 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 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.
Through our acquisitions or joint ventures, we
may also assume unknown or undisclosed business,
operational, tax, regulatory and other liabilities, fail to
properly assess known contingent liabilities or
assume businesses with internal control deficiencies.
While in most of our transactions we seek to mitigate
these risks through, among other things, due
diligence and indemnification provisions, these or
other risk-mitigating provisions we put in place may
not be sufficient to address these liabilities and
contingencies. 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 and the risk of being
unable to cross-sell acquired products or services to
our existing clients. Acquisitions of investment
servicing businesses entail information technology
systems conversions, which involve operational risks.
Acquisitions of technology firms can involve extensive
information technology integration, with associated
risk of defects and product enhancement and
development activities, the costs of which can be
difficult to estimate. Clients of businesses that we
have acquired may be dissatisfied with the acquisition
and choose to limit or terminate their relationship with
us, a risk which increases where those clients are
competitors. 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
State Street Corporation | 43
to goodwill and other intangibles.
With any acquisition, the integration of the
operations and resources of the businesses could
result in the loss of key employees, the disruption of
our and the acquired company's ongoing businesses
or inconsistencies in standards, controls, procedures
or policies that could adversely affect our ability to
maintain relationships with clients or employees,
maintain regulatory compliance or to achieve the
anticipated benefits of the acquisition. Integration
efforts may also divert management attention and
resources.
Competition for our employees is intense, and we
may not be able to attract and retain the highly
skilled people we need to support our business.
Our success depends, in large part, on our
ability to attract and retain key people. Competition
for the best people in most activities in which we
engage can be intense, and we may not be able to
hire people or retain them, particularly in light of
challenges associated with evolving compensation
restrictions applicable, or which may become
applicable, to banks and some asset managers and
that potentially are not applicable to other financial
services firms in all jurisdictions or to technology
firms, generally. The unexpected loss of services of
key personnel in business units, control functions,
information technology, operations or other areas
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 to
provide other services to them or to maintain a culture
of innovation and proficiency.
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, particularly in the “Fintech” sector, 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, significant pricing pressure in many of
our core businesses, particularly our custodial and
investment management services. This pricing
pressure has and may continue to impact our
revenue growth and operational margins and may
limit the positive impact of new client demand and
growth in AUCA. 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.
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
State Street Corporation | 44
up-front investment by us, including technology and
conversion costs, and carry the risk that pricing for
the products and services we provide might not prove
adequate to generate expected operating margins
over the term of the contracts.
The profitability of these contracts is largely a
function of our ability to accurately calculate pricing
for our services, efficiently assume our contractual
responsibilities in a timely manner, control our costs
and maintain the relationship with the client for an
adequate period of time to recover our up-front
investment. Our estimate of the profitability of these
arrangements can be adversely affected by declines
in the assets under the clients' management, whether
due to general declines in the securities markets or
client-specific issues. In addition, the profitability of
these arrangements may be based on our ability to
cross-sell additional services to these clients, and we
may be unable to do so.
Performance risk exists in each contract, given
our dependence on successful conversion and
implementation onto our own operating platforms of
the service activities provided. Our failure to meet
specified service levels or implementation timelines
may also adversely affect our revenue from such
arrangements, or permit early termination of the
contracts by the client. If the demand for these types
of services were to decline, we could see our revenue
decline.
Changes in accounting standards may 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. For additional information regarding
change in accounting standards, refer to the “Recent
Accounting Developments” section of Note 1 included
under Item 8, Financial Statements and
Supplementary Data, of this Form 10-K.
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.
On December 22, 2017, the United States
enacted the Tax Cuts and Jobs Act (H.R. 1), effective
January 2018. This decreased the U.S. corporate
income tax rate from 35% to 21%, repealed the
alternative minimum tax and replaced the existing
worldwide tax system with a modified territorial
system. The modified territorial system eliminates
income tax on foreign dividends and introduces new
provisions that generate incremental tax on foreign
earnings, base erosion payments and limit the benefit
of foreign tax credits. There is uncertainty around the
application of these provisions, generally and as to
their applicability to our business, and guidance from
the Internal Revenue Service has been limited to
date. Although we have not yet fully determined the
impact of these provisions, it is possible these new
provisions could diminish the benefit of the lower U.S.
corporate income tax rate.
U.S. state governments, including
Massachusetts, and jurisdictions around the world
continue to review proposals to amend tax laws, rules
and regulations applicable to our businesses that
could have a negative impact on our capital 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.
State Street Corporation | 45
ITEM 1B. UNRESOLVED STAFF COMMENTS
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.
None.
ITEM 2. PROPERTIES
Our headquarters is located at State Street
Financial Center, One Lincoln Street, Boston,
Massachusetts, a 36-story leased office building.
Various divisions of our two lines of business, as well
as support functions, occupy space in this building.
We occupy four buildings located in Quincy,
Massachusetts, one of which we own and three of
which we lease, along with the Channel Center,
another leased office building located in Boston, all of
which function as our principal operations facilities.
We occupy a total of approximately 8.1 million
square feet of office space and related facilities
worldwide, of which approximately 7.2 million square
feet are leased. The following table provides
information on our office space and related facilities:
Principal Properties(1)
City
State/
Country
Owned/
Leased
U.S. and Canada:
State Street Financial Center
Channel Center
Summer Street
Crown Colony Drive
Heritage Drive
John Adams Building
Josiah Quincy Building
Grafton Data Center
Boston
Boston
Boston
Quincy
Quincy
Quincy
Quincy
Grafton
Westborough Data Center
Westborough
Summer Street
Pennsylvania Avenue
College Road East
Avenue of the Americas
Stamford
Kansas City
Princeton
New York
MA
MA
MA
MA
MA
MA
MA
MA
MA
CT
MO
NJ
NY
Adelaide Street East
Toronto
Canada
Europe, Middle East and Africa:
Churchill Place
Herriotstrasse
Brienner Strasse
Sir John Rogerson's Quay
Via Ferrante Aporti
Kirchberg
Titanium Tower
Bonarka
CBK
Ferry Road
Asia Pacific:
George Street
San Dun
Tian Tang
Ecoworld 6B
London
Frankfurt
Munich
Dublin
Milan
England
Germany
Germany
Ireland
Italy
Gdansk
Krakow
Krakow
Poland
Poland
Poland
Edinburgh
Scotland
Sydney
Australia
Hangzhou
Hangzhou
Bangalore
China
China
India
India
Knowledge City Salarpuria
Hyderabad
Leased
Leased
Leased
Leased
Leased
Owned
Leased
Owned
Owned
Leased
Leased
Leased
Leased
Leased
Leased
Leased
Leased
Leased
Leased
Leased
Leased
Leased
Leased
Leased
Leased
Leased
Leased
Leased
Luxembourg
Luxembourg
Leased
(1) We lease other properties in the above regions which consists of 36
locations in the U.S. and Canada, 34 locations in EMEA and 30 locations in
APAC.
State Street Corporation | 46
EXECUTIVE OFFICERS OF THE REGISTRANT
The following table presents certain information with respect to each of our executive officers as of
February 26, 2018.
Name
Joseph L. Hooley
Eric W. Aboaf
Jeffrey N. Carp
Jeff D. Conway
Andrew J. Erickson
Hannah M. Grove
Kathryn M. Horgan
Karen C. Keenan
Andrew P. Kuritzkes
Louis D. Maiuri
Elizabeth Nolan
Ronald P. O'Hanley
Elizabeth Schaefer
Wai-Kwong Seck
Antoine Shagoury
George E. Sullivan
Cyrus Taraporevala
Age
Position
60 Chairman and Chief Executive Officer
53 Executive Vice President and Chief Financial Officer
61 Executive Vice President, Chief Legal Officer and Secretary
52 Executive Vice President, Global Head of Operations and Business
Transformation
48 Executive Vice President, Head of Global Services
54 Executive Vice President and Chief Marketing Officer
52 Executive Vice President and Chief Human Resources and Citizenship Officer
55 Executive Vice President and Chief Administrative Officer
57 Executive Vice President and Chief Risk Officer
53 Executive Vice President, Head of Global Markets and Global Exchange
55 Executive Vice President, Chief Executive Officer for Europe, Middle East and
Africa
61 President and Chief Operating Officer
43 Senior Vice President, Deputy Controller and Chief Accounting Officer (interim)
62 Executive Vice President, Chief Executive Officer for Asia Pacific
47 Executive Vice President and Global Chief Information Officer
57 Executive Vice President, Head of Alternative Investment Solutions
51 President and Chief Executive Officer, State Street Global Advisors
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.
On November 7, 2017 State Street Corporation
announced that Mr. Hooley will retire as Chief
Executive Officer by the end of 2018 and will remain
as a director and Chairman of the Board of Directors
throughout 2019. Mr. O'Hanley will succeed Mr.
Hooley as State Street's Chief Executive Officer,
upon Mr. Hooley's retirement.
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 2008 through December 2014.
From 2002 to 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.
Mr. Aboaf joined State Street in December 2016
as Executive Vice President and has served as
Executive Vice President and Chief Financial Officer
since February 2017. 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 2003 to March 2015, he served in
several senior management positions for Citigroup, a
global investment banking and financial services
corporation, including as global treasurer and as the
chief financial officer of the institutional client group,
which included the custody business.
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 30
years ago and serves as Executive Vice President
and head of State Street's operations and business
transformation globally. Prior to his current role, he
was Chief Executive Officer for Europe, the Middle
East and Africa from March 2015 until December
2017. As part of his transition from that role, he
remains responsible for some of our UK-regulated
activities. Prior to that role, Mr. Conway held several
other management positions within the Company,
including leading Global Exchange from April 2013 to
March 2015. From 2007 to April 2013, Mr. Conway
State Street Corporation | 47
served as the global head of our Investment
Management Services business.
Mr. Erickson joined State Street in April 1991
and since November 2017 has served as the
Executive Vice President and head of our Global
Services business. Prior to this role and commencing
in June 2016, he served as the Executive Vice
President and head of Investment Services business
in the Americas. Prior to that role, Mr. Erickson was
the head of our Global Services business in Asia
Pacific from April 2014 to June 2016 and prior to that
was Head of North Asia for Global Services from
2010 to April 2014. Mr. Erickson has also held
several other positions within State Street during his
over 25 years with the Company.
Ms. Grove joined State Street in 1998 and
currently serves as Executive Vice President and
Chief Marketing Officer, a role she has been in since
2008. Prior to this role, Ms. Grove served as senior
vice president for State Street’s Global Marketing
division. Prior to joining State Street, Ms. Grove was
the marketing director for World Times' Money
Matters Institute, a collaboration between the United
Nations and the World Bank that sought to foster
sustainable development in emerging economies.
Ms. Horgan joined State Street in April 2009 and
has served as Executive Vice President and Chief
Human Resources and Citizenship Officer since
March 2017. Prior to March 2017, she served as
Executive Vice President from 2012, and Chief
Operating Officer, from 2011, for State Street's Global
Human Resources division. Prior to that 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 Executive
Vice President and Chief Administrative Officer,
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 State Street's
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.
Ms. Nolan joined State Street in October 2015
and serves as Chief Executive Officer for Europe, the
Middle East and Africa, with regulatory approval
pending for U.K. banking activities. Prior to that, she
served as Executive Vice President and co-head of
State Street Global Services for Europe, the Middle
East and Africa from January 2017 to January 2018.
Prior to that role, she served as head of European
Banking from October 2015 to January 2017. Before
joining State Street, from January 2015 to October
2015, Ms. Nolan served as managing director at
Deutsche Bank in the global custody and clearing
business. Prior to that role, Ms. Nolan spent 12 years
at J.P. Morgan in various senior leadership roles,
including from 2009 to 2014 as the head of client
services and client onboarding globally for markets
and investor services.
Mr. O'Hanley joined State Street in April 2015
and has served as President and Chief Operating
Officer since November 2017. Prior to this role Mr.
O'Hanley served as the Chief Executive Officer and
President of State Street Global Advisors, the
investment management arm of State Street
Corporation and was appointed as 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
State Street Corporation | 48
Officer of BNY Asset Management in Boston from
2007 to 2010.
Ms. Schaefer joined State Street in 2014, and
since September 2017 has served as Interim Chief
Accounting Officer. Ms. Schaefer continues to serve
as Senior Vice President and Deputy Controller, a
position she has held since July 2016, prior to which
she served as Director of SEC Reporting, Accounting
Policy & Regulatory Compliance. Prior to joining
State Street, she served in various roles at American
Express Company, a global services company whose
principal products and services are charge and credit
card products and travel-related services, including,
from August 2012 to December 2014, senior roles
within the Controllership organization.
Mr. Seck joined State Street in 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 as Executive Vice President, Information
Technology and Global Chief Information Officer
(CIO). Prior to joining State Street, Mr. Shagoury had
several senior management positions from 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 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.
Mr. Taraporevala joined State Street in April
2016 and since November 2017 has served as
president and chief executive officer of SSGA. He
joined SSGA as Executive Vice President and Global
Head of Product and Marketing. Prior to joining
SSGA, Mr. Taraporevala was the head of Retail
Management Accounts and Life Insurance &
Annuities for Fidelity Investments from 2012 to
October 2015. Prior to that, Mr. Taraporevala held
senior leadership roles at BNY Mellon Asset
Management, including executive director of North
American distribution.
State Street Corporation | 49
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 5,214 shareholders of record as of January 31,
2018. 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 2017, 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, 2018. As of December 31, 2017, we had
approximately $700 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, 2017. All
shares of our common stock purchased during the
quarter ended December 31, 2017 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, 2017
November 1 - November 30, 2017
December 1 - December 31, 2017
Total
— $
1,479
2,177
3,656
$
—
92.52
97.88
95.71
— $
1,479
2,177
3,656
$
1,050
913
700
700
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 | 50
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 2017, our Parent Company declared
aggregate quarterly common stock dividends to its
shareholders of $1.60 per share, totaling
approximately $596 million. In 2016, our Parent
Company declared aggregate quarterly common
stock dividends to its shareholders of $1.44 per
share, totaling approximately $559 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 | 51
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, 2012. It also
assumes reinvestment of common stock dividends.
The S&P Financial Index is a publicly available,
capitalization-weighted index, comprised of 67 of the
Standard & Poor’s 500 companies, representing 27
diversified financial services companies, 23 insurance
companies, and 17 banking companies. The KBW
Bank Index is a modified cap-weighted index
consisting of 24 exchange-listed stocks, representing
national money center banks and leading regional
institutions.
State Street Corporation
S&P 500 Index
S&P Financial Index
KBW Bank Index
2012
2013
2014
2015
2016
2017
$
$
100
100
100
100
$
159
132
136
138
$
172
151
156
151
$
148
153
154
151
$
178
171
189
195
227
208
230
231
State Street Corporation | 52
ITEM 6.
SELECTED FINANCIAL DATA
(Dollars in millions, except per share amounts or where otherwise noted)
YEARS ENDED DECEMBER 31:
Total fee revenue
Net interest income
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(1)
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:
2017
2016
2015
2014
2013
$
8,905
$
8,116
$
8,278
$
8,010
$
7,570
2,304
(39)
2,084
7
2,088
(6)
2,260
4
11,170
10,207
10,360
10,274
2
8,269
2,899
722
—
2,177
(184)
1,993
5.32
5.24
1.60
$
$
$
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
$
$
$
$
97.61
$
77.72
$
66.36
$
78.50
$
73.39
$ 97,579
$ 97,167
$ 100,022
$ 112,636
$ 116,914
191,235
238,425
184,896
11,620
22,317
33,119
2,782
36,643
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
Return on average common shareholders' equity
10.6%
10.5%
9.8%
9.8%
10.2%
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(2)
Tier 1 capital ratio(2)
Total capital ratio(2)
Tier 1 leverage ratio(2)
Supplementary leverage ratio(3)
0.99
29.89
8.6
1.29
12.3
15.5
16.5
7.3
6.5
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
NA
(1) Amounts represent preferred stock dividends and the allocation of earnings to participating securities using the two-class method.
(2) Ratios for 2014 through 2017 were calculated in conformity with the advanced approaches provisions of the Basel III final rule. Ratios for 2013 were calculated in
conformity with the provisions of Basel I. Ratios for 2014 through 2017 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.
(3) 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.
NA: Not applicable.
State Street Corporation | 53
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 Income
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
Information Technology Risk Management
Market Risk Management
Model Risk Management
Strategic Risk Management
Capital
Off-Balance Sheet Arrangements
Significant Accounting Estimates
Recent Accounting Developments
55
56
58
58
58
60
62
62
63
64
70
71
75
77
77
82
87
92
95
96
103
104
104
116
117
120
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 | 54
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, 2017, we had consolidated
total assets of $238.43 billion, consolidated total
deposits of $184.90 billion, consolidated total
shareholders' equity of $22.32 billion and 36,643
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;
depotbank services (a fund oversight role created by
regulation); 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; performance, risk and
compliance analytics; and financial data management
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, and 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 NII, a non-GAAP measure, which
reports non-taxable revenue, such as interest income
State Street Corporation | 55
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
associated with tax-exempt investment securities, on
a fully taxable-equivalent basis, facilitates an
investor's understanding and 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) and the
liquidity coverage ratio, 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
2017
2016
2015
$ 8,905
$ 8,116
$ 8,278
Net interest income
2,304
2,084
2,088
Gains (losses) related to investment
securities, net
Total revenue
(39)
7
(6)
11,170
10,207
10,360
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:
2
8,269
2,899
722
—
10
8,077
2,120
(22)
1
12
8,050
2,298
318
—
$ 2,177
$ 2,143
$ 1,980
Dividends on preferred stock(1)
$
(182)
$
(173)
$
(130)
Earnings allocated to
participating securities(2)
Net income available to common
shareholders
Earnings per common share:
(2)
(2)
(2)
$ 1,993
$ 1,968
$ 1,848
Basic
Diluted
$
5.32
$
5.03
$
4.53
5.24
4.97
4.47
Average common shares outstanding
(in thousands):
Basic
Diluted
374,793
391,485
407,856
380,213
396,090
413,638
Cash dividends declared per
common share
Return on average common equity
$
1.60
$
1.44
$
1.32
10.6%
10.5%
9.8%
(1) Additional information about our preferred stock dividends is provided in Note 15
to the consolidated financial statements in this Form 10-K.
(2) Represents the portion of net income available to common equity allocated to
participating securities, composed of 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 “Financial Results and Highlights”
section provides information related to significant
events, as well as highlights of our consolidated
financial results for the year ended December 31,
2017 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, 2017 to those for the year ended
December 31, 2016, is provided under “Consolidated
Results of Operations,” "Line of Business Information"
and "Capital" which follows these sections, as well as
in our consolidated financial statements included in
this Form 10-K. 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 2016 period
to the relevant 2017 period results.
State Street Corporation | 56
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Financial Results and Highlights
Expenses
• EPS of $5.24 in 2017 increased 5%
compared to $4.97 in 2016.
Both 2017 and 2016 include the impact
of notable items. The 2017 results
include a one-time estimated net impact
of $270 million associated with the Tax
Cuts and Jobs Act (TCJA). This impact
consisted of a one-time estimated tax
expense of approximately $250 million
and a one-time reduction of
approximately $20 million in revenue.
Actual effects of the TCJA may
differ from these estimates,
among other things, due to
additional tax and regulatory
guidance and changes in our
assumptions and interpretations.
The 2016 results include an acceleration
of compensation expense of $249
million ($161 million after-tax) and tax
benefits of $211 million resulting from a
reduction in accrued tax expense
attributable to retained foreign earnings
and tax benefits from capital actions
involving our overseas affiliates.
•
2017 ROE of 10.6% increased from 10.5% in
2016.
• Pre-tax margin of 26.0% in 2017 increased
• Total expenses increased 2% in 2017
compared to 2016, primarily due to higher
restructuring charges, information systems
and communications costs, and
compensation and employee benefit costs,
partially offset by approximately $150 million
of Beacon savings. Total Beacon program-
to-date savings were approximately $325
million through December 31, 2017.
•
In 2017, we recorded restructuring charges of
$245 million related to Beacon. We expect
Beacon target savings of $550 million to be
realized by mid-2019, 18 months ahead of
schedule.
AUCA/AUM
• AUCA increased 15% in 2017 compared to
2016, primarily due to strength in equity
markets, flows, and new business. In 2017,
we secured new asset servicing mandates of
approximately $445 billion. Our AUCA
pipeline of asset servicing mandates
remaining to be installed in future periods
totaled approximately $350 billion as of
December 31, 2017.
• AUM increased 13% in 2017 compared to
2016, primarily driven by strength in equity
markets, weaker U.S. dollar, and positive
ETF flows.
from 20.8% in 2016.
Capital
Revenue
• Total revenue and fee revenue increased 9%
and 10%, respectively, in 2017 compared to
2016, primarily driven by strength in servicing
fees, management fees, processing and
other fees, and the impact of the weaker U.S.
dollar, partially offset by lower trading
services revenue.
• Servicing fee revenue increased 6% in 2017
compared to 2016, primarily due to market
appreciation and net new business, partially
offset by continued hedge fund outflows and
the impact of the businesses we exited in
2017.
• Management fee revenue increased 25% in
2017 compared to 2016, primarily due to the
GEAM business acquired in 2016, continued
strength in global equity markets, and ETF
flows.
• NII increased 11% in 2017 compared to
2016, driven by higher market interest rates
in the U.S. and loan portfolio growth, partially
offset by a smaller balance sheet.
• We declared aggregate common stock
dividends of $1.60 per share, totaling
approximately $596 million in 2017,
compared to $1.44 per share, totaling $559
million in 2016, representing an increase of
approximately 11% on a per share basis.
•
In 2017, we acquired 16.8 million shares of
common stock at an average per-share cost
of $86.37 and an aggregate cost of
approximately $1,450 million under common
stock purchase programs approved by our
Board.
• CET1 capital ratio under the Basel III
standardized approach increased to 11.9%
as of December 31, 2017, compared to
11.6% as of December 31, 2016.
• Tier 1 leverage ratio increased to 7.3% as of
December 31, 2017, compared to 6.5% as of
December 31, 2016.
State Street Corporation | 57
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
CONSOLIDATED RESULTS OF OPERATIONS
Generally, servicing fees are affected by
This section discusses our consolidated results
of operations for 2017 compared to 2016, as well as
2016 compared to 2015, 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,
2017
2016
2015
%
Change
2017
vs.
2016
%
Change
2016
vs.
2015
(Dollars in
millions)
Fee revenue:
Servicing fees
$ 5,365
$ 5,073
$ 5,153
6%
(2)%
Management fees
1,616
1,292
1,174
25
10
Trading services:
Foreign exchange
trading
Brokerage and
other trading
services
Total trading
services
Securities finance
Processing fees
and other
Total fee revenue
Net interest income:
641
654
690
430
445
456
1,071
1,099
1,146
606
247
562
90
496
309
8,905
8,116
8,278
Interest income
2,908
2,512
2,488
Interest expense
604
428
400
Net interest income
2,304
2,084
2,088
(2)
(3)
(3)
8
174
10
16
41
11
(5)
(2)
(4)
13
(71)
(2)
1
7
—
Gains (losses)
related to
investment
securities, net
Total revenue
nm Not meaningful
Fee Revenue
(39)
7
(6)
$11,170
$10,207
$10,360
nm
9
nm
(1)
Table 2: Total Revenue, provides the breakout of
fee revenue for the years ended December 31, 2017,
2016 and 2015.
Servicing and management fees collectively
made up approximately 78% of total fee revenue in
both 2017 and 2016 compared to approximately 76%
in 2015. The level of these fees is influenced by
several factors, including the mix and volume of our
AUCA and our AUM, 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.
changes in daily average valuations of AUCA.
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 generally are affected by
changes in month-end valuations of AUM.
Management fees for certain components of
managed assets, such as ETFs, are affected by daily
average valuations of AUM. 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 AUM and the investment
strategies employed, management fees may reflect
other factors, 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 AUM than for passive products.
Actively managed products may also include
performance fee arrangements which are recorded
when the fee is earned, based on predetermined
benchmarks associated with the applicable fund’s
performance.
In light of the above, we estimate, using relevant
information as of December 31, 2017 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%.
State Street Corporation | 58
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
See Table 3: Daily, Month-End and Year-End
Equity Indices and Table 4: Year-End Debt Indices,
for selected 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 AUCA and AUM as of those dates.
Further discussion of fee revenue is provided
under Line of Business Information in this
Management's Discussion and Analysis in this Form
10-K.
TABLE 3: DAILY, MONTH-END AND YEAR-END EQUITY INDICES(1)
S&P 500®
MSCI EAFE®
MSCI® Emerging Markets
HFRI Asset Weighted
Composite®
Daily Averages of Indices
Averages of Month-End Indices
Year-End Indices
Years Ended December 31,
Years Ended December 31,
Years Ended December 31,
2017
2016
2,449
1,886
1,028
2,095
1,645
835
% Change
17%
15
23
2017
2016
2,465
1,900
1,036
2,106
1,652
842
NA
NA
NA
1,352
1,264
% Change
17%
15
23
7
2017
2016
2,674
2,051
1,158
2,239
1,684
862
1,389
1,305
% Change
19%
22
34
6
(1) The index names listed in the table are service marks of their respective owners.
NA Not applicable
TABLE 4: YEAR-END DEBT INDICES(1)
Barclays Capital U.S. Aggregate Bond Index®
Barclays Capital Global Aggregate Bond Index®
2017
2,046
485
As of December 31,
2016
% Change
1,976
451
4%
8
(1) The index names listed in the table are service marks of their respective owners.
State Street Corporation | 59
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Net Interest Income
See Table 2: Total Revenue, for the breakout of
interest income and interest expense for the years
ended December 31, 2017, 2016 and 2015. NII was
$2,304 million for 2017 compared to $2,084 million
and $2,088 million for 2016 and 2015, respectively.
NII is defined as interest income 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.
NIM represents the relationship between
annualized fully taxable-equivalent NII and average
total interest-earning assets for the period. It is
calculated by dividing fully taxable-equivalent NII 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 the U.S. federal and state statutory
income tax rates.
TABLE 5: AVERAGE BALANCES AND INTEREST RATES - FULLY TAXABLE-EQUIVALENT BASIS
Years Ended December 31,
2017
Interest
Revenue/
Expense
Average
Balance
Rate
Average
Balance
2016
Interest
Revenue/
Expense
Rate
Average
Balance
2015
Interest
Revenue/
Expense
Rate
.38% $ 53,091
$
.24% $ 69,753
$
208
.30%
(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
$ 47,514
$
2,131
1,011
95,779
21,916
22,884
Average total interest-earning assets
$ 191,235
Interest-bearing deposits:
U.S.
Non-U.S.(2)
Total interest-bearing deposits(2)
Securities sold under repurchase agreements
Federal funds purchased
Other short-term borrowings
Long-term debt
Other interest-bearing liabilities
$ 30,623
91,937
122,560
3,683
—
1,313
11,595
4,607
Average total interest-bearing liabilities
$ 143,758
Interest-rate spread
Net interest income—fully taxable-equivalent basis
Net interest margin—fully taxable-equivalent basis
Tax-equivalent adjustment
Net interest income—GAAP basis
$
$
$
$
3,233
1,194
62
1
105,611
2,069
100,738
1,962
180
264
12.38
(1)
(.12)
1,891
519
222
3,075
1.97
2.37
.97
1.61
2,558
921
19,013
22,863
$ 199,184
96
67
163
2
—
10
308
121
604
2,471
.31% $ 30,107
95,551
125,658
4,113
31
1,666
11,401
5,394
$ 148,263
.07
.13
.05
—
.80
2.66
2.63
.42
1.19%
1.29%
126
146
—
384
61
2,679
132
(47)
85
1
—
7
260
75
428
2,251
$
$
$
$
5.70
—
1.95
2.02
.27
1.34
17,948
22,717
$ 220,456
.44% $ 30,819
102,491
133,310
8,875
21
3,826
10,301
6,471
$ 162,804
(.05)
.07
.02
—
.40
2.29
1.39
.29
1.05%
1.13%
311
10
2,661
51
46
97
1
—
6
250
46
400
2,261
$
$
$
$
1.92
.08
1.96
1.73
.04
1.21
.16%
.05
.07
.01
—
.15
2.43
.71
.25
.96%
1.03%
(167)
$
2,304
(167)
$
2,084
(173)
$
2,088
(1) Reflects the impact of balance sheet netting under enforceable netting agreements of approximately $31 billion, $30 billion and $30 billion for the years ended
December 31, 2017, 2016 and 2015, respectively. Excluding the impact of netting, the average interest rates would be approximately 0.79%, 0.43% and 0.19% for
the years ended December 31, 2017, 2016 and 2015, respectively.
(2) Average rate includes the impact of FX swap expense of approximately $141 million, $27 million and $44 million for the years ended December 31, 2017, 2016 and
2015, respectively. Average rates for total interest-bearing deposits excluding the impact of FX swap expense were 0.02%, 0.04% and 0.04% for the years ended
December 31, 2017, 2016 and 2015, respectively.
See Table 5: Average Balances and Interest
Rates - Fully Taxable-Equivalent Basis, for the
breakout of NII on a fully taxable-equivalent basis for
the years ended December 31, 2017, 2016 and 2015.
NII on a fully taxable-equivalent basis increased in
2017 compared to 2016, as benefits due to higher
U.S. market interest rates, disciplined liability pricing
and loan portfolio growth, partially offset by a smaller
balance sheet. Average balances in 2017 reflect
management actions to reduce the usage of
wholesale certificates of deposit (CDs) on our
balance sheet. Average interest-bearing and
noninterest-bearing deposits were approximately
$6.71 billion lower in 2017 compared to 2016,
primarily due to a $9.64 billion reduction in wholesale
CDs, partially offset by an increase in client deposits.
We recorded aggregate discount accretion in
interest income of approximately $19 million in 2017,
respectively, related to the assets we consolidated
onto our balance sheet in 2009 from our asset-
backed commercial paper conduits. Assuming that
we hold the former conduit securities remaining in our
investment portfolio until they mature or are sold, we
expect to generate aggregate discount accretion in
future periods of approximately $123 million over their
remaining terms.
State Street Corporation | 60
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
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 or 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.
Changes in the components of interest-earning
assets and interest-bearing liabilities are discussed in
more detail below. Additional information about the
components of interest income and interest expense
is provided in Note 17 to the consolidated financial
statements included in this Form 10-K.
Average total interest-earning assets were $7.95
billion lower in 2017 compared to 2016, primarily
driven by lower levels of wholesale CDs and
corresponding reductions in interest-bearing deposits
with banks and investment securities.
Interest-bearing deposits with banks averaged
$47.51 billion in 2017 compared to $53.09 billion in
2016. These deposits primarily reflect our
maintenance of cash balances at the Federal
Reserve, the ECB and other non-U.S. central banks.
Securities purchased under resale agreements
averaged $2.13 billion in 2017 compared to $2.56
billion in 2016, which reflects the impact of balance
sheet netting under enforceable netting agreements
of approximately $31 billion and $30 billion for 2017
and 2016, respectively. We maintain an agreement
with a clearing organization that enables us to net all
securities sold under repurchase agreements against
those purchased under resale agreements with
counterparties that are also members of the clearing
organization.
Investment securities averaged $95.78 billion in
2017 compared to $100.74 billion in 2016. The
decrease in average investment securities was driven
by a reduction in U.S. Treasury securities and
continued investment in loans and leases.
Loans and leases averaged $21.92 billion in
2017 compared to $19.01 billion in 2016. The
increase in average loans and leases resulted from
growth in loans to municipalities, hedge fund
collateralized lending, mutual fund lending, and
continued investment in senior secured loans. Loans
and leases also includes U.S. and non-U.S.
overdrafts, which provide liquidity to clients in support
of investment activities. Average U.S. and non-U.S.
overdrafts remained relatively stable in 2017 at $2.26
billion and $1.46 billion, respectively, from $2.28
billion and $1.36 billion in 2016.
Average other interest-earning assets remained
relatively stable with $22.88 billion in 2017 and
$22.86 billion in 2016. Our average other interest-
earning assets, largely associated with our enhanced
custody business, comprised approximately 12% of
our average total assets in 2017 and 2016. The
enhanced custody business is our securities financing
business where we act as principal with respect to
our custody clients and generate securities finance
revenue. The NII earned on these transactions is
generally lower than the interest earned on other
alternative investments.
Aggregate average U.S. and non-U.S. interest-
bearing deposits decreased to $122.56 billion in 2017
from $125.66 billion in 2016. The lower levels in
2017 compared to the prior year period were a result
of higher U.S. and non-U.S. interest bearing client
deposit levels during the year, offset by management
actions to reduce wholesale CDs. In 2017, a full year
average of $3.62 billion of non-U.S. interest-bearing
deposits was transferred to U.S. interest bearing
deposits. Future deposit levels will be influenced by
the underlying asset servicing business, client deposit
behavior, and market conditions, including the
general levels of U.S. and non-U.S. interest rates.
Average other short-term borrowings declined to
$1.31 billion in 2017 from $1.67 billion in 2016, as
bonds matured in the tax-exempt investment
program.
Average long-term debt was $11.60 billion in
2017, compared to $11.40 billion in 2016. These
amounts reflect issuances of senior debt, partially
offset by maturities, during the respective periods.
Average other interest-bearing liabilities were
$4.61 billion in 2017 compared to $5.39 billion in
2016. Other interest-bearing liabilities primarily
reflect our level of cash collateral received from
clients in connection with our enhanced custody
business, which is presented on a net basis where we
have enforceable netting agreements.
Several factors could affect future levels of NII
and NIM, including the volume and mix of client
liabilities; actions of various central banks; changes in
the level of U.S. and non-U.S. interest rates and the
slope of 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; changes in the type and
amount of credit or other loans we extend; and
changes in our enhanced custody business.
State Street Corporation | 61
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Based on market conditions and other factors,
Expenses
including regulatory standards, 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 MBS
and U.S. and non-U.S. mortgage- and ABS. 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, including interpretation of those
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 NII and NIM.
Provision for Loan Losses
We recorded a provision for loan losses of $2
million in 2017 compared to $10 million in 2016 and
$12 million in 2015. 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
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.
Table 6: Expenses, provides the breakout of
expenses for the years ended December 31, 2017,
2016 and 2015.
TABLE 6: EXPENSES
Years Ended December 31,
(Dollars in millions)
2017
2016
2015
%
Change
2017
vs.
2016
%
Change
2016
vs.
2015
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
Regulatory fees and
assessments
Other
Total other
$ 4,394
$ 4,353
$ 4,061
1 %
7 %
1,167
1,105
1,022
838
461
21
245
340
214
106
483
800
440
69
140
379
207
82
502
793
444
20
490
197
115
824
5
75
nm
6
5
5
(70)
8
1
(1)
245
(10)
(23)
3
29
(4)
(2)
2
8
5
(29)
(39)
(28)
1
4
1,143
1,170
1,626
Total expenses
$ 8,269
$ 8,077
$ 7,971
Number of employees at
year-end
36,643
33,783
32,356
nm Not meaningful
Compensation and employee benefits expenses
increased 1% in 2017 compared to 2016, primarily
due to increased costs to support new business,
annual merit and performance based incentive
compensation increases, partially offset by Beacon
savings. 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, previously issued, deferred cash-settled
incentive compensation awards for certain employees
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
increased 7% in 2016 compared to 2015. The
increase was primarily due to the aforementioned
acceleration of compensation expenses and the
impact of the GEAM business acquired in 2016.
Headcount increased 8% in 2017 compared to
2016. The growth in headcount was primarily within
low cost locations. These increases were driven by
strategic initiatives and new business, including the
impact of large client lift outs, as well as regulatory
initiatives and contractor conversions to full-time
employees and partially offset by other reductions
from Beacon.
State Street Corporation | 62
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Information systems and communications
expenses increased 6% in 2017 compared to 2016.
The increases were primarily related to technology
infrastructure costs and investments supporting
Beacon.
Information systems and communications
expenses increased 8% in 2016 compared to 2015.
The increase was primarily related to investments
supporting new business and Beacon, and the impact
of the GEAM business acquired in 2016.
Other expenses decreased 2% in 2017
In 2017, we recorded restructuring charges of
$245 million, compared to $142 million in 2016,
related to Beacon. In aggregate, we have recorded
restructuring charges of $387 million related to
Beacon, including $280 million in severance costs
and $107 million in information technology application
rationalization and real estate action.
In 2017, we achieved approximately $150 million
in year-over-year expense savings related to Beacon
and expect target savings of $550 million to be
realized by mid-2019.
compared to 2016, primarily due to lower professional
services costs.
The following table presents aggregate
restructuring activity for the periods indicated.
Other expenses decreased 28% 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.
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 regulatory compliance requirements
and expectations will continue to affect our expenses.
Acquisition Costs
We recorded acquisition costs of $21 million,
$69 million and $20 million in 2017, 2016 and 2015,
respectively. In 2017, all such costs related to our
acquisition of the GEAM business on July 1, 2016.
Restructuring Charges
In connection with Beacon, we announced in
2016 that we expected:
(i) to incur aggregate pre-tax restructuring
charges of approximately $300 million to $400 million
beginning in 2016 through December 31, 2020
including approximately $250 million to $300 million in
severance and benefits costs associated with
targeted staff reductions (a substantial portion of
which would result in future cash expenditures) and
approximately $50 million to $100 million in
information technology application rationalization and
real estate actions; and
(ii) 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.
TABLE 7: RESTRUCTURING CHARGES
(In millions)
Accrual Balance at
December 31, 2014
Accruals for Business
Operations and IT
Payments and other
adjustments
Accrual Balance at
December 31, 2015
Accruals for Business
Operations and IT
Accruals for Beacon
Payments and other
adjustments
Accrual Balance at
December 31, 2016
Accruals for Beacon
Payments and Other
Adjustments
Accrual Balance at
December 31, 2017
Employee
Related
Costs
Real
Estate
Actions
Asset and
Other
Write-offs
Total
$
39
$
23
$
7
$
69
(5)
(25)
(3)
(9)
13
5
(17)
(51)
$
9
$
11
$
3
$
23
(2)
94
—
18
—
30
(2)
142
(64)
(12)
(31)
(107)
$
37
$
186
17
32
$
2
$
27
56
245
(57)
(17)
(26)
(100)
$
166
$
32
$
3
$
201
Income Tax Expense
Income tax expense (benefit) was $722 million
in 2017, $(22) million in 2016 and $318 million in
2015. Our 2017 effective tax rate was 24.9%,
compared to (1.0)% in 2016 and 13.8% in 2015. The
2017 income tax expense includes a one-time
estimated tax expense of $250 million for the
provisional impact of the enactment of the TCJA.
Actual effects of the TCJA may differ from these
estimates, among other things, due to additional tax
and regulatory guidance and changes in our
assumptions and interpretations. 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.
Additional information regarding income tax
expense, including unrecognized tax benefits, and tax
contingencies are provided in Notes 13 and 22 to the
consolidated financial statements under Item 8,
Financial Statements and Supplementary Data, of
this Form 10-K.
State Street Corporation | 63
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
LINE OF BUSINESS INFORMATION
Investment Servicing
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
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 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 8: INVESTMENT SERVICING LINE OF BUSINESS
RESULTS
(Dollars in millions,
except where
otherwise noted)
Years Ended December 31,
2017
2016
2015
%
Change
2017
vs.
2016
%
Change
2016
vs.
2015
Servicing fees
$5,365
$5,073
$5,153
6%
(2)%
Trading services
Securities finance
Processing fees and
other
Total fee revenue
Net interest income
Gains (losses) related
to investment securities,
net
999
606
240
7,210
2,309
1,038
1,091
562
119
6,792
2,081
496
342
7,082
2,086
(39)
7
(6)
Total revenue
9,480
8,880
9,162
(4)
8
102
6
11
nm
7
Provision for loan
losses
2
10
12
(80)
Total expenses
6,717
6,660
6,990
Income before income
tax expense
Pre-tax margin
Average assets
(in billions)
$2,761
$2,210
$2,160
29%
25%
24%
$214.0
$225.3
$246.6
1
25
(5)
13
(65)
(4)
—
nm
(3)
(17)
(5)
2
nm Not meaningful
Servicing Fees
Servicing fees increased 6% in 2017 compared
to 2016, primarily due to continued market
appreciation and net new business, partially offset by
continued hedge fund outflows and the impact of the
businesses we exited in 2017. Servicing fees in 2016
included a revenue reduction of $48 million related to
reimbursements to our clients related to the manner
in which we invoiced certain expenses to our clients.
Servicing fees decreased 2% in 2016 compared
to 2015, primarily due to lower international market
levels.
Servicing fees generated outside the U.S. were
approximately 45% of total servicing fees in 2017
compared to approximately 42% in both 2016 and
2015.
TABLE 9: ASSETS UNDER CUSTODY AND ADMINISTRATION BY PRODUCT
As of December 31,
(In billions)
Mutual funds
Collective funds
Pension products
Insurance and other
products
Total
2017
2016
2015
2014
2013
$
7,603
$
6,841
$
6,768
$
6,992
$
9,707
6,704
9,105
7,501
5,584
8,845
7,088
5,510
8,142
6,949
5,746
8,501
$
33,119
$
28,771
$
27,508
$
28,188
$
6,811
6,428
5,851
8,337
27,427
2016-2017 Annual
Growth Rate
2013-2017 Compound
Annual Growth Rate
11%
29
20
3
15
3%
11
3
2
5
State Street Corporation | 64
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
TABLE 10: ASSETS UNDER CUSTODY AND ADMINISTRATION BY ASSET CLASS
As of December 31,
(In billions)
Equities
Fixed-income
Short-term and other
investments
Total
2017
2016
2015
2014
2013
$
$
19,214
$
16,189
$
14,888
$
15,876
$
10,070
3,835
9,231
3,351
9,264
3,356
8,739
3,573
33,119
$
28,771
$
27,508
$
28,188
$
15,050
9,072
3,305
27,427
2016-2017 Annual
Growth Rate
2013-2017 Compound
Annual Growth Rate
19%
9
14
15
6%
3
4
5
TABLE 11: ASSETS UNDER CUSTODY AND ADMINISTRATION BY GEOGRAPHY(1)
As of December 31,
(In billions)
North America
Europe/Middle East/Africa
Asia/Pacific
Total
2017
2016
2015
2014
2013
$
$
24,418
$
21,544
$
20,842
$
21,217
$
7,028
1,673
5,734
1,493
5,387
1,279
5,633
1,338
33,119
$
28,771
$
27,508
$
28,188
$
20,764
5,511
1,152
27,427
(1) Geographic mix is based on the location in which the assets are serviced.
The increase in total AUCA as of December 31,
Trading Services
2017 compared to December 31, 2016 primarily
resulted from higher global equity markets. Asset
levels as of December 31, 2017 do not reflect the
approximately $350 billion of new business in assets
to be installed, which was awarded to us in 2017 and
prior periods but not installed prior to December 31,
2017, including approximately $445 billion of new
asset servicing mandates awarded to us in 2017.
This new business will be reflected in AUCA in future
periods after installation and will generate servicing
fee revenue in subsequent periods. The $350 billion
of new business assets to be serviced does not
include new business which has been contracted, but
for which the client has not yet provided permission to
publicly disclose and is not yet installed. Also not
included is the loss of business which occurs from
time to time or changes in AUCA, usually from
changes in market values of customer assets,
subscriptions or redemptions from our customer
investment products.
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.
As a result of a decision to diversify providers,
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 principally occur in 2018 and
beyond and represents approximately $1 trillion in
assets with respect to which we will no longer derive
revenue post-transition.
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 2: Total Revenue.
Foreign Exchange Trading Revenue
We primarily earn FX trading revenue by acting
as a principal market-maker through both "direct
sales and trading” and “indirect foreign exchange
trading.”
• Direct sales and trading: Represent FX
transactions at negotiated rates with clients
and investment managers that contact our
trading desk directly. These principal market-
making activities include transactions for
funds serviced by third party custodians or
prime brokers, as well as those funds under
custody at State Street.
Indirect FX trading: Represent FX
transactions with clients or their investment
managers routed to our FX desk through our
asset-servicing operation; in which all cases,
we are the funds' custodian. We execute
indirect FX trades as a principal at rates
disclosed to our clients.
•
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 bid-offer
spreads across product mix tend to result in
increases or decreases, as the case may be, in client-
related FX revenue.
State Street Corporation | 65
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Our clients that utilize indirect FX trading can, in
Securities Finance
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
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.
Brokerage and Other Trading Services
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.
These products and services are generally offered by
us as 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.
Total brokerage and other trading services
revenue primarily consists of "electronic FX services"
and "other trading, transition management and
brokerage revenue."
• 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.
• Other trading, transition management and
brokerage revenue: As our clients look to
State Street to enhance and preserve
portfolio values, they may choose to utilize
our Transition or Currency Management
capabilities or transact with our Equity Trade
execution group. These transactions
generate revenue via commissions charged
for trades transacted during the management
of these portfolios.
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 and
SEC in 2017, including a deferred prosecution
agreement. The reputational and regulatory impact of
those compliance issues continues and may
adversely affect our results in future periods.
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.
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 or other
market participants 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 assets under custody and administration from
clients who have designated State Street as an
eligible borrower.
Securities finance revenue as presented in Table
8: Investment Servicing Line of Business Results,
increased 8% in 2017 compared to 2016, primarily as
a result of higher revenue 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, including
revised or proposed capital and liquidity standards,
and interpretations of those standards, may influence
modifications to the way in which we deliver our
agency lending or enhanced custody businesses, the
volume of our securities lending activity and related
revenue and profitability in future periods.
State Street Corporation | 66
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Processing Fees and Other
Investment Management
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 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 8: Investment Servicing Line of Business
Results, increased 102% in 2017 compared to 2016.
The increase is primarily due to a pre-tax gain of $30
million on the dispositions of our joint venture
interests in IFDS U.K. and BFDS in the first quarter of
2017 and the sale of an equity trading platform
business in the third quarter of 2017, partially offset
by a pre-tax gain of approximately $53 million related
to the sale of WM/Reuters in 2016.
Processing fees and other revenue decreased
65% 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, partially offset by
a pre-tax gain on the sale of WM/Reuters in 2016.
Expenses
Total expenses for Investment Servicing
increased 1% in 2017 compared to 2016, primarily
due to costs to support new business, higher annual
merit and performance based incentive
compensation, including higher seasonal deferred
incentive compensation expense for retirement
eligible employees and payroll taxes in the first
quarter of 2017 compared to the first quarter of 2016.
These increases were partially offset by Beacon
savings and a one-time acceleration of compensation
expense of approximately $42 million in the fourth
quarter of 2016.
Additional information about expenses is
provided under "Expenses" in "Consolidated Results
of Operations" included in this Management's
Discussion and Analysis of this Form 10-K.
TABLE 12: INVESTMENT MANAGEMENT LINE OF BUSINESS
RESULTS
Years Ended December 31,
(Dollars in millions)
2017
2016
2015
$ 1,616
$ 1,292
$ 1,174
61
55
%
Change
2017
vs.
2016
%
Change
2016
vs.
2015
25%
18
10%
11
Total fee revenue
1,695
1,324
1,196
Net interest income
(5)
(29)
(33)
(124)
(12)
3
1,327
1,218
2
1,198
962
28
nm
27
6
11
50
11
27
72
7
1,690
1,286
Management fees
Trading services(1)
Processing fees
and other
Total revenue
Total expenses
Income before
income tax
expense
Pre-tax margin
Average assets
(in billions)
$ 404
$ 109
$ 236
271
(54)
24%
8%
20%
$
5.4
$
4.4
$
3.9
(1) Includes revenues associated with the SPDR® Gold Shares ETF and
SPDR® Long Dollar Gold Trust ETF, for which we act as the marketing agent.
nm Not meaningful
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 AUM
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 25% in 2017
compared to 2016, primarily due to the full year of
acquired GEAM business compared to a half year in
2016, higher global equity markets and higher
revenue yielding ETF inflows.
Management fees increased 10% in 2016
compared to 2015, primarily due to the acquired
GEAM business in the second half of 2016.
Management fees generated outside the U.S.
were approximately 28% of total management fees in
2017, compared to 32% and 35% in 2016 and 2015,
respectively. The percentage of management fees
generated outside the U.S. in 2017 decreased from
2016 primarily due to the acquired GEAM business.
State Street Corporation | 67
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
TABLE 13: ASSETS UNDER MANAGMENT BY ASSET CLASS AND INVESTMENT APPROACH
2017
2016
2015
2014
2013
As of December 31,
2016-2017 Annual
Growth Rate
2013-2017
Compound Annual
Growth Rate
(In billions)
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
$
95
$
73
$
32
$
39
$
1,650
1,745
1,401
1,474
1,294
1,326
1,436
1,475
77
337
414
330
18
129
147
23
123
146
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
42
1,334
1,376
16
311
327
385
23
110
133
14
110
124
Total
$
2,782
$
2,468
$
2,245
$
2,448
$
2,345
30%
18
18
10
9
10
(1)
(5)
21
17
(18)
(5)
(7)
13
23%
5
6
48
2
6
(4)
(6)
4
3
13
3
4
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 Shares ETF and SPDR® Long Dollar Gold Trust ETF. State Street is not
the investment manager for the SPDR® Gold Shares ETF and SPDR® Long Dollar Gold Trust ETF, but acts as the marketing agent.
TABLE 14: EXCHANGE - TRADED FUNDS BY ASSET CLASS(1)
As of December 31,
(In billions)
Alternative Investments(2)
2017
2016
2015
2014
2013
$
48
$
42
$
34
$
38
$
Cash
Equity
Fixed-income
2
531
63
2
426
51
3
350
41
1
388
39
Total Exchange-Traded Funds
$
644
$
521
$
428
$
466
$
2016-2017 Annual
Growth Rate
2013-2017
Compound Annual
Growth Rate
39
1
325
34
399
14%
—
25
24
24
5%
19
13
17
13
(1) ETFs are a component of AUM presented in the preceding table.
(2) Includes real estate investment trusts, currency and commodities, including SPDR® Gold Shares ETF and SPDR® Long Dollar Gold Trust ETF. State Street is not
the investment manager for the SPDR® Gold Shares ETF and SPDR® Long Dollar Gold Trust ETF, but acts as the marketing agent.
TABLE 15: GEOGRAPHIC MIX OF ASSETS UNDER MANAGEMENT(1)
As of December 31,
(In billions)
North America
Europe/Middle East/Africa
Asia/Pacific
Total
2017
2016
2015
2014
2013
$
$
1,931
$
1,691
$
1,452
$
1,568
$
521
330
482
295
489
304
559
321
2,782
$
2,468
$
2,245
$
2,448
$
1,456
560
329
2,345
(1) Geographic mix is based on client location or fund management location.
State Street Corporation | 68
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
TABLE 16: ACTIVITY IN ASSETS UNDER MANAGEMENT BY PRODUCT CATEGORY
(In billions)
Equity
Fixed-
Income
Cash(1)
Multi-Asset-
Class Solutions
Alternative
Investments(2)
Total
Balance as of December 31, 2014
$
1,475
$
319
$
399
$
127
$
128
$
2,448
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
277
(363)
(86)
(29)
—
(115)
(13)
(21)
(34)
62
(70)
(8)
5
—
(3)
3
(7)
(4)
—
—
—
1
(27)
(26)
—
(5)
(5)
51
(59)
(8)
—
—
(8)
(12)
(4)
(16)
33
(31)
2
(1)
—
1
16
(9)
7
423
(523)
(100)
(24)
(27)
(151)
(6)
(46)
(52)
Balance as of December 31, 2015
$
1,326
$
312
$
368
$
103
$
136
$
2,245
Long-term institutional inflows(3)
Long-term institutional outflows(3)
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)
244
(301)
(57)
37
—
(20)
140
(10)
130
38
90
(96)
(6)
9
—
3
10
(3)
7
56
—
—
—
—
(37)
(37)
—
(2)
(2)
4
48
(34)
14
—
—
14
9
(3)
6
3
13
(21)
(8)
6
—
(2)
14
(2)
12
11
395
(452)
(57)
52
(37)
(42)
173
(20)
153
112
Balance as of December 31, 2016
$
1,474
$
378
$
333
$
126
$
157
$
2,468
Long-term institutional inflows(3)
Long-term institutional outflows(3)
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
270
(344)
(74)
26
—
(48)
293
26
319
94
(92)
2
10
—
12
15
9
24
—
—
—
—
(8)
(8)
1
3
4
56
(52)
4
—
—
4
12
5
17
20
(41)
(21)
1
—
(20)
3
6
9
440
(529)
(89)
37
(8)
(60)
324
49
373
Balance as of December 31, 2017
$
1,745
$
414
$
329
$
147
$
146
$
2,782
(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 Shares ETF and SPDR® Long Dollar Gold Trust ETF. State Street is not
the investment manager for the SPDR® Gold Shares ETF and SPDR® Long Dollar Gold Trust ETF, but acts as the marketing agent.
(3) Amounts represent long-term portfolios, excluding ETFs.
(4) Includes AUM acquired as part of the acquisition of the GEAM business on July 1, 2016.
The preceding table does not include approximately $20 billion of new asset management business which was
awarded but not installed as of December 31, 2017. 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,
2017 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 as the timing can vary significantly.
State Street Corporation | 69
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Expenses
TABLE 17: AVERAGE STATEMENT OF CONDITION(1)
Total expenses for Investment Management
increased 6% in 2017 compared to 2016 primarily
due to the full year of the acquired GEAM business
compared to a half year in 2016, higher annual merit
and performance based incentive compensation,
including higher seasonal deferred incentive
compensation expense for retirement eligible
employees and payroll taxes in the first quarter of
2017 compared to the first quarter of 2016, and
higher costs to support new business. These
increases were partially offset by a one-time
acceleration of compensation expense of
approximately $81 million in the fourth quarter of
2016 and Beacon savings.
Additional information about expenses is
provided under "Expenses" in “Consolidated Results
of Operations” included in this Management's
Discussion and Analysis of this Form 10-K.
FINANCIAL CONDITION
The structure of our consolidated statement of
condition is primarily driven by the liabilities
generated by our Investment Servicing and
Investment Management lines of business. Our
clients' needs and our operating objectives determine
balance sheet volume, mix, and currency
denomination. As our clients execute their worldwide
cash management and investment activities, they
utilize deposits and short-term investments that
constitute the majority of our liabilities. These
liabilities are generally in the form of interest-bearing
transaction account deposits, which are denominated
in a variety of currencies; non-interest-bearing
demand deposits; and repurchase agreements, which
generally serve as short-term investment alternatives
for our clients.
Deposits and other liabilities 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 AFS or HTM 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,
2017
2016
2015
Average
Balance
Average
Balance
Average
Balance
(In millions)
Assets:
Interest-bearing deposits with banks
$ 47,514
$ 53,091
$ 69,753
Securities purchased under resale
agreements
Trading account assets
Investment securities
Loans and leases
Other interest-earning assets
Average total interest-earning
assets
2,131
1,011
2,558
921
3,233
1,194
95,779
100,738
105,611
21,916
22,884
19,013
22,863
17,948
22,717
191,235
199,184
220,456
Cash and due from banks
3,097
3,157
2,460
Other non-interest-earning assets
25,118
27,386
27,516
Average total assets
$219,450
$229,727
$250,432
Liabilities and shareholders’ equity:
Interest-bearing deposits:
U.S.
Non-U.S.
$ 30,623
$ 30,107
$ 30,819
91,937
95,551
102,491
Total interest-bearing deposits
122,560
125,658
133,310
Securities sold under repurchase
agreements
3,683
4,113
8,875
Federal funds purchased
—
31
21
Other short-term borrowings
1,313
1,666
3,826
Long-term debt
11,595
11,401
10,301
Other interest-bearing liabilities
4,607
5,394
6,471
Average total interest-bearing
liabilities
Non-interest-bearing deposits
Other non-interest-bearing liabilities
Preferred shareholders’ equity
143,758
148,263
162,804
41,248
12,379
3,197
44,827
14,742
3,060
51,675
14,626
2,418
Common shareholders’ equity
18,868
18,835
18,909
Average total liabilities and
shareholders’ equity
$219,450
$229,727
$250,432
(1) Additional information about our average statement of condition, primarily
our interest-earning assets and interest-bearing liabilities, is provided in "Net
Interest Income" in this Management's Discussion and Analysis included in
this Form 10-K.
State Street Corporation | 70
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Investment Securities
TABLE 18: CARRYING VALUES OF INVESTMENT
SECURITIES
(In millions)
Available-for-sale:
U.S. Treasury and federal agencies:
As of December 31,
2017
2016
Direct obligations
$
223
$
4,263
Mortgage-backed securities
Total U.S. Treasury and federal agencies
10,872
11,095
13,257
17,520
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
3,358
1,542
—
1,447
6,347
6,695
2,947
10,721
6,108
26,471
9,151
1,054
2,560
46
—
397
—
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
Total
$
57,121
$
61,998
Held-to-maturity(2):
U.S. Treasury and federal agencies:
Direct obligations
$
17,028
$
17,527
Mortgage-backed securities
Total U.S. Treasury and federal agencies
16,651
33,679
10,334
27,861
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
Collateralized mortgage obligations
3,047
798
1
3,846
939
263
474
48
1,724
1,209
2,883
897
35
3,815
1,150
531
286
113
2,080
1,413
Total
$
40,458
$
35,169
(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) Includes securities at amortized cost or fair value on the date of transfer
from AFS.
Additional information about our investment
securities portfolio is provided in Note 3 to the
consolidated financial statements included in 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.
Average duration of our investment securities
portfolio increased to 2.7 years as of December 31,
2017, compared to 2.5 years as of December 31,
2016. The increase is primarily driven by the
deployment of non-U.S. cash into foreign securities.
In 2017, we sold $12.2 billion of AFS, primarily
Agency MBS and U.S. Treasury securities in our
investment portfolio, to position for the then-existing
interest rate environment resulting in a pre-tax loss of
$39 million.
In 2017, $496 million of Agency MBS previously
classified as AFS were transferred to HTM, and in
2016, $4.9 billion of Agency MBS and Student Loan
ABS 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 loss of $2.8 million and a net unrealized
gain of $87 million as of December 31, 2017 and
2016, respectively, within accumulated other
comprehensive loss which will be accreted into
interest income over the remaining life of the
transferred security (ranging from approximately 10 to
42 years).
Approximately 90% of the carrying value of the
portfolio was rated “AAA” or “AA” as of December 31,
2017 and 91% as of December 31, 2016.
TABLE 19: INVESTMENT PORTFOLIO BY EXTERNAL CREDIT
RATING
December 31, 2017
December 31, 2016
AAA(1)
AA
A
BBB
Below BBB
74%
16
6
4
—
100%
78%
13
5
3
1
100%
(1) Includes U.S. Treasury and federal agency securities that are split-rated,
“AAA” by Moody’s Investors Service and “AA+” by Standard & Poor’s.
State Street Corporation | 71
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Approximately 80% and 88% of the aggregate
carrying value of these non-U.S. debt securities was
rated “AAA” or “AA” as of December 31, 2017 and
December 31, 2016, 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, 2017
and December 31, 2016, approximately 61% and
65%, 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.
As of December 31, 2017, our non-U.S. debt
securities had an average market-to-book ratio of
100.4%, and an aggregate pre-tax net unrealized
gain of approximately $114 million, composed of
gross unrealized gains of $180 million and gross
unrealized losses of $66 million. These unrealized
amounts included;
•
•
a pre-tax net unrealized gain of $35 million,
composed of gross unrealized gains of $95
million and gross unrealized losses of $60
million, associated with non-U.S. debt
securities available-for-sale and;
a pre-tax net unrealized gain of $79 million,
composed of gross unrealized gains of $85
million and gross unrealized losses of $6
million, associated with non-U.S. debt
securities held-to-maturity.
As of December 31, 2017, the underlying
collateral for non-U.S. MBS and ABS primarily
included Australian, Dutch, Italian and U.K. prime
mortgages and German auto 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 auto loans, prime mortgages, and
corporate debt and covered bonds. The securities
listed under “Japan” were substantially composed of
Japanese government securities and corporate debt.
As of December 31, 2017, the investment
portfolio was diversified with respect to asset class
composition. The following table presents the
composition of these asset classes.
TABLE 20: INVESTMENT PORTFOLIO BY ASSET CLASS
December 31, 2017
December 31, 2016
US Treasuries
US Agency MBS
ABS
Foreign Sovereign
Other Credit
17%
26
22
12
23
100%
23%
23
23
6
25
100%
Non-U.S. Debt Securities
Approximately 29% of the aggregate carrying
value of our investment securities portfolio was non-
U.S. debt securities as of December 31, 2017,
compared to approximately 23% as of December 31,
2016.
TABLE 21: NON-U.S. DEBT SECURITIES
(In millions)
Available-for-sale:
As of December 31,
2017
2016
United Kingdom
$
5,721
$
Australia
Canada
France
Italy
Spain
Japan
Belgium
Netherlands
Ireland
Hong Kong
Sweden
Germany
Norway
Finland
Austria
South Korea
Other(1)
Total
Held-to-maturity:
United Kingdom
Netherlands
Singapore
Australia
Germany
Spain
Other(2)
Total
$
$
$
4,717
3,066
2,500
1,645
1,413
1,319
1,193
1,175
787
666
538
529
514
299
234
19
136
26,471
410
372
353
235
127
104
123
$
$
5,093
4,272
2,989
1,013
676
266
1,388
360
1,283
85
664
188
713
508
223
57
634
88
20,500
504
473
180
374
329
98
122
1,724
$
2,080
(1) Included approximately $37 million and $22 million as of December 31,
2017 and December 31, 2016, respectively, related to Portugal, which was
related to MBS and auto loans.
(2) Included approximately $75 million and $80 million as of December 31,
2017 and December 31, 2016, respectively, related to Italy, Portugal and
Norway, all of which were related to MBS and auto loans.
State Street Corporation | 72
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Municipal Obligations
We carried approximately $9.15 billion of
municipal securities classified as state and political
subdivisions in our investment securities portfolio as
of December 31, 2017 as shown in Table 18: Carrying
Values of Investment Securities, all of which were
classified as AFS. As of the same date, we also
provided approximately $9.32 billion of credit and
liquidity facilities to municipal issuers.
TABLE 22: 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, 2017
State of Issuer:
Texas
California
New York
Massachusetts
Washington
Total
$
$
As of December 31, 2016
State of Issuer:
Texas
California
New York
Massachusetts
Washington
Maryland
Total
$
1,713
415
742
859
623
4,352
1,781
523
740
916
708
488
5,156
$
$
$
$
1,622
2,237
1,288
991
366
6,504
1,685
2,298
1,293
1,071
234
411
6,992
$ 3,335
2,652
2,030
1,850
989
$ 10,856
$ 3,466
2,821
2,033
1,987
942
899
$ 12,148
18%
14
11
10
5
18%
14
10
10
5
5
(1) Represented 5% or more of our aggregate municipal credit exposure of
approximately $18.47 billion and $19.57 billion across our businesses as of
December 31, 2017 and December 31, 2016, respectively.
(2) Includes municipal loans which are also presented within Table 24.
Our aggregate municipal securities exposure
presented in Table 22: 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,
2017. As of that date, approximately 49% and 51% of
our aggregate municipal securities exposure was
associated with general obligation and revenue
bonds, respectively. 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 OTTI 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.
State Street Corporation | 73
3.30%
3.26
2.53
—
2.08
2.42
—
1.71
2.68
6.74
3.33
3.07
1.58%
3.12
2.10
—
2.46
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
TABLE 23: CONTRACTUAL MATURITIES AND YIELDS
As of December 31, 2017
Under 1 Year
1 to 5 Years
6 to 10 Years
Over 10 Years
Amount
Yield
Amount
Yield
Amount
Yield
Amount
Yield
(Dollars in millions)
Available-for-sale(1):
U.S. Treasury and federal agencies:
Direct obligations
Mortgage-backed securities
Total U.S. treasury and federal agencies
Asset-backed securities:
$
Student loans
Credit cards
Other
Total asset-backed securities
Non-U.S. debt securities:
Mortgage-backed securities
Asset-backed securities
Government securities
Other
Total non-U.S. debt securities
State and political subdivisions(2)
Collateralized mortgage obligations
Other U.S. debt securities
—
96
96
289
—
—
289
551
205
2,195
1,078
4,029
474
3
296
—% $
2.99
2.12
—
—
1.51
0.38
3.65
2.75
5.59
3.05
5.34
12
762
774
1,044
1,290
350
2,684
4,502
2,185
3,201
4,235
14,123
2,415
145
1,097
1.85% $
3.39
2.10
1.68
2.09
0.99
0.75
1.56
1.12
6.25
2.81
2.84
6
3,123
3,129
685
252
956
1,893
602
557
4,448
758
6,365
4,724
170
1,107
3.75% $
3.06
2.10
2.24
1.68
2.11
0.68
2.57
1.81
6.73
3.25
2.55
205
6,891
7,096
1,340
—
141
1,481
1,040
—
877
37
1,954
1,538
736
60
Total
$
5,187
$
21,238
$
17,388
$
12,865
Held-to-maturity(1):
U.S. Treasury and federal agencies:
Direct obligations
Mortgage-backed securities
Total U.S. treasury and federal agencies
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
$
1,988
1.33% $
14,968
2.16% $
—
1,988
35
178
—
213
132
26
353
—
511
8
—
1.66
2.22
—
0.52
0.18
3.54
—
3.12
162
15,130
245
620
—
865
217
237
121
48
623
144
2.57
1.87
1.88
—
0.48
0.99
0.25
0.01
2.49
14
1,605
1,619
265
—
—
265
45
—
—
—
45
1.66% $
58
3.04
1.93
—
—
14,884
14,942
2,502
—
1
2,503
2.70
545
1.10
—
—
—
—
—
—
545
714
—
—
—
2.50
343
2.25
Total
$
2,720
$
16,762
$
2,272
$
18,704
(1) The maturities of MBS, ABS and collateralized mortgage obligations are based on expected principal payments.
(2) Yields were calculated on a fully taxable-equivalent basis, using applicable statutory tax rates (35% as of December 31, 2017). Going forward, the statutory tax
rate will reflect the impact of TCJA.
State Street Corporation | 74
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Impairment
Loans and Leases
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. 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).
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 less than $1 million of OTTI in
2017 and $2 million in 2016. Management considers
the aggregate decline in fair value of the remaining
investment securities and the resulting gross
unrealized losses of $657 million as of December 31,
2017 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 in this Form 10-K.
Our evaluation of potential OTTI of structured
credit securities with collateral in the U.K. and
continental Europe takes into account the outcome
from the Brexit referendum and other geopolitical
events, and assumes no disruption of payments on
these securities.
TABLE 24: U.S. AND NON- U.S. LOANS AND LEASES
As of December 31,
(In millions)
2017
2016
2015
2014
2013
Domestic:
Commercial and
financial
Commercial real
estate
Lease financing
$18,696
$16,412
$15,899
$14,515
$10,305
98
267
27
338
28
337
28
335
209
339
Total domestic
19,061
16,777
16,264
14,878
10,853
Non-U.S.:
Commercial and
financial
3,837
2,476
1,957
2,653
1,877
Lease financing
396
504
578
668
756
Total non-U.S.
4,233
2,980
2,535
3,321
2,633
Total loans and
leases
Average loans and
leases
$23,294
$19,757
$18,799
$18,199
$13,486
$21,916
$19,013
$17,948
$15,912
$13,781
The increase in loans in the commercial and
financial segment as of December 31, 2017
compared to December 31, 2016 was primarily driven
by higher levels of loans to investment funds and
loans to municipalities.
As of both December 31, 2017 and
December 31, 2016, our investment in senior secured
loans totaled approximately $3.5 billion. In addition,
we had binding unfunded commitments as of
December 31, 2017 and December 31, 2016 of $279
million and $76 million, respectively, to participate in
such syndications.
These senior secured loans, which are primarily
rated “speculative” under our internal risk-rating
framework (refer to Note 4 to the consolidated
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 89% and 92% of the loans rated “BB”
or “B” as of December 31, 2017 and December 31,
2016, 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 $2.1 billion
and $1.4 billion as of December 31, 2017 and
December 31, 2016, respectively.
As of December 31, 2017 and December 31,
2016, unearned income deducted from our
investment in leveraged lease financing was $75
million and $94 million, respectively, for U.S. leases
State Street Corporation | 75
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
and $159 million and $192 million, respectively, for
non-U.S. leases.
No loans were modified in troubled debt
restructurings in 2017 or 2016.
Additional information about all of our loan-and-
leases segments, as well as underlying classes, is
provided in Note 4 to the consolidated financial
statements included in this Form 10-K.
TABLE 25: 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, 2017
Total
Under 1 Year
1 to 5 Years
Over 5 Years
$
18,696
$
11,517
$
4,863
$
98
267
—
144
19,061
11,661
3,837
397
4,234
1,878
123
2,001
—
—
4,863
1,544
91
1,635
2,316
98
123
2,537
415
183
598
$
23,295
$
13,662
$
6,498
$
3,135
TABLE 26: 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
TABLE 27: ALLOWANCE FOR LOAN AND LEASE LOSSES
$
$
As of December 31, 2017
(In millions)
2017
2016
2015
2014
2013
Years Ended December 31,
Allowance for loan and lease losses:
Beginning balance
Provision for loan and lease losses(1)
Charge-offs(2)
Ending balance
$
$
53
$
2
(1)
54
$
$
46
10
(3)
53
$
$
38
12
(4)
46
$
28
10
—
38
$
$
494
9,138
9,632
22
6
—
28
(1) The provision for loan and lease losses is related to commercial and financial loans.
(2) The charge-offs are related to commercial and financial loans.
The provision of $2 million and the charge-offs
of $1 million recorded in 2017 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, 2017 and December 31,
2016, approximately $47 million and $44 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 $7 million and $9 million as of
December 31, 2017 and December 31, 2016,
respectively, were related to other components of
commercial and financial loans.
State Street Corporation | 76
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
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 28: Cross-Border Outstandings, represented
approximately 26%, 28% and 25% of our
consolidated total assets as of December 31, 2017,
2016 and 2015 respectively.
TABLE 28: CROSS-BORDER OUTSTANDINGS(1)
(In millions)
December 31, 2017
Germany
Japan
United Kingdom
Australia
Canada
France
December 31, 2016
United Kingdom
Japan
Germany
Australia
Luxembourg
Canada
December 31, 2015
United Kingdom
Japan
Germany
Australia
Canada
Luxembourg
Investment
Securities and
Other Assets
Derivatives
and Securities
on Loan
Total Cross-
Border
Outstandings
$
$
$
$
$
$
18,201
15,250
12,051
5,278
4,215
2,684
18,712
17,922
13,812
5,122
3,389
3,179
16,965
17,328
12,111
4,035
3,156
3,034
$
$
$
295
549
1,253
390
707
344
1,761
1,171
484
986
762
781
1,589
87
569
292
1,113
514
18,496
15,799
13,304
5,668
4,922
3,028
20,473
19,093
14,296
6,108
4,151
3,960
18,554
17,415
12,680
4,327
4,269
3,548
(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.
As of December 31, 2017, there were no
countries whose aggregate cross-border outstandings
amounted to between 0.75% and 1% of our
consolidated assets. 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 the
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 the Netherlands.
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
State Street Corporation | 77
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
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.
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
Information Technology Risk Management
Market Risk Management
Model Risk Management
Strategic Risk Management
Governance and Structure
Form 10-K
Page Number
78
82
87
92
95
96
103
104
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 | 78
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
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
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
Model Risk
Committee
(MRC)
Compliance and
Ethics Committee
Third Party Risk
Management
Steering
Committee
Access Control
Board
Technology Risk
Governance
Committee
Executive
Information
Security
Committee
CCAR Steering
Committee
SSGA Risk
Committee
Legal Entity
Oversight Committee
Business Controls
Steering
Committee
Global Transitions
Oversight
Committee
Country Risk
Committee
Conduct Standards
Committee
Data Governance
Board
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:
•
•
“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 | 79
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
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,
resolution planning, 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 management's
operation of our comprehensive 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, is co-chaired by our CRO and CFO, who
regularly present to the RC on 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 CAO
and the Chief Information Officer.
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MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
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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:
MRAC
• ALCO is the senior corporate oversight and
decision-making body for balance sheet
strategy, Global Treasury business activities
and risk management for interest rate risk,
liquidity risk and non-trading market risk.
ALCO’s roles and responsibilities are
designed to be complementary to, and in
coordination with the MRAC, which approves
the 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;
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, 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
• TMRC reviews the effectiveness of, and
• The Fiduciary Review Committee reviews
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
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.
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MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
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• The Conduct Standards Committee provides
oversight of our enforcement of employee
conduct standards.
TORC
• 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 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 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;
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MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
counterparty, industry and country concentrations;
and regulatory compliance. These policies and
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
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MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
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
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 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
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MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
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
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.
beneficiary of the provided protection) on account of
an exposure owing by the obligor. The protection
provider may support the underlying exposure either
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.
All types of collateral are assessed regularly by
We have established a review process to
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.
Netting
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 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
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.
Credit Limits
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.
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MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
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
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.
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MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
GCR is subject to oversight by the CRPC, and
provides periodic updates to the Board’s RC.
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 and at
State Street Bank, 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 maintains access to
enough cash, primarily in the form of interest-bearing
deposits or time deposits with its banking subsidiaries
and access to borrowing from SSIF, to meet its
current debt maturities and cash needs, as well as
those projected over the next one-year period. As of
December 31, 2017, the value of our Parent
Company's net liquid assets totaled $0.53 billion,
compared with $3.64 billion as of December 31,
2016, reflecting the contribution of liquid assets to
SSIF in July 2017 in accordance with the support
agreement. At December 31, 2017, the value of
SSIF's net liquid assets totaled $2.88 billion. As of
December 31, 2017, our Parent Company has
approximately $1.4 billion 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,
2017 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
State Street Corporation | 87
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
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
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 MBS), 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
State Street Corporation | 88
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
$65.35 billion and $87.20 billion as of December 31,
2017 and December 31, 2016, respectively.
TABLE 29: COMPONENTS OF AVERAGE HQLA BY TYPE OF
ASSET
(In millions)
Excess Central Bank Balances
U.S. Treasuries
Other Investment securities
Foreign government
Total
December 31,
2017
December 31,
2016
$
$
33,584
$
10,278
13,422
8,064
65,348
$
48,407
17,770
15,442
5,585
87,204
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, 2017, we maintained cash balances in
excess of regulatory requirements governing deposits
with the Federal Reserve of approximately $33.58
billion at the Federal Reserve, the ECB and other
non-U.S. central banks, compared to $48.40 billion as
of December 31, 2016. The lower levels of deposits
with central banks as of December 31, 2017
compared to December 31, 2016 was due to normal
deposit volatility.
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, 2017 and
December 31, 2016, 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 $66.10 billion as of
December 31, 2017, compared to $54.40 billion as of
December 31, 2016. 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. A recurring significant use of our liquidity
involves our deployment of HQLA from our
investment portfolio to post collateral to financial
institutions and participants in our agency lending
program serving as sources of securities under our
enhanced custody program.
We had unfunded commitments to extend credit
with gross contractual amounts totaling $26.49 billion
and $26.99 billion as of December 31, 2017 and
December 31, 2016, respectively. These amounts do
not reflect the value of any collateral. As of
December 31, 2017, approximately 72% 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. As of December 31, 2017 and
December 31, 2016, approximately 60% of our
average client deposit balances were denominated in
U.S. dollars, approximately 20% in EUR, 10% in GBP
and 10% in all other currencies.
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.
State Street Corporation | 89
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
TABLE 30: TOTAL DEPOSITS
December 31
Average Balance
Years Ended
December 31,
(In millions)
2017
2016
2017
2016
Client deposits
$ 180,149
$ 176,693
$ 158,996
$ 156,029
Wholesale CDs
4,747
10,470
4,812
14,456
Total deposits
$ 184,896
$ 187,163
$ 163,808
$ 170,485
Short-Term Funding
Our on-balance sheet liquid assets are also an
integral component of our liquidity management
strategy. These assets provide liquidity through
maturities of the assets, but more importantly, they
provide us with the ability to raise funds by pledging
the securities as collateral for borrowings or through
outright sales. In addition, our access to the global
capital markets gives us the ability to source
incremental funding at reasonable rates of interest
from wholesale investors. As discussed earlier under
“Asset Liquidity,” State Street Bank's membership in
the FHLB allows for advances of liquidity 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 $2.84 billion and $4.40 billion as of
December 31, 2017 and December 31, 2016,
respectively.
State Street Bank currently maintains a line of
credit with a financial institution of CAD 1.40 billion, or
approximately $1.11 billion as of December 31, 2017,
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, 2017, there was no
balance outstanding on this line of credit.
Long-Term Funding
We have the ability to issue debt and equity
securities under our current universal shelf
registration to meet current commitments and
business needs, including accommodating the
transaction and cash management needs of our
clients. In addition, State Street Bank, a wholly
owned subsidiary of the Parent Company, also has
authorization to issue up to $5 billion in unsecured
senior debt and an additional $500 million of
subordinated debt.
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;
serving markets; and
engaging 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 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 | 90
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
TABLE 31: 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, 2017
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
Contractual Cash Obligations and Other Commitments
The long-term contractual cash obligations included within Table 32: Long-Term Contractual Cash Obligations
were recorded in our consolidated statement of condition as of December 31, 2017, except for operating leases and
the interest portions of long-term debt and capital leases.
TABLE 32: LONG-TERM CONTRACTUAL CASH OBLIGATIONS
December 31, 2017
(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
11,370
$
1,408
$
3,141
$
2,742
$
4,079
1,131
267
197
53
329
90
269
90
336
34
12,768
$
1,658
$
3,560
$
3,101
$
4,449
$
$
(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, 2017.
(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 32: 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 Note 8 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, 2017 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 32: Long-Term Contractual Cash
Obligations.
State Street Corporation | 91
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
TABLE 33: 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 AS OF DECEMBER 31, 2017
Total amounts
committed(1)
Less than
1 year
1-3
years
4-5
years
Over 5
years
381,817
$
381,817
$
— $
— $
26,653
26,488
3,158
282
26,653
16,998
1,596
74
—
5,834
1,424
100
—
3,395
138
57
438,398
$
427,138
$
7,358
$
3,590
$
—
—
261
—
51
312
(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 33: 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, Business Controls
Steering Committee, Compliance and Ethics
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 and co-chaired by the
FLOD Head of Business Controls, provides cross-
business oversight of operational risk, operational risk
programs and their implementation to identify,
measure, manage and control operational risk in an
effective and consistent manner 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.
State Street Corporation | 92
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
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
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 ORM's Capital
Analysis 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 and Assessments
The objective of risk identification and
assessments 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
State Street Corporation | 93
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
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’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.
Capital Analysis
The primary measurement tool used is an
internally developed loss distribution approach (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 $3.67 billion and $45.82 billion,
respectively, as of December 31, 2017, compared to
$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
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. The results of these workshops
are used to make a comparison to our LDA
model results to determine that our
calculation of required capital considers
relevant risk-related information.
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MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
• Business environment and internal control
Effectiveness and Testing
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
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, Reporting and Analytics
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.
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.
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.
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.
Information Technology Risk Management
Overview and Principles
We define technology risk as the risk associated
with the use, ownership, operation, involvement,
influence and adoption of information technology.
Technology risk includes risks potentially triggered by
technology non-compliance with regulatory
obligations, information security and privacy
incidents, business disruption, technology internal
control and process gaps, technology operational
events, and adoption of new business technologies.
The principal technology risks within our
technology risk policy and risk appetite framework
include:
• Third party vendor risk
• Business disruption and technology resiliency
risk
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• Cyber and information security risk
• Promoting a strong technology risk culture
• Technology asset and configuration risk
• Technology obsolescence risk
Governance
Our Board is responsible for the approval and
oversight of our overall technology risk framework
and program. It does so through its Technology
Committee, which reviews and approves our
technology risk policy and appetite framework
annually.
Our technology risk policy establishes our
approach to our management of technology risk
across State Street. The policy identifies the
responsibilities of individuals and committees charged
with oversight of the management of technology risk
and articulates a broad mandate that supports
implementation of the technology risk framework.
Risk control functions in the business are
responsible for adopting and executing the Enterprise
Technology Risk Management, or ETRM, technology
risk framework and reporting requirements. They do
this, in part, by developing and maintaining an
inventory of critical applications and supporting
infrastructure, as well as identifying, assessing and
measuring technology risk utilizing the ETRM
framework. They are also responsible for monitoring
and evaluating risk on a continual basis using key risk
indicators, risk reporting and adopting appropriate risk
responses to risk issues.
The Chief Technology Risk Officer, a member of
the CRO’s executive management team, leads the
ETRM. ETRM is the separate risk function
responsible for the technology risk strategy and
appetite, and technology risk framework development
and execution. ETRM also performs overall
technology risk monitoring and reporting to the Board,
and provides a separate view of the technology risk
posture to executive leadership.
We manage technology risks by:
• Coordinating various risk assessment and
risk management activities, including ERM
operational risk programs;
• Establishing, through TORC and the
Technology Committee of the Board, the
enterprise level technology risk and cyber risk
appetite and limits;
• Producing enterprise level risk reporting,
aggregation, dashboards, profiles and risk
appetite statements;
• Validating appropriateness of reporting of
information technology risks and risk
acceptance to senior management risk
committees and the Board;
through communication;
• Serving as an escalation and challenge point
for technology risk policy guidance,
expectations and clarifications;
• Assessing effectiveness of key enterprise
information technology risk and internal
control remediation programs; and
• Providing risk oversight, challenge and
monitoring for the Global Continuity and Third
Party Vendor Management Program,
including the collection of risk appetite,
metrics and KRIs, and reviewing issue
management processes and consistent
program adoption.
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.
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
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MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
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, 2017, the notional amount of these
derivative contracts was $1.75 trillion, of which $1.68
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;
• A defined limit structure and escalation
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;
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MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
• 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.
Covered Positions
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 foreign exchange
spot, 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.
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.
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MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
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
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.
•
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MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
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.
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 NII, 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
each of 2017, 2016 and 2015. In reference to the
2017 exception, the trading loss that day exceeded
the VaR based on the prior day’s closing positions,
following the euro’s forward point spike on short
tenors driven by thinning liquidity and reduced
volumes spurred by banks’ year-end balance sheet
preparations. 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
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MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
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, 2017 and 2016, respectively, as measured by our VaR methodology:
TABLE 34: TEN-DAY VaR ASSOCIATED WITH TRADING ACTIVITIES FOR COVERED POSITIONS
Quarter Ended December 31, 2017
Quarter Ended December 31, 2016
As of
December 31,
2017
As of
December 31,
2016
(In thousands)
Global Markets
Global Treasury
Total VaR
Average
Maximum Minimum
Average
Maximum Minimum
VaR
VaR
$
$
8,148
$ 13,502
650
1,767
8,123
$ 13,306
$
$
3,402
126
3,410
$
$
8,307
$
15,847
527
756
8,285
$
15,723
$
$
3,048
333
2,970
$
$
5,719
1,346
5,562
$
$
4,088
756
3,938
TABLE 35: TEN-DAY STRESSED VaR ASSOCIATED WITH TRADING ACTIVITIES FOR COVERED POSITIONS
Quarter Ended December 31, 2017
Quarter Ended December 31, 2016
As of
December 31,
2017
As of
December 31,
2016
Average
Maximum Minimum
Average
Maximum Minimum
Stressed VaR
Stressed VaR
(In thousands)
Global Markets
Global Treasury
Total Stressed VaR
$
27,789
$ 42,527
$
14,320
$
38,645
$
55,899
$
20,646
$
27,185
$ 41,908
$
14,408
$
36,168
$
52,057
$
18,883
8,761
17,460
2,560
10,275
13,868
7,030
$
$
31,512
12,042
29,649
$
$
26,811
11,342
28,624
The average of our stressed VaR-based
measure was approximately $28 million for the
quarter ended December 31, 2017, compared to an
average of approximately $39 million for the quarter
ended December 31, 2016.
The decrease in our stressed VaR based
measure for the quarter ended December 31, 2017,
compared to the quarter ended December 31, 2016,
was mainly driven by lower end of day foreign
exchange positions in Q4 2017 compared to Q4
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, 2017 and 2016,
respectively. The totals of the VaR-based and
stressed VaR-based measures for the three attributes
in total 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.
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MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
TABLE 36: 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, 2017
Interest Rate
Risk
Volatility Risk
Foreign
Exchange Risk
Interest Rate
Risk
Volatility Risk
As of December 31, 2016
$
$
6,149
100
6,250
$
$
5,546
1,372
5,840
$
$
3
—
3
$
$
3,279
220
3,269
$
$
3,281
737
3,004
$
$
102
—
102
TABLE 37: 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, 2017
Interest Rate
Risk
Volatility Risk
Foreign
Exchange Risk
Interest Rate
Risk
Volatility Risk
As of December 31, 2016
$
$
15,975
153
16,105
$
$
27,161
12,192
25,177
$
$
3
—
3
$
$
5,026
258
5,056
$
$
36,563
11,597
36,592
$
$
111
—
111
(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 NII 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 NII 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 NII 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. NII sensitivity is a short-term, earnings-
based simulation that measures re-pricing
mismatches on the balance sheet. It compares our
baseline view of NII 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 NII forecast includes our expectations
for new business growth, changes in balance sheet
mix and investment portfolio positioning. While
investment securities balances can fluctuate with the
level of rates as prepayment assumptions change,
our 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 over a long-term horizon. 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 NII
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). NII and EVE
sensitivity metrics are continuously monitored as
market conditions change and managed within
internally-approved risk limits and guidelines.
Net Interest Income at Risk
In the table below, we report the expected
change in NII over the next twelve months from
+/-100 bps instantaneous and gradual parallel rate
shocks. Note that in each scenario, all currencies 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.
We also routinely measure NII sensitivity to non-
parallel rate shocks to isolate the impact of short-term
or long-term market rates. In the up 100 bps
instantaneous shock, approximately 75% of the
expected 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 bps instantaneous shock,
approximately 50-60% of the benefit is driven by U.S.
rates.
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MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
TABLE 38: NII SENSITIVITY
(In millions)
Rate change:
December 31,
2017
December 31,
2016
Benefit / (Exposure)
+100 bps shock
$
435
$
–100 bps shock
+100 bps ramp
–100 bps ramp
(294)
177
(122)
585
(265)
284
(161)
As of December 31, 2017, NII sensitivity
remains positioned to benefit from rising interest
rates. Compared to prior year-end, the decreased
benefit to the up 100 bps instantaneous shock is
driven by investment portfolio activity and higher
forecasted short-end rates, which impacts the
repricing characteristics of client deposits and other
liabilities. The increased exposure to the down 100
bps instantaneous rate shock is driven by higher
observed short-term interest rates relative to prior
year-end. Gradual rate shocks have a similar asset
sensitive positioning compared with instantaneous
shocks, but are less impactful due to the severity of
the rate shift.
As a result, the Model Risk Management Framework
seeks to mitigate model risk at State Street.
Our model risk management program has three
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.
Economic Value of Equity
Governance
The following table highlights our economic
value of equity sensitivity to a +/-200 bps
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.
TABLE 39: EVE SENSITIVITY
(In millions)
Rate change:
+200 bps shock
–200 bps shock
December 31,
2017
December 31,
2016
Benefit / (Exposure)
$
(1,507) $
11
(1,092)
877
As of December 31, 2017, economic value of
equity sensitivity remains exposed to upward shifts in
interest rates. The change in each scenario is driven
by investment portfolio repositioning and higher
modeled client deposit duration. The -200 bps
scenario is also impacted by the low level of rates,
which can limit the size of the rate shock.
Model Risk Management
The use of 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.
Models used in the regulatory capital calculation
can only be deployed for use after undergoing a
model validation by ERM's Model Risk Management
and receiving the result on the validation that allows
for use.
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.
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MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Model owners submit models to the Model
Validation Group for validation on a regular basis, as
per existing policy.
Model Validation
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
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
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MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
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
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.
Stress Testing
We administer a robust State Street-wide stress-
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
State Street Corporation | 105
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
the Federal Reserve.
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.
Governance
In order to support integrated decision making,
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 CET1 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 CET1 capital, tier 1
capital and total capital.
Additional information about G-SIBs is provided
under “Regulatory Capital Adequacy and Liquidity
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 CET1 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 CET1 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 CET1 capital conservation buffer
of more than 2.5% of total risk-weighted assets and, if
deployed during periods of excessive credit growth, a
CET1 countercyclical capital buffer of up to 2.5% of
total risk-weighted assets, above each of the
minimum CET1, 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
State Street Corporation | 106
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
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 CET1 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 CET1 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
CET1 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.
The following table sets forth the transition to full implementation and the minimum risk-based capital ratio
requirements under the Basel III final rule.
TABLE 40: BASEL III FINAL RULES TRANSITION ARRANGEMENTS AND MINIMUM RISK-BASED CAPITAL RATIOS(1)
Capital conservation buffer (CET1)
G-SIB surcharge (CET1)(2)
Minimum CET1(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
4.500
6.000
8.000
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) Minimum ratios shown above do not reflect the countercyclical buffer, currently set at zero by U.S. banking regulators.
(2) 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 CET1, 10.0% for tier 1 capital and 12.0% for total capital.
(3) Minimum CET1 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.
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MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
TABLE 41: REGULATORY CAPITAL STRUCTURE AND RELATED REGULATORY CAPITAL RATIOS
State Street
State Street Bank
(In millions)
Common shareholders' equity:
Basel III
Advanced
Approaches
December 31,
2017(1)
Basel III
Standardized
Approach
December 31,
2017(2)
Basel III
Advanced
Approaches
December 31,
2016(1)
Basel III
Standardized
Approach
December 31,
2016(2)
Basel III
Advanced
Approaches
December 31,
2017(1)
Basel III
Standardized
Approach
December 31,
2017(2)
Basel III
Advanced
Approaches
December 31,
2016(1)
Basel III
Standardized
Approach
December 31,
2016(2)
Common stock and related surplus
$
Retained earnings
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
CET1 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
$
$
$
$
10,302
18,856
(972)
(9,029)
19,157
(6,877)
(76)
12,204
3,196
—
(18)
15,382
980
—
4
1
16,367
49,976
45,822
3,358
99,156
209,328
$
$
$
$
$
10,302
18,856
(972)
(9,029)
19,157
(6,877)
(76)
12,204
3,196
—
(18)
15,382
980
—
72
1
16,435
101,349
NA
1,334
102,683
209,328
$
$
$
$
$
10,286
$
10,286
$
17,459
17,459
11,612
12,312
$
11,612
12,312
$
11,376
$
11,376
12,285
12,285
(809)
—
(809)
—
23,115
23,115
(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
$
$
$
$
(6,579)
(5)
16,531
—
—
—
16,531
983
—
—
—
17,514
47,448
45,295
3,375
96,118
206,070
(1,648)
—
22,013
(6,060)
(148)
15,805
—
—
—
(1,648)
—
22,013
(6,060)
(148)
15,805
—
—
—
(6,579)
(5)
16,531
—
—
—
16,531
983
15,805
1,179
15,805
1,179
—
72
—
17,586
98,433
NA
1,334
99,767
206,070
—
15
—
16,999
47,383
44,043
3,822
95,248
222,584
$
$
$
$
$
$
$
$
—
77
—
17,061
94,413
NA
1,751
96,164
222,584
$
$
$
$
2017 Minimum
Requirements
Including Capital
Conservation
Buffer and G-
SIB Surcharge(6)
2016 Minimum
Requirements
Including Capital
Conservation
Buffer and G-
SIB Surcharge(7)
6.5%
5.5%
12.3%
11.9%
11.7%
11.6%
17.2%
16.6%
16.6%
16.4%
8.0
10.0
4.0
7.0
9.0
4.0
15.5
16.5
7.3
15.0
16.0
7.3
14.8
16.0
6.5
14.7
16.0
6.5
17.2
18.2
8.0
16.6
17.6
8.0
16.6
17.8
7.1
16.4
17.7
7.1
Capital
Ratios(1):
CET1
capital
Tier 1
capital
Total capital
Tier 1
leverage
(1) CET1 capital, tier 1 capital and total capital ratios as of December 31, 2017 and December 31, 2016 were calculated in conformity with the advanced approaches provisions of the Basel III
final rule. Tier 1 leverage ratio as of December 31, 2017 and December 31, 2016 were calculated in conformity with the Basel III final rule.
(2) CET1 capital, tier 1 capital and total capital ratios as of December 31, 2017 and December 31, 2016 were calculated in conformity with the standardized approach provisions of the Basel III
final rule. Tier 1 leverage ratio as of December 31, 2017 and December 31, 2016 were calculated in conformity with the Basel III final rule.
(3) Amounts for State Street and State Street Bank as of December 31, 2017 consisted of goodwill, net of associated deferred tax liabilities, and 80% of other intangible assets, net of associated
deferred tax liabilities. Amounts for State Street and State Street Bank as of December 31, 2016 consisted of goodwill, net of deferred tax liabilities and 60% 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, 2017. See Table 36: 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, 2016. See Table 36: Basel III Final
Rules Transition Arrangements and Minimum Risk Based Capital Ratios.
NA Not applicable
State Street Corporation | 108
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
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 CET1 capital increased $580 million as of
December 31, 2017 compared to December 31, 2016
primarily due to net income of $2.18 billion and an
increase in accumulated other comprehensive
income of $964 million. The increases in CET1
capital were partially offset by capital distributions of
$2.23 billion from common stock purchases and
dividends, the impact from the 2017 phase-in of the
deduction of intangibles (80% in 2017 compared to
60% in 2016), and the impact from the TCJA in 2017.
The TCJA resulted in one-time estimated net impact
to capital attributable to a change in deferred tax
liability on capital deductions of $356 million which
consisted of the $270 million impact to net income
and an additional $86 million related to a net change
in deductible deferred taxes. Actual effects of the
TCJA may differ from these estimates, among other
things, due to additional tax and regulatory guidance
and change in State Street assumptions and
interpretations.
In the same comparative period, our tier 1
capital increased $665 million, due to the increase in
CET1 capital. Total capital increased $458 million
under advanced approaches and increased $468
million under standardized approach due to the
changes to tier 1 capital. State Street Bank's tier 1
capital increased $726 million, and total capital
increased $515 million and $525 million under the
advanced and standardized approaches, respectively,
as of December 31, 2017, compared to
December 31, 2016. The increase is a result of
higher CET1.
The table below presents a roll-forward of CET1
capital, tier 1 capital and total capital for the years
ended December 31, 2017 and 2016.
TABLE 42: CAPITAL ROLL-FORWARD
State Street
Basel III
Advanced
Approaches
December 31,
2017
Basel III
Standardized
Approach
December 31,
2017
Basel III
Advanced
Approaches
December 31,
2016
Basel III
Standardized
Approach
December 31,
2016
$
11,624 $
11,624 $
12,433 $
12,433
(In millions)
CET1 capital:
CET1 capital balance,
beginning of period
Net income
2,177
2,177
2,143
2,143
Changes in treasury
stock, at cost
Dividends declared
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 CET1
capital
CET1 capital balance,
end of period
Additional tier 1 capital:
Tier 1 capital balance,
beginning of period
Change in CET1
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
(1,347)
(778)
(1,347)
(1,225)
(1,225)
(778)
(732)
(732)
(529)
(529)
(421)
(421)
964
93
580
964
93
580
(514)
(60)
(809)
(514)
(60)
(809)
12,204
12,204
11,624
11,624
14,717
14,717
15,264
15,264
580
—
—
85
665
580
—
—
85
665
(809)
493
(237)
6
(547)
(809)
493
(237)
6
(547)
15,382
15,382
14,717
14,717
1,192
1,250
2,085
2,139
(192)
(192)
(186)
(186)
—
(15)
—
(207)
985
—
(5)
—
(713)
(713)
7
(1)
11
(1)
(197)
(893)
(889)
1,053
1,192
1,250
15,909
15,967
17,349
17,403
665
(207)
665
(197)
(547)
(893)
(547)
(889)
$
16,367 $
16,435 $
15,909 $
15,967
State Street Corporation | 109
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The following table presents a roll-forward of the
Basel III advanced approaches risk-weighted assets
for the years ended December 31, 2017 and 2016.
TABLE 43: 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,
2017
December 31,
2016
$
99,301
$
99,552
2,914
(1,027)
30
(683)
440
(1,082)
(2,543)
(924)
(47)
(417)
1,243
575
(3,246)
606
1,812
447
(833)
512
(627)
697
$
99,156
$
99,301
(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, 2017, total advanced
approaches risk-weighted assets decreased $145
million compared to December 31, 2016, mainly due
to a decrease in credit risk and market risk, partially
offset by an increase in operational risk. The
decrease in credit risk was mainly due to lower
volatility in our FX derivative portfolio leading to a
lower positive marked-to-market, a decrease in cash
and redemptions of equity investments, offset by an
increase in the investment portfolio driven by
purchases of foreign sovereign bonds. Market risk
reduction of $417 million resulted from a lower
stressed VaR. The decrease in credit valuation
adjustment was also driven by the lower marked-to-
market in our FX derivative portfolios. Operational
risk increased approximately $1.24 billion due to a
recalibration of the Operational Risk Advanced
Measurement Approach Capital model.
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, partially 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 market valuation FX contracts.
The following table presents a roll-forward of the
Basel III standardized approach risk-weighted assets
for the years ended December 31, 2017 and 2016.
TABLE 44: 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,
2017
December 31,
2016
$
99,876
$
95,893
1,729
2,589
(1,471)
998
(690)
(3,144)
2,058
(1,709)
(753)
3,224
(417)
4,994
3,462
(229)
4,610
(627)
$
102,683
$
99,876
(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, 2017, total standardized
approach risk-weighted assets increased $2.81 billion
compared to December 31, 2016, primarily the result
of an increase in credit risk partially offset by a
decrease in market risk resulting from a lower
stressed VaR. The main drivers of the credit risk
change were an increase in loans, securities finance
portfolio due to a mix shift to equities, corporate
bonds and sovereigns, and an increase in the
investment portfolio due to purchases, offset by a
decrease in FX contracts due to a shift to
counterparties with a lower weighted-average risk-
weight.
State Street Corporation | 110
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
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 to calls of agency debt
securities. Market risk reduction resulted from a
lower stressed VaR.
The regulatory capital ratios as of December 31,
2017, presented in Table 41: 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, 2017, 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 the Form 10-Q or an annual
report on Form 10-K. Significant components of
these advanced systems involve the exercise of
judgment by us and our regulators, and our advanced
systems may not, 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.
State Street Corporation | 111
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Estimated Basel III Fully Phased-in Capital Ratios
Table 45: Regulatory Capital Structure and Related Regulatory Capital Ratios - State Street, and Table 46:
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, 2017, 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.
TABLE 45: REGULATORY CAPITAL STRUCTURE AND RELATED REGULATORY CAPITAL RATIOS - STATE STREET
December 31, 2017
(In millions)
Total common shareholders' equity
Regulatory capital adjustments:
Goodwill and other intangible assets, net of associated deferred tax
liabilities
Other adjustments
CET1 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
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
$
19,157
$
(23) $
19,134
$
19,157
$
(23)
$
19,134
(6,877)
(76)
12,204
3,196
—
(18)
3,178
15,382
980
—
4
1
$
$
985
16,367
99,156
209,328
236,986
(279)
(18)
(320)
—
—
18
18
(302)
1
—
—
(1)
—
(7,156)
(94)
11,884
(6,877)
(76)
12,204
3,196
3,196
—
—
3,196
15,080
981
—
4
—
985
—
(18)
3,178
15,382
980
—
72
1
1,053
(279)
(18)
(320)
—
—
18
18
(302)
1
—
—
(1)
—
(7,156)
(94)
11,884
3,196
—
—
3,196
15,080
981
—
72
—
1,053
$
$
(302) $
16,065
$
16,435
(42) $
99,114
$ 102,683
$
$
(302)
$
16,133
(40)
$ 102,643
(220)
(278)
209,108
236,708
209,328
236,986
(220)
(278)
209,108
236,708
Minimum
Requirement
Including
Capital
Conservation
Buffer and G-
SIB Surcharge
2017
Minimum
Requirement
Including
Capital
Conservation
Buffer and G-
SIB Surcharge
2019
Minimum
Requirement
4.5%
6.5%
8.5%
12.3%
12.0%
11.9%
6.0
8.0
4.0
5.0
8.0
10.0
NA
NA
10.0
12.0
NA
NA
15.5
16.5
7.3
6.5
15.2
16.2
7.2
6.4
15.0
16.0
7.3
6.5
11.6%
14.7
15.7
7.2
6.4
Capital ratios(1):
CET1 capital(2)
Tier 1 capital
Total capital
Tier 1 leverage
SLR
(1) CET1 ratio is calculated by dividing CET1 (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 SLR is calculated by dividing tier 1 capital (numerator) by total
assets for SLR (denominator).
(2) CET1 ratios were calculated in conformity with the provisions of the Basel III final rule; refer to Table 41: Regulatory Capital Structure and Related Regulatory
Capital Ratios.
NA Not applicable
State Street Corporation | 112
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
TABLE 46: REGULATORY CAPITAL STRUCTURE AND RELATED REGULATORY CAPITAL RATIOS - STATE STREET BANK
December 31, 2017
(In millions)
Total common shareholders' equity
Regulatory capital adjustments:
Goodwill and other intangible assets, net of associated deferred
tax liabilities
Other adjustments
CET1 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
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
$
23,115
$
(21)
$
23,094
$
23,115
$
(21)
$
23,094
(6,579)
(5)
16,531
—
—
—
(270)
—
(291)
—
—
—
(6,849)
(6,579)
(5)
(5)
16,240
16,531
—
—
—
—
—
—
(270)
—
(291)
—
—
—
(6,849)
(5)
16,240
—
—
—
16,531
(291)
16,240
16,531
(291)
16,240
983
—
983
$
$
17,514
96,118
$
$
206,070
233,790
—
—
—
(291)
(88)
(214)
(271)
$
$
983
—
983
17,223
96,030
205,856
233,519
983
72
1,055
17,586
99,767
206,070
233,790
$
$
—
—
—
(291)
(83)
(214)
(271)
$
$
983
72
1,055
17,295
99,684
205,856
233,519
$
$
Minimum
Requirement
Including
Capital
Conservation
Buffer and G-
SIB Surcharge
2017
Minimum
Requirement
Including
Capital
Conservation
Buffer and G-
SIB Surcharge
2019
Minimum
Requirement
4.5%
6.5%
8.5%
17.2%
16.9%
16.6%
6.0
8.0
4.0
6.0
8.0
10.0
NA
NA
10.0
12.0
NA
NA
17.2
18.2
8.0
7.1
16.9
17.9
7.9
7.0
16.6
17.6
8.0
7.1
16.3%
16.3
17.3
7.9
7.0
Capital ratios(1):
CET 1 capital(2)
Tier 1 capital
Total capital
Tier 1 leverage
SLR
(1) CET1 capital ratio is calculated by dividing CET1 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 SLR is calculated by dividing tier 1 capital
(numerator) by total assets for SLR (denominator).
(2) CET1 ratios were calculated in conformity with the provisions of the Basel III final rule; refer to Table 41: Regulatory Capital Structure and Related Regulatory
Capital Ratios.
NA Not applicable
Fully phased-in pro-forma estimates of common shareholders' equity include 100% of AOCI, including AOCI
attributable to AFS securities, cash flow hedges and defined benefit pension plans. Fully phased-in pro-forma
estimates of CET1 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.
State Street Corporation | 113
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
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 47: 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, 2017
(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
15,382
$
(302)
$
15,080
243,958
(6,972)
236,986
$
6.5%
—
(278)
$
(278)
(0.1)%
243,958
(7,250)
236,708
6.4%
16,531
$
(291)
$
16,240
240,373
(6,583)
233,790
7.1%
$
—
(271)
(271)
(0.1)%
$
240,373
(6,854)
233,519
7.0%
$
$
$
$
State Street Corporation | 114
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
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, 2017:
TABLE 48: 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 tables present the dividends declared for each of the series of preferred stock issued and
outstanding for the periods indicated:
TABLE 49: PREFERRED STOCK DIVIDENDS
Dividends
Declared per
Share
2017
Dividends
Declared per
Depositary
Share
Years Ended December 31,
Total
(In millions)
Dividends
Declared per
Share
2016
Dividends
Declared per
Depositary
Share
Total
(In millions)
$
5,250
$
1.32
$
5,900
6,000
5,250
5,352
1.48
1.52
52.50
1.32
26
44
45
40
27
$
5,250
$
5,900
6,000
5,250
3,626
$
182
1.32
1.48
1.52
52.50
0.90
$
$
26
44
45
40
18
173
Preferred Stock:
Series C
Series D
Series E
Series F
Series G
Total
In February 2018, 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, $26.25,
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 2018.
Common Stock
In June 2017, our Board approved a common stock purchase program authorizing the purchase of up to $1.4
billion of our common stock through June 30, 2018 (the 2017 Program).
In June 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). The table below presents the activity under
both the 2017 Program and 2016 Program during the year ended December 31, 2017:
State Street Corporation | 115
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
TABLE 50: SHARES REPURCHASED
2016 Program(1)
2017 Program
Total
Shares Acquired
(In millions)
Average Cost per Share
Total Acquired
(In millions)
$
9.4
7.4
16.8
$
79.93
$
94.54
86.37
$
750
700
1,450
(1) Includes $158 million relating to shares acquired in exchange for BFDS stock during the first quarter of 2017. Additional information about the exchange is
provided in Note 1 to the consolidated financial statements included in this Form 10-K.
The table below presents the dividends declared on common stock for the periods indicated:
TABLE 51: COMMON STOCK DIVIDENDS
Years Ended December 31,
2017
2016
Common Stock
$
1.60
$
596
$
1.44
$
559
Dividends Declared
per Share
Total
(In millions)
Dividends Declared
per Share
Total
(In millions)
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. Our common stock and preferred stock
dividends, including the declaration, timing and
amount thereof, are subject to consideration and
approval by the Board at the relevant times.
Stock purchases may be made using various
types of mechanisms, including open market
purchases, accelerated share repurchases 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 $381.82 billion as of December 31, 2017,
compared to $360.45 billion as of December 31,
2016. 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 $400.83 billion and $377.92 billion as
collateral for indemnified securities on loan as of
December 31, 2017 and December 31, 2016,
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 $400.83
billion and $377.92 billion, referenced above, $61.27
billion and $60.00 billion was invested in indemnified
repurchase agreements as of December 31, 2017
and December 31, 2016, respectively. We or our
agents held $65.27 billion and $63.96 billion as
collateral for indemnified investments in repurchase
agreements as of December 31, 2017 and
December 31, 2016, respectively.
State Street Corporation | 116
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Additional information about our securities
Changes in the fair value of these financial
finance activities and other off-balance sheet
arrangements is provided in Notes 10, 12 and 14 to
the consolidated financial statements included in 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
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.
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, 2017, including the effect of
netting, we categorized approximately 1% of our
financial assets carried at fair value in level 1,
approximately 96% 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,
State Street Corporation | 117
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
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, 2017, on the same basis,
we categorized less than 1% of our financial liabilities
carried at fair value in level 1, approximately 99% 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, 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.
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.
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, 2017 increased
approximately 57% compared to 2016, primarily the
result of purchases of asset-backed and non-U.S.
debt securities.
With respect to derivative instruments, we
evaluated the impact on valuation of the credit risk of
our counterparties and of our own credit. We
considered such factors as the market-based
probability of default by us and our counterparties,
and our current and expected potential future net
exposures by remaining maturities, in determining the
appropriate measurements of fair value. Valuation
adjustments associated with derivative instruments
were not significant to our consolidated financial
results in 2017, 2016 or 2015.
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 at the acquisition
State Street Corporation | 118
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
date. 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 earnings and
cash flows 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.
Management reviews goodwill for impairment
annually or more frequently if circumstances arise or
events occur that indicate an impairment of the
carrying amount may exist. We begin our review by
first assessing qualitative factors to determine
whether it is more likely than not that the fair value of
a reporting unit is less than its carrying amount. If we
conclude from the qualitative assessment of goodwill
impairment that it is more likely than not that a
reporting unit’s fair value is greater than its carrying
amount, quantitative tests are not required. However,
if we determine it is more likely than not that a
reporting unit’s fair value is less than its carrying
amount, then we complete a quantitative assessment
to determine if there is goodwill impairment.
The quantitative assessment involves 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, of this Form 10-K.
During the third quarter of 2017, we assessed
goodwill for impairment using a qualitative
assessment. The qualitative assessment required
management to make judgments and to evaluate
several factors, which included, but were not limited
to, significant or adverse changes in the business,
firm and industry events, 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. Based on our
evaluation of these factors, we determined that it was
more likely than not that the fair value of each of the
reporting units exceeded its respective carrying
amount.
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
State Street Corporation | 119
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
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 2017, 2016 or 2015. Goodwill and other
intangible assets recorded in our consolidated
statement of condition as of December 31, 2017
totaled approximately $6.02 billion and $1.61 billion,
respectively, compared to $5.81 billion and $1.75
billion, respectively, as of December 31, 2016.
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 | 120
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 | 121
Report of Independent Registered Public Accounting Firm
The Shareholders and Board of Directors of
State Street Corporation
Opinion on the Financial Statements
We have audited the accompanying consolidated statements of condition of State Street Corporation (the
"Corporation") as of December 31, 2017 and 2016, 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, 2017, and the related notes (collectively referred to as the "consolidated financial
statements"). In our opinion, the consolidated financial statements present fairly, in all material respects, the
financial position of the Corporation at December 31, 2017 and 2016, and the results of its operations and its cash
flows for each of the three years in the period ended December 31, 2017, 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) ("PCAOB"), the Corporation’s internal control over financial reporting as of December 31, 2017,
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 26, 2018 expressed
an unqualified opinion thereon.
Basis for Opinion
These consolidated financial statements are the responsibility of the Corporation's management. Our
responsibility is to express an opinion on the Corporation’s consolidated financial statements based on our audits.
We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the
Corporation in accordance with the U.S. federal securities laws and the applicable rules and regulations of the
Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we
plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are
free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess
the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and
performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence
regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the
accounting principles used and significant estimates made by management, as well as evaluating the overall
presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
We have served as the Corporation's auditor since 1972.
Boston, Massachusetts
February 26, 2018
/s/ Ernst & Young LLP
State Street Corporation | 122
STATE STREET CORPORATION
CONSOLIDATED STATEMENT OF INCOME
(Dollars in millions, except per share amounts)
Years Ended December 31,
2017
2016
2015
Fee revenue:
Servicing fees
Management fees
Trading services
Securities finance
Processing fees and other
Total fee revenue
Net interest income:
Interest income
Interest expense
Net interest income
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 (benefit)
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
$
5,365
$
5,073
$
1,616
1,071
606
247
8,905
2,908
604
2,304
(39)
—
—
(39)
1,292
1,099
562
90
8,116
2,512
428
2,084
10
(2)
(1)
7
5,153
1,174
1,146
496
309
8,278
2,488
400
2,088
(5)
(1)
—
(6)
11,170
10,207
10,360
2
10
12
4,394
1,167
838
461
266
340
214
589
8,269
2,899
722
—
2,177
1,993
5.32
5.24
$
$
$
4,353
1,105
800
440
209
379
207
584
8,077
2,120
(22)
1
2,143
1,968
5.03
4.97
$
$
$
4,061
1,022
793
444
25
490
197
1,018
8,050
2,298
318
—
1,980
1,848
4.53
4.47
$
$
$
374,793
380,213
391,485
396,090
407,856
413,638
$
1.60
$
1.44
$
1.32
The accompanying notes are an integral part of these consolidated financial statements.
State Street Corporation | 123
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 $21, ($11) and
($101), respectively
Net unrealized gains (losses) on available-for-sale securities, net of
reclassification adjustment and net of related taxes of $272, ($119) and
($195), respectively
Net unrealized gains (losses) on available-for-sale securities designated
in fair value hedges, net of related taxes of $16, $16 and $5, respectively
Other-than-temporary impairment on held-to-maturity securities related to
factors other than credit, net of related taxes of $3, $5 and $8,
respectively
Net unrealized gains (losses) on cash flow hedges, net of related taxes
of ($181), ($42) and $24, respectively
Net unrealized gains (losses) on retirement plans, net of related taxes of
$8, $1 and $51, respectively
Other comprehensive income (loss)
Total comprehensive income
Years Ended December 31,
2017
2016
2015
$
2,177
$
2,143
$
1,980
900
367
22
3
(285)
24
1,031
(372)
(735)
(181)
(331)
23
7
(64)
(11)
(598)
12
13
17
89
(935)
1,045
$
3,208
$
1,545
$
The accompanying notes are an integral part of these consolidated financial statements.
State Street Corporation | 124
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 $40,255 and $34,994)
Loans and leases (less allowance for losses of $54 and $53)
Premises and equipment (net of accumulated depreciation of $3,881 and $3,333)
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 (136,229,784 and 121,940,502 shares)
Total shareholders’ equity
Total liabilities and shareholders' equity
December 31
2017
2016
$
2,107
$
67,227
3,241
1,093
57,121
40,458
23,240
2,186
3,099
6,022
1,613
1,314
70,935
1,956
1,024
61,998
35,169
19,704
2,062
2,644
5,814
1,750
$
$
31,018
38,328
238,425
$
242,698
47,175
$
50,139
87,582
184,896
2,842
1,144
15,606
11,620
59,397
30,911
96,855
187,163
4,400
1,585
16,901
11,430
216,108
221,479
491
742
728
742
493
504
9,799
18,856
(1,009)
(9,029)
22,317
491
742
728
742
493
504
9,782
17,459
(2,040)
(7,682)
21,219
$
238,425
$
242,698
The accompanying notes are an integral part of these consolidated financial statements.
State Street Corporation | 125
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, 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 income (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
Net income
Other comprehensive income
Preferred stock issued
Cash dividends declared:
Common stock - $1.60 per share
Preferred stock
Common stock acquired
Common stock awards exercised
Other
1,031
2,177
(596)
(182)
(2)
16
1
2,177
1,031
—
(596)
(182)
16,788
(1,450)
(1,450)
(2,503)
4
104
(1)
120
(2)
Balance as of December 31, 2017
$
3,196
503,880
$
504
$ 9,799
$ 18,856
$
(1,009) 136,230
$ (9,029) $ 22,317
The accompanying notes are an integral part of these consolidated financial statements.
State Street Corporation | 126
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)
Amortization of other intangible assets
Other non-cash adjustments for depreciation, amortization and accretion, net
Losses (gains) related to investment securities, net
Change in trading account assets, net
Change in accrued interest and fees receivable, net
Change in collateral deposits, net
Change in unrealized 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 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
Proceeds from sale of joint venture investment
Other, net
Net cash provided by investing activities
Financing Activities:
Net (decrease) increase in time deposits
Net increase (decrease) in all other deposits
Net (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) financing activities
Net increase (decrease)
Cash and due from banks at beginning of period
Cash and due from banks at end of period
Years Ended December 31,
2017
2016
2015
$
2,177
$
2,143
$
1,980
95
214
871
39
(69)
(455)
1,819
3,267
(1,341)
9
307
6,933
3,708
(1,285)
12,439
28,878
(358)
207
722
(7)
(175)
(298)
(18)
(1,057)
1,772
(1,147)
506
2,290
4,403
1,448
1,401
30,070
(168)
197
604
6
75
(104)
(6,662)
982
1,156
(48)
579
(1,403)
18,185
(1,014)
12,309
28,025
(34,841)
(30,162)
(25,397)
4,028
(8,772)
(3,511)
—
(233)
(637)
172
102
48
(15,306)
13,040
(1,999)
747
(493)
—
—
7,942
(8,425)
(924)
(437)
(643)
(613)
—
170
3,842
(9,398)
(561)
—
(366)
(703)
—
73
4,230
24,995
8,488
(12,952)
(268)
1,492
(1,441)
493
—
(9,878)
(7,535)
(7,074)
2,983
(1,155)
742
4
(1,292)
(1,365)
(1,520)
—
(126)
(768)
9
13
(122)
(723)
(28)
70
(222)
(655)
—
(6,188)
(6,413)
(24,240)
793
1,314
107
1,207
$
2,107
$
1,314
$
(648)
1,855
1,207
The accompanying notes are an integral part of these consolidated financial statements.
State Street Corporation | 127
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 Income
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
129
133
141
149
152
153
153
154
155
155
162
166
167
169
171
173
175
175
177
178
179
179
181
181
183
184
We use acronyms and other defined terms for certain business terms and abbreviations, as defined in the acronyms
list and glossary accompanying these consolidated financial statements.
State Street Corporation | 128
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, including our principal banking
subsidiary, 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; depotbank services
(a fund oversight role created by regulation); 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;
performance, risk and compliance analytics; and
financial data management 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
can use these securities as collateral for repurchase
agreements.
State Street Corporation | 129
STATE STREET CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For securities sold under repurchase
Other Significant Policies
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 Income
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 the
performance period is complete, based on
predetermined benchmarks associated with the
applicable fund’s performance.
Interest income on interest-earning assets and
interest expense on interest-bearing liabilities are
recorded in our consolidated statement of income as
components of NII, and are generally based on the
effective yield of the related financial asset or liability.
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
133
Investment Securities
Note 3
Page
141
Loans and Leases
Note 4
Page
149
Goodwill and Other
Intangible Assets
Derivative Financial
Instruments
Offsetting Arrangements
Note 5
Page
152
Note 10
Page
155
Note 11
Page
162
Contingencies
Note 13
Page
167
Variable Interest Entities
Note 14
Page
169
Regulatory Capital
Note 16
Page
173
Equity-Based Compensation Note 18
Page
175
Income Taxes
Note 22
Page
179
Earnings Per Common
Share
Note 23
Page
181
Acquisitions and Dispositions
In the first quarter of 2017, we completed the
sale of our joint venture interest in IFDS U.K. for
approximately $175 million in cash and the exchange
of our joint venture interest in BFDS stock for $158
million in State Street's common stock. We
recognized a pre-tax gain of $30 million, in the
aggregate, in the year ended December 31, 2017 on
these dispositions. In the third quarter of 2017, we
recognized a pre-tax gain of $26 million on the sale of
an alternative trading platform.
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.
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 | 130
STATE STREET CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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
January 1, 2018
Effects on the financial statements or
other significant matters
The timing and amount of our material revenue
streams, including servicing fees, management
fees, trading services, and securities finance,
remain substantially unchanged as these
revenues will continue to be recognized over
time. Specifically, under the new standard we will
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.
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 NII,
securities gains/ losses and revenue related to
derivative instruments are not impacted by the
standard.
The new standard modified the principal and
agent guidance requiring certain costs previously
presented on a net basis to be presented on a
gross basis, which we expect will increase 2018
revenue and expenses by an estimated $225
million, the majority reflected in Investment
Management.
We have adopted the new standard as of
January 1, 2018, using the modified
retrospective method of adoption. No material
adjustment to retained earnings was required.
ASU 2016-01, Financial
Instruments-Overall (Subtopic
825-10): Recognition and
Measurement of Financial Assets
and Financial Liabilities
ASU 2016-02, Leases (Topic
842)
ASU 2016-13, Financial
Instruments-Credit Losses (Topic
326): Measurement of Credit
Losses on Financial Instruments
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.
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.
January 1, 2018 Upon adoption of the standard on January 1,
2018, we reclassified approximately $443 million
of equity securities classified as available for sale
to equity securities held at fair value through
profit and loss. The cumulative-effect transition
adjustment recognized in retained earnings on
January 1, 2018 was immaterial to the financial
statements.
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 of our lease
obligations.
January 1, 2020 We are currently assessing the impact of the
standard on our consolidated financial
statements, and a significant implementation
project is in place 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, assessing existing credit
loss models against the new guidance and
processes and identifying a complete set of data
requirements and sources. We have
commenced the development of new or modified
credit loss models and based on our analysis to
date, we expect the timing of the allowance for
credit losses to accelerate under the new
standard. We are continuing to assess the
extent of the impact on the allowance for credit
losses.
State Street Corporation | 131
STATE STREET CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Relevant standards that were recently issued but not yet adopted (continued)
Standard
Description
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)
ASU 2017-01, Business
Combinations (Topic 805):
Clarifying the Definition of a
Business
ASU 2017-04, Intangibles-
Goodwill and Other (Topic 350):
Simplifying the Test for Goodwill
Impairment
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.
The standard incorporates gating criteria to determine
when an integrated set of assets and activities is not a
business. When substantially all the fair value of gross
assets acquired (or group of similar identifiable assets) is
concentrated in a single identifiable asset, it would not
represent a business.
The standard simplifies the subsequent measurement of
goodwill by eliminating Step 2 from the goodwill
impairment test. The ASU requires an entity to compare
the fair value of a reporting unit with its carrying amount
and recognize an impairment charge for the amount by
which the carrying value exceeds the fair value of the
reporting unit. Additionally, an entity should consider
income tax effects from any tax deductible goodwill on
the carrying amount of the reporting unit when measuring
the goodwill impairment loss.
Date of
Adoption
January 1, 2018
Effects on the financial statements or
other significant matters
Based on our current presentation there is no
significant change to our presentation of the
statement of cash flows.
January 1, 2018,
early adoption
permitted
We have adopted this standard as of January 1,
2018 and will apply it prospectively to
transactions occurring after adoption date, as
applicable.
January 1, 2020,
early adoption
permitted
We are evaluating the impacts of early adoption,
and will apply this standard prospectively upon
adoption.
ASU 2017-08, Receivables -
Nonrefundable Fees and Other
Costs (Subtopic 310-20):
Premium Amortization on
Purchased Callable Debt
Securities
ASU 2017-12, Derivatives and
Hedging (Topic 815): Targeted
Improvements to Accounting for
Hedging Activities
The standard shortens the amortization period for certain
purchased callable debt securities to the earliest call
date.
January 1, 2019,
early adoption
permitted
We are currently evaluating the impact of the
new standard and the early adoption provisions.
The standard amends the hedge accounting model to
better portray the economics of risk management
activities in the financial statements and enhances the
presentation of hedge results. The amendments also
make targeted changes to simplify the application of
hedge accounting in certain situations.
January 1, 2019,
early adoption
permitted
We are currently evaluating the impact of the
new standard and the early adoption provisions.
Relevant standards that were adopted during the year
ended December 31, 2017
We adopted ASU 2016-09, Compensation -
Stock Compensation (Topic 718): Improvements to
Employee Share-Based Payment Accounting,
effective January 1, 2017. Starting in the quarter
ended March 31, 2017, we reclassified excess tax
benefits related to stock-based compensation from
financing activities to other operating activities on the
consolidated statement of cash flows. We continued
to present repurchases of common stock for
employee tax withholding in financing activities in the
consolidated statements of cash flows for all periods
presented.
As required by the transition provisions of the
standard, excess tax benefits previously recognized
in surplus prior to January 1, 2017 remain in surplus,
and excess tax benefits recognized after January 1,
2017 are included in income tax expense. In
connection with this change, we recognized a tax
benefit of $24.8 million in the year ended December
31, 2017. We elected to make no changes to our
current policy of estimating forfeitures or our tax
withholding rates.
State Street Corporation | 132
STATE STREET CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 2. Fair Value
Fair Value Measurements
We carry trading account assets and liabilities,
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.
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, 2017
and 2016.
Level 3. Financial assets and liabilities with
values based on prices or valuation techniques that
require inputs that are both unobservable in the
market and significant to the overall measurement of
fair value. These inputs reflect management's
judgment about the assumptions that a market
participant would use in pricing the financial asset or
liability, and are based on the best available
information, some of which is internally developed.
The following provides a more detailed discussion of
State Street Corporation | 133
STATE STREET CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
our financial assets and liabilities that we may
categorize in level 3 and the related valuation
methodology.
• The fair value of our investment securities
categorized in level 3 is measured using
information obtained from third-party sources,
typically non-binding broker or dealer quotes,
or through the use of internally-developed
pricing models. Management has evaluated
its methodologies used to measure fair value,
but has considered the level of observable
market information to be insufficient to
categorize the securities in level 2.
• The fair value of certain foreign exchange
contracts, primarily options, is measured
using an option-pricing model. Because of a
limited number of observable transactions,
certain model inputs are not observable, such
as implied volatility surface, but are derived
from observable market information.
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. During
2017, approximately $9 million of assets were
transferred between levels 1 and 2. No transfers of
financial assets or liabilities between levels 1 and 2
occurred during 2016.
State Street Corporation | 134
STATE STREET CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Fair Value Measurements on a Recurring Basis
as of December 31, 2017
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
$
39
$
— $
(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
Total U.S. Treasury and federal agencies
Asset-backed securities:
Student loans
Credit cards
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
U.S. money-market mutual funds
Total AFS investment securities
Other assets:
Derivative instruments:
Foreign exchange contracts
Interest-rate contracts
Other derivative contracts
Total derivative instruments
Total assets carried at fair value
Liabilities:
Accrued expenses and other liabilities:
Trading account liabilities:
Other
Derivative instruments:
Foreign exchange contracts
Interest-rate contracts
Other derivative contracts
Total derivative instruments
Total liabilities carried at fair value
$
$
$
389
44
472
11
—
11
—
—
—
—
—
—
—
—
—
—
—
—
—
—
11
—
8
1
9
492
$
93
528
621
212
10,872
11,084
3,358
1,542
89
4,989
6,576
2,545
10,721
5,904
25,746
9,108
1,054
2,560
46
397
54,984
11,596
—
—
11,596
67,201
$
$
—
—
—
—
—
—
—
—
—
1,358
1,358
119
402
—
204
725
43
—
—
—
—
2,126
1
—
—
1
$
(7,593)
—
—
(7,593)
2,127
$
(7,593) $
39
$
— $
— $
— $
—
—
1
1
40
$
11,467
100
283
11,850
11,850
$
1
—
—
1
1
(5,970)
—
—
(5,970)
$
(5,970) $
39
482
572
1,093
223
10,872
11,095
3,358
1,542
1,447
6,347
6,695
2,947
10,721
6,108
26,471
9,151
1,054
2,560
46
397
57,121
4,004
8
1
4,013
62,227
39
5,498
100
284
5,882
5,921
(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 $2,045 million and $422 million, respectively, for cash collateral received from and provided
to derivative counterparties.
(2) As of December 31, 2017, the fair value of other ABS was primarily composed of $1,447 million of CLOs.
(3) As of December 31, 2017, the fair value of other non-U.S. debt securities was primarily composed of $3,537 million of covered bonds and $1,885 million of
corporate bonds.
State Street Corporation | 135
STATE STREET CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(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
Total U.S. Treasury and federal agencies
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 AFS investment securities
Other assets:
Derivatives 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
$
$
$
$
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
30
495
—
525
3,824
—
3,824
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
3,824
—
—
—
$
— $
174
325
499
439
13,257
13,696
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
56,837
16,476
68
16,544
$
—
—
—
—
—
—
—
97
—
—
905
1,002
—
32
—
248
280
39
16
—
—
—
—
—
1,337
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) $
30
669
325
1,024
4,263
13,257
17,520
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
(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 ABS was primarily composed of $905 million of CLOs.
(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 | 136
STATE STREET CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following tables present activity related to our level 3 financial assets during the years ended December
31, 2017 and 2016, respectively. Transfers into and out of level 3 are reported as of the beginning of the period
presented. During the year ended December 31, 2017, transfers into level 3 were mainly related to certain ABS and
MBS, including non-U.S. debt securities, and municipal loans for which fair value was measured using information
obtained from third-party sources, including non-binding broker or dealer quotes. During the years ended December
31, 2017 and 2016, transfers out of level 3 were mainly related to certain MBS and ABS, 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, 2017
Total Realized and
Unrealized Gains (Losses)
Fair Value
Recorded
in
Revenue(1)
Recorded in
Other
Comprehensive
Income(1)
Purchases
Sales
Settlements
Transfers
into
Level 3
Transfers
out of
Level 3
Fair Value as of
December 31,
2017(1)
as of
December 31,
2016
(In millions)
Assets:
AFS Investment securities:
U.S. Treasury and federal agencies:
Change in
Unrealized
Gains
(Losses)
Related to
Financial
Instruments
Held as of
December 31,
2017
Mortgage-backed securities
$
— $
— $
— $
— $ — $
— $
25
$
(25)
$
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
97
905
1,002
—
32
248
280
39
16
—
Total AFS investment securities
1,337
Other assets:
Derivative instruments:
—
3
3
—
1
—
1
—
—
—
4
Foreign exchange contracts
Total derivative instruments
8
8
Total assets carried at fair value
$
1,345
$
(7)
(7)
(3)
$
1
—
1
(2)
—
1
(1)
2
(1)
—
1
—
—
1
200
1,035
1,235
119
370
5
494
—
24
19
1,772
—
(240)
(240)
—
(10)
(81)
(91)
—
—
(19)
(350)
—
(620)
(620)
2
(11)
31
22
(3)
—
—
—
275
275
—
67
—
67
5
—
—
(298)
—
(298)
—
(47)
—
(47)
—
(39)
—
(601)
372
(409)
2,126
—
—
1,358
1,358
119
402
204
725
43
—
—
4
4
—
—
(4)
(4)
—
—
—
—
1
1
$
1,776
$ (350)
$
(605)
$
372
$
(409)
$
2,127
$
$
(3)
(3)
(3)
(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.
State Street Corporation | 137
STATE STREET CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Fair Value Measurements Using Significant Unobservable Inputs
Year Ended December 31, 2016
Total Realized and
Unrealized Gains (Losses)
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
Fair Value as of
December 31,
2016(2)
$
— $
— $
— $
325
$
— $
— $
(325)
$
—
189
1,764
1,953
—
174
255
429
33
39
10
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
Change in
Unrealized
Gains
(Losses)
Related to
Financial
Instruments
Held as of
December 31,
2016
$
$
5
5
5
(In millions)
Assets:
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
Total AFS investment securities
2,464
Other assets:
Derivative instruments:
Foreign exchange contracts
Total derivative instruments
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.
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
As of
December 31,
2017
As of
December 31,
2016
Valuation Technique
Significant
Unobservable
Input(1)
As of
December 31,
2017
As of
December 31,
2016
Weighted-Average
$
$
$
$
— $
—
1
1
1
1
$
$
$
1 Discounted cash flows
Credit spread
39 Discounted cash flows
Credit spread
8 Option model
Volatility
48
—%
—
7.2
0.3%
1.8
14.4
8 Option model
Volatility
7.2
14.4
8
(1) Significant changes in these unobservable inputs would result in significant changes in fair value measurement.
State Street Corporation | 138
STATE STREET CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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; 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.
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.
State Street Corporation | 139
STATE STREET CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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, 2017
Financial Assets:
Cash and due from banks
$
2,107
$
2,107
$
2,107
$
— $
Interest-bearing deposits with banks
Securities purchased under resale agreements
Investment securities held-to-maturity
Net loans (excluding leases)(1)
67,227
3,241
40,458
22,577
67,227
3,241
40,255
22,482
—
—
16,814
—
67,227
3,241
23,318
22,431
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
$
47,175
$
47,175
$
— $
47,175
$
50,139
87,582
2,842
1,144
11,620
50,139
87,582
2,842
1,144
11,919
—
—
—
—
—
50,139
87,582
2,842
1,144
11,639
—
—
—
123
51
—
—
—
—
—
280
(1) Includes $3 million of loans classified as held-for-sale that were measured at fair value on a non-recurring basis as of December 31, 2017.
(In millions)
December 31, 2016
Financial Assets:
Reported
Amount
Estimated
Fair Value
Quoted Market
Prices in Active
Markets
(Level 1)
Fair Value Hierarchy
Pricing Methods
with Significant
Observable Market
Inputs
(Level 2)
Pricing
Methods with
Significant
Unobservable
Market Inputs
(Level 3)
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
State Street Corporation | 140
STATE STREET CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 | 141
STATE STREET CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following table presents the amortized cost, 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
Total U.S. Treasury and federal agencies
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, 2017
Gross
Unrealized
Gains
Losses
Amortized
Cost
Fair
Value
Amortized
Cost
December 31, 2016
Gross
Unrealized
Gains
Losses
Fair
Value
$
222
$
10,975
11,197
3,325
1,565
—
1,440
6,330
6,664
2,942
10,754
6,076
26,436
8,929
1,060
2,563
40
—
397
—
2
26
28
37
2
—
7
46
36
5
16
38
95
245
3
12
8
—
—
—
$
1
$
223
$
4,265
$
129
130
10,872
11,095
13,340
17,605
4
25
—
—
29
5
—
49
6
60
23
9
15
2
—
—
—
3,358
1,542
—
1,447
6,347
6,695
2,947
10,721
6,108
26,471
9,151
1,054
2,560
46
—
397
—
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
83
12
—
1
10
23
35
4
8
31
78
201
18
18
6
—
—
—
$
9
$
4,263
159
168
75
26
18
—
119
6
1
6
5
18
112
35
30
3
—
—
—
13,257
17,520
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
Total
$
56,952
$ 437
$
268
$
57,121
$
62,056
$
427
$
485
$ 61,998
Held-to-maturity:
U.S. Treasury and federal agencies:
Direct obligations
Mortgage-backed securities
Total U.S. Treasury and federal agencies
$
17,028
16,651
33,679
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
Collateralized mortgage obligations
3,047
798
1
3,846
939
263
474
48
1,724
1,209
$ — $
22
22
32
2
—
34
82
1
2
—
85
45
$
143
225
368
$
16,885
16,448
33,333
$
17,527
10,334
27,861
9
—
—
9
6
—
—
—
6
6
3,070
800
1
3,871
1,015
264
476
48
1,803
1,248
2,883
897
35
3,815
1,150
531
286
113
2,080
1,413
17
20
37
5
2
—
7
70
—
3
1
74
42
$
58
221
279
$ 17,486
10,133
27,619
30
—
—
30
15
—
—
—
15
11
2,858
899
35
3,792
1,205
531
289
114
2,139
1,444
Total
$
40,458
$ 186
$
389
$
40,255
$
35,169
$
160
$
335
$ 34,994
(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, 2017 and December 31, 2016, the fair value of other ABS was primarily composed of $1,447 million and $905 million, respectively, of CLOs.
(3) As of December 31, 2017 and December 31, 2016, the fair value of other non-U.S. debt securities was primarily composed of $3,537 million and $3,769 million,
respectively, of covered bonds and $1,885 million and $988 million, as of December 31, 2017 and December 31, 2016, respectively, of corporate bonds.
State Street Corporation | 142
STATE STREET CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Aggregate investment securities with carrying
In 2017, $496 million of Agency MBS previously
values of approximately $48 billion and $46 billion as
of December 31, 2017 and December 31, 2016,
respectively, were designated as pledged for public
and trust deposits, short-term borrowings and for
other purposes as provided by law.
In 2017, we sold $12.2 billion of AFS, primarily
Agency MBS and U.S. Treasury securities in our
investment portfolio, to position for the then-existing
interest rate environment resulting in a pre-tax loss of
$39 million.
classified as AFS were transferred to HTM, and in
2016, $4.9 billion, of Agency MBS and Student Loan
ABS 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 loss of $2.8 million and a net unrealized
gain of $87 million as of December 31, 2017 and
2016, respectively, within accumulated other
comprehensive loss which will be accreted into
interest income over the remaining life of the
transferred security (ranging from approximately 10 to
42 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:
December 31, 2017
(In millions)
Available-for-sale:
U.S. Treasury and federal agencies:
Direct obligations
Mortgage-backed securities
Total U.S. Treasury and federal agencies
Asset-backed securities:
Student loans
Credit cards
Total asset-backed securities
Non-U.S. debt securities:
Mortgage-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
Total U.S. Treasury and federal agencies
Asset-backed securities:
Student loans
Total asset-backed securities
Non-U.S. debt securities:
Mortgage-backed securities
Total non-U.S. debt securities
Collateralized mortgage obligations
Total
Less than 12 months
12 months or longer
Total
Fair
Value
Gross
Unrealized
Losses
Fair
Value
Gross
Unrealized
Losses
Fair
Value
Gross
Unrealized
Losses
$
— $
— $
67
$
1
$
67
$
5,161
5,161
—
1,289
1,289
1,059
7,629
816
9,504
734
399
1,007
—
31
31
—
25
25
4
48
4
56
6
5
8
—
3,341
3,408
769
—
769
469
68
289
826
901
136
345
6
98
99
4
—
4
1
1
2
4
17
4
7
2
8,502
8,569
769
1,289
2,058
1,528
7,697
1,105
10,330
1,635
535
1,352
6
1
129
130
4
25
29
5
49
6
60
23
9
15
2
$
18,094
$
131
$
6,391
$
137
$ 24,485
$
268
$
14,439
$
109
$
2,447
$
34
$ 16,886
$
6,785
21,224
38
147
5,988
8,435
187
221
12,773
29,659
440
440
—
—
—
3
3
—
—
—
423
423
239
239
276
6
6
6
6
6
863
863
239
239
276
143
225
368
9
9
6
6
6
$
21,664
$
150
$
9,373
$
239
$ 31,037
$
389
State Street Corporation | 143
STATE STREET CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2016
(In millions)
Available-for-sale:
U.S. Treasury and federal agencies:
Direct obligations
Mortgage-backed securities
Total U.S. Treasury and federal agencies
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
Total U.S. Treasury and federal agencies
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
Total non-U.S. debt securities
Collateralized mortgage obligations
Less than 12 months
Fair
Value
Gross
Unrealized
Losses
12 months or longer
Gross
Unrealized
Losses
Fair
Value
Total
Fair
Value
Gross
Unrealized
Losses
$
651
$
8
$
180
$
1
$
831
$
7,072
7,723
54
795
1
75
925
442
253
1,314
670
2,679
3,390
1,259
944
8
131
139
—
1
—
—
1
1
—
6
4
11
102
31
24
—
1,114
1,294
3,745
494
252
—
28
29
75
25
18
—
8,186
9,017
3,799
1,289
253
75
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
168
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
15,729
221
278
$
86
—
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
—
1
21
—
—
21
13
—
—
13
7
$
8,977
$
6,838
15,815
1,940
33
27
2,000
384
63
180
627
741
58
221
279
30
—
—
30
15
—
—
15
11
Total
$ 17,284
$
293
$
1,899
$
42
$ 19,183
$
335
State Street Corporation | 144
STATE STREET CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following table presents contractual maturities of debt investment securities by carrying amount as of
December 31, 2017. The maturities of certain ABS, MBS, and CMOs 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, 2017
(In millions)
Available-for-sale:
U.S. Treasury and federal agencies:
Direct obligations
Mortgage-backed securities
Total U.S. Treasury and federal agencies
Asset-backed securities:
Student loans
Credit cards
Other
Total asset-backed securities
Non-U.S. debt securities:
Mortgage-backed securities
Asset-backed securities
Government securities
Other
Total non-U.S. debt securities
State and political subdivisions
Collateralized mortgage obligations
Other U.S. debt securities
Total
Held-to-maturity:
U.S. Treasury and federal agencies:
Direct obligations
Mortgage-backed securities
Total U.S. Treasury and federal agencies
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
$
— $
12
$
6
$
205
$
223
96
96
289
—
—
289
551
205
2,195
1,078
4,029
474
3
296
762
774
1,044
1,290
350
2,684
4,502
2,185
3,201
4,235
14,123
2,415
145
1,097
3,123
3,129
685
252
956
1,893
602
557
4,448
758
6,365
4,724
170
1,107
6,891
7,096
1,340
—
141
1,481
1,040
—
877
37
1,954
1,538
736
60
10,872
11,095
3,358
1,542
1,447
6,347
6,695
2,947
10,721
6,108
26,471
9,151
1,054
2,560
5,187
$
21,238
$
17,388
$
12,865
$
56,678
1,988
$
14,968
$
14
$
58
$
17,028
—
1,988
162
15,130
1,605
1,619
14,884
14,942
16,651
33,679
35
178
—
213
132
26
353
—
511
8
245
620
—
865
217
237
121
48
623
144
265
—
—
265
45
—
—
—
45
343
2,502
—
1
2,503
545
—
—
—
545
714
3,047
798
1
3,846
939
263
474
48
1,724
1,209
$
$
$
2,720
$
16,762
$
2,272
$
18,704
$
40,458
State Street Corporation | 145
STATE STREET CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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,
2017
2016
2015
$
74
$
15
$
57
(113)
—
—
—
(5)
(2)
(1)
(3)
$
(39) $
7
$
(62)
(1)
—
(1)
(6)
$
$
— $
(1) $
—
—
(2)
— $
(3) $
(1)
(1)
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,
2017
2016
2015
Balance, beginning of period
$
66
$
92
$
115
Additions:
Losses for which OTTI was
previously recognized
Deductions:
—
2
1
Previously recognized losses related
to securities sold or matured
(2)
(28)
Balance, end of period
$
64
$
66
$
(24)
92
Interest income 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 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 income 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 OTTI.
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. 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;
the analysis of the underlying collateral for
MBS and ABS;
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;
State Street Corporation | 146
STATE STREET CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
•
•
•
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
2017, 2016 and 2015 and changes in period-end
unrealized losses, for major security types as of
December 31, 2017.
U.S. Agency Securities
Our portfolio of U.S. agency direct obligations
and MBS 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 2017, 2016 or 2015.
The overall increase in the unrealized losses on these
securities as of December 31, 2017 was primarily
attributable to interest rate increases in 2017.
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 to our securities 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
2017, 2016 or 2015.The improvement in the mark to
market for our FFELP loan-backed securities portfolio
as of December 31, 2017 was primarily attributable to
the tightening FFELP spreads.
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 4.6 years as of December
31, 2017.
In general, the rating agencies have largely
completed their downgrade review of FFELP loan-
backed securities due to potential extension of
student loan repayments beyond the securities’ legal
final maturity dates. At this time, we do not expect a
significant number of additional downgrades related
to potential legal final maturity breaches. 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 $70 million as of
December 31, 2017. Our assessment of OTTI of
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 2017, 2016 or 2015.
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 and U.K. 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 less than $1 million, $2
million and $1 million in 2017, 2016 and 2015,
respectively, on non-U.S. residential MBS, which
resulted from adverse changes in the timing of
expected future cash flows from the securities.
State Street Corporation | 147
STATE STREET CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Our assessment of OTTI of these securities
takes into account government intervention in the
corresponding mortgage markets and assumes a
baseline macroeconomic environment for this region,
factoring in slower economic growth and continued
government austerity measures. 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
2017, 2016 or 2015. The decline in the unrealized
losses on these securities as of December 31, 2017
was primarily attributable to the narrowing of spreads
and U.S. Treasury rates in 2017.
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
2017, 2016 or 2015.
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. We recorded no OTTI on
these securities in 2017 and 2015. In 2016 we
recorded $1 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 MBS and ABS and other relevant
factors, management considers the aggregate decline
in fair value of the investment securities portfolio and
the resulting gross pre-tax unrealized losses of $657
million related to 1,283 securities as of December 31,
2017 to be temporary, and not the result of any
material changes in the credit characteristics of the
securities.
State Street Corporation | 148
STATE STREET CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 income 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 income 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 OTTI, 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:
Loans to investment funds
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
Loans and leases, net of allowance
December 31,
2017
December 31,
2016
$
$
13,618
2,923
2,105
50
98
267
19,061
3,213
624
396
4,233
23,294
(54)
23,240
$
$
11,734
3,256
1,352
70
27
338
16,777
2,224
252
504
2,980
19,757
(53)
19,704
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,
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, 2017 and December 31, 2016, the
loans pledged as collateral totaled $1.9 billion and
$1.5 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, 2017 and December 31, 2016:
(In millions)
Net rental income receivable
Estimated residual values
Unearned income
Investment in leveraged lease financing
Less: related deferred income tax liabilities
2017
2016
$
808
$
1,039
89
(234)
663
(184)
89
(286)
842
(313)
529
Net investment in leveraged lease financing
$
479
$
State Street Corporation | 149
STATE STREET CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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, 2017
(In millions)
Investment grade(1)
Speculative(2)
Special mention(3)
Total
December 31, 2016
(In millions)
Investment grade(1)
Speculative(2)
Substandard(4)
Total
Commercial and
Financial
Commercial Real
Estate
Lease
Financing
Total Loans and
Leases
$
$
$
$
$
17,866
4,638
29
22,533
$
98
—
—
98
Commercial and
Financial
Commercial Real
Estate
14,889
$
3,984
15
18,888
$
27
—
—
27
$
$
$
$
$
663
—
—
663
$
18,627
4,638
29
23,294
Lease
Financing
Total Loans and
Leases
842
$
—
—
842
$
15,758
3,984
15
19,757
(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, 2017.
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, 2017
December 31, 2016
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
22,533
22,533
$
98
98
$
663
663
23,294
18,873
$
23,294
$
18,888
$
27
27
$
842
842
$
19,742
19,757
(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, 2017 , no loans were individually evaluated for
impairment. As of December 31, 2016, $195 thousand of the allowance for loan and lease loss related to commercial and financial loans were individually evaluated
for impairment, and the remainder of the allowance related to commercial and financial loans collectively evaluated for impairment.
State Street Corporation | 150
STATE STREET CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
As of December 31, 2017, we had no impaired
loans and leases. As of December 31, 2016, we
identified one commercial and financial loan as
impaired, with both a recorded investment and unpaid
principal balance of $15 million. The impaired loan
had zero related interest income and an associated
allowance for loan losses of $0.2 million.
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, 2017 and December 31,
2016.
We generally place loans on non-accrual status
once principal or interest payments are 90 days
contractually past due, or earlier if management
determines that full collection is not probable. Loans
90 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 income. For loans on non-accrual status,
income 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, 2017, there were no loans
or leases on non-accrual status. As of December 31,
2016, there was one commercial and financial loan
on non-accrual status, and no CRE loans or leases
were on non-accrual status. As of both December 31,
2017 and 2016 there were no loans or leases 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.
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,
2017
2016
2015
Total Loans
and Leases
Total Loans
and Leases
Total Loans
and Leases
$
$
53
$
46
$
2
(1)
10
(3)
54
$
53
$
38
12
(4)
46
(In millions)
Allowance for loan
and lease losses(1):
Beginning balance
Provision for loan and
lease losses
Charge-offs
Ending balance
(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.
State Street Corporation | 151
STATE STREET CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 at least 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 on a
straight-line basis 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.
The following table presents changes in the carrying amount of goodwill during the periods indicated:
(In millions)
Goodwill:
Ending balance December 31, 2015
Acquisitions(1)
Divestitures and other reductions
Foreign currency translation
Ending balance December 31, 2016
Acquisitions
Divestitures and other reductions
Foreign currency translation
Ending balance December 31, 2017
Investment
Servicing
Investment
Management
Total
$
$
$
5,641
$
30
$
5,671
—
(11)
(80)
236
—
(2)
236
(11)
(82)
5,550
$
264
$
5,814
17
(9)
194
—
—
6
5,752
$
270
$
17
(9)
200
6,022
(1) Investment Management includes our acquisition of the GEAM business on July 1, 2016, which is 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:
Ending balance December 31, 2015
Acquisitions(1)
Divestitures
Amortization
Foreign currency translation and other, net
Ending balance December 31, 2016
Acquisitions
Divestitures
Amortization
Foreign currency translation and other, net
Ending balance December 31, 2017
Investment
Servicing
Investment
Management
Total
$
1,753
$
15
$
1,768
—
(8)
(186)
(20)
217
—
(21)
—
217
(8)
(207)
(20)
$
1,539
$
211
$
1,750
16
(11)
(183)
71
—
—
(31)
1
16
(11)
(214)
72
$
1,432
$
181
$
1,613
(1) Investment Management includes our acquisition of the GEAM business on July 1, 2016, which is described in Note 1.
State Street Corporation | 152
STATE STREET CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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, 2017
December 31, 2016
Gross
Carrying
Amount
Accumulated
Amortization
Net
Carrying
Amount
Gross
Carrying
Amount
Accumulated
Amortization
Net
Carrying
Amount
$
$
2,669
$
(1,470) $
1,199
$
2,620
$
(1,306) $
1,314
686
142
(320)
(94)
366
48
661
132
(277)
(80)
384
52
3,497
$
(1,884) $
1,613
$
3,413
$
(1,663) $
1,750
Amortization expense related to other intangible
assets was $214 million, $207 million and $197 million
in 2017, 2016 and 2015, respectively.
Expected future amortization expense for other
intangible assets recorded as of December 31, 2017 is
as follows:
(In millions)
Years Ending December 31,
Future
Amortization
2018
2019
2020
2021
2022
$
191
174
171
166
165
Note 6. Other Assets
The following table presents the components 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
Prepaid expenses
Accounts receivable
Receivable for securities settlement
Deposits with clearing organizations
Deferred tax assets, net of valuation
allowance(2)
Income taxes receivable
Other(3)
December 31,
2017
December 31,
2016
$
19,404
$
21,204
4,013
3,242
2,259
473
364
348
188
120
113
97
397
7,321
3,158
2,363
2,236
333
886
40
132
210
106
339
Total
$
31,018
$
38,328
(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. Gross deferred tax
assets and liabilities are presented in Note 22.
(3) In 2017, includes amounts held in escrow accounts at third parties related
to the negotiated settlements in the transition management legal matter
presented in Note 13.
Note 7. Deposits
As of December 31, 2017, we had $39.73 billion
of time deposits outstanding, of which $4.75 billion
were wholesale CDs, $34.73 billion were derived from
client deposits (payable on demand to such clients)
and held in a time deposit established by State
Street as the agent, and $252 million were non-U.S.
and all of which are scheduled to mature in 2018. As
of December 31, 2016, we had $55.03 billion of time
deposits outstanding, of which $214 million were non-
U.S. As of December 31, 2017 and 2016,
substantially all U.S. and non-U.S. time deposits were
in amounts of $100,000 or more. Demand deposit
overdrafts of $3.24 billion and $2.62 billion were
included as loan balances at December 31, 2017 and
2016, respectively.
State Street Corporation | 153
Maximum outstanding as of
any month-end
Average outstanding during
the year
Weighted-average interest
rate as of year-end
Weighted-average interest
rate during the year
STATE STREET CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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.
Collectively, short-term borrowings had weighted-average interest rates of 0.25% and 0.13% in 2017 and
2016, 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:
(Dollars in millions)
2017
2016
2015
2017
2016
2015
2017
2016
2015
Securities Sold Under
Repurchase Agreements
Federal Funds Purchased
Tax-Exempt
Investment Program
Balance as of December 31
$
2,842
$
4,400
$
4,499
$
4,302
3,683
5,572
10,977
4,113
8,875
$
—
—
1
—
29
31
$
6
$
1,078
$
1,158
$
1,748
29
21
1,158
1,127
1,726
1,512
1,865
1,807
.03 %
.04 %
.02 %
.00 %
.00 %
.03 %
1.45%
.67%
.03%
.05
.02
.01
.00
.17
.01
.79
.36
.06
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 $2.90 billion underlying the repurchase agreements
remained in our investment securities portfolio as of
December 31, 2017.
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, 2017. The
table excludes repurchase agreements collateralized
by securities purchased under resale agreements and
collateralized by trading account assets.
(In millions)
U.S. Government
Securities Sold
Amortized
Cost
Fair Value
Repurchase
Agreements(1)
Amortized
Cost
Overnight maturity
$
2,928
$
2,899
$
2,842
(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 $31.15 billion in 2017 compared to
$30.86 billion in 2016.
State Street Bank currently maintains a line of
credit of CAD 1.40 billion, or approximately $1.11
billion as of December 31, 2017, 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, 2017 and 2016, there was no balance
outstanding on this line of credit.
State Street Corporation | 154
STATE STREET CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 9. Long-Term Debt
(Dollars in millions)
Issuance Date
Maturity Date
Coupon Rate
Seniority
Interest Due
Dates
As of December 31,
2017
2016
Parent Company And Non-Banking Subsidiary Issuances
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
May 15, 2023(2)
3.55%
2.55%
3.7%
3.3%
3.1%
Senior notes
Senior notes
Senior notes
Senior notes
Subordinated notes
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)
April 30, 2007
June 15, 2047
Floating-rate
Junior subordinated
debentures
3/15; 6/15; 9/15;
12/15
May 15, 2017
March 7, 2011
May 19, 2016
May 19, 2016
May 15, 2023
March 7, 2021
May 19, 2021
May 19, 2026
February 11, 2011
March 15, 2018(3)
2.653%
4.375%
1.95%
2.65%
4.956%
Fixed to Floating Rate
Senior notes
Senior notes
Senior notes
Senior notes
Junior subordinated
debentures
August 18, 2015
August 18, 2020
Floating-rate
Senior notes
5/15; 11/15(1)
3/7; 9/7(1)
5/19; 11/19(1)
5/19; 11/19(1)
3/15; 9/15
2/18; 5/18; 8/18;
11/18
May 15, 2013
May 15, 2018
1.35%
Senior notes
5/15; 11/15
May 15, 2028
June 15, 2026(4)
April 30, 2017
Floating-rate
Junior subordinated
debentures
2/15; 5/15; 8/15;
11/15
7.35%
5.375%
Senior notes
Senior notes
6/15; 12/15
4/30; 10/30
May 15, 1998
June 21, 1996
April 30, 2007
Parent Company
Long-term capital leases
State Street Bank issuances
September 24, 2003
October 15, 2018(2)
5.25%
Subordinated notes
4/15; 10/15
1,287
1,184
1,021
1,293
1,192
1,033
993
981
793
740
734
724
706
502
499
499
150
150
—
250
407
999
987
793
—
738
726
704
511
499
497
150
150
450
293
415
Total long-term debt
$
11,620
$
11,430
(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, 2017 and December 31, 2016, the carrying value of long-term debt associated with these fair value hedges
decreased $87 million and $15 million, respectively. 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 debentures qualify for inclusion in tier 2 regulatory capital under current federal regulatory capital guidelines.
(4) We may not redeem notes prior to their maturity.
Parent Company
As of December 31, 2017 and 2016, long-term
capital leases included $244 million and $278 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
State Street Corporation | 155
STATE STREET CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
rate futures contract is a commitment to buy or sell, at
a future date, a financial instrument at a contracted
price; it may be settled in cash or through the delivery
of the contracted instrument.
Foreign exchange contracts involve an
agreement to exchange one currency for another
currency at an agreed-upon rate and settlement date.
Foreign exchange contracts generally consist of
foreign exchange forward and spot contracts, option
contracts and cross-currency swaps. Future cash
requirements, if any, related to foreign exchange
contracts are represented by the gross amount of
currencies to be exchanged under each contract
unless we and the counterparty have agreed to pay
or to receive the net contractual settlement amount
on the settlement date.
Derivative financial instruments involve the
management of interest-rate and foreign currency
risk, and involve, to varying degrees, market risk and
credit and counterparty risk (risk related to
repayment). Market risk is defined by U.S. banking
regulators as the risk of loss that could result from
broad market movements, such as changes in the
general level of interest rates, credit spreads, foreign
exchange rates or commodity prices. We use a
variety of risk management tools and methodologies
to measure, monitor and manage the market risk
associated with our trading activities, which 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, 2017 and 2016, we had recorded
approximately $2.55 billion and $1.99 billion,
respectively, of cash collateral received from
counterparties and approximately $869 million and
$4.39 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, 2017 and 2016 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, 2017 totaled
approximately $1.13 billion, against which we
provided no 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, 2017 was approximately $1.13 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.
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
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
State Street Corporation | 156
STATE STREET CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
to generate trading services revenue and to manage
volatility in our NII. 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 change in the fair value of the
derivatives utilized in our trading activities are
recorded in trading services revenue, and the entire
change 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.
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.
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 income from
certain AFS investment securities from a fixed rate to
a floating rate. The hedged AFS investment
securities included hedged trusts that had a
State Street Corporation | 157
STATE STREET CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
weighted-average life of approximately 4.6 years as
of December 31, 2017, compared to 4.5 years as of
December 31, 2016. These trusts are hedged with
interest rate swap contracts of similar maturity,
repricing frequency and fixed-rate coupons. The
interest rate swap contracts convert the interest
income 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 one subordinated note 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, 2017
Senior Notes
Maturity
Paid Fixed
Interest Rate
2020
2021
2021
2022
2023
2024
2025
2026
2.55%
4.38
1.95
2.65
3.70
3.30
3.55
2.65
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.
We have entered into an interest rate swap
agreement to hedge the forecasted cash flows
associated with LIBOR-indexed floating-rate loans.
The interest rate swaps synthetically convert the loan
interest receipts from a variable-rate to a fixed-rate,
thereby mitigating the risk attributable to changes in
the LIBOR benchmark rate. As of December 31,
2017, the maximum maturity date of the underlying
loans is approximately 4.9 years.
Subordinated Notes
Net Investment Hedges
2023
3.10
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 NII. Changes in
the fair value of a derivative that are highly effective,
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 2017.
State Street Corporation | 158
STATE STREET CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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:
Futures
Foreign exchange contracts:
December 31,
2017
December 31,
2016
2,392
13,455
Forward, swap and spot
1,679,976
1,414,765
350
302
50
16
50
337
202
—
—
—
26,653
473
27,182
409
Options purchased
Options written
Futures
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:
Forward and swap
28,913
8,564
(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.
11,047
10,169
Total
$
10,169
$
— $
10,169
management activities, we have entered into interest-
rate contracts designated as fair value and cash flow
hedges to manage our interest rate risk. The
following 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)
Floating rate loans
Total
$
$
December 31, 2017
Fair Value
Hedges
Cash
Flow
Hedges(1)
Total
1,254
$
— $
8,493
—
—
1,300
1,254
8,493
1,300
9,747
$
1,300
$
11,047
December 31, 2016
Fair Value
Hedges
Cash
Flow
Hedges
$
1,444
$
— $
8,725
—
—
—
Total
1,444
8,725
—
(In millions)
Investment securities
available for sale
Long-term debt(2)
Floating rate loans
(1) In 2017, we entered into interest-rate contracts designated as cash flow hedges
for floating rate loans.
(2) As of December 31, 2017 and December 31, 2016 , these fair value hedges
decreased the carrying value of long-term debt presented in our consolidated
statement of condition by $87 million and $15 million, respectively.
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,
2017
2016
Contractual
Rates
Rate
Including
Impact of
Hedges
Contractual
Rates
Rate
Including
Impact of
Hedges
Long-term debt
3.34%
2.66%
3.40%
2.29%
State Street Corporation | 159
STATE STREET CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 provided in Note 11 to the consolidated financial statements in this Form 10-K.
(In millions)
Derivatives not designated as hedging instruments:
Foreign exchange 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
Total
Derivatives designated as hedging instruments:
Foreign exchange contracts
Interest-rate contracts
Total
Derivative Assets(1)
Fair Value
December 31, 2017
December 31, 2016
11,477
1
11,478
120
8
128
$
$
$
$
15,982
—
15,982
502
68
570
Derivative Liabilities(1)
Fair Value
December 31, 2017
December 31, 2016
11,361
284
11,645
107
100
207
$
$
$
$
15,881
380
16,261
75
348
423
$
$
$
$
$
$
$
$
(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:
(In millions)
Derivatives not designated as hedging instruments:
Location of Gain (Loss) on
Derivative in Consolidated
Statement of Income
Amount of Gain (Loss) on Derivative Recognized in
Consolidated Statement of Income
Years Ended December 31,
2017
2016
2015
Foreign exchange contracts
Interest-rate contracts
Foreign exchange contracts
Interest-rate contracts
Credit derivative contracts
Other derivative contracts
Other derivative contracts
Total
Trading services revenue
Processing fees and other revenue
Processing fees and other revenue
Trading services revenue
Trading services revenue
Trading services revenue
Compensation and employee benefits
$
$
632
$
662
$
686
—
(23)
8
—
—
1
—
(7)
(1)
(2)
(143)
474
$
(448)
205
$
—
—
(2)
(1)
8
(149)
542
State Street Corporation | 160
STATE STREET CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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:
Years Ended December 31,
2017
2016
2015
Years Ended December 31,
2017
2016
2015
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
$
18
$
(6) $
(101)
Investment
securities
626
39
221
43
(241) FX deposit
16
Available-for-sale
securities
(38)
(98)
61
Long-term debt
$
645
$
160
$
(265)
Processing fees and
other revenue
Processing fees and
other revenue
Processing fees and
other revenue(1)
Processing fees and
other revenue
$
(18) $
6
$
101
(626)
(221)
241
(37)
39
(40)
100
(17)
(54)
$
(642) $
(155) $
271
(1) In 2017, 2016 and 2015, $22 million, $23 million and $12 million, respectively, of net unrealized gains 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 NII, represent hedge ineffectiveness.
Amount of Gain
(Loss) on Derivative
Recognized in Other
Comprehensive
Income
Years Ended December 31,
Location of
Gain (Loss)
Reclassified
from OCI to
Consolidated
Statement of
Income
(In millions)
2017
2016
2015
Derivatives designated as
cash flow hedges:
Location of
Gain (Loss) on
Derivative
Recognized in
Consolidated
Statement of
Income
Amount of Gain
(Loss) Reclassified
from OCI to
Consolidated
Statement of Income
Years Ended December 31,
2017
2016
2015
Amount of Gain
(Loss) on Derivative
Recognized in
Consolidated
Statement of Income
Years Ended December 31,
2017
2016
2015
Interest-rate contracts
$
(14) $ — $ —
Foreign exchange contracts
(104)
(39)
Total
$ (118) $
(39) $
55
55
Net interest
income
Net interest
income
$ — $ — $
(4)
—
—
$ — $ — $
—
(4)
Net interest
income
Net interest
income
$
$
2
$ — $ —
24
26
$
24
24
$
10
10
Derivatives designated as
net investment hedges:
Foreign exchange contracts $ (160) $
Total
$ (160) $
109
109
$ —
$ —
Gains (Losses)
related to
investment
securities, net
$ — $ — $ —
$ — $ — $ —
Gains (Losses)
related to
investment
securities, net
$ — $ — $ —
$ — $ — $ —
State Street Corporation | 161
STATE STREET CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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
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, 2017 and
December 31, 2016, the fair value of securities
received as collateral from third parties where we are
permitted to transfer or re-pledge the securities
totaled $2.47 billion and $1.77 billion, respectively,
and the fair value of the portion that had been
transferred or re-pledged as of the same dates was
$15 million and $166 million, respectively.
State Street Corporation | 162
STATE STREET CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following tables present information about the offsetting of assets related to derivative contracts and
secured financing transactions, as of the dates indicated:
Assets:
December 31, 2017
(In millions)
Derivatives:
Foreign exchange contracts
Interest-rate contracts(6)
Other derivative contracts
Cash collateral and securities
netting
Total derivatives
Other financial instruments:
Resale agreements and securities
borrowing(7)
Total derivatives and other financial
instruments
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(4)
Net Amount(5)
Gross Amounts Not Offset in
Statement of Condition
$
$
11,597
8
1
NA
11,606
(5,548) $
—
—
(2,045)
(7,593)
6,049
8
1
(2,045) $
4,013
$
(124)
(124)
6,049
8
1
(2,169)
3,889
70,079
(47,434)
22,645
(22,645)
—
$
81,685
$
(55,027) $
26,658
$
(22,769) $
3,889
Assets:
December 31, 2016
(In millions)
Derivatives:
Foreign exchange contracts
Interest-rate contracts
Cash collateral and securities
netting
Total derivatives
Other financial instruments:
Resale agreements and securities
borrowing(7)
Total derivatives and other financial
instruments
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(4)
Net Amount(5)
Gross Amounts Not Offset in
Statement of Condition
$
$
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
(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 about 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) Includes securities in connection with our securities borrowing transactions.
(5) Includes amounts secured by collateral not determined to be subject to enforceable netting arrangements.
(6) Variation margin payments presented as settlements rather than collateral.
(7) Included in the $22,645 million as of December 31, 2017 were $3,241 million of resale agreements and $19,404 million of collateral provided related to securities
borrowing. 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. 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.
NA Not applicable
State Street Corporation | 163
STATE STREET CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following tables present information about the offsetting of liabilities related to derivative contracts and
secured financing transactions, as of the dates indicated:
Liabilities:
December 31, 2017
(In millions)
Derivatives:
Foreign exchange contracts
Interest-rate contracts(6)
Other derivative contracts
Cash collateral and securities
netting
Total derivatives
Other financial instruments:
Repurchase agreements and
securities lending(7)
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(7)
Total derivatives and other
financial instruments
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(4)
$
11,467
$
(5,548) $
100
285
NA
11,852
—
—
(422)
(5,970)
5,919
100
285
(422) $
5,882
(450)
(450)
Net Amount(5)
$
5,919
100
285
(872)
5,432
54,127
(47,434)
6,693
(4,299)
2,394
$
65,979
$
(53,404) $
12,575
$
(4,749) $
7,826
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(4)
348
380
NA
16,684
(73)
—
(2,356)
(10,682)
7,703
275
380
(2,356) $
6,002
(180)
(180)
Net Amount(5)
$
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
Foreign exchange contracts
$
15,956
$
(8,253) $
(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 about 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) Includes securities provided in connection with our securities lending transactions.
(5) Includes amounts secured by collateral not determined to be subject to enforceable netting arrangements.
(6) Variation margin payments presented as settlements rather than collateral.
(7) Included in the $6,693 million as of December 31, 2017 were $2,842 million of repurchase agreements and $3,851 million of collateral received related to securities
lending. 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. 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.
NA Not applicable
State Street Corporation | 164
STATE STREET CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The securities transferred under resale and
repurchase agreements typically are U.S. Treasury,
agency and agency MBS. 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, 2017
Overnight and
Continuous
Up to 30 days
30 – 90 days
Total
U.S. Treasury and agency securities
$
43,072
$
— $
— $
Total
Securities lending transactions:
Corporate debt securities
Equity securities
Non-U.S. sovereign debt
Total
43,072
35
11,020
—
11,055
—
—
—
—
—
—
—
—
—
—
43,072
43,072
35
11,020
—
11,055
Gross amount of recognized liabilities for repurchase agreements
and securities lending
$
54,127
$
— $
— $
54,127
(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
State Street Corporation | 165
STATE STREET CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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:
December 31,
2017
December 31,
2016
Unfunded credit facilities
$
26,488
$
26,993
Guarantees(1):
Indemnified securities financing
$
381,817
$
360,452
Stable value protection
Standby letters of credit
26,653
3,158
27,182
3,459
(1) 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, 2017, approximately 72% 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
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:
(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,
2017
December 31,
2016
$
381,817
$
360,452
400,828
377,919
61,270
60,003
65,272
63,959
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. Our
right to receive and obligation to return collateral in
connection with our securities lending transactions
are recorded in other assets and other liabilities,
respectively, in our consolidated statement of
condition. As of December 31, 2017 and
December 31, 2016, we had approximately $19.40
billion and $21.20 billion, respectively, of collateral
provided and approximately $3.85 billion and $5.02
billion, respectively, of collateral received from clients
in connection with our participation in principal
securities finance transactions.
Stable Value Protection
In the normal course of our business, we offer
products that provide book-value protection, primarily
to plan participants in stable value funds managed by
non-affiliated investment managers of post-retirement
defined contribution benefit plans, particularly 401(k)
plans. The book-value protection is provided on
portfolios of intermediate investment grade fixed-
income securities, and is intended to provide safety
and stable growth of principal invested. The
protection is intended to cover any shortfall in the
event that a significant number of plan participants
withdraw funds when book value exceeds market
value and the liquidation of the assets is not sufficient
to redeem the participants. The investment
parameters of the underlying portfolios, combined
with structural protections, are designed to provide
cushion and guard against payments even under
extreme stress scenarios.
State Street Corporation | 166
STATE STREET CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 and regulatory
proceedings on a case-by-case basis. When we have
a liability that we deem probable, and we deem the
amount of such liability can be reasonably estimated
as of the date of our consolidated financial
statements, we accrue our estimate of the amount of
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 legal and regulatory
proceedings and the amount of reasonably estimable
loss (or range thereof) are inherently difficult to
predict, especially in the early stages of proceedings.
Even if a loss is probable, an amount (or range) of
loss might not be reasonably estimated until the later
stages of the proceeding due to many factors such as
the presence of complex or novel legal theories, the
discretion of governmental authorities in seeking
sanctions or negotiating resolutions in civil and
criminal matters, the pace and timing of discovery
and other assessments of facts and the procedural
posture of the matter (collectively, "factors influencing
reasonable estimates").
As of December 31, 2017, our aggregate
accruals for loss contingencies for legal and
regulatory matters totaled approximately $12 million.
To the extent that we have established accruals in our
consolidated statement of condition for probable loss
contingencies, such accruals may not be sufficient to
cover our ultimate financial exposure associated with
any settlements or judgments. Any such ultimate
financial exposure, or proceedings to which we may
become subject in the future, could have a material
adverse effect on our businesses, on our future
consolidated financial statements or on our
reputation. Except where otherwise noted below, we
have not established significant accruals with respect
to the claims discussed.
We have identified certain matters for which loss
is reasonably possible (but not probable) in future
periods, whether in excess of an accrued liability or
where there is no accrued liability, and for which we
are able to estimate a range of reasonably possible
loss. As of December 31, 2017, our estimate of the
range of reasonably possible loss for these matters is
from zero to approximately $15 million in the
aggregate. Our estimate with respect to the
aggregate range of reasonably possible loss is based
upon currently available information and is subject to
significant judgment and a variety of assumptions and
known and unknown uncertainties. The matters
underlying the estimated range will change from time
to time, and actual results may vary significantly from
the current estimate.
In certain other pending matters, including the
invoicing matter, Federal Reserve/Massachusetts
Division of Banks written agreement and shareholder
litigation matters discussed below, it is not currently
feasible to reasonably estimate the amount or a
range of reasonably possible loss (including
reasonably possible loss in excess of amounts
accrued), and such losses, which may be significant,
are not included in the estimate of reasonably
possible loss discussed above. This is due to, among
other factors, the factors influencing reasonable
estimates described above. These factors are
particularly prevalent in governmental and regulatory
inquiries and investigations. As a result, reasonably
possible loss estimates often are not feasible until the
later stages of the inquiry or investigation or of any
related legal or regulatory proceeding. An adverse
State Street Corporation | 167
STATE STREET CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
outcome in one or more of the matters for which we
have not estimated the amount or a range of
reasonably possible loss, individually or in the
aggregate, could have a material adverse effect on
our businesses, on our future consolidated financial
statements or on our reputation. Given that we cannot
estimate reasonably possible loss for all legal and
regulatory proceedings as to which we may be
subject now or in the future, including matters that if
adversely concluded may present material financial,
regulatory and reputational risks, no conclusion as to
the ultimate exposure from current pending or
potential legal or regulatory proceedings should be
drawn from the current estimate of reasonably
possible loss.
The following discussion provides information
with respect to significant legal, governmental and
regulatory matters.
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 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. In connection with
our enhancements to our billing processes, we
continue to review historical billing practices and may
from time to time identify additional remediation. We
currently expect the cumulative total of our payments
to customers for these matters to be at least $360
million.
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. In addition, in
March 2017, a purported class action was
commenced against us alleging that our invoicing
practices violated duties owed to retirement plan
customers under ERISA.
We are also responding to requests for
information from, and are cooperating with
investigations by, governmental and regulatory
authorities on these matters, including the civil and
criminal divisions of the DOJ, the SEC, the DOL, the
Massachusetts Attorney General, and the New
Hampshire Bureau of Securities Regulation, which
could result in significant fines or other sanctions, civil
and criminal, against us. If these governmental or
regulatory authorities were to conclude that all or a
portion of the billing errors merited civil or criminal
sanctions, any fine or other penalty could be a
significant percentage, or a multiple of, the portion of
the overcharging serving as the basis of such a claim
or of the full amount overcharged. The governmental
and regulatory authorities have significant discretion
in civil and criminal matters as to the fines and other
penalties they may seek to impose. The severity of
such fines or other penalties could take into account
factors such as the amount and duration of our
incorrect invoicing, the government’s or regulator's
assessment of the conduct of our employees, as well
as prior conduct such as that which resulted in our
January 2017 deferred prosecution agreement in
connection with transition management services and
our recent settlement of civil claims regarding our
indirect foreign exchange business.
The outcome of any of these proceedings and,
in particular, any criminal sanction could materially
adversely affect our results of operations and could
have significant collateral consequences for our
business and reputation.
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 have been 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
to evaluate whether any suspicious activity was not
previously reported. 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.
Shareholder Litigation
A State Street shareholder has filed a purported
class action complaint against the Company alleging
that the Company’s financial statements in its annual
reports for the 2011-2014 period were misleading due
to the inclusion of revenues associated with the
invoicing matter referenced above and the facts
surrounding our 2017 settlements with the U.S.
government relating to our transition management
business. In addition, a State Street shareholder has
filed a derivative complaint against the Company's
past and present officers and directors to recover
State Street Corporation | 168
STATE STREET CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
alleged losses incurred by the Company relating to
the invoicing matter and to our Ohio public retirement
plans matter.
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, and the Internal Revenue Service is
currently reviewing our U.S. income tax returns for
the tax years 2014 and 2015. The earliest tax year
open to examination in jurisdictions where we have
material operations is 2011. Management believes
that we have sufficiently accrued liabilities as of
December 31, 2017 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 ABS, which we
carry in our investment securities portfolio. These
ABS 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 ABS 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, 2017 and
December 31, 2016, we carried AFS investment
securities, composed of securities related to state and
political subdivisions, with a fair value of $1.25 billion
and $1.35 billion, respectively, and other short-term
borrowings of $1.08 billion and $1.16 billion,
respectively, in our consolidated statement of
condition in connection with these trusts. The interest
income and interest expense generated by the
investments and certificated interests, respectively,
are recorded as components of NII when earned or
incurred.
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 trust 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 4.6 years as
of December 31, 2017, compared to approximately
4.5 years as of December 31, 2016.
Under separate legal agreements, we provide
liquidity facilities to these trusts and, with respect to
certain securities, letters of credit. As of
December 31, 2017, our commitments to the trusts
under these liquidity facilities and letters of credit
totaled $1.10 billion and $351 million, respectively,
and none of the liquidity facilities or letters of credit,
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 or 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.
State Street Corporation | 169
STATE STREET CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 SSGA
commingled investment vehicles and other similar
investment structures. The majority of our AUM 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, 2017, the aggregate assets
and liabilities of our consolidated sponsored
investment funds totaled $149 million and $50 million,
respectively. As of December 31, 2016, we had no
consolidated funds.
As of December 31, 2017, our potential
maximum total exposure associated with the
consolidated sponsored investment funds totaled
$100 million and represented the value of our
economic ownership interest in the funds.
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, 2017 and December 31,
2016, 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 $72 million and $121
million as of December 31, 2017 and December 31,
2016, 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 | 170
STATE STREET CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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, 2017:
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)
August 2012
20,000,000
1/4,000th
$
100,000
$
Series C
Series D
Series E
Series F
February 2014
30,000,000
1/4,000th
November 2014
30,000,000
1/4,000th
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 present the dividends declared for each of the series of preferred stock issued and
outstanding for the periods indicated:
Dividends
Declared per
Share
2017
Dividends
Declared per
Depositary
Share
Years Ended December 31,
Total
(In millions)
Dividends
Declared per
Share
2016
Dividends
Declared per
Depositary
Share
Total
(In millions)
$
5,250
$
1.32
$
5,900
6,000
5,250
5,352
1.48
1.52
52.50
1.32
26
44
45
40
27
$
5,250
$
5,900
6,000
5,250
3,626
$
182
1.32
1.48
1.52
52.50
0.90
$
$
26
44
45
40
18
173
Preferred Stock:
Series C
Series D
Series E
Series F
Series G
Total
In February 2018, 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, $26.25
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 2018.
Common Stock
In June 2017, our Board approved a common stock purchase program authorizing the purchase of up to $1.4
billion of our common stock through June 30, 2018 (the 2017 Program).
In June 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). The table below presents the activity under
both the 2017 Program and 2016 Program during the year ended December 31, 2017:
2016 Program(1)
2017 Program
Total
Shares Acquired
(In millions)
Average Cost per Share
Total Acquired
(In millions)
$
9.4
7.4
16.8
$
79.93
$
94.54
86.37
$
750
700
1,450
(1) Includes $158 million relating to shares acquired in exchange for BFDS stock during the first quarter of 2017. Additional information about the exchange is
provided in Note 1 to the consolidated financial statements included in this Form 10-K.
State Street Corporation | 171
STATE STREET CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The table below presents the dividends declared on common stock for the periods indicated:
Years Ended December 31,
2017
2016
Dividends Declared per
Share
Total
(In millions)
Dividends Declared per
Share
Total
(In millions)
Common Stock
$
1.60
$
596
$
1.44
$
559
Accumulated Other Comprehensive Income (Loss)
The following table presents the after-tax components of AOCI as of the dates indicated:
(In millions)
December 31
2017
2016
2015
Net unrealized gains (losses) on cash flow hedges
$
(56) $
229
$
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
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
148
19
167
(64)
(65)
(6)
(170)
(815)
(225)
25
(200)
(86)
95
(9)
(194)
(1,875)
$
(1,009) $
(2,040) $
293
9
(28)
(19)
(109)
(14)
(16)
(183)
(1,394)
(1,442)
The following table presents changes in AOCI by component, net of related taxes, for the periods indicated:
Net
Unrealized
Gains
(Losses)
on Cash
Flow
Hedges
Net
Unrealized
Gains
(Losses)
on
Available-
for-Sale
Securities
Net
Unrealized
Gains
(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
(In millions)
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)
Other comprehensive income (loss) before
reclassifications
Amounts reclassified into (out of) earnings
Other comprehensive income (loss)
(285)
—
(285)
Balance as of December 31, 2017
$
(56) $
412
(23)
389
103
(160)
—
(160)
3
—
3
—
24
24
1,059
1,029
1
2
1,060
1,031
$
(65) $
(6) $
(170) $
(815) $ (1,009)
State Street Corporation | 172
STATE STREET CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following table presents after-tax reclassifications into earnings for the periods indicated:
(In millions)
Available-for-sale securities:
Net realized gains (losses) from sales of available-for-sale securities, net of
related taxes of $16 and ($4), 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 $0 and $1, respectively
Retirement plans:
Amortization of actuarial losses, net of related taxes of ($8) and ($1),
respectively
Foreign currency translation:
Sales of non-U.S. entities, net of related taxes of $0 and ($2), respectively
Total reclassifications (out of) into AOCI
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
Years Ended December 31,
2017
2016
Amounts Reclassified into
(out of) Earnings
Affected Line Item in
Consolidated Statement of
$
(23) $
6
Net gains (losses) from sales of
available-for-sale securities
—
24
(1)
Losses reclassified (from) to
other comprehensive income
(11)
Compensation and employee
benefits expenses
$
1
2
$
(3)
(9)
Processing fees and other
revenue
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, 2017, State Street and
State Street Bank exceeded all regulatory capital
adequacy requirements to which they were subject.
As of December 31, 2017, 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, 2017 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 | 173
STATE STREET CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
State Street
State Street Bank
Basel III
Advanced
Approaches
December 31,
2017(1)
Basel III
Standardized
Approach
December 31,
2017(2)
Basel III
Advanced
Approaches
December 31,
2016(1)
Basel III
Standardized
Approach
December 31,
2016(2)
Basel III
Advanced
Approaches
December 31,
2017(1)
Basel III
Standardized
Approach
December 31,
2017(2)
Basel III
Advanced
Approaches
December 31,
2016(1)
Basel III
Standardized
Approach
December 31,
2016(2)
(In millions)
Common shareholders' equity:
Common stock and related surplus
$
10,302
$
10,302
$
10,286
$
10,286
$
11,612
$
11,612
$
11,376
$
11,376
Retained earnings
18,856
18,856
17,459
17,459
12,312
12,312
12,285
12,285
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
(972)
(9,029)
19,157
(6,877)
(76)
12,204
3,196
—
(18)
15,382
980
—
4
1
(972)
(9,029)
19,157
(6,877)
(76)
12,204
3,196
—
(18)
15,382
980
—
72
1
(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
$
$
$
$
16,367
$
16,435
$
15,909
$
15,967
49,976
$
101,349
$
50,900
$
98,125
45,822
3,358
99,156
209,328
$
$
NA
1,334
44,579
3,822
NA
1,751
102,683
$
99,301
$
99,876
209,328
$ 226,310
$ 226,310
(809)
—
(809)
—
(1,648)
(1,648)
—
—
23,115
23,115
22,013
22,013
(6,579)
(6,579)
(5)
(5)
16,531
16,531
—
—
—
—
—
—
(6,060)
(148)
15,805
—
—
—
(6,060)
(148)
15,805
—
—
—
16,531
983
16,531
983
15,805
1,179
15,805
1,179
—
—
—
$
$
$
$
17,514
47,448
45,295
3,375
96,118
206,070
$
$
$
$
—
72
—
—
15
—
—
77
—
17,586
$
16,999
$
17,061
98,433
$
47,383
$
94,413
NA
1,334
44,043
3,822
NA
1,751
99,767
$
95,248
$
96,164
206,070
$ 222,584
$ 222,584
2017 Minimum
Requirements
Including
Capital
Conservation
Buffer and
G-SIB
Surcharge(6)
2016 Minimum
Requirements
Including
Capital
Conservation
Buffer and
G-SIB
Surcharge(7)
6.5%
5.5%
12.3%
11.9%
11.7%
11.6%
17.2%
16.6%
16.6%
16.4%
8.0
10.0
4.0
7.0
9.0
4.0
15.5
16.5
7.3
15.0
16.0
7.3
14.8
16.0
6.5
14.7
16.0
6.5
17.2
18.2
8.0
16.6
17.6
8.0
16.6
17.8
7.1
16.4
17.7
7.1
Capital
Ratios:
Common
equity tier 1
capital
Tier 1 capital
Total capital
Tier 1
leverage
(1) CET1 capital, tier 1 capital and total capital ratios as of December 31, 2017 and December 31, 2016 were calculated in conformity with the advanced approaches provisions of the Basel III
final rule. Tier 1 leverage ratio as of December 31, 2017 and December 31, 2016 were calculated in conformity with the Basel III final rule.
(2) CET1 capital, tier 1 capital and total capital ratios as of December 31, 2017 and December 31, 2016 were calculated in conformity with the standardized approach provisions of the Basel III
final rule. Tier 1 leverage ratio as of December 31, 2017 and December 31, 2016 were calculated in conformity with the Basel III final rule.
(3) Amounts for State Street and State Street Bank as of December 31, 2017 consisted of goodwill, net of associated deferred tax liabilities, and 80% of other intangible assets, net of associated
deferred tax liabilities. Amounts for State Street and State Street Bank as of December 31, 2016 consisted of goodwill, net of deferred tax liabilities and 60% 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, 2017.
(7) Minimum requirements will be phased in up to full implementation beginning on January 1, 2019; minimum requirements listed are as of December 31, 2016.
NA Not applicable
State Street Corporation | 174
STATE STREET CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 17. Net Interest Income
The following table presents the components of
interest income and interest expense, and related NII,
for the periods indicated:
(In millions)
Interest income:
Deposits with banks
Investment securities:
U.S. Treasury and federal
agencies
State and political subdivisions
Other investments
Securities purchased under resale
agreements
Loans and leases
Other interest-earning assets
Total interest income
Interest expense:
Deposits
Securities sold under repurchase
agreements
Short-term borrowings
Long-term debt
Other interest-bearing liabilities
Total interest expense
Net interest income
Years Ended December 31,
2017
2016
2015
$
180
$
126
$
208
854
226
658
264
504
222
821
224
756
146
378
61
735
227
934
62
311
11
2,908
2,512
2,488
163
2
10
308
121
604
85
1
7
260
75
428
97
—
7
250
46
400
$ 2,304
$ 2,084
$ 2,088
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
appreciation rights are 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.
The 2017 Stock Incentive Plan, or 2017 Plan,
was approved by shareholders in May 2017 for
issuance of stock and stock based awards. Awards
may be made under the 2017 Plan for (i) up to 8.3
million shares of common stock plus (ii) up to an
additional 28.5 million shares that were available to
be issued under the 2006 Equity Incentive Plan, or
2006 Plan, or may become available for issuance
under the 2006 Plan due to expiration, termination,
cancellation, forfeiture or repurchase of awards
granted under the 2006 Plan. As of December 31,
2017, a total of 17.9 million shares from the 2006
Plan have been added to and may be issued from the
2017 Plan. As of December 31, 2017, a cumulative
total of 0.4 million shares had been awarded under
the 2017 Plan and 68.9 million had been awarded
under the 2006 Plan. As of December 31, 2016 and
2015, we had cumulative totals of 65.7 million shares
and 60.9 million shares, respectively, awarded under
the 2006 Plan. The 2017 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
issuance under the 2017 Plan. From inception to
December 31, 2017, fewer than 1 million shares had
been awarded under the 2017 Plan but not delivered,
and have become available for reissue. As of
December 31, 2017, a total of 25.9 million shares
were available for future issuance under the 2017
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, 2017 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
State Street Corporation | 175
STATE STREET CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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-
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 $243 million,
$268 million and $319 million for the years ended
December 31, 2017, 2016 and 2015, respectively.
Such expense for 2017, 2016 and 2015 excluded $15
million, $9 million and $10 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, 2017, 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 Appreciation Rights:
Outstanding as of December 31, 2015
Exercised
Forfeited or expired
Outstanding as of December 31, 2016
Exercised
Forfeited or expired
Outstanding and exercisable as of December 31, 2017(1)
1,206
$
(227)
(24)
955
(595)
(360)
— $
76.29
70.59
81.71
77.52
81.71
70.59
—
0
$
—
(1) There were no shares subject to stock options and no stock appreciation rights.
The total intrinsic value of stock appreciation
rights exercised during the years ended
December 31, 2017, 2016 and 2015 was $5 million,
$1 million and $5 million, respectively. As of
December 31, 2017, there was no unrecognized
compensation cost related to stock options and stock
appreciation rights.
Shares
(In thousands)
Weighted-Average
Grant Date Fair
Value
Deferred Stock Awards:
Outstanding as of
December 31, 2015
Granted
Vested
Forfeited
Outstanding as of
December 31, 2016
Granted
Vested
Forfeited
Outstanding as of
December 31, 2017
8,736
$
4,336
(4,897)
(361)
7,814
2,977
(3,686)
(257)
6,848
$
61.59
52.49
56.18
60.12
60.01
76.38
62.88
63.56
65.44
The total fair value of deferred stock awards
vested for the years ended December 31, 2017, 2016
and 2015, based on the weighted average grant date
fair value in each respective year, was $232 million,
$275 million and $340 million, respectively. As of
December 31, 2017, total unrecognized
compensation cost related to deferred stock awards,
net of estimated forfeitures, was $242 million, which
is expected to be recognized over a weighted-
average period of 2.5 years.
Shares
(In thousands)
Weighted-Average
Grant Date Fair Value
Performance Awards:
Outstanding as of
December 31, 2015
Granted
Forfeited
Paid out
Outstanding as of
December 31, 2016
Granted
Forfeited
Paid out
Outstanding as of
December 31, 2017
1,165
$
506
—
(424)
1,247
534
—
(233)
1,548
$
60.45
50.81
—
49.27
60.37
76.27
—
58.91
66.09
State Street Corporation | 176
STATE STREET CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The total fair value of performance awards paid
out for the years ended December 31, 2017, 2016
and 2015, based on the weighted average grant date
fair value in each respective year, was $14 million,
$21 million and $39 million, respectively. As of
December 31, 2017, total unrecognized
compensation cost related to performance awards,
net of estimated forfeitures, was $16 million, which is
expected to be recognized over a weighted-average
period of 2.8 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 $15 million, $16 million
and $46 million in 2017, 2016 and 2015, 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 $1.32 billion, $125 million and $16 million,
respectively, as of December 31, 2017 and $1.23
billion, $136 million and $21 million, respectively, as
of December 31, 2016. 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 $9 million and $32 million
as of December 31, 2017 and 2016, respectively.
The non-qualified supplemental retirement plans were
underfunded by $125 million and $136 million as of
December 31, 2017 and 2016, respectively. The
other post-retirement benefit plans were underfunded
by $16 million and $21 million as of December 31,
2017 and 2016, 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 $146 million, $132 million, and
$130 million in 2017, 2016 and 2015, respectively.
State Street Corporation | 177
STATE STREET CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 2017, 2016
and 2015 was $526 million, $472 million and $443
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, 2017 and 2016, an aggregate net book
value of $159 million and $194 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 2017, 2016 and 2015,
interest expense related to these capital lease
obligations, reflected in NII, was $20 million, $22
million and $32 million, respectively. As of
December 31, 2017 and 2016, accumulated
amortization of capital lease assets was $401 million
and $365 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
2017, 2016 and 2015 amounted to $229 million, $194
million and $190 million, respectively. Total rental
expense was reduced by sublease revenue of $5
million in 2017 and $4 million in both 2016 and 2015.
The following table presents a summary of future minimum lease payments under non-cancelable capital and
operating leases as of December 31, 2017. Aggregate future minimum rental commitments have been reduced by
aggregate sublease rental commitments of $41 million for capital leases and $19 million for operating leases.
(In millions)
2018
2019
2020
2021
2022
Thereafter
Total minimum lease payments
Less amount representing interest payments
Present value of minimum lease payments
Capital
Leases
Operating
Leases
Total
$
$
53
45
45
45
45
34
$
197
$
175
154
144
125
336
250
220
199
189
170
370
267
$
1,131
$
1,398
(56)
211
State Street Corporation | 178
STATE STREET CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 21. Expenses
The following table presents the components of
other expenses for the periods indicated:
(In millions)
Insurance
Regulatory fees and
assessments
Bank operations
Sales advertising public relations
Litigation
Other
Total other expenses
$
Restructuring Charges
Years Ended December 31,
2017
2016
2015
$
118
$
93
$
106
80
67
(15)
233
589
$
82
62
52
50
245
584
126
115
105
65
422
185
$
1,018
In the year ended December 31, 2017, we
recorded restructuring charges of $245 million,
compared to $142 million in the year ended
December 31, 2016. The charges were primarily
related to Beacon.
The following table presents aggregate
restructuring activity for the periods indicated:
(In millions)
Accrual Balance at
December 31, 2014
Accruals for Business
Operations and IT
Payments and other
adjustments
Accrual Balance at
December 31, 2015
Accruals for Business
Operations and IT
Accruals for Beacon
Payments and other
adjustments
Accrual Balance at
December 31, 2016
Accruals for Beacon
Payments and Other
Adjustments
Accrual Balance at
December 31, 2017
Employee
Related
Costs
Real Estate
Actions
Asset and
Other
Write-offs
Total
$
39
$
23
$
7
$
69
(5)
(25)
(3)
(9)
13
5
(17)
(51)
$
9
$
11
$
3
$
23
(2)
94
(64)
$
37
$
186
(57)
—
18
(12)
17
32
(17)
—
30
(2)
142
(31)
(107)
$
2
$
56
27
245
(26)
(100)
$
166
$
32
$
3
$
201
Note 22. Income Taxes
We use an asset-and-liability approach to
account for income taxes. Our objective is to
recognize the amount of taxes payable or refundable
for the current year through charges or credits to the
current tax provision, and to recognize deferred tax
assets and 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 periods
indicated:
(In millions)
2017
2016
2015
Years Ended December 31,
Current:
Federal
State
Non-U.S.
Total current expense
Deferred:
Federal
State
Non-U.S.
Total deferred expense (benefit)
Total income tax expense
(benefit)
$
229
$
(14) $
18
380
627
49
65
(19)
95
30
320
336
(311)
38
(85)
(358)
52
92
342
486
(39)
40
(169)
(168)
$
722
$
(22) $
318
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 periods indicated:
U.S. federal income tax rate
35.0%
35.0 %
35.0%
Years Ended December 31,
2017
2016
2015
Changes from statutory rate:
State taxes, net of federal benefit
Tax-exempt income
Business tax credits(1)
Foreign tax differential
Transition tax
Deferred tax revaluation
Foreign designated earnings
Foreign capital transactions
Tax refund
Litigation expense
Other, net
Effective tax rate
1.9
(4.5)
(6.8)
(7.4)
15.7
(6.8)
(0.7)
—
—
—
2.0
(6.1)
(13.6)
(7.7)
—
—
(6.8)
(4.3)
—
1.4
(1.5)
(0.9)
4.2
(5.6)
(9.4)
(9.6)
—
—
—
—
(2.8)
2.7
(0.7)
24.9%
(1.0)%
13.8%
(1) Business tax credits include low-income housing, production and
investment tax credits.
On December 22, 2017, the President signed
into law the TCJA (H.R. 1), reducing the corporate
income tax rate from 35% to 21% and enacting a
one-time transition tax on unremitted earnings of
foreign subsidiaries. Although we have not
completed accounting for the tax effects of the TCJA,
we included a provisional estimate for the impact to
deferred tax balances and cost associated with the
one-time transition tax.
State Street Corporation | 179
STATE STREET CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
As a result of the reduction in the corporate
income tax rate, certain U.S. deferred tax assets and
liabilities were revalued resulting in a provisional
estimated deferred tax benefit of $197 million.
Deferred tax assets and liabilities represent the future
impact on income taxes resulting from temporary
differences that exist as of the balance sheet date
using enacted tax rates. Certain U.S. temporary
differences are a provisional estimate based on
information currently available. As additional
information is made available, there may be
adjustments to temporary differences that could
increase or decrease the deferred tax balances. As
such, the $197 million benefit may be adjusted in
future periods.
The one-time transition tax is measured on total
post-1986 earnings and profits ("E&P") of foreign
subsidiaries previously deferred from U.S. income
taxes. Although we have not completed our analysis
of cumulative E&P, we have included a provisional
expense of $454 million based on information
available and our current interpretations of the newly
enacted law. This amount is based on the amount of
earnings held in cash and other specified assets. We
understand that this amount will change as estimates
of foreign E&P and foreign income taxes are refined
and assumptions are modified from additional
guidance on the TCJA.
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 following table presents significant
components of our gross deferred tax assets and
gross deferred tax liabilities as of the dates indicated:
(In millions)
Deferred tax assets:
Unrealized losses on investment
securities, net
Deferred compensation
Defined benefit pension plan
Restructuring charges and other reserves
Foreign currency translation
General business credit
NOL and other carryforwards
Other
Total deferred tax assets
Valuation allowance for deferred tax
assets
Deferred tax assets, net of valuation
allowance
Deferred tax liabilities:
Leveraged lease financing
Fixed and intangible assets
Non-U.S. earnings
Investment basis differences
December 31,
2017
2016
$
17
$
159
82
132
18
231
101
27
767
157
285
116
199
225
425
73
32
1,512
$
$
(88)
(66)
679
$
1,446
$
184
755
6
158
313
886
164
120
Total deferred tax liabilities
$
1,103
$
1,483
The reduction in deferred tax assets and
liabilities includes the provisional estimated impact of
TCJA as well as current year activity such as the
utilization of General Business Credits, additional
investments in tax advantaged investments and
changes in FX rates.
The table below summarizes the deferred tax
assets and related valuation allowances recognized
as of December 31, 2017:
(In millions)
General business
Credits
NOLs - Non-U.S.
Other Carryforwards
NOLs - State
Deferred
Tax
Asset
Valuation
Allowance
Expiration
$
231
$
— 2035-2037
47
41
13
(35)
2018-2026 /
None
(41) None
(12) 2018-2036
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 carryforward periods to
realize these assets.
State Street Corporation | 180
STATE STREET CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
At December 31, 2017, 2016 and 2015, the
gross unrecognized tax benefits, excluding interest,
were $94 million, $71 million, and $63 million,
respectively. Of this, the amounts that would reduce
the effective tax rate, if recognized, are $87 million,
$63 million and $55 million, respectively.
Unrecognized tax benefits do not include the benefit
of the federal deduction for unrecognized state tax
benefits which is included in the effective tax rate.
The following table presents activity related to
unrecognized tax benefits as of the dates indicated:
December 31,
(In millions)
2017
2016
2015
Beginning balance
$
71
$
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 years
Ending balance
$
(14)
(13)
(122)
26
11
94
$
7
14
71
$
8
14
63
It is reasonably possible that of the $94 million of
unrecognized tax benefits as of December 31, 2017,
up to $14 million could decrease within the next 12
months due to the resolution of various audits.
Management believes that we have sufficient accrued
liabilities as of December 31, 2017 for tax exposures
and related interest expense.
Income tax expense included related interest
and penalties of approximately $3 million and $2
million in 2017 and 2016, respectively. Total accrued
interest and penalties are approximately $8 million,
$5 million and $3 million as of December 31, 2017,
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 equity-based
awards. The effect of 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
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
periods indicated:
(Dollars in millions, except per
share amounts)
Net income
Less:
Years Ended December 31,
2017
2016
2015
$
2,177
$
2,143
$ 1,980
Preferred stock dividends
(182)
(173)
(130)
Dividends and undistributed
earnings allocated to
participating securities(1)
Net income available to common
shareholders
Average common shares
outstanding (In thousands):
(2)
(2)
(2)
$
1,993
$
1,968
$ 1,848
Basic average common shares
374,793
391,485
407,856
Effect of dilutive securities: equity-
based awards
Diluted average common shares
Anti-dilutive securities(2)
Earnings per Common Share:
5,420
4,605
5,782
380,213
396,090
413,638
188
2,143
661
Basic
Diluted(3)
$
5.32
$
5.24
$
5.03
4.97
4.53
4.47
(1) Represents the portion of net income available to common equity
allocated to participating securities, composed of 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.
(2) Represents 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.
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;
depotbank services (a fund oversight role created by
regulation); record-keeping; cash management;
foreign exchange, brokerage and other trading
services; securities finance; our enhanced custody
product, which integrates principal securities lending
State Street Corporation | 181
STATE STREET CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
and custody; deposit and short-term investment
facilities; loans and lease financing; investment
manager and alternative investment manager
operations outsourcing; performance, risk and
compliance analytics; and financial data management
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.
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 NII,
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, 2017 included net acquisition and
restructuring costs of $266 million.
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 costs 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;
• Net severance costs associated with staffing
realignment of $73 million.
State Street Corporation | 182
STATE STREET CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following is a summary of our line of business results for the periods indicated. 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 2017.
(Dollars in millions)
2017
2016
2015
2017
2016
2015
2017
Investment
Servicing
Investment
Management
Other
2016
2015
2017
Total
2016
2015
Servicing fees
$ 5,365
$ 5,073
$ 5,153
$ — $ — $ — $ — $ — $ — $ 5,365
$ 5,073
$ 5,153
Years Ended December 31,
—
1,616
1,292
1,174
Management fees
Trading services
Securities finance
Processing fees and
other
Total fee revenue
Net interest income
—
999
606
240
7,210
2,309
—
1,038
562
119
6,792
2,081
1,091
496
342
7,082
2,086
Gains (losses) related to
investment securities, net
(39)
7
(6)
72
—
7
61
—
55
—
(29)
(33)
1,695
1,324
1,196
(5)
—
3
—
2
—
Total revenue
9,480
8,880
9,162
1,690
1,327
1,198
Provision for loan losses
2
10
12
—
—
Total expenses
6,717
6,660
6,990
1,286
1,218
—
962
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
266
199
—
—
—
—
—
—
—
—
—
98
1,616
1,071
606
247
8,905
2,304
1,292
1,099
562
90
8,116
2,084
1,174
1,146
496
309
8,278
2,088
(39)
7
(6)
11,170
10,207
10,360
2
10
12
8,269
8,077
8,050
Income before income
tax expense
$ 2,761
$ 2,210
$ 2,160
$ 404
$ 109
$ 236
$ (266)
$ (199)
$
(98)
$ 2,899
$ 2,120
$ 2,298
Pre-tax margin
29%
25%
24%
24%
8%
20%
26%
21%
22%
Average assets (in
billions)
$ 214.0
$ 225.3
$ 246.6
$
5.4
$
4.4
$
3.9
$ 219.4
$ 229.7
$ 250.5
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 2017, 2016 and 2015
included $1.05 billion, $1.05 billion and $938 million,
respectively, in the U.K.
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.
2017
U.S.
Total
Non-U.S.
2016
U.S.
Total
Non-U.S.
2015
U.S.
Total
$
4,734
$
6,436
$
11,170
$
4,419
$
5,788
$
10,207
$
4,428
$
5,932
$
10,360
1,230
1,669
2,899
1,047
1,073
2,120
1,193
1,105
2,298
Non-U.S. assets were $82.1 billion and $79.1 billion as of December 31, 2017 and 2016, respectively.
State Street Corporation | 183
STATE STREET CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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,
2017
2016
2015
Cash dividends from consolidated banking subsidiary
$
2,224
$
640
$
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
12
127
2,363
297
94
391
(86)
2,058
20
99
75
92
807
249
107
356
(47)
498
1,629
16
Net income
$
2,177
$
2,143
$
585
171
73
829
209
310
519
(186)
496
1,384
100
1,980
State Street Corporation | 184
STATE STREET CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
STATEMENT OF CONDITION - PARENT COMPANY
(In millions)
Assets:
December 31,
2017
2016
Interest-bearing deposits with consolidated banking subsidiary
$
532
$
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
361
43
23,080
6,762
63
2,973
143
263
3,635
325
39
22,147
2,687
297
2,743
126
461
$
$
$
34,220
$
32,460
917
$
10,986
11,903
22,317
34,220
$
514
10,727
11,241
21,219
32,460
State Street Corporation | 185
STATE STREET CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
STATEMENT OF CASH FLOWS - PARENT COMPANY
(In millions)
Years Ended December 31,
2017
2016
2015
Net cash provided by operating activities
$
2,047
$
417
$
926
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 increase in investments in unconsolidated affiliates
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
3,103
(7,672)
4,216
—
172
(181)
—
748
(450)
—
—
(1,292)
(104)
(768)
(1,866)
—
—
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)
—
—
—
State Street Corporation | 186
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 NII for the years indicated:
(Dollars in millions; fully
taxable-equivalent basis)
Assets:
Years Ended December 31,
2017
2016
2015
Average
Balance
Interest
Average
Rate
Average
Balance
Interest
Average
Rate
Average
Balance
Interest
Average
Rate
Interest-bearing deposits with U.S. banks
$ 16,790
$
184
1.10% $ 19,639
$
102
.52% $ 52,135
$
136
.26%
Interest-bearing deposits with non-U.S.
banks
Securities purchased under resale
agreements
Trading account assets
Investment securities:
U.S. Treasury and federal agencies(1)
State and political subdivisions(1)
Other investments
Loans
Lease financing(1)
Other interest-earning assets
Total interest-earning assets(1)
Cash and due from banks
Other assets
Total assets
Liabilities and shareholders’ equity:
Interest-bearing deposits:
Time
Savings
Non-U.S.
Total interest-bearing deposits
Securities sold under repurchase
agreements
Federal funds purchased
Other short-term borrowings
Long-term debt
Other interest-bearing liabilities
Total interest-bearing liabilities
Non-interest-bearing deposits:
Special time
Demand
Non-U.S.(2)
Other liabilities
Shareholders’ equity
191,235
3,075
3,097
25,118
$ 219,450
65
31
67
163
2
—
10
308
121
604
$ 12,020
$
18,603
91,937
122,560
3,683
—
1,313
11,595
4,607
143,758
27,402
13,556
290
12,379
22,065
30,724
(4)
(.01)
33,452
2,131
1,011
43,273
9,928
42,578
21,149
767
22,884
264
12.38
(1)
(.12)
854
378
659
498
21
222
1.97
3.80
1.55
2.36
2.67
.97
1.61
2,558
921
46,551
10,326
43,861
18,136
877
22,863
24
146
—
821
385
756
354
30
61
199,184
2,679
3,157
27,386
$ 229,727
.07
5.7
—
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
72
62
1
735
399
935
276
35
10
220,456
2,661
2,460
27,516
$ 250,432
44
7
46
97
1
—
6
250
46
400
.54% $ 19,223
$
125
.65% $ 20,758
$
.17
.07
.13
.05
—
.80
2.66
2.63
.42
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
—
.4
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
.41
1.92
.08
1.84
3.81
1.70
1.62
3.74
.04
1.21
.21%
.07
.05
.08
.01
—
.15
2.43
.71
.29
Total liabilities and shareholders’ equity
$ 219,450
$ 229,727
$ 250,432
Net interest income, fully taxable-equivalent
basis
Excess of rate earned over rate paid
Net interest margin(3)
$
2,471
$
2,251
$
2,261
1.19%
1.29
1.05%
1.13
.96%
1.03
(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 income 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 income presented above were $167 million, $167 million and $173 million for the years ended December 31,
2017, 2016 and 2015, respectively, and were substantially related to tax-exempt securities (state and political subdivisions).
(2) Non-U.S. non-interest-bearing deposits were $762 million, $337 million and $95 million as of December 31, 2017, 2016 and 2015, respectively.
(3) NIM is calculated by dividing fully taxable-equivalent NII by average total interest-earning assets.
State Street Corporation | 187
The following table summarizes changes in fully taxable-equivalent interest income 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 income related to:
2017 Compared to 2016
2016 Compared to 2015
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
$
(15) $
97
$
82
$
(84) $
50
$
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
(2)
(24)
—
(58)
(15)
(22)
59
(4)
—
(81)
(47)
5
2
—
—
(1)
4
(11)
(48)
Net interest income
$
(33) $
(26)
142
(1)
91
8
(75)
85
(5)
161
477
(13)
19
112
1
—
4
44
57
(28)
118
(1)
33
(7)
(97)
144
(9)
161
396
(60)
24
114
1
—
3
48
46
224
253
$
176
220
$
65
(13)
—
120
(6)
(191)
18
(2)
—
(93)
(3)
1
(3)
—
—
(3)
27
(8)
11
(104) $
(113)
97
(1)
(34)
(8)
12
60
(3)
51
111
84
(1)
(90)
—
—
4
(17)
37
17
94
(34)
(48)
84
(1)
86
(14)
(179)
78
(5)
51
18
81
—
(93)
—
—
1
10
29
28
$
(10)
State Street Corporation | 188
Quarterly Summarized Financial Information (Unaudited)
(Dollars in millions,
except per share amounts; shares in thousands)
Total fee revenue
Interest income
Interest expense
Net interest income
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 (loss) from minority interest
Net income
Net income available to common shareholders
Earnings per common share(1):
Basic
Diluted
Average common shares outstanding:
2017 Quarters
2016 Quarters
Fourth
Third
Second
First
Fourth
Third
Second
First
$
2,230
$
2,242
$
2,235
$
2,198
$
2,014
$
2,079
$
2,053
$
1,970
797
181
616
—
761
158
603
1
700
125
575
—
650
140
510
(40)
616
102
514
2
2,846
2,846
2,810
2,668
2,530
(2)
3
3
2,131
2,021
2,031
822
137
—
685
629
$
$
776
156
—
620
584
$
$
(2)
2,086
584
82
—
502
446
2
2,183
345
(248)
—
593
557
$
$
$
$
647
110
537
4
2,620
—
1,984
636
72
(1)
563
507
$
$
717
347
—
370
334
.91
.89
$
$
$
$
$
$
620
99
521
(1)
629
117
512
2
2,573
2,484
4
1,860
709
92
2
619
585
$
$
4
2,050
430
62
—
368
319
.80
.79
1.69
$
1.56
$
1.17
$
1.45
$
1.31
$
1.48
$
1.66
1.53
1.15
1.43
1.29
1.47
Basic
Diluted
369,934
372,765
375,395
381,224
384,115
388,358
375,477
378,518
380,915
386,417
389,046
393,212
394,160
398,847
399,421
403,615
Dividends per common share
$
.42
$
.42
$
.38
$
.38
$
.38
$
.38
$
.34
$
.34
Common stock price:
High
Low
Closing
$
100.90
$
96.39
$
91.43
$
83.49
$
81.91
$
71.62
$
64.69
$
65.65
89.68
97.61
89.25
95.54
76.95
89.73
74.45
79.61
68.16
77.72
51.22
69.63
50.60
53.92
50.73
58.52
(1) Basic and diluted earnings per common share for full-year 2017 and basic earnings per common share for full-year 2016 do not equal the sum of the four quarters
for the year.
State Street Corporation | 189
Asset-backed securities
Available-for-sale
Alternative Investment Fund Managers Directive
Advanced Internal Ratings-Based Approach
Allowance for loan and lease losses
Anti-money laundering
ACRONYMS
GEAM
G-SIB
HQLA(1)
HTM
IDI
General Electric Asset Management
Global systemically important bank
High-quality liquid assets
Held-to-maturity
Insured depository institution
IFDS U.K.
International Financial Data Services Limited U.K.
Accumulated other comprehensive income (loss)
Accounting Standards Update
ISDA
LCR(1)
International Swaps and Derivatives Association
Liquidity coverage ratio
Assets under custody and administration
LDA model
Loss distribution approach model
ABS
AFS
AIFMD
AIRB(1)
ALLL
AML
AOCI
ASU
AUCA
AUM
BCBS
BCRC
BFDS
Board
bps
BRRD
CAP
CCAR
CD
CET1(1)
CFTC
CIS
CLO
CMO
COSO
CRE
CRPC
CVA
DIF
Assets under management
Basel Committee on Banking Supervision
Business Conduct Risk Committee
Boston Financial Data Services, Inc.
Board of Directors
Basis points
Bank Recovery and Resolution Directive
Capital adequacy process
Comprehensive Capital Analysis and Review
Certificates of deposit
Common equity tier 1
Commodity Futures Trading Commission
Corporate Information Security
Collateralized loan obligations
Collateralized mortgage obligations
Committee of Sponsoring Organizations of the Treadway
Commission
Commercial real estate
Credit Risk & Policy Committee
Credit valuation adjustment
Deposit Insurance Fund
Dodd-Frank Act
Dodd-Frank Wall Street Reform and Consumer Protection
Act
DOJ
DOL
E&A Committee
EAD(1)
ECB
ECC
EMIR
EPS
ERISA
ERM
ETF
EVE
FASB
FCA
FDIC
Department of Justice
Department of Labor
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 Conduct Authority
Federal Deposit Insurance Corporation
Federal Reserve
Board of Governors of the Federal Reserve System
FFELP
FHLB
FRBB
FSB
FSOC
FX
GDPR
GAAP
GCR
Federal Family Education Loan Program
Federal Home Loan Bank of Boston
Federal Reserve Bank of Boston
Financial Stability Board
Financial Stability Oversight Council
Foreign exchange
General Data Protection Regulation
Generally accepted accounting principles
Global credit review
(1) As defined by the applicable U.S. regulations.
LTD
MBS
MiFID
MiFID II
MiFIR
MRAC
MRC
MVG
NII
NIM
NSFR(1)
NYSE
OCC
OCI
OCIO
OFAC
ORM
OTC
OTTI
Long term debt
Mortgage-backed securities
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 income
Net interest margin
Net stable funding ratio
New York Stock Exchange
Office of the Comptroller of the Currency
Other comprehensive income (loss)
Outsourced Chief Investment Officer
Office of Foreign Assets Control
Operational risk management
Over-the-counter
Other-than-temporary-impairment
Parent Company
State Street Corporation
PCA
PD(1)
PUA
P&L
RC
RCSA
ROE
RWA(1)
SEC
SERP
SIFI
SLR(1)
SOX
Prompt corrective action
Probability-of-default
Purchase undertaking agreement
Profit-and-loss
Risk Committee
Risk and control self-assessment
Return on average common equity
Risk-weighted assets
Securities and Exchange Commission
Supplemental executive retirement plans
Systemically Important Financial Institution
Supplementary leverage ratio
Sarbanes-Oxley Act of 2002
SSGA
SSGA FM
SSGA Ltd.
SSIF
State Street Bank
TLAC(1)
TMRC
TORC
UCITS
UOM
VaR
VIE
State Street Global Advisors
State Street Global Advisors Funds Management, Inc.
State Street Global Advisors Limited
State Street Intermediate Funding, LLC
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 | 190
Financial Accounting Standards Board
SPOE Strategy
Single Point of Entry Strategy
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.
Beacon: A multi-year program, announced in October 2015, to create
cost efficiencies through changes in our operational processes and to
further digitize our processes and interfaces with our clients.
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.
Commercial real estate: Property intended to generate profit from
capital gains or rental income. Our CRE loans are primarily composed
of loans acquired in 2008 pursuant to indemnified repurchase
agreements with an affiliate of Lehman Brothers.
Doubtful: Loans and leases meet the same definition of substandard
loans and leases (i.e., well-defined weaknesses that jeopardize
repayment with the possibility that we will sustain some loss) with the
added characteristic that the weaknesses make collection or
liquidation in full highly questionable and improbable.
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.
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.
Investment-grade: Loans and leases that 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.
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.
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.
Special mention: Loans and leases that consist of counterparties with
potential weaknesses that, if uncorrected, may result in deterioration of
repayment prospects.
Speculative: Loans and leases that 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.
Substandard: Loans and leases that consist of counterparties with
well-defined weakness that jeopardizes repayment with the possibility
we will sustain some loss.
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.
State Street Corporation | 191
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE
None.
ITEM 9A. 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, 2017,
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, 2017.
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 U.S. 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,
2017, 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 | 192
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 U.S. 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, 2017. 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, 2017, 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 | 193
Report of Independent Registered Public Accounting Firm
To the Shareholders and the Board of Directors of
State Street Corporation
Opinion on Internal Control over Financial Reporting
We have audited State Street Corporation’s (the “Corporation”) internal control over financial reporting as of
December 31, 2017, 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”). In
our opinion, the Corporation maintained, in all material respects, effective internal control over financial reporting as
of December 31, 2017, based on the COSO criteria.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board
(United States) (“PCAOB”), the 2017 consolidated financial statements of the Corporation and our report dated
February 26, 2018 expressed an unqualified opinion thereon.
Basis for Opinion
The Corporation's management is responsible for maintaining effective internal control over financial reporting
and for its assessment of the effectiveness of internal control over financial reporting included in the accompanying
Management’s Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on
the Corporation’s internal control over financial reporting based on our audit. We are a public accounting firm
registered with the PCAOB and are required to be independent with respect to the Corporation in accordance with
the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange
Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. 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.
Definition and Limitations of Internal Control Over Financial Reporting
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.
/s/ Ernst & Young LLP
Boston, Massachusetts
February 26, 2018
State Street Corporation | 194
ITEM 9B. OTHER INFORMATION
None.
PART III
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS
AND CORPORATE GOVERNANCE
Information concerning our directors will appear
in our Proxy Statement for the 2018 Annual Meeting
of Shareholders, to be filed pursuant to
Regulation 14A on or before April 30, 2018, referred
to as the 2018 Proxy Statement, under the caption
"Election of Directors." Information concerning
compliance with Section 16(a) of the Exchange Act
will appear in our 2018 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
2018 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 2018 Proxy Statement under the caption
"Executive Compensation." Such information is
incorporated herein by reference.
State Street Corporation | 195
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 2018 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, 2017. 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
Equity compensation plans not approved by
shareholders
Total
8,396 (2) $
24 (3)
8,420
—
—
25,884
—
25,884
(1) Excludes deferred stock awards and performance awards for which there is no exercise price.
(2) Consists of 6,848 shares subject to deferred stock awards, zero shares subject to stock options, zero stock appreciation rights and 1,548 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 243,567
shares of common stock were outstanding as of
December 31, 2017; awards made through June 30,
2003, totaling 23,606 shares outstanding as of
December 31, 2017, 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 2018 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 2018 Proxy Statement under the
caption “Examining and Audit Committee Matters.”
Such information is incorporated herein by reference.
State Street Corporation | 196
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, 2017, 2016 and 2015
Consolidated Statement of Comprehensive Income - Years ended December 31, 2017, 2016 and 2015
Consolidated Statement of Condition - As of December 31, 2017 and 2016
Consolidated Statement of Changes in Shareholders' Equity - Years ended December 31, 2017, 2016 and
2015
Consolidated Statement of Cash Flows - Years ended December 31, 2017, 2016 and 2015
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 preceding 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 | 197
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 (filed as Exhibit 3.1 to State Street’s Annual
Report on Form 10-K (File No. 001-07511) for the year ended December 31, 2016 filed with the
SEC on February 17, 2017 and incorporated herein by reference)
By-Laws, as amended (filed as Exhibit 3.2 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 (filed
as Exhibit 10.2 to State Street's Annual Report on Form 10-K (File No. 001-07511) for the year
ended December 31, 2016 filed with the SEC on February 17, 2017 and incorporated herein by
reference)
Supplemental Cash Incentive Plan, as amended, and form of award and agreement thereunder
(filed as Exhibit 10.3 to State Street's Annual Report of Form 10-K (File No. 001-07511) for the
year ended December 31, 2014 filed with the SEC on February 20, 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)
State Street Corporation | 198
10.5†*
10.6†*
10.7†*
10.8†*
10.9†*
10.10†*
10.11†*
10.12†*
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)
Form of Amendment to the Amended and Restated Employment Agreement 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 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)
State Street’s Management Supplemental Savings Plan, Amended and Restated, as amended
(filed as Exhibit 10.10 to State Street's Annual Report on Form 10-K (File No. 001-07511) for the
year ended December 31, 2016 filed with the SEC on February 17, 2017 and incorporated herein
by reference)
Deferred Compensation Plan for Directors of State Street Corporation, Restated January 1, 2008,
as amended (filed as Exhibit 10.11 to State Street's Annual Report on Form 10-K (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*
10.15†*
10.16†*
10.17A†*
10.17B†*
10.17C†*
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 (filed
as Exhibit 10.14 to State Street's Annual Report on Form 10-K (File No. 001-07511) for the year
ended December 31, 2016 filed with the SEC on February 17, 2017 and incorporated herein by
reference)
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
Current Report on Form 8-K (File No. 001-07511) dated May 23, 2013 filed with the SEC on June
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 | 199
10.17D†*
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)
10.18†*
10.19†*
10.20†*
10.21†*
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)
2016 State Street Corporation Senior Executive Annual Incentive Plan (filed as Exhibit 10.19 to
State Street's Annual Report on Form 10-K (File No. 001-07511) for the year ended December
31, 2016 filed with the SEC on February 17, 2017 and incorporated herein by reference)
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)
State Street's 2017 Stock Incentive Plan, and forms of award agreements thereunder (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, 2017 filed with the SEC on August 4, 2017 and incorporated herein by reference)
10.22†*
State Street’s Executive Compensation Trust Agreement dated June 1, 2002 (Rabbi Trust), as
amended
12*
21*
23*
31.1
31.2
32
Statement of Ratios of Earnings to Fixed Charges
Subsidiaries of State Street Corporation
Consent of Independent Registered Public Accounting Firm
Rule 13a-14(a)/15d-14(a) Certification of Chairman and Chief Executive Officer
Rule 13a-14(a)/15d-14(a) Certification of Chief Financial Officer
Section 1350 Certifications
101.INS*
XBRL Instance Document
101.SCH*
XBRL Taxonomy Extension Schema Document
101.CAL*
XBRL Taxonomy Calculation Linkbase Document
101.DEF*
XBRL Taxonomy Extension Definition Linkbase Document
101.LAB*
XBRL Taxonomy Label Linkbase Document
101.PRE*
XBRL Taxonomy Presentation Linkbase Document
† 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, 2017, 2016 and 2015, (ii) consolidated statement of
comprehensive income for the years ended December 31, 2017, 2016 and 2015, (iii) consolidated statement of condition as of
December 31, 2017 and December 31, 2016, (iv) consolidated statement of changes in shareholders' equity for the years ended
December 31, 2017, 2016 and 2015, (v) consolidated statement of cash flows for the years ended December 31, 2017, 2016
and 2015, and (vi) notes to consolidated financial statements.
State Street Corporation | 200
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 26, 2018, hereunto duly
authorized.
SIGNATURES
STATE STREET CORPORATION
By /s/ ERIC W. ABOAF
ERIC W. ABOAF,
Executive Vice President and
Chief Financial Officer
By /s/ ELIZABETH M. SCHAEFER
ELIZABETH M. SCHAEFER,
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below on
February 26, 2018 by the following persons on behalf of the registrant and in the capacities indicated.
Senior Vice President, Deputy Controller and Chief
Accounting Officer (Interim)
OFFICERS:
/s/ JOSEPH L. HOOLEY
JOSEPH L. HOOLEY,
Chairman and Chief Executive Officer
/s/ ERIC W. ABOAF
ERIC W. ABOAF,
Executive Vice President and
Chief Financial Officer
/s/ ELIZABETH M. SCHAEFER
ELIZABETH M. SCHAEFER,
Senior Vice President, Deputy Controller and Chief
Accounting Officer (Interim)
DIRECTORS:
/s/ JOSEPH L. HOOLEY
JOSEPH L. HOOLEY
/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/ KENNETT F. BURNES
KENNETT F. BURNES
/s/ LINDA A. HILL
LINDA A. HILL
/s/ SEAN O'SULLIVAN
SEAN O'SULLIVAN
/s/ RICHARD P. SERGEL
RICHARD P. SERGEL
/s/ GREGORY L. SUMME
GREGORY L. SUMME
State Street Corporation | 201
EXHIBIT 31.1
I, Joseph L. Hooley, certify that:
1.
I have reviewed this Annual Report on Form 10-K of State Street Corporation;
RULE 13a-14(a)/15d-14(a) CERTIFICATION
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a
material fact necessary to make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly
present, in all material respects, the financial condition, results of operations and cash flows of the registrant as
of, and for, the periods presented in this report;
4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls
and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial
reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to
be designed under our supervision, to ensure that material information relating to the registrant, including
its consolidated subsidiaries, is made known to us by others within those entities, particularly during the
period in which this report is being prepared;
(b) Designed such internal control over financial reporting, or caused such internal control over financial
reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of
financial reporting and the preparation of financial statements for external purposes in accordance with
generally accepted accounting principles;
(c) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this
report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of
the period covered by this report based on such evaluation; and
(d) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred
during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an
annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal
control over financial reporting; and
5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal
control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of
directors (or persons performing the equivalent functions):
(a) All significant deficiencies and material weaknesses in the design or operation of internal control over
financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process,
summarize and report financial information; and
(b) Any fraud, whether or not material, that involves management or other employees who have a significant
role in the registrant's internal control over financial reporting.
Date: February 26, 2018
By:
/s/ JOSEPH L. HOOLEY
Joseph L. Hooley,
Chairman and Chief Executive Officer
EXHIBIT 31.2
I, Eric W. Aboaf, certify that:
1.
I have reviewed this Annual Report on Form 10-K of State Street Corporation;
RULE 13a-14(a)/15d-14(a) CERTIFICATION
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a
material fact necessary to make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly
present, in all material respects, the financial condition, results of operations and cash flows of the registrant as
of, and for, the periods presented in this report;
4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls
and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial
reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to
be designed under our supervision, to ensure that material information relating to the registrant, including
its consolidated subsidiaries, is made known to us by others within those entities, particularly during the
period in which this report is being prepared;
(b) Designed such internal control over financial reporting, or caused such internal control over financial
reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of
financial reporting and the preparation of financial statements for external purposes in accordance with
generally accepted accounting principles;
(c) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this
report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of
the period covered by this report based on such evaluation; and
(d) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred
during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an
annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal
control over financial reporting; and
5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal
control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of
directors (or persons performing the equivalent functions):
(a) All significant deficiencies and material weaknesses in the design or operation of internal control over
financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process,
summarize and report financial information; and
(b) Any fraud, whether or not material, that involves management or other employees who have a significant
role in the registrant's internal control over financial reporting.
Date: February 26, 2018
By:
/s/ ERIC W. ABOAF
Eric W. Aboaf,
Executive Vice President and
Chief Financial Officer
SECTION 1350 CERTIFICATIONS
EXHIBIT 32
To my knowledge, this Report on Form 10-K for the period ended December 31, 2017 fully complies with the
requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, and the information contained in this
Report fairly presents, in all material respects, the financial condition and results of operations of State Street
Corporation.
Date: February 26, 2018
By:
/s/ JOSEPH L. HOOLEY
Date: February 26, 2018
By:
Joseph L. Hooley,
Chairman and Chief Executive Officer
/s/ ERIC W. ABOAF
Eric W. 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 has also historically presented results on a non-GAAP, or operating-basis or otherwise adjusted bases. Management believed
this presentation would support additional meaningful analysis and comparisons of trends with respect to State Street's business operations
from period to period. Management may also provide additional non-GAAP measures, including 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.
Our operating-basis, or otherwise adjusted basis, financial results have historically adjusted our GAAP-basis financial results to both: (1)
exclude the impact of revenue and expenses outside of State Street’s normal course of business, such as restructuring charges; and (2)
present revenue from non-taxable sources, such as interest income from tax-exempt investment securities and processing fees and other
revenue associated with tax-advantaged adjustments, on a fully taxable-equivalent basis. Management believed that this presentation of
financial information facilitates an investor's further understanding and analysis of State Street's financial performance and trends, including
providing additional insight into our underlying margin and profitability, in addition to financial information prepared and reported in conformity
with GAAP. The tax-equivalent adjustments allow for more meaningful comparisons of yields and margins on assets and the evaluation of
investment opportunities with different tax profiles.
Beginning with the first quarter of 2017, we began simplifying our operating-basis presentation of our financial results to no longer
exclude, as part of the non-ordinary course adjustment, the effects of gains/losses on sales of businesses or the discount accretion
associated with former conduit securities. In the first and third quarters of 2017, operating-basis results included a pre-tax gain of
approximately $30 million on the sale of our transfer agency joint venture interests and a pre-tax gain of approximately $26 million on the sale
of an alternative trading system, respectively. In the first, second, third, and fourth quarters of 2017, operating-basis results included $5
million, $6 million, $4 million and $4 million, respectively, of discount accretion. These changes resulted in total increases in operating-basis
revenue of $35 million, $6 million, $30 million and $4 million in the first, second, third and fourth quarters of 2017, respectively, relative to our
historical operating-basis presentation. Note that in the second quarter of 2016, operating-basis results excluded a pre-tax gain of
approximately $53 million on the sale of the WM/Reuters business. We believe that these changes to our operating-basis presentation
simplify the overall presentation of our financial results, making them easier to understand, while, overall, continuing to facilitate a useful and
helpful additional understanding of our financial results.
Certain of our financial metrics have been adjusted to exclude certain notable items in 4Q16 and 4Q17 as well as full year 2016 and 2017.
Such notable items consist of: 4Q17 GAAP results reflect a 4Q17 one-time net $270 million (-$0.72 per share) related to recently enacted tax
law of which $250 million is recorded in tax expense and $20 million is recorded as a reduction in revenue, and, in 4Q16 both GAAP and
operating-basis results reflected a tax benefit of $211 million ($0.54 per share) and acceleration of compensation expense of $249 million
($161 million after-tax, or -$0.41 per share) for a combined net benefit of $0.13 per share. Our presentation of financial results excluding
notable items, as well as our presentation of operating-basis financial results generally, are non-GAAP presentations. The final impact of the
recently enacted tax law may differ from these estimates, due to additional guidance from the taxing authorities and changes in State Street
assumptions and interpretations.
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 2017 Annual Report on
Form 10-K.
(Dollars in millions)
Total Revenue(1),(2),(3):
Total revenue, GAAP-basis
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 WM/Reuters Business
Discount accretion related to former conduit securities
Impact of tax legislation(5)
Total revenue, operating-basis
Fee Revenue(1),(3):
Total fee revenue, GAAP basis
Tax-equivalent adjustment associated with tax-advantaged investments
Gain on sale of WM/Reuters Business
Expense billing matter, net
Impact of tax legislation(5)
Total fee revenue, operating basis
Net Interest Income(2),(4)
Net interest income, GAAP-basis
Tax-equivalent adjustment associated with tax-exempt investment securities
Impact of tax legislation(5)
Discount accretion associated with former conduit securities
Net interest income, operating-basis
Years Ended
% Change
December 31,
2017
December 31,
2016
2017
vs.
2016
$
11,170
$
10,207
9%
316
167
—
—
—
20
470
167
43
(53)
(82)
—
11,673
$
10,752
8,905
$
8,116
316
—
—
18
470
(53)
43
—
9,239
$
8,576
2,304
$
2,084
167
2
—
167
—
(82)
9
10
8
11
2,473
$
2,169
14
$
$
$
$
$
RECONCILIATION OF OPERATING-BASIS (NON-GAAP) FINANCIAL RESULTS (Continued)
(Dollars in millions, except per share amounts, or where otherwise noted)
Total Expenses(3):
Years Ended
% Change
December 31,
2017
December 31,
2016
2017
vs.
2016
Total expenses, GAAP-basis
$
8,269
$
8,077
2%
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 notable items
Total expenses, operating-basis excluding notable items(6)
Diluted Earnings per Common Share(1),(2):
Diluted earnings per common share, GAAP-basis
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
Impact of tax legislation(5)
Gain on sale of WM/Reuters Business
Diluted earnings per common share, operating-basis
Impact of notable items
Diluted earnings per common share, operating-basis excluding notable items(6)
Return on Average Common Equity(1),(2):
Return on average common equity, GAAP-basis
Provisions for legal contingencies
Expense billing matter, net
Acquisition costs
Restructuring charges, net
Discount accretion associated with former conduit securities
Impact of tax legislation(5)
Gain on sale of WM/Reuters Business
Return on average common equity, operating-basis
Impact of notable items
Return on average common equity, operating-basis excluding notable items(6)
—
—
—
(21)
(245)
8,003
—
8,003
5.24
—
—
—
.03
.42
—
.72
—
6.41
—
6.41
$
$
$
$
$
11
(41)
(15)
(69)
(140)
7,823
(249)
7,574
4.97
(.02)
.13
.1
.11
.21
(.13)
—
(.10)
5.27
(.13)
5.14
$
$
$
$
$
2
6
5%
22
25
10.6 %
10.5 %
10 bps
—
—
.1
.8
—
1.4
—
12.9 %
—
12.9 %
.3
.2
.2
.4
(.3)
—
(.2)
11.1 %
(0.3)
10.8 %
180
210
(1) 2017 GAAP-basis and operating basis results include a pre-tax gain of approximately $30 million on the sale of our transfer agency joint venture interests
and a pre-tax gain of approximately $26 million on the sale of an alternative trading system, respectively, reflecting a change in our operating-basis presentation
effective the first quarter of 2017 to include gains/losses on sales of businesses. In the second quarter of 2016, under our historical presentation, operating-
basis results excluded a $53 million pre-tax gain on the sale of WM/Reuters business, and such results have not been revised.
(2) Beginning in the first quarter of 2017, management will no longer present discount accretion with former conduit securities as an operating-basis adjustment.
Therefore, the year ended December 31, 2017 operating-basis results include $19 million of discount accretion. The year ended December 31, 2016 excludes
$82 million of discount accretion and such results have not been revised.
(3) The impact of acquired operations on total revenue and fee revenue contributed approximately $129 million and $143 million for the years ended 2016 and
2017, respectively. The impact of acquired operations on expenses contributed approximately $115 million and $102 million for the years ended 2016 and 2017,
respectively, excluding merger and integration charges and financing costs.
(4) Net interest income on an operating-basis is adjusted to reflect the impact of discount accretion in 2016, and the impact of tax legislation in 2017.
(5) The effects of the TCJA described in this presentation are estimates. Actual effects of the TCJA may differ from these estimates, among other things, due to
additional tax and regulatory guidance and changes in State Street assumptions and interpretations.
(6) Operating-basis results for 2016 included in this presentation reflect additional adjustments for two notable items that occurred in 4Q16 and are presented on
an adjusted basis throughout this presentation to allow for more meaningful comparisons to current year operating-basis results. The additional adjustments
consist of excluding the effects of our 4Q16 (1) acceleration of compensation expense (-$249M pre-tax; -$161M after-tax, or -$041 per share) and (2) one-time
tax benefit ($211M, or $0.54 per share). Our operating-basis presentation of financial results is a non-GAAP presentation.
BOARD OF DIRECTORS
March 29, 2018
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
Sara Mathew
Retired Chairman and Chief Executive Officer, Dun &
Bradstreet, commercial data and analytics firm
Patrick de Saint-Aignan
Retired Managing Director and Advisory Director for
Morgan Stanley, global financial services
William L. Meaney
President, Chief Executive Officer and Director, Iron
Mountain Inc., global storage and information
management provider
Lynn A. Dugle
Chairman and Chief Executive Officer, Engility Holdings,
Inc., technology consulting company
Sean O'Sullivan
Retired Group Managing Director and Group Chief
Operating Officer, HSBC Holdings, plc., banking and
financial services organization
Amelia C. Fawcett
Deputy Chairman, Kinnevik AB, a long-term oriented
investment company based in Sweden
Richard P. Sergel
Retired President and Chief Executive Officer,
North American Electric Reliability Corporation, a self-
regulatory authority for bulk electricity systems
William C. Freda
Gregory L. Summe
Retired Senior Partner and Vice Chairman, Deloitte LLP,
a global professional services firm
Managing Partner and Founder, Glen Capital Partners,
LLC, an alternative asset investment fund
EXECUTIVE LEADERSHIP
March 29, 2018
Joseph L. Hooley(1)(2)
Chairman and Chief Executive Officer
Eric W. Aboaf(1)(2)
Executive Vice President and
Chief Financial Officer
Daniel P. Farley
Executive Vice President
Scott R. Fitzgerald
Executive Vice President
Joerg Ambrosius
Executive Vice President
Paul J. Fleming
Executive Vice President
Jacqueline Angell
Executive Vice President
Silvio Angius
Executive Vice President
Michael Fontaine
Executive Vice President
Elizabeth Franson
Executive Vice President
Tracy Atkinson
Executive Vice President and
Chief Compliance Officer
Dennis Fitchman
Executive Vice President
Louis D. Maiuri(1)(2)
Executive Vice President
Ian Martin
Executive Vice President
Ivan Matviak
Executive Vice President
Stephan F. Nazzaro
Executive Vice President
Kimberly Newell
Executive Vice President
Elizabeth Nolan(1)(2)
Executive Vice President
Melissa Ballenger
Executive Vice President
Aunoy Banerjee
Executive Vice President
Anthony C. Bisegna
Executive Vice President
Lynn S. Blake
Executive Vice President
Martine A. Bond
Executive Vice President
Nicholas J. Bonn
Executive Vice President
Marc P. Brown
Executive Vice President
James C. Caccivio, Jr.
Executive Vice President
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
Cuan Coulter
Executive Vice President
Lochiel Crafter
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
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
Stefan M. Gavell
Executive Vice President
Todd Gershkowitz
Executive Vice President
Phillip S. Gillespie
Executive Vice President
Stefan Gmür
Executive Vice President
Nicholas Good
Executive Vice President
Michael T. Goonan
Executive Vice President
John H. Griffin
Executive Vice President
Hannah M. Grove(1)(2)
Executive Vice President
Michele Hardeman
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
Mark R. Keating
Executive Vice President
Ronald P. O'Hanley(1)(2)
President and Chief Operating Officer
David C. Phelan
Executive Vice President,
General Counsel and Assistant Secretary
John Plansky
Executive Vice President
Michael Richards
Executive Vice President and
General Auditor
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
John J. Slyconish
Executive Vice President and
Treasurer
David Suetens
Executive Vice President
George E. Sullivan(1)(2)
Executive Vice President
Richard Taggart
Executive Vice President
Karen C. Keenan(1)(2)
Executive Vice President and
Chief Administrative Officer
Cyrus Taraporevala(1)(2)
Executive Vice President and President and
Chief Executive Officer of State Street Global
Advisors
Pinar Kip
Executive Vice President
Rory Tobin
Executive Vice President
Andrew Kuritzkes(1)(2)
Executive Vice President and
Chief Risk Officer
Richard F. Lacaille
Executive Vice President
Ralph Layman
Executive Vice President
John Lehner
Executive Vice President
Brenda Lyons
Executive Vice President
Donald W. Torey
Executive Vice President
David Wiederecht
Executive Vice President
Ronald B. Woodard
Executive Vice President
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