2018 Annual Report
to Shareholders
9
19-33478-0319
Ronald P. O’Hanley
President and
Chief Executive Officer
Our asset
servicing
business
continued to
benefit from
broad-based
new business
activity and
expanded client
relationships.
To my fellow shareholders,
I am honored to write to you as the new CEO of State Street
Corporation and the latest steward of a firm that has sought
for more than 225 years to help build better futures for the
people and institutions we serve.
Our purpose is clear: help asset
managers and asset owners achieve
better outcomes for their beneficiaries.
The world today is much more challenging
for global asset managers and asset
owners for a number of secular and
cyclical reasons, but State Street is in a
strong position to help our clients achieve
their objectives. I am privileged to lead
State Street at a time when our clients
need our help more than ever before.
I was fortunate to have a full year to
transition to my new role, after nearly
three years of leading State Street
Global Advisors, State Street’s asset
management business. This transition
period gave me the opportunity to focus
on our core asset servicing business. This
focus enabled me, along with my senior
leadership team, to sharpen our strategy
and position State Street for success.
As a result, in this letter, in addition to
reviewing our performance for 2018,1
I will share our vision for State Street
and the strategy to realize that vision.
2018 Financial Results
Total revenue grew 7.3%2 from 2017 to
2018, largely due to favorable net interest
income and foreign exchange trading
results. Our asset servicing business
continued to benefit from broad-based
new business activity and expanded
client relationships, resulting in record
new mandates of $1.9 trillion announced
during the year. Despite this new client
activity, lower equity markets, fee
pressure and a previously disclosed client
transition constrained asset servicing fee
revenue growth. Assets under custody
and administration (AUCA) ended 2018 at
$31.6 trillion, down 5% compared
with the end of 2017.
2016
2017
2018
Assets under custody
and/or administration
($T at year-end)
$28.77
$33.12
$31.62
Assets under management
($T at year-end)
$2.47
$2.78
$2.51
State Street Global Advisors continued
to diversify its business mix to focus on
higher-revenue capabilities. It expanded
its offerings to respond to market demand
for a broader range of ETFs, multi-asset
solutions, asset allocation strategies,
exposure management and outsourced
CIO capabilities. With challenged flows
and much of its asset base linked to equity
market performance, total assets under
management (AUM) ended the year
at $2.5 trillion, down 10% from the
end of 2017.
The Management Committee is
intensely focused on expenses, and as
the challenging revenue environment
manifested itself over the course of the
year, we managed second-half 2018
underlying expenses flat to those of the
first half of the year. 3 We entered 2019
determined to better manage our expenses
while continuing to invest prudently in our
business and announced a $350 million
cost-savings program in January.
Earnings per common share (EPS)
grew from $5.24 in 2017 to $6.40 in 2018,
an increase of 22%. Underlying our EPS
growth, total revenue increased by 7%
year-on-year while total expenses
grew 9%, resulting in a narrowing of
our pre-tax margin from 26% to 25%.
Return on equity grew from 10.6% to 12.2%
over this same period. This return was
driven by strong business results, active
balance sheet management and lower
taxes, offset by lower-than-planned share
buybacks as a result of our acquisition of
Charles River Development (CRD).
We maintained a strong capital position
and undertook significant balance sheet
repositioning in 2018. These actions
should better position us for the Federal
Reserve’s annual Comprehensive
Capital and Analysis Review (CCAR)
process in 2019, and thus support a
key priority of returning high levels
of capital to our shareholders.4
During 2018,
we achieved
an important
milestone in
our digital
and technology
strategy
with the
acquisition of
Charles River
Development.
Diluted EPS and return on
average common equity (ROACE)
Diluted EPS and return on
average common equity (ROACE)
Revenue and pre-tax margin
Revenue and pre-tax margin
$4.97
$5.24
$4.97
$5.24
$10,207
$10,207
$6.40
$6.40
$11,170
$11,982
$11,170
$11,982
10.5%
10.5%
10.6%
10.6%
20.8%
20.8%
12.2%
12.2%
26.0%
26.0%
25.0%
25.0%
2016
2016
2017
2017
2018
2018
2016
2016
2017
2017
2018
2018
Diluted EPS
Diluted EPS
ROACE
ROACE
Total Revenue ($M)
Pre-Tax Margin (%)
Total Revenue ($M)
Pre-Tax Margin (%)
12.2%
State Street is
well-positioned
to enable
investors to
streamline their
operations and
reduce costs
while helping
them derive
more value and
insights from
their own data.
During 2018, we achieved an important
milestone in our digital and technology
strategy with the acquisition of CRD, a
key provider of front-office investment
tools and software. Together with our
leading data, custody, accounting and
middle-office services, State Street is
positioned to provide the industry’s first
front-middle-back office platform from
a single provider.
Though our revenues and earnings for the
year were up, and substantial strategic
progress occurred, we are not satisfied
and know we can do better, particularly in
driving fee revenue growth and managing
expenses. In light of this performance,
we reduced 2018 senior management
(Management Committee and Executive
Vice Presidents) incentive compensation
by more than 25% from 2017.
Our focus in 2019 includes reigniting
servicing fee growth, reducing costs
across our organization and realizing the
benefits of our advances in digitization and
automation more quickly. Collectively, this
means being faster and smarter about
how we deliver solutions that solve our
clients’ greatest challenges, while better
achieving and leveraging scale economies.
The Path Forward
Our asset manager and asset owner clients
face existential pressures. They must deal
with “lower-for-even-longer” revenue
models, as the rise of passive investing
compresses fees and investment
outperformance becomes harder to
Net interest income and net interest margin
$2,304
$2,084
1.13%
1.29%
$2,671
1.47%
2016
2017
2018
Net Interest Income ($M)
Net Interest Margin
(%, fully taxable equivalent)
achieve. At the same time, their costs
have risen substantially because of the
need to incorporate more technology
and comply with new regulations.
Meanwhile, data and analytics are
becoming the new frontier in both
asset management and asset servicing.
Most institutions now recognize that
they need to simplify and scale in this
new world to compete effectively.
Against this more challenging background,
State Street is well-positioned to enable
clients to streamline their operations
and reduce costs while helping them
derive more value and insights from
their own data. Our institutional clients
need our help more than ever in order
to generate both the requisite returns
for their beneficiaries and sufficient
financial performance.
With the
underpinning of
data we control,
State Street is
now in a position
to create the
industry’s first
interoperable
front-to-back
asset servicing
platform.
Innovating and Diversifying for Growth
Against this industry backdrop,
we have designed a five-pronged
strategy. Successfully executing on
these strategic priorities will enable
us to boost fee growth, diversify
our revenue streams with new
products and solutions, and generate
significant structural cost savings.
Let me take each one of these priorities
in turn, although all are interconnected
and synergistic.
1. Be an essential partner to our clients.
We work with the world’s largest and
most complex asset managers and
asset owners. These institutions are big
and getting bigger, and they need our
help to solve their growth, performance
and efficiency challenges. They want
to simplify their operations so they can
reduce costs and focus on generating
investment outperformance. They also
need us to bring our operational scale to
them as they grow, expand and innovate.
Since the announcement of our
acquisition of the CRD data and analytics
platform, we have had a high degree of
interest from both State Street clients
and CRD clients asking us to do more
for them. We believe that connecting the
industry’s back-, middle- and front-office
operations and services will be a powerful
catalyst for growing our share of wallet
with our largest institutional clients,
while building and strengthening
enduring relationships.
To become our clients’ essential partner,
we have overhauled our client coverage
model and upgraded the client executives
assigned to our largest clients. This
team now has responsibility for the
end-to-end client experience across
State Street and accountability for
the growth and profitability of these
relationships. We have also strengthened
pricing processes, with an emphasis
on securing new business, extending
term and reducing costs to serve
in return for renegotiating fees.
2. Deploy the front-to-back asset
servicing platform and continue to
diversify our revenue mix. With the CRD
acquisition, State Street is positioned to
take a significant strategic leap forward.
With the underpinning of data we control,
State Street is now in a position to create
the industry’s first interoperable front-
to-back asset servicing platform, linking
CRD’s automation of front- and middle-
office investment services with our legacy
back- and middle-office services. This
will enable us to provide a much higher
degree of operational and cost efficiencies
for our largest institutional clients. Clients
will be able to manage their entire trade
and investment life cycle all on a single
platform—everything from pre-trade
analytics to portfolio construction, trading,
risk analysis, reporting and custody.
Superior data analytics will allow clients
to inject insights from their own data
back into their investment processes to
improve their overall performance.
Our global hubs
are playing an
increasingly
important role
as we align
functions
globally and
work across
time zones
to enhance
service delivery
and reduce
structural costs.
CRD is already used by a number of large
investment management firms. It is also
on the desktops of 8,000 broker/dealers,
RIAs and other private wealth managers,
opening up the fast-growing wealth
market to us. We aim to nearly triple the
number of intermediaries who have CRD
on their desktops to 22,000 by the end of
2020, thus diversifying our revenue base.
Perhaps the most compelling revenue
opportunity with the front-to-back
platform is its planned interoperability.
That means that the platform will connect
our clients to a host of third-party
service providers that can plug into our
platform for a fee. We expect those new
platform economics will be a significant
and enduring revenue growth driver and
diversifier for us.
Fully enabling this offering will be a
multi-year effort, with a first release in
2019. It will result in a truly distinctive data
and analytics platform that will be easier
to enhance with new applications and
services because of its open architecture.
The new platform will also allow us
to expand access to other front-office
offerings, such as foreign exchange
trading and securities financing.
3. Operate as a technology-driven
scale provider with globally consistent
best-in-class processes and systems.
End-to-end, straight-through processes
are an important enhancement for
our clients and for our own business
efficiency. As mentioned, our clients
need our scale and skill to help them
drive better results. For ourselves, by
automating key processes, increasing
straight-through processing, reducing
manual errors and realizing the promise
of our digitization project, we should be
able to bring on new business quickly and
efficiently without incurring additional
costs to do so.
Moving from a regional structure
with high variability to a truly global,
consistent-process structure is an
important part of this effort. Our global
hubs are playing an increasingly
important role as we align functions
globally and work across time zones
to enhance service delivery and
reduce structural costs. Our ultimate
goal is to provide a more seamless
end-to-end service experience
to our clients, underpinned by
reliable, 24/7 global operations.
4. Build innovative and capital-efficient
investment solutions. As asset owners
continue to focus on fees, our asset
management business will leverage its
systematic investment heritage to build
capital-efficient investment solutions
across traditional indexing, factor-based
strategies and truly idiosyncratic alpha
sources, while continuing to build out
our ETF capabilities and distribution.
As the third-largest ETF manager in
the world, we see strong growth
potential outside the US and with
sophisticated institutional investors
who are increasingly using ETFs to
express their tactical investment views.
While
technology
underpins
everything
we do, our
success
depends on
the talent and
expertise of
our teams and
our ability to
operate as a
high-performing
organization.
We are also committed to better
leveraging our broader State Street
client base to identify opportunities for
driving new business to, for example, our
cash management and environmental,
social and governance (ESG) investment
strategies. Both are examples of how we
are developing comprehensive solutions
utilizing capabilities across State Street.
restricted stock program for our senior
management. Beginning with awards
granted in 2019, future payouts will be
based on pre-tax margin, in addition
to the existing ROE metric. Combined,
these elements align an executive’s
compensation with the risks and
performance results experienced
by our shareholders.
5. Foster a high-performing organization.
While technology underpins everything
we do, our success depends on the
talent and expertise of our teams and our
ability to operate as a high-performing
organization. That means managing our
organizational complexity by increasing
spans of control and reducing layers
to accelerate decision-making, align
accountability and create a more
results-oriented culture. For the 2018
performance management cycle, we
implemented a fully redesigned, more
rigorous performance management
process for all employees.
In line with our pay-for-performance
philosophy, at least 50% of incentive
pay for senior management consists of
deferred equity-based compensation.
Additionally, to further align management
with shareholders, we deliver a portion
of this deferred compensation in
performance-based restricted stock units
that pay out based on the achievement
of measures aligned to our long-term
strategy. To further strengthen this
alignment, we have added a second
metric to the performance-based
As our straight-through-processing and
automation efforts accelerate, it will
increase our business efficiency and allow
us to steadily step down structural costs
annually and reduce the variability of our
cost structure as we scale our business.
Better leveraging our global hubs in China,
India and Poland will be key to achieving
that goal. We must also evolve our skills
base to support the automation and data
priorities that will be critical for our future
success, while realizing risk excellence in
everything we do.
Being a high-performing organization
also means that we continue to play an
active role in the communities in which
we do business. I am very proud that
in 2018 our State Street Foundation
provided $21.5 million in grants to
charitable organizations worldwide and
our employees donated more than 112,000
volunteer hours to charitable causes. We
also are continuing to focus on additional
issues that align with the long-term
sustainability of our business,
including diversity and inclusion and
environmental impact.
Our digitization
efforts will
drive recurring
benefits,
as investing
in automation
affords both
the opportunity
to reduce
structural
expenses
and grow
new revenue
streams.
I also want to commend Jay Hooley for
his vision and leadership over more than
three decades of service to State Street,
including the past nine years as our CEO.
I am particularly grateful for his generous
support to me during this past year of
transition. We are all grateful that State
Street will continue to benefit from
Jay’s leadership as our non-executive
chairman in 2019.
There is much to be done, but the Board,
the Management Committee and I are
excited by the opportunity to grow a
business that will generate sustainable
value for all of our stakeholders:
you, our clients, our employees and
our societies. Thank you for your
continued confidence in us.
Sincerely,
Ronald P. O’Hanley
President and Chief Executive Officer
March 19, 2019
Building on our Strengths to
Drive Better Outcomes
Our ambitions are high, but we base
them on a strong foundation. We are
one of the world’s largest custodians,
responsible for servicing approximately
10% of the world’s financial assets. We
are the leading middle-office services
provider, the number-one servicer of
ETFs, and the number-one FX liquidity
provider to real money asset managers.
State Street Global Advisors is the world’s
third-largest asset manager and the
third-largest ETF provider globally.5
We enjoy strong relationships with the
biggest and most sophisticated investors
in the world. Our clients want us to
succeed, because it will help them be
more successful. Our front-to-back
platform will enable us to bring innovative
products and services to market more
quickly and efficiently. Our digitization
efforts will drive recurring benefits,
as investing in automation affords both
the opportunity to reduce structural
expenses and grow new revenue streams.
In turn, we believe this combination can
fuel further investment in the business
and increased returns to shareholders.
We have a clear plan of action to
achieve our goals.
In closing, I would like to thank our
Board for their robust engagement.
Their independent leadership and
strong, diverse skills provide collective
oversight and wisdom for the benefit
of State Street and our shareholders.
Endnotes
1 Financial results presented in this letter reflect the impact of US tax reform and new revenue recognition standards,
as well as notable items from both 2017 and 2018, including initiatives to fund cost-reduction programs. In addition,
announced servicing asset mandates for 2018 include a significant amount of assets contracted in the fourth quarter
of 2017 for which we received client consent to disclose in the first quarter of 2018. Refer to Item 7 and Item 8 of the
Form 10-K included within this annual report for details.
2 In the first quarter of 2019, we plan to change our accounting method under the Financial Accounting Standards Board
(FASB) Accounting Standards Codification (ASC) 323, Investments – Equity Method and Joint Ventures, for investments in
low-income housing tax credit (LIHTC) investments from the equity method of accounting to the proportional amortization
method of accounting. Financial results presented within this letter do not reflect this change. For additional information,
see our current report on Form 8-K dated March 5, 2019, on file with the SEC.
3 Underlying expenses are calculated as GAAP expenses less notable items and CRD operating expenses and CRD-related
intangible asset amortization. Underlying expenses are non-GAAP measures.
4 Subject to regulatory approval, including on the basis of the annual CCAR process conducted by the Board of Governors
of the Federal Reserve System. CCAR cycles run from mid-year to mid-year.
5 Sources for “responsible for servicing approximately 10% of the world’s financial assets”: State Street and McKinsey
Global Institute, Global Capital Markets, December 31, 2016 and updated in January 2018 per bespoke McKinsey report
(this represents State Street’s AUC/A ($29T) as a proportion of total global financial assets ($270T)).
Sources for “leading middle-office services provider”: State Street data and analysis to identify firms outsourcing middle
office based on assets that are fully outsourced to a middle-office service provider and does not include certain component
services, in which only a portion of middle-office activity is performed; analysis based on the 100 largest Asset Managers
per Pensions & Investments rankings as of December 2017.
Sources for “number-one servicer of ETFs”: compiled based on industry data sourced from ETFGI as of December 2018
and State Street data and analysis. State Street ETF AUC/A and industry data were used in the calculation of market
share size.
Source for “number-one FX liquidity provider to real money asset managers”: 2018 Euromoney (Real Money) FX Survey,
published May 30, 2018.
Source for “world’s third-largest asset manager,” P&I Research Center, as of December 31, 2017, published May 28, 2018.
This online data resource aggregates data collected by P&I’s editorial team through surveys and day-to-day reporting on
thousands of money managers and institutional asset owners.
Source for “third-largest ETF provider globally”: Bloomberg, as of December 31, 2018.
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.
2018
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 15, 2019, 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: help@astfinancial.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 mail, please visit our web-site at:
www.statestreet.com/stockholder
For copies of our Forms 10-Q, quarterly earnings press releases, Forms 8-K or additional copies of this Annual
Report, please visit our website or write to Investor Relations at Corporate Headquarters. Copies are provided without
charge.
Investors and analysts interested in additional financial information may contact our Investor Relations department at
Corporate Headquarters, telephone +1 617/664-3477.
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
Form 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2018
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the transition period from to
Commission File No. 001-07511
STATE STREET CORPORATION
(Exact name of registrant as specified in its charter)
Massachusetts
(State or other jurisdiction of incorporation)
One Lincoln Street
Boston, Massachusetts
(Address of principal executive office)
04-2456637
(I.R.S. Employer Identification No.)
02111
(Zip Code)
617-786-3000
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
(Title of Each Class)
Common Stock, $1 par value per share
Depositary Shares, each representing a 1/4,000th ownership interest in a share of
Non-Cumulative Perpetual Preferred Stock, Series C, without par value per share
Depositary Shares, each representing a 1/4,000th ownership interest in a share of
Fixed-to-Floating Rate Non-Cumulative Perpetual Preferred Stock, Series D, without
par value per share
Depositary Shares, each representing a 1/4,000th ownership interest in a share of
Non-Cumulative Perpetual Preferred Stock, Series E, without par value per share
Depositary Shares, each representing a 1/4,000th ownership interest in a share of
Non-Cumulative Perpetual Preferred Stock, Series G, without par value per share
(Name of each exchange on which registered)
New York Stock Exchange
New York Stock Exchange
New York Stock Exchange
New York Stock Exchange
New York Stock Exchange
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 every Interactive Data File required to be submitted 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 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 an 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
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 ($93.09) 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, 2018) was approximately $33.94 billion.
The number of shares of the registrant’s common stock outstanding as of January 31, 2019 was 378,659,763.
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 2019 Annual Meeting of Shareholders to be filed pursuant to Regulation 14A on or before April 30, 2019 (Part III).
STATE STREET CORPORATION
ANNUAL REPORT ON FORM 10-K FOR THE YEAR ENDED
December 31, 2018
TABLE OF CONTENTS
PART I
Item 1
Item 1A
Item 1B
Item 2
Item 3
Item 4
Business
Risk Factors
Unresolved Staff Comments
Properties
Legal Proceedings
Mine Safety Disclosures
Supplemental Item
Executive Officers of the Registrant
PART II
Item 5
Item 6
Item 7
Item 7A
Item 8
Item 9
Item 9A
Item 9B
PART III
Item 10
Item 11
Item 12
Item 13
Item 14
PART IV
Item 15
Item 16
Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
Selected Financial Data
Management's Discussion and Analysis of Financial Condition and Results of Operations
Quantitative and Qualitative Disclosures About Market Risk
Financial Statements and Supplementary Data
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
Controls and Procedures
Other Information
Directors, Executive Officers and Corporate Governance
Executive Compensation
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
Certain Relationships and Related Transactions, and Director Independence
Principal Accounting Fees and Services
Exhibits, Financial Statement Schedules
Form 10-K Summary
EXHIBIT INDEX
SIGNATURES
4
18
47
47
47
47
48
51
54
56
118
118
187
187
190
190
190
191
192
192
192
192
193
196
State Street Corporation | 3
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 $31.62 trillion of
AUC/A and $2.51 trillion of AUM as of December 31,
2018.
As of December 31, 2018, we had consolidated
total assets of $244.63 billion, consolidated total
deposits of $180.36 billion, consolidated
total
shareholders' equity of $24.79 billion and over 40,000
employees. We operate in more than 100 geographic
markets worldwide,
the U.S., Canada,
including
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 incorporated
by reference in 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
the Nominating and
Compensation Committee,
the Risk
Corporate Governance Committee,
Committee and
the Technology and Operations
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
including
regulatory standards,
applicable bank
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 under Item 8 in 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.
LINES OF BUSINESS
We have two lines of business: Investment
Servicing and Investment Management.
Investment Servicing
Our
to execute
investor clients
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
large
financial services and products allow our
institutional
financial
transactions on a daily basis in markets across the
globe. As most
investors cannot
institutional
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
State Street Corporation | 4
loans and
facilities;
lease
financing;
investment
manager and alternative
investment manager
risk and
operations outsourcing; performance,
compliance analytics; and financial data management
to support institutional investors.
Included within our Investment Servicing line of
business is Charles River Systems, Inc. (Charles River
Development), which we acquired on October 1, 2018.
As a result of our acquisition of Charles River
Development, we are extending our core capabilities
by creating a front-to-back office platform that combines
our core back and middle office services with front office
solutions across all asset classes
for portfolio
management, trading and compliance. New products
and services resulting from our acquisition of Charles
River Development include: portfolio modeling and
construction, trade order management, investment risk
and compliance and wealth management solutions.
We provide some or all of the Investment Servicing
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, 2018, we serviced AUC/A of approximately $23.20
trillion in the Americas, approximately $6.70 trillion in
Europe and the Middle East and approximately $1.72
trillion in the Asia-Pacific region.
Investment Management
Our Investment Management line of business,
through State Street Global Advisors, provides a broad
range of investment management strategies and
products for our clients. Our investment management
strategies and products span the risk/reward spectrum,
including core and enhanced indexing, multi-asset
strategies, active quantitative and fundamental active
capabilities and alternative investment strategies. Our
AUM is currently primarily weighted to indexed
strategies. In addition, we provide a breadth of services
and solutions, including environmental, social and
governance investing, defined benefit and defined
contribution and Outsourced Chief Investment Officer
(OCIO). State Street Global Advisors is also a provider
of ETFs, including the SPDR® ETF brand. While
management fees are primarily determined by the
values of AUM and the investment strategies employed,
management fees reflect other factors as well, including
respective
the benchmarks specified
management agreements related to performance fees.
As of December 31, 2018, State Street Global Advisors
had AUM of approximately $2.51 trillion.
the
in
COMPETITION
We operate in a highly competitive environment in
all areas of our business globally. 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.
the markets
We believe that many key factors drive competition
for our business. Technological
in
expertise, economies of scale, required levels of
capital, pricing, quality and scope of services and sales
and marketing are critical to our Investment Servicing
line of business. For our Investment Management line
of business, key competitive factors include expertise,
experience, availability of related service offerings,
quality of service, price, efficiency of our products and
services and performance.
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 integrate existing and future products and
services effectively into an interoperable platform, to
continue to expand our relationships with existing
clients, and to attract new clients.
important
We are a systemically
financial
institution (SIFI) 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. Most other
financial
institutions designated as systemically important have
substantially greater financial resources and a broader
base of operations than us and are, consequently, in a
better competitive position to manage and bear the
costs of this enhanced regulatory requirement. See
"Supervision and Regulation" in this Item for more
information.
Additional information about our lines of business
is provided under “Line of Business Information”
included in our Management's Discussion and Analysis,
and in Note 24 to the consolidated financial statements
in this Form 10-K. Additional information about our non-
U.S. activities is included in Note 26 to the consolidated
financial statements in this Form 10-K.
State Street Corporation | 5
SUPERVISION AND REGULATION
We are 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." The
regulatory limits on our activities 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.
to,
the
following: providing
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, either de novo or by
acquisition, in activities that are defined by the Federal
Reserve to be financial in nature, 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
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 are
expected to 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 result in
restrictions on our activities and 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 issued an executive
order that sets forth principles for the reform of the
federal financial regulatory framework, and, in May
2018, the Economic Growth, Regulatory Relief and
Consumer Protection Act (EGRRCPA) was enacted.
The EGRRCPA’s revisions to the U.S. financial
regulatory framework, some of which remain subject to
further rulemaking, have altered certain laws and
regulations applicable to us and other major financial
services firms. 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” in this “Supervision and Regulation” section
and under "Capital" in “Financial Condition” in our
Management's Discussion and Analysis in 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), the Markets in
Financial Instruments Regulation (MiFIR) and the E.U.
General Data Protection Regulation (GDPR).
and
agencies
regulatory
Many aspects of our business are subject to
regulation by other U.S. federal and state governmental
self-regulatory
and
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.
Regulatory Capital Adequacy and Liquidity
Standards
Basel III Final Rule
We and State Street Bank, as advanced
approaches banking organizations, are subject to the
Basel III framework in the U.S. Provisions of the Basel
State Street Corporation | 6
III final rule that became effective under a transition
timetable which began in January 2014, with full
implementation required beginning on January 1, 2019.
Since January 2013, we have been subject to the final
market risk capital rule jointly issued by U.S. banking
regulators to implement the changes to the market risk
capital framework in the U.S.
The Basel III final rule provides for two frameworks
for the calculation of RWA for purposes of bank
regulatory compliance: the “standardized” approach
and the “advanced” approaches, which are applicable
to advanced approaches banking organizations, like us.
The standardized approach prescribes standardized
risk weights for certain on- and off-balance sheet
exposures in the calculation of RWA. The advanced
approaches consist of the Advanced Internal Ratings-
Based Approach (AIRB) used for the calculation of RWA
related to credit risk, and the Advanced Measurement
Approach (AMA) used for the calculation of RWA related
to operational risk.
Among other things, the Basel III final rule does
the following:
•
•
•
•
•
•
adds requirements for a minimum CET1 risk-
based capital ratio of 4.5% and a minimum
supplementary
for
advanced approaches banking organizations;
leverage ratio of 3%
raises the minimum tier 1 risk-based capital
ratio from 4% under both Basel I and Basel II
to 6%;
leaves the 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" in our
Management's Discussion and Analysis in this
Form 10-K;
the
implements
standardized approach
calculation of credit RWA under Basel I; and
described
the
previously
replace
to
implements the advanced approaches for the
calculation of credit RWA.
Beginning January 1, 2018, the U.S. banking
regulators required a minimum SLR requirement of 5%
for us and the other eight U.S. G-SIBs in order to avoid
any limitations on distributions and discretionary bonus
payments and a minimum SLR requirement of 6% for
the Insured Depository Institutions' subsidiaries (State
Street Bank) of such G-SIBs. On April 11, 2018, the
Federal Reserve proposed modifications to SLR that
would replace the current 2% SLR buffer applicable to
us with a leverage buffer equal to 50% of G-SIB capital
surcharge, which is currently 1.5%. Under the proposal,
our SLR buffer would become 0.75%, for a total
enhanced SLR
requirement of 3.75%,
assuming that our G-SIB capital surcharge remains the
same when the proposal becomes effective. As part of
(eSLR)
the same proposal, the Federal Reserve also proposed
to align the well-capitalized eSLR standard applicable
to State Street Bank with the proposed SLR buffer
applicable to us. Under the proposal, the well-
capitalized eSLR requirement for State Street Bank
would change from the current 6% to 3% plus 50% of
our current G-SIB capital surcharge, for a total well-
capitalized SLR requirement of 3.75%, assuming that
our G-SIB capital surcharge remains the same when
the proposal becomes effective. Furthermore,
EGRRCPA directed the U.S. banking regulators to
amend regulation to exclude certain central bank
balances from the measure of total leverage exposure,
the SLR denominator, for custody banks. Specifically,
central bank balances would be excluded to the extent
of the value of client deposits at the custody bank that
are linked to fiduciary, custody or safekeeping accounts.
The U.S. banking agencies have not yet issued a
this provision of
proposed
EGRRCPA.
implementing
rule
In addition to SLR, we are subject to a minimum
tier 1 leverage ratio of 4%, which differs from 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.
We are required to include SLR disclosures with our
other Basel disclosures.
Under
the Basel
final rule, a banking
III
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 the applicable G-SIB surcharge (plus any
potentially applicable countercyclical capital buffer)
over the minimum required risk-based capital ratios and
well capitalized leverage based requirements. 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 RWAs under
certain economic conditions. The Federal Reserve has
proposed changes to its stress testing and capital
planning
the capital
conservation buffer with a Stress Capital Buffer. For
additional information about the proposal, refer to
“Capital Planning, Stress Tests and Dividends” in this
"Supervision and Regulation" section.
that would
replace
rules
Under the Basel III final rule, our total regulatory
capital is composed of three tiers; CET1 capital, tier 1
capital (which includes CET1 capital), and tier 2 capital.
The total of tier 1 and tier 2 capital, adjusted as
applicable, is referred to as total regulatory capital.
CET1 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.
State Street Corporation | 7
Goodwill and other intangible assets, net of related
deferred tax liabilities, are deducted from the core CET1
capital elements. Tier 1 capital is composed of CET1
capital plus additional tier 1 capital instruments which,
for us, includes six series of preferred equity. Tier 2
capital includes certain eligible subordinated long-term
debt instruments. The Basel III phase-in and phase-out
schedules for calculating regulatory capital that apply
to State Street have concluded and our capital
measures are considered fully phased-in. Minimum
capital ratio, buffer, and G-SIB surcharge requirements
become fully phased-in as of January 1, 2019.
include
investments
Certain other items, if applicable, must be
deducted from tier 1 and tier 2 capital. These items
in
deductible
primarily
unconsolidated banking,
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.
financial and
On October 30, 2018, the U.S. banking regulators
issued a proposal that would, among other things,
implement the standardized approach for counterparty
credit risk (SA-CCR), a new methodology for calculating
the exposure amount for derivative contracts under the
U.S. regulatory capital rules. Under the proposal, we
would have the option to use the SA-CCR or the Internal
Model Methodology (IMM) to measure the exposure
amount of our cleared and uncleared derivative
transactions, as well as the RWA amount of our central
counterparty default fund contributions, under our
advanced approach capital calculation. We would be
required to determine the amount of these exposures
using the SA-CCR under our standardized approach
capital calculation. The proposal would also incorporate
the SA-CCR into the calculation of our total leverage
exposure for the purpose of calculating SLR. The
proposal requires us to implement SA-CCR by July 1,
2020 but would permit early adoption before that date
after a final rule implementing SA-CCR is effective.
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,
the capital conservation buffer and
including
countercyclical capital buffer described above in this
"Supervision and Regulation" section. Our risk-based
capital ratios for regulatory assessment purposes are
the
the
standardized approach and the advanced approaches.
ratio calculated under
lower of each
are described above
Regulation” section.
in
this
“Supervision and
For additional information about our regulatory
capital position and our regulatory capital adequacy, as
well as current and
regulatory capital
requirements, refer to "Capital" in “Financial Condition"
in our Management's Discussion and Analysis, and
Note 16 to the consolidated financial statements in this
Form 10-K.
future
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 became fully effective on January 1,
2019. The eight U.S. banks deemed to be G-SIBs,
including us, are required to calculate the G-SIB
surcharge annually 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,
cross-
interconnectedness,
jurisdictional activity and substitutability; or
complexity,
• 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 currently is the binding methodology for
us and our applicable surcharge for 2019 was
calculated to be 1.5%, which is based on a calculation
date of December 31, 2017. Assuming a countercyclical
buffer of 0%, the minimum capital ratios as of January
1, 2019, including a capital conservation buffer of 2.5%
and a G-SIB surcharge of 1.5% in 2019, are 8.5% for
CET1 capital, 10.0% for tier 1 risk-based capital and
12.0% for total risk-based capital, in order for us to make
capital distributions and discretionary bonus payments
without limitation. Further, like all other U.S. G-SIBs, we
are also currently subject to a 2% leverage buffer under
the Basel III final rule, subject to the Federal Reserve’s
proposed changes to the SLR. If we fail to exceed the
2% leverage buffer, we 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.
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
State Street Corporation | 8
Total Loss-Absorbing Capacity
In 2016, the Federal Reserve released its final rule
on TLAC, LTD and clean holding company
requirements for U.S. domiciled G-SIBs, such as us,
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) external TLAC requirements (i.e.,
combined eligible tier 1 regulatory capital and LTD); (2)
separate external LTD requirements; and (3) clean
holding company requirements that impose restrictions
on certain types of liabilities and limit non-TLAC related
third party liabilities to 5% of external TLAC.
Among other things, the TLAC final rule requires
us to comply with minimum requirements for external
TLAC and external LTD effective January 1, 2019.
Specifically, we must hold (1) combined eligible tier 1
regulatory capital and LTD in the amount equal to the
greater of 21.5% of total RWA (18.0% minimum plus a
2.5% capital conservation buffer plus a G-SIB
surcharge calculated for these purposes under Method
1 of 1.0%) and 9.5% of total leverage exposure (7.5%
minimum plus the eSLR buffer of 2.0%), as defined by
the SLR final rule; and (2) qualifying external LTD equal
to the greater of 7.5% of RWA (6.0% minimum plus a
G-SIB surcharge calculated for these purposes under
method 2 of 1.5%) and 4.5% of total leverage exposure,
as defined by the SLR final rule.
We requested and received from the Federal
Reserve, a one year extension from January 1, 2019 to
January 1, 2020, for compliance with the LTD SLR
requirements of the rule. In granting the extension
request, the Federal Reserve noted the EGRRCPA that
was signed into law in May 2018, under which the
Federal Reserve and the other U.S. federal banking
agencies must promulgate rules to exclude certain
central bank placements from the calculation of SLR for
custodial banks, such as us. This regulatory change is
expected to reduce the LTD we are required to hold as
calculated under the current requirements.
The extension will allow us to determine the
appropriate amount of LTD needed to comply with the
LTD SLR requirements of the TLAC rule after the
Federal Reserve and the other U.S. federal banking
agencies have adopted this regulatory change. For
additional information about TLAC and SLR, refer to
this "Supervision and
in
“Basel
Regulation" section.
III Final Rule"
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
banking
resilience
internationally
active
of
organizations, like us, 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. For the quarters ended December 31,
2018 and December 31, 2017, daily average LCR for
the Parent Company was 108% and 112%,
respectively. In addition, we publicly disclose certain
qualitative and quantitative information about our LCR
consistent 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 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.
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
State Street Corporation | 9
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 capital qualifying
instruments, any capital distributions, such as
payments of dividends on, or repurchases 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, 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 repurchases 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 repurchase our stock, or require us to provide
capital assistance to State Street Bank and any other
banking subsidiary.
In June 2018, we received the results of the
Federal Reserve’s review of our 2018 capital plan in
connection with its 2018 annual CCAR process. The
Federal Reserve did not object to our capital plan as
part of the 2018 CCAR process, conditioned on our
making enhancements
the management and
to
analysis of counterparty exposures under stress. In
connection with the capital plan, our Board approved a
common stock repurchase program authorizing the
repurchase of up to $1.2 billion of our common stock
from July 1, 2018 through June 30, 2019 (the 2018
Program). In connection with our acquisition of Charles
River Development, we did not repurchase any
common stock during 2018 under the 2018 Program.
We have resumed our common stock purchase
program in the first quarter of 2019 and may repurchase
up to $600 million through June 30, 2019 under the 2018
Program.
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 November 2018, we
provided summary results of our 2018 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 EGRRCPA modifies
certain aspects of these stress-testing requirements,
reducing the number of scenarios in the Federal
Reserve’s supervisory stress test from three to two and
modifying our obligation to perform company-run
stress-tests from semi-annually to annually. The
Federal Reserve issued a proposal in October 2018 that
would, among other things, implement this modification.
The Dodd-Frank Act also requires State Street
Bank to conduct an annual stress test. State Street
Bank published a summary of its stress test results on
June 21, 2018.
The Federal Reserve is currently considering
making further changes to its capital planning and
stress testing requirements.
On April 10, 2018, the Federal Reserve issued a
proposal to integrate its annual capital planning and
stress testing requirements with certain ongoing
regulatory capital requirements. The proposal, which
would apply to certain bank holding companies,
including us, would introduce a Stress Capital Buffer
(SCB) and a Stress Leverage Buffer (SLB) and related
changes to the capital planning and stress testing
processes. Under the proposal, the requirements would
apply only with respect to the standardized approach
and tier 1 leverage regulatory capital requirements.
In the standardized approach, the SCB would
replace the existing capital conservation buffer. The
standardized approach SCB would equal the greater of
(i) the maximum decline in our CET1 capital ratio under
the severely adverse scenario over the supervisory
stress test measurement period, plus the sum of the
ratios of the dollar amount of our planned common stock
dividends to our projected RWA for each of the fourth
through seventh quarters of the supervisory stress test
projection period; and (ii) 2.5%. Regulatory capital
requirements under the standardized approach would
include the SCB, as summarized above, as well as our
G-SIB capital surcharge and any applicable
countercyclical capital buffer.
State Street Corporation | 10
Like the SCB, the SLB would be calculated based
on the results of our annual supervisory stress tests.
The SLB would equal the maximum decline in our tier
1 leverage ratio under the severely adverse scenario,
plus the sum of the ratios of the dollar amount of our
planned common stock dividends to our projected
leverage ratio denominator for each of the fourth
through seventh quarters of the supervisory stress test
projection period. No floor would be established for the
SLB, which would apply in addition to the current
minimum tier 1 leverage ratio of 4%.
The proposal would make related changes to
capital planning and stress testing processes for bank
holding companies subject to these requirements. In
particular, the proposal would limit projected capital
actions to planned common stock dividends in the fourth
through seventh quarters of the supervisory stress test
projection period and would assume that bank holding
companies maintain a constant level of assets and RWA
throughout the supervisory stress test projection period.
If the proposal is adopted, limitations on capital
distributions and discretionary bonus payments to
executive officers would be determined by the most
stringent limitation, if any, as determined under the
standardized approach or the tier 1 leverage ratio,
inclusive of the proposed stress buffer requirements, or
the advanced approach or SLR or TLAC requirements,
inclusive of applicable buffers.
In November 2018, the Federal Reserve’s Vice
Chairman for Supervision stated that the Federal
Reserve does not expect the proposed stress buffer
requirements will go into effect before 2020. However,
the Federal Reserve does expect to finalize certain
elements of the proposed requirements and expects
that other elements will be re-proposed and again
subject to public comment.
The Volcker Rule
We are subject
the Volcker Rule and
to
implementing regulations. The Volcker Rule prohibits
banking entities, including us and our affiliates, from
engaging in certain prohibited proprietary trading
activities, as defined
final Volcker Rule
in
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
The final Volcker Rule regulations require banking
entities to establish extensive programs designed to
promote 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
certain
which State Street Global Advisors acts as an advisor
and
relationships.
of
Consequently, Volcker Rule compliance entails both the
cost of a compliance program and loss of certain
revenue and future opportunities.
trustee
types
regulations
that would
the Volcker Rule
On May 30, 2018, the Federal Reserve and the
other federal financial regulatory agencies responsible
released an
for
interagency proposal
revise certain
elements of those regulations. The proposed changes
focus on proprietary trading, including the metrics
reporting requirements and certain requirements
imposed in connection with permitted market making,
underwriting and risk-mitigating hedging activities,
including market-making in and underwriting of covered
funds. The impact of this proposal on us will not be
known with certainty until final rules are issued.
Enhanced Prudential Standards
the
The Dodd-Frank Act, as amended by
EGRRCPA, establishes a systemic risk regime to which
large bank holding companies with $100 billion or more
in consolidated assets, such as us, are subject. The
Federal Reserve is required to tailor the application of
the enhanced prudential standards to bank holding
companies based on their size, complexity, risk profile
and other factors. U.S. G-SIBs, such as us, are
expected to remain subject to the most stringent
requirements, including heightened capital, leverage,
liquidity and risk management requirements and single-
counterparty credit limits (SCCL).
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
institutions,
financial
to prudential supervision and
them
subjecting
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.
final
Under
rule
the Federal Reserve's
implementing certain of the Dodd-Frank Act's enhanced
prudential standards, 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.
On June 14, 2018, the Federal Reserve finalized
rules that would establish SCCL for large banking
organizations. U.S. G-SIBs, including us, are subject to
State Street Corporation | 11
a limit of 15% of tier 1 capital for aggregate net credit
exposures to any “major counterparty” (defined to
include other U.S. G-SIBs, foreign G-SIBs and non-
bank systemically
institutions
important
supervised by the Federal Reserve). In addition we are
subject to a limit of 25% of tier 1 capital for aggregate
to any other unaffiliated
net credit exposures
counterparty. We must comply with the final SCCL rules
beginning on January 1, 2020.
financial
that
The Federal Reserve has established 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
transfer
generally must expressly provide
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, and the first compliance
date was January 1, 2019.
In addition, the Federal Reserve has proposed
rules that would 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
U.S. G-SIBs 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
We are required to periodically submit 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 our insolvency, to maintain State Street Bank’s role
as a key infrastructure provider within the financial
system, while minimizing risk to the financial system
the benefit of our
and maximizing value
stakeholders. We have and will continue to focus
management attention and
to meet
regulatory expectations with respect to resolution
planning.
resources
for
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 us, to
continue to improve resolvability: intra-group liquidity;
internal
loss-absorbing capacity; derivatives; and
payment, clearing and settlement activities. Our next
resolution plan is due July 1, 2019.
to
that prior
In the event of material financial distress or failure,
our preferred resolution strategy is the SPOE Strategy.
The SPOE Strategy provides
the
bankruptcy of the Parent Company and pursuant to a
support agreement among the Parent Company, SSIF
(a direct subsidiary of the Parent Company), our
Beneficiary Entities (as defined below) and certain of
our other entities, SSIF is obligated, up to its available
resources, to recapitalize and/or provide liquidity to
State Street Bank and the other 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 our
other 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 Parent
the support agreement,
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
State Street Corporation | 12
permitted to 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.
for capital contributed
In the event a Recapitalization Event occurs, the
obligations outstanding under the Parent Company
Funding Notes would automatically convert into or be
exchanged
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 our policies, we are required
to monitor, on an ongoing basis, the capital and liquidity
needs of State Street Bank and our other Beneficiary
Entities. To support this process, we have 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 our financial condition
occur. In the event that we experience material financial
distress, the support agreement requires us 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.
to
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
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 of our entities from a
creditor's perspective or determining whether to enter
into a contractual relationship with any of our entities,
on any of our affiliates 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 our 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. The FDIC’s
Chairman has indicated that until the FDIC’s revisions
to its IDI plan requirements are finalized, no IDI plans
will be required to be filed.
Orderly Liquidation Authority
Under the Dodd-Frank Act, certain financial
companies, including bank holding companies such as
us, 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 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.
State Street Corporation | 13
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
the
receivership to creditors not transferred to a third party
or bridge financial institution.
the assets of
from
In 2013, the FDIC released its proposed SPOE
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 OTC 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
the supervision, examination and
activity 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-
interest rate swap activity
purpose designation,
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.
Subsidiaries
The Federal Reserve is the primary federal
banking agency responsible for regulating us and our
subsidiaries, including State Street Bank, with respect
to both our U.S. and non-U.S. operations.
Our banking subsidiaries are subject
to
supervision and examination by various regulatory
authorities. State Street Bank is a member of the
Federal Reserve System, its deposits are insured by
the FDIC and it is subject to applicable federal and state
banking laws and to supervision and examination by
the Federal Reserve, as well as by the Massachusetts
Commissioner of Banks, the FDIC, and the regulatory
authorities of those states and countries in which State
Street Bank operates a branch. Our other subsidiary
trust companies are subject to supervision and
examination by the OCC, the Federal Reserve or by the
appropriate state banking regulatory authorities of the
states in which they are organized and operate. Our
non-U.S. banking subsidiaries are subject to regulation
by the regulatory authorities of the countries in which
they operate.
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
State Street Corporation | 14
as the investment manager, investment adviser,
commodity trading advisor or sponsor and other
covered funds organized and offered pursuant to
specific exemptions
final Volcker Rule
regulations.
the
in
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,
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.
in
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 for a
depositor preference on amounts realized from the
liquidation or other resolution of any depository
institution insured by the FDIC.
Our subsidiaries, State Street Global Advisors FM
and State Street Global Advisors Ltd., act as investment
advisers to investment companies registered under the
Investment Company Act of 1940. State Street Global
Advisors 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. State Street Global Advisors 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. State Street Global Advisors Ltd.
is also authorized and regulated by the U.K. FCA and
is an investment firm under the MiFID. Our subsidiary,
State Street Global Advisors Asia Limited, 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
including asset
perform a variety of activities,
management. State Street Global Advisors Asia Limited
also holds permits as a qualified foreign institutional
Investor (QFII) and a renminbi qualified foreign
the
institutional
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
(RQFII), approved by
investor
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.
We have three 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 operates as a limited purpose broker/
dealer that provides distributing and related marketing
activities for U.S. mutual funds and ETFs associated
with State Street Global Advisors. State Street Global
Advisors Funds Distributors, LLC also may privately
offer certain State Street Global Advisors advised
funds. State Street Global Markets LLC is a U.S. broker/
dealer that provides agency execution services. We
also acquired Charles River Brokerage, LLC, a U.S.
broker/dealer, as part of our acquisition of Charles River
Development. In addition, we have a subsidiary,
SwapEX, LLC, registered with the CFTC in the U.S. as
a swap execution facility.
including our
Our businesses,
investment
management and securities 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 U.K. FCA and the U.K. PRA
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
State Street Corporation | 15
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
to Edge Act
subsidiaries.
limitations applicable
Additionally, Massachusetts has its own bank
holding company statute, under which we, 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.
In 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. 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
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 FDIC-
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 qualifies as a custody bank for this purpose.
The custody bank assessment adjustment may not
exceed total transaction account deposits identified by
the institution as being directly linked to a fiduciary or
custody and safekeeping asset.
Prompt Corrective Action
The FDIC Improvement Act of 1991 requires the
appropriate federal banking regulator to take “prompt
corrective action” with respect to a depository institution
if that institution does not meet certain capital adequacy
standards, 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
State Street Corporation | 16
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.
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.
In
Insolvency of an
Depository Institution
Insured U.S. Subsidiary
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
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
for
securities, changes
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.
in reserve requirements
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
expand
standards would
institutions and their third-party service providers,
including us and our banking subsidiaries. The
existing
proposed
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.
risk
Further discussion of cyber security
management is provided in "Information Technology
Risk Management" included in our Management's
Discussion and Analysis in this Form 10-K.
STATISTICAL DISCLOSURE BY BANK HOLDING
COMPANIES
The following information, included under Items 6,
7 and 8 in 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 our
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).
“Loans and Leases” section included in our
Management’s Discussion and Analysis (Item 7) and
Note 4, “Loans and Leases,” to the consolidated
financial statements (Item 8) - disclose our policy for
placing loans and leases on non-accrual status and
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
our cross-border outstandings and other
loan
concentrations.
“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
State Street Corporation | 17
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
- discloses deposit
Differential”
information.
(Item 8)
table
Note 8,
the
consolidated financial statements (Item 8) - discloses
information regarding our short-term borrowings.
“Short-Term Borrowings,”
to
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 our 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,
and
portfolio
transformation
performance, dividend and stock purchase programs,
outcomes of legal proceedings, market growth,
acquisitions, joint ventures and divestitures, client
technologies, services and
growth and new
opportunities, as well as industry, governmental,
regulatory, economic and market trends, initiatives and
developments, the business environment and other
matters that do not relate strictly to historical facts.
investment
strategies,
initiatives,
savings
cost
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.
to
Forward-looking statements are subject
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
U.S. 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:
•
•
•
•
•
•
•
the financial strength of the counterparties with
which we or our clients do business and to which
we have investment, credit or financial exposures
or to which our clients have such exposures as a
result of our acting as agent, including as an asset
manager or securities lending agent;
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 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 volatility of servicing fee, management fee,
trading fee and securities finance revenues due
to, among other factors, the value of equity and
fixed-income markets, market interest and foreign
exchange rates, the volume of client transaction
activity, competitive pressures in the investment
servicing and asset management industries, and
the timing of revenue recognition with respect to
processing fees and other revenues;
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;
in our
the securities
the credit quality, credit-agency ratings and fair
investment
values of
securities portfolio, a deterioration or downgrade
of which could lead to other-than-temporary
impairment of such securities and the recognition
in our consolidated
loss
of an
statement of income;
impairment
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;
State Street Corporation | 18
•
•
•
and
testing
resolution
the manner and timing with which the Federal
Reserve and other U.S. and non-U.S. 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
planning
stress
requirements, implementation of international
standards applicable to financial institutions, such
as those proposed by the Basel Committee and
European legislation (such as UCITS V, the Money
Market Fund Regulation and MiFID II / MiFIR);
among other consequences, these regulatory
changes impact the levels of regulatory capital,
long-term debt and liquidity we must maintain,
acceptable levels of credit exposure to third
parties, margin
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 heightened standards and
changes in regulatory expectations for global
institutions
systemically
applicable
risk
liquidity and capital planning,
management,
resolution planning and compliance programs, as
well as changes in governmental enforcement
approaches to perceived failures to comply with
regulatory or legal obligations;
requirements applicable
to, among other
important
financial
things,
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,
in
subsidiaries, dividends and stock repurchases,
without which our growth plans, distributions to
shareholders, share repurchase programs or
other capital or corporate initiatives may be
restricted;
acquisitions,
investments
•
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, without limitation, 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 exit from the European Union
or actual or potential changes in trade policy, such
as tariffs or bilateral and multilateral trade
agreements;
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,
reputational 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, 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 or penalties
imposed by governmental authorities;
technology;
our ability to expand our use of technology to
enhance the efficiency, accuracy and reliability of
our operations and our dependencies on
and
information
consolidate systems, particularly those relying
upon older
to adequately
incorporate resiliency and business continuity into
our systems management; to implement robust
management processes into our technology
development and maintenance programs; and to
technology, and
replace
to
State Street Corporation | 19
control risks related to use of technology, including
cyber-crime and inadvertent data disclosures;
our ability to address threats to our information
technology infrastructure and systems (including
those of our third-party service providers), the
effectiveness of our and our third party service
providers' efforts to manage the resiliency of the
systems on which we rely, controls regarding the
access to, and integrity of, our and our clients' data,
and complexities and costs of protecting the
security of such systems and data;
the results of, and costs associated with,
governmental or
inquiries and
litigation and similar claims,
investigations,
disputes, or civil or criminal proceedings;
regulatory
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 AUC/A 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
revenue in the event a client re-balances or
changes
investment approach, re-directs
assets to lower- or higher-fee asset classes or
changes the mix of products or services that it
receives from us;
its
the potential
investments in sponsored investment funds;
losses arising
for
from our
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; and the possibility that
our clients or regulators will assert claims that our
fees, with respect to such investment products,
are not appropriate;
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 us 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
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
intellectual property rights,
protect our
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;
changes or potential changes to the competitive
environment, due
things,
regulatory and technological changes, the effects
of industry consolidation and perceptions of us, as
a suitable service provider or counterparty;
to, among other
our ability to complete acquisitions, joint ventures
and divestitures, including, without limitation, our
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, including,
without limitation, our acquisition of Charles River
Development, 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
the
experienced; and
transaction will harm our relationships with our
clients, our employees or regulators;
that disruptions
from
to
ability
our
integrate Charles River
Development's front office software solutions with
our middle and back office capabilities to develop
a front-to-middle-to-back office platform that is
competitive, generates revenues in line with our
expectations and meets our clients' requirements;
trends and profitable
our ability to recognize evolving needs of our
clients and to develop products that are responsive
to such
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;
to us;
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.
State Street Corporation | 20
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
assumptions 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.
Risk Factors
In the normal course of our business activities, we
are exposed to a variety of risks. The following is a
discussion of risk factors applicable to us. Additional
information about our risk management framework is
included under “Risk Management” in Management’s
Discussion and Analysis in this Form 10-K. Additional
risks beyond those described in our 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
financial
We assume significant credit risk to counterparties,
many of which are major financial institutions.
These
other
counterparties may also have substantial financial
dependencies with other financial institutions and
sovereign entities. These credit exposures and
concentrations could expose us to financial loss.
institutions
and
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
individual and aggregate
for monitoring both
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 that
began in 2007-2008, 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) and
substantially reduced value and liquidity in the market
for their credit instruments. 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.
State Street Corporation | 21
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.
•
These
industries,
industry or country
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
level. This
concentration risk also applies to groups of
unrelated counterparties that may have similar
investment strategies involving one or more
regions, or other
particular
characteristics.
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. Our operating model exposes us
to risk of unaffiliated sub-custodians to a degree
greater than some of our competitors who have
banking operations in more jurisdictions than
us. Our sub-custodians operate
in all
invest,
in which our clients
jurisdictions
including emerging and other underdeveloped
markets that entail heightened risks. 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 V directive, requirements that we be
responsible for resulting losses suffered by our
clients. We may agree to similar or more
stringent standards with clients that are not
subject to such regulations.
• 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.
the proceeds of
lending program, we
• Securities lending and repurchase agreement
indemnification. On behalf of clients enrolled in
our securities
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
disposition of the collateral recalled from the
borrower in connection with such transaction.
We also lend and borrow securities as riskless
principal, and
those
transactions receive a security interest in
securities held by the borrowers in their
securities portfolios and advance cash or
securities 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
in connection with
State Street Corporation | 22
from
these securities or
collateral changes, additional collateral is
provided by the borrower or collateral is
returned to the borrower. In addition, our
lending clients often
agency securities
purchase securities or other
financial
instruments
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
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
the
repurchase arrangements
these
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.
if
• Stable value arrangements. We enter into
stable value wrap derivative contracts with
unaffiliated stable value funds that allow a
stable value fund to provide book value
coverage to its participants. During the financial
crisis, the book value of obligations under many
of these contracts exceeded the market value
of the underlying portfolio holdings. Concerns
regarding the portfolio of investments protected
by such contracts, or regarding the investment
manager overseeing such an
investment
option, may result in redemption demands from
stable value products covered by benefit-
responsive contracts at a time when the
portfolio's market value is less than its book
value, potentially exposing us to risk of loss.
• U.S. municipal obligations remarketing credit
in
facilities. We provide credit
connection with
the remarketing of U.S.
municipal obligations, potentially exposing us
to credit exposure to the municipalities issuing
such bonds and contingent liquidity risk.
facilities
• 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-
through
investment
borrowers
grade
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.
• Commercial Real Estate. We have recently
launched an initiative financing commercial
and multi-family properties, which serve as
collateral for our loans. Although collateralized,
these loans may become under-secured if the
value of the collateral was over-estimated or
changes. Loan payments are dependent on the
successful operation and management of the
underlying collateral property to generate
sufficient cash flow to repay the loan in a timely
fashion. A material decline in real estate
markets or economic conditions could
negatively
property
performance, which could adversely impact
timely loan repayment, which may result in
increased provision for losses on loans, and
actual losses, either of which would have an
adverse impact on our net income. We seek to
minimize these risks by maintaining lending
policies and procedures and underwriting
standards, however, there can be no assurance
that these will protect us from credit-related
losses or delinquencies.
impact
value
or
• 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. In some
cases, for example in our securities finance and
foreign exchange activities, we are able to enter
into netting agreements that allow us to net
offsetting exposures and payment obligations
against one another. In the event we become
unable, due to operational constraints, actions
by
in accounting
law or regulation (or related
principles,
interpretations) or other factors, to net some or
all of our offsetting exposures and payment
regulators, changes
State Street Corporation | 23
obligations under those agreements, we would
be required to gross up our assets and liabilities
on our statement of condition and our
calculation of RWA, accordingly. This would
result in a potentially material increase in our
regulatory ratios, including LCR, and present
increased credit, liquidity, asset-and-liability
management and operational risks, some of
which could be material.
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, without limitation, financial
institutions and sovereign issuers, to levels that we may
currently exceed. These credit exposure restrictions
under such evolving regulations have and may further
adversely affect certain of 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,
without limitation, 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, without limitation, 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, without limitation,
interest
rates, credit spreads and credit
performance.
Our investment securities portfolio represented
approximately 36% of our total assets as of December
31, 2018. The gross interest income associated with
our investment portfolio represented approximately
13% of our total gross revenue for the year ended
December 31, 2018 and has represented as much as
31% 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
(including, without
spreads, credit performance
limitation, risk of default), credit ratings, our access to
liquidity, foreign exchange markets and mark- to-market
valuations, and our ability to profitably manage changes
in repayment rates of principal with respect to our
portfolio 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, 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, recently introduced
regulatory liquidity standards, such as the LCR, require
that we maintain minimum levels of HQLA in our
investment portfolio, which generally generate lower
rates of return than other investment assets. This has
resulted in increased levels of HQLA as a percentage
of our investment portfolio and an associated negative
impact on our NII and our NIM. As a result we may not
be able to attain our historical levels of NII and NIM. For
additional
liquidity
requirements, refer to the “Liquidity Coverage Ratio and
Net Stable Funding Ratio” section of “Supervision and
Regulation” in Business in 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.
information
regarding
these
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 11% of our total
assets as of December 31, 2018), in comparison to
many other major financial institutions. In some
respects, the accounting and regulatory treatment of
less
investment securities portfolio may be
our
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
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
loan-and-lease
institutions whose
financial
major
their
portfolios represent a
losses) are not similarly
larger proportion of
included
in
State Street Corporation | 24
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, without limitation, 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 portfolio of U.S.
state and municipal bonds, the value of which
may be affected by the budget deficits that a
number of states and municipalities currently
face, resulting in risks associated with this
portfolio.
• 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
in management's expectations
changes
in
or
regarding
management's
to hold
investment
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
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.
experience
repayment
timing
intent
to
• 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 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 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 HQLA that have lower yields than other
investable assets. See also, “Our business
activities expose us to interest rate risk” in this
section.
Our business activities expose us to interest rate
risk.
interest-earning assets and
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
interest-bearing
our
liabilities. These factors are influenced, among other
things, by a variety of economic and market forces and
expectations, including, without limitation, 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
State Street Corporation | 25
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 the Market Risk Management section,
"Asset-and-Liability Management Activities" in our
Management's Discussion and Analysis in 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,
particularly settlement related extensions of credit, 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
by
transaction-based
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, without
limitation, 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
deposits
alternative short-term investments available to our
clients, including, without limitation, the capital markets,
and the classification of certain deposits for regulatory
purposes and related discussions we may have from
time to time with clients regarding better balancing our
clients' cash management needs with our economic and
regulatory objectives.
The Parent Company is a non-operating holding
company 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, without limitation, 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 ours, 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.
State Street Corporation | 26
to
return capital
Our business and capital-related activities,
including our ability
to
shareholders and repurchase 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-
to be
stress capital ratios are determined
insufficient as a result of regulatory capital stress
testing.
Basel III and Dodd-Frank Act
We are required to calculate our risk-based capital
ratios under both the Basel III advanced approaches
and the Basel III standardized approach, and we are
subject to the more stringent of the risk-based capital
ratios calculated under the advanced approaches and
those calculated under the standardized approach in
the assessment of our capital adequacy.
In implementing various 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, without limitation, changes
to
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.
interpretations made
these standards or
Along with the Basel III final rule, banking
regulators also introduced additional requirements,
such as the SLR, LCR and the proposed NSFR, each
of which presents compliance risks.
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,
without limitation, 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, without limitation, 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 us 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 Standards” section under
“Supervision and Regulation” in Business in 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.
Comprehensive Capital Analysis and Review
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 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,
without limitation, stock repurchases 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, without limitation, 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
the Federal Reserve’s
supervisory expectations for the capital planning
process. The Federal Reserve may object to our capital
plan or impose conditions on us in connection with a
non-objection to our capital plan, or we may decide that
we need to adjust our capital plan to avoid an objection
by the Federal Reserve. Any of these potential events
potentially could require 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
instructions and
State Street Corporation | 27
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.
In
Our
revenues.
the event
the Federal Reserve may
liquidity
implementation of capital and
requirements, including our capital plan, may not be
approved or may be objected to by the Federal Reserve,
impose capital
and
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
that our
consolidated
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 repurchase 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, without limitation,
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
regulatory
requirements, our ability to deploy capital, our levels of
liquidity or our business operations in those jurisdictions
may be adversely affected.
current and
future
For additional
information about
the above
matters, refer to “Regulatory Capital Adequacy and
Liquidity Standards” section under "Supervision and
Regulation" in Business and “Capital” section under
"Financial Condition" in our Management's Discussion
and Analysis in 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 2018 total fee revenue
represented approximately 78% of our total revenue.
Fee revenue generated by our Investment Servicing
and Investment Management businesses is augmented
by foreign exchange trading services, securities finance
and processing fees and other revenue.
The level of these fees is influenced by several
factors, including, without limitation, the mix and volume
of our AUC/A and our AUM, the value and type of
securities positions held (with respect to assets under
custody) and the volume of our clients' portfolio
transactions, and the types of products and services
used by our clients. For example, reductions in the level
of economic and capital markets activity tend to have a
negative effect on our fee revenue, as these often result
in reduced asset valuations and transaction volumes.
They may also result in investor preference trends
towards asset classes and markets deemed more
secure, such as cash or non-emerging markets, with
respect to which our fee rates are often lower.
include
In addition, our clients
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.
and disruptions
Our businesses have significant European
in European
operations,
economies could have an adverse effect on our
consolidated results of operations or financial
condition.
interdependencies among
While the European economy continued to expand
in 2018, growth moderated from 2017 levels and
concerns remain with regard to sovereign debt
sustainability,
financial
institutions and sovereigns, the unwinding of ECB
quantitative easing measures and political and other
risks, including the rise of populist governments and
terrorist threats in one or more European nations. In
addition, continued divergence between the pace of
monetary tightening in the U.S. and Europe, as well as
the weakening of the external environment for Europe,
specifically with regard to weaker external trade, have
led to increased uncertainty around the sustainability of
recent economic progress in Europe.
including
the potential
In addition, the United Kingdom's potential exit
from the E.U., or Brexit, and related developments
impact on
present risks,
economic activity in the E.U. and the U.K. and the future
relationship between the E.U. and the U.K. and the
resulting arrangements around market access for
financial services. 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.
In order to conform to restrictions on activity between
the E.U. and the U.K. following Brexit, we are
implementing
and
governance changes to our European businesses,
some of which are subject to regulatory approvals or
other execution risks. If we experience delays or other
organizational,
operational
State Street Corporation | 28
challenges in implementing these changes, we may
incur additional costs or inefficiencies associated with
our European activities, client dissatisfaction or other
difficulties in executing our regional strategy.
Geopolitical and economic conditions and
affect us,
developments
particularly if we face increased uncertainty and
unpredictability in managing our businesses.
adversely
could
financial markets can suffer
volatility,
from
Global
illiquidity and disruption,
substantial
particularly as a result 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 or emerging markets, such developments
could have an adverse effect 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,
disruptions to 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 our
AUC/A 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 non-U.S. 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, without
limitation, the degree of any offset between increases
or decreases to both revenue and expenses, will
depend upon the nature and scope of our operations
and activities in the relevant jurisdictions during the
relevant periods, which may vary from period to period.
As our product offerings expand, in part as we seek
to take advantage of perceived opportunities arising
under various regulatory reforms and resulting market
changes, the degree of our exposure to various market
and credit risks will evolve, potentially resulting in
greater revenue volatility. We also will need to make
additional investments to develop the operational
infrastructure and to enhance our compliance and risk
management capabilities to support these businesses,
which may increase the operating expenses of such
businesses or, if our control environment fails to keep
pace with product expansion, result in increased risk of
loss from such businesses.
We may need to raise additional capital or debt in
the future, which may not be available to us or may
only be available on unfavorable terms.
We may need to raise additional capital in order
to maintain our credit ratings, in response to regulatory
changes, including capital rules, or for other purposes,
including, without limitation, financing acquisitions and
joint ventures. For example, in December 2018, we
issued additional long-term debt in order to meet
requirements under the Federal Reserve’s TLAC final
rule, and in September 2018 and July 2018 we issued
preferred stock and common stock, respectively, to
finance our acquisition of Charles River Development.
law
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
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, without
limitation, the financing of acquisitions and joint
to maintain regulatory
ventures and our efforts
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 position 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, without limitation, 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
State Street Corporation | 29
based on our consolidated results of operations and
developments in our businesses, including, without
limitation, 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
institutions and other
counterparties, including, without limitation, 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.
financial
to
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, due to, including, without limitation,
the effects of market or regulatory developments,
announced or
rumored business developments,
consolidated results of operations, a decline in our stock
price or a downgrade to our 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 service we
provide to them or seek to transfer the business, in
whole or in part, to other service providers; or our
prospective clients may select other service providers,
all of which may have adverse effects on our business
and reputation.
in which
limitation, an environment
The risk that we may be perceived as less
creditworthy than other market participants is higher as
a result of recent market developments which include,
without
the
consolidation, and in some instances failure, of financial
institutions, including major global financial institutions,
has 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 non-U.S. jurisdictions
in which we operate, which may increase our costs
and expose us to risks related to compliance.
institution with substantial
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
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 foreign regulatory agencies and
officials.
In particular, we are 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, we 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 we
and our 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 issued an executive order that
sets forth principles for the reform of the federal financial
regulatory framework, and, in May 2018, the United
States enacted EGRRCPA. The EGRRCPA’s revisions
to the U.S. financial regulatory framework, some of
which remain subject to further rulemaking, have
altered certain laws and regulations applicable to us
and other major financial firms. It is too early to assess
whether there will be any more changes to the
regulatory environment or further 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
State Street Corporation | 30
expect that our business will remain subject to extensive
regulation and supervision. Several other aspects of the
regulatory environment in which we operate, and
risks, are discussed below. Additional
related
information
is provided under "Supervision and
Regulation” in Business in this Form 10-K.
Resolution Planning
We are required to periodically submit 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 with
respect to resolution planning.
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 support
the obligations under
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 our 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 State Street Bank
or certain of the Parent Company’s other operating
subsidiaries or any of their depositors or creditors or
before U.S. taxpayers are put at risk; (3) there can be
there would be sufficient
no assurance
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" in Business in this Form
10-K.
that
Systemic Importance
and
higher
capital
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
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
lawsuits,
fines, penalties,
The breadth of our business activities, together
with the scope of our global operations and varying
business practices in relevant jurisdictions, increase the
complexity and costs of meeting our regulatory
compliance obligations, including in areas that are
receiving significant regulatory scrutiny. We are,
therefore, subject to related risks of non-compliance,
including
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 that we comply with
outsourcing oversight requirements, including with
respect to affiliated entities, and data security standards
of multiple jurisdictions and enable our clients to comply
with outsourcing and data security requirements
imposed upon them. Regulatory scrutiny of compliance
with these and other laws and regulations is increasing
and may, in some respects, impede the implementation
of our global operating model that is central to both
delivery of client service requirements and cost
efficiency. We sometimes face 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
State Street Corporation | 31
the European Union also have the potential to increase
the complexity and cost of regulatory compliance.
initiatives
limitation,
regulatory
In addition to U.S. regulatory initiatives, we are
further affected by non-U.S. regulatory initiatives,
including, without
the proposed Risk
Reduction Package, the Investment Firm Review, the
review of EMIR, the Shareholder Rights Directive, as
well as
finalized and/or
implemented over the last few years such as the GDPR,
UCITS V, Money Market Funds Regulation MiFID II and
MiFIR. Recent, proposed or potential regulations in the
U.S. and E.U. with respect to 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 addition, anti-competitive, governance and
other concerns with passive investment strategies have
become the focus of legislative and regulatory debate
which could significantly
impact both our asset
management business and the clients that we service.
Consequences of Regulatory Environment and
Compliance Risks
regulatory
increase our
Domestic and international regulatory reform
could limit our ability to pursue certain business
opportunities,
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, without limitation, 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 requirements. Changes in
these regulations can significantly affect the services
that we are asked to provide, as well as our costs.
to
fail
to comply with any
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
regulatory
requirements, we may be liable to them for losses and
expenses that they incur. In recent years, regulatory
oversight
increased
enforcement
substantially, imposing additional costs and increasing
the potential risks associated with our operations. If this
regulatory
to
adversely affect our operations and, in turn, our
consolidated results of operations and
financial
condition.
it could continue
trend continues,
have
and
For additional information, see the risk factor, “Our
businesses may be adversely affected by government
enforcement and litigation.”
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.
Separately, in connection with the resolution of
certain proceedings relating to our having charged six
clients of our 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 retain an
independent compliance and ethics monitor for a term
of three years (subject to extension) to, 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. We have retained a monitor
who is fulfilling our obligations under both the deferred
prosecution agreement and the SEC settlement.
Responding to the monitor's requests entails significant
cost and management attention and we are, in general,
required to implement remediation plans to address any
These
of
recommendations.
the monitor's
State Street Corporation | 32
recommendations may require substantial cost and
effort to remediate and, even when consistent with our
own control enhancement objectives, may reflect
differences in approach, timing and cost than we may
independently intend. Under the deferred prosecution
agreement we also have a heightened obligation
promptly to report issues involving potential or alleged
fraudulent activities to the DOJ.
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
involve costs and
management time and may lead to proceedings relating
to our own activities.
inquiries
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
impact our
regulatory authority could adversely
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
rewarding
whistleblowing, may also increase the instances of
current or former employees alleging that certain
practices are inconsistent with our legal or regulatory
obligations.
governmental
programs
as
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
to various
business, we are
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
frequently subject
the attention of
for disgorgement, demands
In government settlements since
Regardless of the outcome of any governmental
enforcement or litigation matter, responding to such
matters is time-consuming and expensive and can
divert
senior management.
Governmental enforcement and litigation matters can
involve claims
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.
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 transition management matter, we
agreed to pay a fine of £22.9 million (approximately
$37.8 million) to the U.K. FCA in 2014 and fines of $32.3
million to each of the DOJ 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
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 transition management matter, and such
agreement could
that
governmental authorities will seek criminal sanctions
likelihood
increase
the
State Street Corporation | 33
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.” Government
authorities may also pursue criminal claims against
current or former employees, and these matters can,
among other things, involve continuing reputational
harm to us. For example, four of our former employees
were indicted by U.S. prosecutors on charges of
criminal conspiracy in connection with their involvement
in the transition management matter. Two of these
individuals pled guilty, and a third was convicted in 2018.
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 in 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
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
the risks of
to
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 2015, we determined we had incorrectly
invoiced some of our Investment Servicing clients for
certain expenses. We have reimbursed most of our
affected customers for what we determined to be the
overcharges and we have implemented enhancements
to our billing processes. In connection with our
enhancements to our billing processes, we continue to
review historical billing practices and may from time to
time identify additional required remediation. We
identified, at the end of 2017, an additional area of past
incorrect billing for certain mailing services expenses
arising in our retirement services business. The accrual
for loss contingencies at December 31, 2018 included
an estimate of the amount we anticipate reimbursing
clients due to that error. We currently expect the
cumulative total of our payments to customers for these
invoicing errors, including the error in the retirement
services business, to be at least $380 million, all of
which has been paid or is accrued. However, we may
identify additional remediation costs. See the risk factor
“Our efforts to improve our billing processes and
practices are ongoing and may result in the identification
of additional billing errors.”
In 2017, a purported class action was commenced
against us alleging that our invoicing practices violated
duties owed to retirement plan customers under ERISA.
In addition, we have received a purported class action
demand letter alleging that our invoicing practices were
unfair and deceptive under Massachusetts law. A class
of customers, or particular customers, may assert that
we have not paid to them all amounts incorrectly
invoiced, and may seek double or treble damages under
Massachusetts law.
We are also cooperating with investigations by
governmental and regulatory authorities on these
matters, including the civil and criminal divisions of the
DOJ, the SEC, the DOL and the Massachusetts
Attorney General, 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
State Street Corporation | 34
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 settlement of
civil claims regarding our indirect foreign exchange
business. The staff of the SEC has informed us that it
intends to ask the SEC for permission to bring an action
against us asserting that we overcharged clients that
are registered investment companies for custody
expenses in violation of §§ 31(a), 34(b) and 37 of the
Investment Company Act of 1940, and Rules 31a-1(a)
and 31a-1(b) thereunder. We have submitted to the staff
of the SEC a response, which included a settlement
proposal that the staff has indicated is too low, and we
remain in discussions with the staff as to a possible
settlement. Our aggregate accruals
loss
contingencies for legal and regulatory matters as of
December 31, 2018 include the amount of penalties
reflected in our most recent settlement proposal. There
can be no assurance that any settlement, whether with
the SEC or other governmental authorities, will be
reached or, if so, the amount of the settlement or its
impact on other claims relating to these matters. In the
first half of 2019, it is likely that discussions will
commence with
the DOJ regarding a potential
resolution of their investigation regarding this matter,
which will then enable us to better assess the potential
penalties and/or sanctions they will be seeking. The
aggregate amount of penalties that may potentially be
imposed upon us in connection with the resolution of all
outstanding investigations into our historical billing
practices could be multiples of the potential penalties
being discussed with the staff of the SEC.
for
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 may result in the
identification of additional billing errors.
these errors,
In 2015, we determined we had incorrectly
invoiced some of our Investment Servicing clients for
certain expenses. In 2016, we began the process of
remediating
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 over the next
three or more years, 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. For example, we
identified at the end of 2017 an additional area of past
incorrect billing for certain mailing services expenses in
our retiree services business and will be reimbursing
the amounts associated with this issue to affected
clients. Such discoveries may lead to increased
expense and decreased revenues, the need to
remediate
government
investigations, or litigation that may materially impact
our business, financial results and reputation.
errors,
billing
prior
facilities or disruptions
Any failures of or damage to, attack on or
unauthorized access to our information technology
to our
systems or
continuous operations, including the systems,
facilities or operations of third parties with which
we do business, such as resulting from cyber-
attacks, could result in significant limits on our
ability to conduct our business activities, costs and
reputational damage.
financial services
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,
firms have suffered
several
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-attacks, 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.
State Street Corporation | 35
Our computer, communications, data processing,
networks, backup, business continuity, disaster
recovery or other operating, information or technology
systems, facilities and activities may suffer disruptions
or otherwise fail to operate properly or become disabled,
overloaded or damaged as a result of a number of
factors, including, without limitation, 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
in
example,
transaction
or
telecommunications outages, natural disasters, cyber-
attacks or employee or contractor error or malfeasance.
We may not successfully prevent, respond to, recover
from or learn from any such disruptions or failures.
there could be sudden
increases
electrical
volumes,
data
or
The third parties with which we do business, which
facilitate our business activities, to whom we outsource
operations or other activities, from whom we receive
products or services or with whom we otherwise engage
or interact, including, without limitation, financial
intermediaries and
infrastructure and
technology
service providers, are also susceptible to the foregoing
risks (including the third parties with which they are
similarly interconnected or on which they otherwise
rely), and our or their business operations and activities
therefore be adversely affected, perhaps
may
materially, by
terminations, errors or
malfeasance by, or attacks or constraints on, one or
or
technology,
more
government institutions or intermediaries with whom we
or they are interconnected or conduct business.
infrastructure
financial,
failures,
in
the unauthorized
In particular, we, like other financial services firms,
will continue to face increasing cyber threats, including,
without limitation, 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
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 SIFI 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
related costs and
could experience significant
exposures,
lost or
limitation,
including, without
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, among other things, (1) as
some of our systems are approaching the end of their
useful life, are redundant or do not share data without
reconciliation; (2) to be more efficient, meet client
expectations and support opportunities of growth; and
(3) to enhance resiliency and maintain business
continuity. Updating these systems involves material
costs and often involves implementation, integration
and security risks, including, without limitation, 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, impair our ability to maintain continuous
operations 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.
(including, without
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
limitation, client
transactional and holdings 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. In addition, our or
our vendors’ personnel have in the past and may in the
future inadvertently disclose client or other confidential
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. To the extent any of these
events involve personally sensitive information, the
risks of enhanced regulatory scrutiny and the potential
financial liabilities are exacerbated, particularly under
data protection regulations such as the GDPR.
State Street Corporation | 36
We are subject to variability in our assets under
custody and/or 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.
to attract
retirement plans,
Our clients include institutional investors, such as
mutual funds, collective investment funds, UCITS,
hedge funds and other investment pools, corporate and
insurance companies,
public
foundations, endowments and investment managers.
In both our asset servicing and asset management
businesses, we endeavor
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 AUC/A 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. For example, as previously reported, as a
result of a decision to diversify providers, in 2018 one
of our large clients moved the servicing for a portion of
its assets, largely common trust funds, to another
provider. The transition represented approximately $1
trillion in assets with respect to which we will no longer
derive revenue. Our AUM or AUC/A are also affected
by decisions by institutional owners to favor or disfavor
certain investment instruments or categories. Similarly,
if one or more clients change 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. In 2018, several
industry-wide and company specific trends continued
to impact AUC/A and AUM asset levels. As our fee
revenue is significantly impacted by our levels of AUC/
A and AUM, changes in levels of different asset classes
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. Our strategy of
focusing our efforts on the segments of the market for
investor services represented by very large asset
managers and asset owners causes us to be particularly
impacted by this industry trend. 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 and effectively execute upon
those plans. Strategic initiatives that we are currently
developing or executing against include cost initiatives,
enhancements and efficiencies to our operational
processes, improvements to existing and new service
offerings, targeting for sales growth certain segments
of the markets for investor services and asset
management, and enhancements to existing and
development of new information technology and other
Implementing strategic programs and
systems.
creating cost efficiencies involves certain strategic,
technological and operational risks.
Strategic Risk
information
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. In 2019, we
announced
that, having completed our Beacon
program, we were launching an additional effort to
reduce expenses
resource discipline,
through
automation and process re-engineering. We may
initiatives on cost
undertake additional strategic
management, operating effectiveness or other matters
of varying sizes, some of which may be material.
Operational process and
technology
transformations, such as Beacon and the recently
announced expense initiative, as well as future strategic
initiatives we may undertake, entail significant risks.
The new program, and any future strategic initiatives
we implement, may prove to be inadequate to achieve
its objectives, may not achieve
the anticipated
automation or process re-engineering, may not be
successfully implemented or meet client expectations
and may not be responsive to industry, technological or
market changes. These programs also may result in
increased or unanticipated costs, may result in earnings
volatility, may take longer than anticipated to implement
and may result in increases in operating losses,
inadvertent data disclosures or other operating errors.
In implementing these programs, we may have material
dependencies on third parties. In addition, our efforts to
manage expenses may be matched or exceeded by our
competitors. Any failure to implement any strategic
initiative
operational
effectiveness or other matters 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
cost management,
on
State Street Corporation | 37
return on our associated investment. The success of
expense management programs 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 anticipated revenues, realize
expected cost savings or achieve desired operational
our
efficiencies. Accordingly,
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 in our Management’s
Discussion and Analysis in this Form 10-K.
business,
our
Information Technology Obsolescence and
Operational Transformation
business
Many features of our 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 or loss of institutional understanding and
may present other unanticipated
technical or
operational hurdles. In addition, the relocation to or
expansion of servicing activities and other operations
in different geographic regions or vendors may entail
client, regulatory and other third party data use, storage
and security challenges, as well as other regulatory
compliance,
other
considerations. As a result, we may not achieve some
or all of the cost savings or other benefits anticipated
and may experience unanticipated challenges from
clients, regulators or other parties or reputational harm.
In addition, some systems development initiatives may
not have access
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 enhance resiliency and decommission
obsolete technologies, to permit us to optimize our use
of capital or to reduce the risk of operating error. In
addition, the implementation of our front to back office
platform and integration of Charles River Development
will require substantial systems development and
expense. We may not have the resources to pursue all
of these objectives simultaneously.
to significant
continuity
and
including without
Development and completion of new products and
services,
limitation, our
interoperable front-to-back servicing platform, may
impose additional costs on us,
involve
dependencies on third parties and may expose us
to increased operational and model risk.
in
ledger
innovative
the capabilities we acquired
Investment Servicing business
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
technology (“Blockchain"), and
distributed
developing potentially industry-changing new products,
services and industry standards. For example, in 2018,
we acquired Charles River Development, and we are
that
leveraging
transaction to create an interoperable front-to-back
office servicing platform combining the offerings within
our
line. The
introduction of new products and services can require
significant time and resources, including regulatory
approvals and the development and implementation of
technical, control and model validation requirements.
New products and services, such as an interoperable
front-to-back office servicing platform, often also involve
dependencies on third parties to, among other things,
access
technologies, develop new
distribution channels or form collaborative product and
service offerings, and can require complex strategic
alliances and joint venture relationships. Substantial
risks and uncertainties are associated with
the
introduction of new products and services, strategic
rapid
alliances and
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, the sharing of benefits in
those relationships, conflicts with existing business
partners and clients and 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
all of the above risks in the development and
implementation of new products or services, including,
without limitation, completion of our interoperable front-
to-back office servicing platform, could have a material
including
ventures
joint
State Street Corporation | 38
adverse effect on our business and reputation,
consolidated results of operations or financial condition.
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,
ineffective
deployment of capital, regulatory concerns, exit costs
or diminished competitive position or reputation.
revenues,
lowered
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 approximately $2.46 billion
associated with our acquisition of Charles River
Development in 2018. These assets are not eligible for
inclusion
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.
in
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
things, due diligence,
through, among other
indemnification provisions or insurance, these or other
risk-mitigating provisions we put in place may not be
sufficient to address these liabilities and contingencies
and involve credit and execution risks associated with
successfully seeking recourse from a third party, such
as the seller or an insurance provider. 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 and the retention and development
of the benefits of our acquisitions results in risks
to our business and other uncertainties.
In recent years, we have undertaken several
acquisitions, including our 2018 acquisition of Charles
River Development and our 2016 acquisition of the
GEAM business. 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, 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. In particular, some clients,
including significant clients, of an acquired business
may have the right to transition their business to other
providers on short notice for convenience, fiduciary or
other reasons and may take the opportunity of the
acquisition or market, commercial, relationship, service
the
satisfaction or other developments
acquisition to terminate, reduce or renegotiate the fees
or other terms of our relationship. Any such client
following
State Street Corporation | 39
losses, reductions or renegotiations likely will reduce
the expected benefits of the acquisition, including,
without limitation, revenues, cross-selling opportunities
and market share or cause impairment to goodwill and
other intangibles, which effects could be material, and
we may not have recourse against the seller of the
business or the client. The risk of client loss is even
greater where the client is a competitor of ours.
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,
as well as heightened cultural and compliance concerns
in integrating an unregulated firm into a bank regulatory
environment. Acquisitions of Investment Servicing
businesses entail information technology systems
conversions, which involve operational risks.
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.
Our acquisition of Charles River Development and
the integration of its business, operations and
employees with our own may be more difficult,
costly or time consuming than expected, and the
anticipated benefits and cost synergies of the
acquisition may not be fully realized, which could
adversely
impact our business operations,
financial condition and results of operations.
We completed our acquisition of Charles River
Development on October 1, 2018. The success of the
acquisition, including the achievement of anticipated
the
growth opportunities and cost synergies of
acquisition, is subject to a number of uncertainties and
will depend, in part, on our ability to successfully
combine and integrate Charles River Development’s
business into our business in an efficient and effective
manner. The combined company may face significant
challenges in implementing such integration, including
without limitation, challenges related to:
•
integrating Charles River Development's
business into our own in a manner that permits
the combined company to achieve the cost and
operating synergies anticipated to result from
the acquisition, which could result in the
anticipated benefits of the acquisition not being
realized partly or wholly in the time frame
currently anticipated or at all;
•
retaining Charles River Development’s clients,
some of which are our competitors;
•
•
•
•
•
•
•
•
retaining key management and
personnel;
technical
integrating Charles River Development’s
software solutions with our existing products
and services and related operations and
systems, including performance, risk and
compliance analytics, investment manager
operations
accounting,
outsourcing,
administration and custody;
the
of
accelerating
enhancements to the features and functions of
Charles River Development’s
software
solutions;
development
internal
coordinating and
operations, compensation programs, policies
and procedures, and corporate structures;
integrating our
potential unknown liabilities and unforeseen or
increased costs and expenses;
the possibility of faulty assumptions underlying
expectations regarding potential synergies and
the integration process;
incurring significant acquisition-related costs
and expenses associated with combining our
operations; and
performance shortfalls as a result of the
diversion of management’s attention and
resources
the
companies’ operations.
caused by
integrating
Any of these factors could result in our failure to
realize the anticipated benefits of the acquisition, on the
expected timeline or at all, and could adversely impact
our business operations, financial condition and results
of operations.
to non-U.S.
jurisdictions and
Cost shifting
outsourcing may expose us
increased
operational risk and reputational harm and may not
result in expected cost savings.
to
We manage expenses by migrating certain
business processes and business support functions to
lower-cost geographic locations, such as India, Poland
and China, and by outsourcing to vendors in various
jurisdictions and to joint ventures. This effort exposes
us to the risk that we may not maintain service quality,
control and effective management or business
resiliency within these operations during and after
transitions. These migrations also involve risks that our
outsourcing vendors or joint ventures may not comply
with their servicing and other contractual obligations to
us,
to
indemnification and information security, and to the risk
that we may not satisfy applicable
regulatory
responsibilities
the management and
regarding
oversight of third parties and outsourcing providers. Our
geographic footprint also exposes us to the relevant
macroeconomic, political,
legal and similar risks
generally involved in doing business in the jurisdictions
limitation, with respect
including, without
State Street Corporation | 40
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 concerns
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, which 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, trade barrier or other
measures which seek to discourage the use of lower
cost jurisdictions.
The market transition away from broad use of the
London Interbank Offered Rate (LIBOR) as an
interest rate benchmark may impose additional
costs on us and may expose us to increased
operational, model and financial risk.
Globally, regulators have advised large banks to
assess the risks and to prepare for transition from
LIBOR to alternative rates ahead of year end 2021. Our
financial performance depends, in part, on our ability to
adapt to market changes promptly, while avoiding
increased related expenses or operational errors.
Substantial risks and uncertainties are associated with
the market transition away from the use of LIBOR as a
critical interest rate benchmark used to determine
amounts payable, under and the value of, financial
instruments and contracts.
and
financial
Due to our dependencies on LIBOR, the failure or
inability to timely plan and implement a LIBOR transition
program
to maintain operational continuity and
minimize economic impact for our clients, ourselves and
other stakeholders could negatively
impact our
business
performance. Those
dependencies include, without limitation, LIBOR-based
securities and loans held in our investment portfolio,
LIBOR-based preferred stock and long-term debt
issued by us and LIBOR-based client fee schedules and
deposit pricing. Also, our internal models which support
decision making and risk management will require
adjustments, which may cause weaknesses in the
underlying model, inadequate assumptions or lead to
reliance on poor or inaccurate data. Assets held by our
customers in their investment portfolios or in the
investment portfolios we manage for others have
LIBOR-based
to enhance our
processes and systems to account for the new
terms. We need
alternative rates-based instruments as they come to
market, the transition of LIBOR-based instruments to
their fallback language and uncertainty as to how such
instruments should be valued where such fallback
language is unclear. These process and systems
requirements could adversely impact our business,
which in some instances is dependent on critical inputs
from third parties, who themselves must timely adapt
to the market changes and failure to implement the
terms of those instruments in a manner consistent with
customer expectation could lead to disputes and
operational issues. Failure or perceived failure to
adequately prepare for LIBOR transition could affect our
ability to attract and retain clients. Uncertainty relative
to external developments necessary for the market
transition away from LIBOR but outside of our control
could further increase the costs and risks of the
transition for us or our subsidiaries and have an adverse
impact on our operational and financial performance.
Our calculations of credit, market and operational
risk exposures, total RWA and capital ratios for
regulatory purposes depend on data
inputs,
formulae, models, correlations and assumptions
that are subject to change over time, which
changes, in addition to our consolidated financial
results, could materially impact our risk exposures,
our total RWA and our capital ratios from period to
period.
To calculate our credit, market and operational risk
exposures, our total RWA 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 on, among other factors, 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
State Street Corporation | 41
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 RWA 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 UOM, 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,
specific to us 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 RWA and our capital ratios
calculated under the Basel III final rule will change, and
may be volatile, over time, and that those latter changes
or volatility could be material as calculated and
measured from period to period.
Our businesses may be negatively affected by
adverse publicity or other reputational harm.
fines,
regulatory actions or
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,
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 criminal convictions or guilty pleas of three of our
former employees in 2018 and the deferred prosecution
agreement we entered into with the DOJ in early 2017
and the related SEC settlement, these effects have the
potential to continue. The client invoicing matter we
announced in late 2015 has the potential to result in
similar effects. For additional information about these
matters, 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.
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, without limitation, former employees, with
knowledge of our intellectual property may 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
without limitation, clients or service providers with whom
we may engage in the development or implementation
of other products, , services or solutions or to whose
information we may have access for limited permitted
purposes but with whom we also compete. The risk of
such
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.
is enhanced
infringement
in
Our controls and procedures may fail or be
circumvented, our risk management policies and
procedures may be inadequate, and operational
risks 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 internal and external
State Street Corporation | 42
limitations,
committing
risks, including, without limitation, risks related to
service providers, in our various businesses. The risk
individuals, either employees or contractors,
of
engaging in conduct harmful or misleading to clients or
to us, such as consciously circumventing established
control mechanisms to exceed trading or investment
fraud or
management
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
regulators
regarding our culture, governance and control
environment. While we seek to contractually limit our
financial exposure to operational risk, the degree of
protection that we are able to achieve varies, and our
potential exposure may be greater than the revenue we
anticipate that we will earn from servicing our clients.
raise concerns among
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.
limitation,
including, without
leading provider of services
Operational risk is inherent in all of our business
activities. As a
to
institutional investors, we provide a broad array of
services,
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, without limitation,
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.
risk
The quantitative models we use to manage our
in
business may contain errors that result
inadequate
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.
assessments,
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, without limitation, 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, without limitation, 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
this evolution. While our risk
accurately reflect
State Street Corporation | 43
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.
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.
investment
these sponsored
In the normal course of business, we manage
various types of sponsored investment funds through
State Street Global Advisors. The services we provide
funds generate
to
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.
for
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
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.
financial accounting purposes
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.
limitation,
investment
including, without
these pools, receive redemptions as
than
We manage assets on behalf of clients in several
forms,
in collective
investment pools, money market funds, securities
finance collateral pools, cash collateral and other cash
products and short-term
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
in-kind
distributions rather
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.
State Street Corporation | 44
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
the
required
circumstances, be
investment pools into our consolidated statement of
condition; levels of redemption activity could increase;
and our consolidated results of operations and business
prospects could be adversely affected. In addition, if a
money market fund that we manage were to have
unexpected liquidity demands from investors in the fund
that exceeded available liquidity, the fund could be
required to sell assets to meet those redemption
requirements, and selling the assets held by the fund
at a reasonable price, if at all, may then be difficult.
to consolidate
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.
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
AUC/A. 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,
without limitation, potentially increased downward
pricing pressure across our businesses.
Some of our competitors including, without
limitation, 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.
State Street Corporation | 45
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, without limitation, services related
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
in some cases, considerable up-front
require,
investment by us,
limitation,
including, without
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.
these
arrangements may be based on our ability to cross-sell
additional services to these clients, and we may be
unable to do so. In addition, such contracts may permit
early termination or reduction in services in the event
that certain service levels are not met, which termination
or service reduction may result in loss of upfront
investment in onboarding the client.
the profitability of
In addition,
on
conversion
Performance risk exists in each contract, given our
dependence
and
successful
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 elect, or
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
changes in accounting standards, refer to the “Recent
Accounting Developments” section of Note 1 to the
consolidated financial statements in this Form 10-K.
in
tax
Changes
laws, rules or regulations,
challenges to our tax positions with respect to
the
historical
composition of our pre-tax earnings may increase
our effective tax rate and thus adversely affect our
consolidated financial statements.
transactions, and changes
in
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 (TCJA), generally
effective January 2018. This decreased the U.S.
corporate income tax rate from 35% to 21%, repealed
the corporate 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.
The U.S. Treasury has yet to issue final guidance
for key provisions of the TCJA, including the Base
Erosion and Anti-abuse tax, Global Intangible Low-
taxed Income and foreign tax credit provisions.
Depending on how those provisions are ultimately
implemented, our effective tax rate could be adversely
affected.
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
is
dependent on the nature and geographic composition
of our pre-tax earnings and could be negatively affected
by changes in these factors.
tax rate
State Street Corporation | 46
We may incur losses as a result of unforeseen
events
terrorist
attacks, natural disasters, the emergence of a
pandemic or acts of embezzlement.
including, without
limitation,
Acts of
terrorism, natural disasters or
the
emergence of a pandemic could significantly affect our
business. We have instituted disaster recovery and
continuity plans to address risks from terrorism, natural
disasters and pandemic; however, anticipating or
addressing all potential contingencies is not possible
for events of this nature. Acts of terrorism, either
targeted or broad in scope, or natural disasters could
damage our physical facilities, harm our employees and
disrupt our operations. A pandemic, or concern about a
possible pandemic, could lead to operational difficulties
and impair our ability to manage our business. Acts of
terrorism, natural disasters and pandemics could also
negatively affect our clients, counterparties and service
providers, as well as result in disruptions in general
economic activity and the financial markets.
ITEM 1B. UNRESOLVED STAFF COMMENTS
None.
ITEM 2. PROPERTIES
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
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 facilities.
buildings
located
four
We occupy a total of approximately 8.0 million
square feet of office space and related facilities
worldwide, of which approximately 7.0 million square
feet are leased. The following table provides information
on certain of 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
District Avenue
Crown Colony Drive
Heritage Drive
John Adams Building
Josiah Quincy Building
Grafton Data Center
Boston
Boston
Boston
Burlington
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
MA
CT
MO
NJ
NY
Adelaide Street East
Toronto
Canada
Europe, Middle East and Africa:
Churchill Place
Brienner Strasse
Sir John Rogerson's Quay
Via Ferrante Aporti
Kirchberg
Titanium Tower
BIG
Bonarka
CBK
Asia Pacific:
George Street
San Dun
Tian Tang
Ecoworld 6B
London
Munich
Dublin
Milan
England
Germany
Ireland
Italy
Gdansk
Krakow
Krakow
Krakow
Poland
Poland
Poland
Poland
Sydney
Australia
Hangzhou
Hangzhou
Bangalore
China
China
India
India
India
Leased
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
Knowledge City Salarpuria
Hyderabad
RMZ Ecoworld 7
Bangalore
(1) We lease other properties in the above regions which consists of 41 locations
in the U.S. and Canada, 39 locations in EMEA and 37 locations in APAC.
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 in this Form 10-K,
and is incorporated herein by reference.
ITEM 4. MINE SAFETY DISCLOSURES
Not applicable.
State Street Corporation | 47
EXECUTIVE OFFICERS OF THE REGISTRANT
The following table presents certain information with respect to each of our executive officers as of February 21,
2019.
Name
Age
Position
Ronald P. O'Hanley
Eric W. Aboaf
Ian W. Appleyard
Jeffrey N. Carp
Jeff D. Conway
Andrew J. Erickson
Hannah M. Grove
Kathryn M. Horgan
Karen C. Keenan
Andrew P. Kuritzkes
Louis D. Maiuri
Donna M. Milrod
Elizabeth Nolan
Antoine Shagoury
Cyrus Taraporevala
62 Chief Executive Officer and President
54 Executive Vice President and Chief Financial Officer
54 Executive Vice President, Global Controller and Chief Accounting Officer
62 Executive Vice President, Chief Legal Officer and Secretary
53 Executive Vice President, Global Head of Operations and Business Transformation
49 Executive Vice President, Head of Global Services
55 Executive Vice President and Chief Marketing Officer
53 Executive Vice President and Chief Human Resources and Citizenship Officer
56 Executive Vice President and Chief Administrative Officer
58 Executive Vice President and Chief Risk Officer
54 Executive Vice President, Head of Global Markets and Global Exchange
51 Executive Vice President and Head of Global Clients Division
56 Executive Vice President, Chief Executive Officer for Europe, Middle East and Africa
48 Executive Vice President and Global Chief Information Officer
52 President and Chief Executive Officer, State Street Global Advisors
All executive officers are appointed by the Board
of Directors and hold office at the discretion of the Board.
No family relationships exist among any of our directors
and executive officers.
In accordance with the Chief Executive Officer
succession plan previously announced in November
2018, Mr. O'Hanley succeeded Joseph L. Hooley as
Chief Executive Officer on January 1, 2019.
Mr. O'Hanley joined State Street in April 2015 and
since January 1, 2019 has served as the President and
Chief Executive Officer. Prior to this role Mr. O'Hanley
served as President and Chief Operating Officer from
November 2017 to December 2018 and served as Vice
Chairman from January 1, 2017 to November 2017. He
served as the Chief Executive Officer and President of
State Street Global Advisors,
investment
management arm of State Street Corporation from April
2015 to November 2017. Prior to joining State Street,
Mr. O'Hanley was president of Asset Management &
Corporate Services for Fidelity Investments, a financial
and mutual fund services corporation, from 2010 to
February 2014. From 1997 to 2010, Mr. O'Hanley
served in various positions at Bank of New York Mellon,
a global banking and financial services corporation,
serving as president and chief executive officer of BNY
Asset Management in Boston from 2007 to 2010.
the
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,
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
from April 2015
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. Appleyard joined State Street in May 2018 as
Executive Vice President, Global Controller and Chief
Accounting Officer. Prior to joining State Street, Mr.
Appleyard served as managing director in group finance
for Credit Suisse, a provider of financial services, from
May 2013 to April 2018 and held several senior
management positions with Credit Suisse after joining
in September 2008. Prior to Credit Suisse, Mr.
Appleyard held senior positions at HSBC and
JPMorgan.
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 Global Delivery. Prior to his current role, he was Chief
Executive Officer for Europe, the Middle East and Africa
from March 2015 until December 2017. 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 served as the global head of
our Investment Management Services business.
State Street Corporation | 48
Mr. Erickson joined State Street in April 1991 and
since November 2017 has served as Executive Vice
President and head of our Global Services business.
Prior to this role and commencing in June 2016, he
served as 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
2009 to 2013.
Ms. Milrod joined State Street in December 2018
as Executive Vice President and Head of Global Clients
Division. Prior to joining State Street, Ms. Milrod was
most recently a senior advisor to Broadridge Financial
Solutions, a provider of investor communications and
technology-driven solutions to banks, broker/dealers,
asset managers and corporate issuers globally, from
January 2018 through November 2018 and senior
advisor to McKinsey & Co, a global management
consulting firm, from May 2017 to June 2018. Ms. Milrod
served as head of DTCC Solutions at the Depository
Trust & Clearing Corporation, a provider of information-
based and business processing solutions to financial
intermediaries globally,
to
November 2016 and before that served as chief
administrative officer, leading operations and finance,
from October 2012 to February 2015. Ms. Milrod held
several senior positions with Deutsche Bank from 1993
to 2012.
from February 2015
Ms. Nolan joined State Street in October 2015 and
serves as Chief Executive Officer for Europe, the Middle
East and Africa. 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. Shagoury joined State Street in November
2015 as Executive Vice President,
Information
Technology and Global Chief Information Officer. 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
information
company, including the group chief operating officer and
chief information officer.
financial
State Street Corporation | 49
Mr. Taraporevala joined State Street in April 2016
and since November 2017 has served as President and
Chief Executive Officer of State Street Global Advisors.
He joined State Street Global Advisors as Executive
Vice President and Global Head of Product and
Marketing. Prior to joining State Street Global Advisors,
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 | 50
PART II
ITEM 5. MARKET FOR REGISTRANT’S COMMON
EQUITY, RELATED STOCKHOLDER MATTERS AND
ISSUER PURCHASES OF EQUITY SECURITIES
MARKET FOR REGISTRANT'S COMMON EQUITY
Our common stock is listed on the New York Stock
Exchange under the ticker symbol STT. There were
2,503 shareholders of record as of January 31, 2019.
In June 2018, our Board approved a common
stock purchase program authorizing the purchase of up
to $1.2 billion of our common stock through June 30,
2019 (the 2018 Program).
In connection with our acquisition of Charles River
Development, we did not repurchase any common
stock during the second, third and fourth quarters of
2018. We resumed our common stock purchase
program in the first quarter of 2019 and may repurchase
up to $600 million through June 30, 2019 under the 2018
Program.
trading programs. The
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
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. Our
common stock purchase program does not have
specific price targets and may be suspended at any
time. We may employ third-party broker/dealers to
acquire shares on the open market in connection with
our common stock purchase programs.
Additional information about our common stock,
including Board authorization with respect to purchases
by us of our common stock, is provided under "Capital"
in
in our Management's
Discussion and Analysis and in Note 15 to the
consolidated financial statements in this Form 10-K,
and is incorporated herein by reference.
“Financial Condition”
RELATED STOCKHOLDER MATTERS
As a bank holding company, our Parent Company
is a legal entity separate and distinct from its principal
banking subsidiary, State Street Bank, and its non-
banking subsidiaries. The right of the Parent Company
to participate as a shareholder in any distribution of
assets of State Street Bank upon its liquidation,
reorganization or otherwise is subject to the prior claims
by creditors of State Street Bank, including obligations
for federal funds purchased and securities sold under
repurchase agreements and deposit liabilities.
Payment of dividends by State Street Bank is
subject to the provisions of the Massachusetts banking
law, which provide that State Street Bank's Board of
Directors may declare, from State Street Bank's "net
profits," as defined below, cash dividends annually,
law,
semi-annually or quarterly (but not more frequently) and
can declare non-cash dividends at any time. Under
for purposes of
Massachusetts banking
determining the amount of cash dividends that are
payable by State Street Bank, “net profits” is defined as
an amount equal to the remainder of all earnings from
current operations plus actual recoveries on loans and
investments and other assets, after deducting from the
total thereof all current operating expenses, actual
losses, accrued dividends on preferred stock, if any, and
all federal and state taxes.
No dividends may be declared, credited or paid so
long as there is any impairment of State Street Bank's
capital stock. The approval of the Massachusetts
Commissioner of Banks is required if the total of all
dividends declared by State Street Bank in any calendar
year would exceed the total of its net profits for that year
combined with its retained net profits for the preceding
two years, less any required transfer to surplus or to a
fund for the retirement of any preferred stock.
Under 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
State Street Corporation | 51
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
in
accordance with federal and state statutory limitations
and guidelines.
resume
in connection with
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
its CCAR process.
Information about dividends declared by our Parent
Company and dividends from our subsidiary banks is
provided under "Capital" in “Financial Condition” in our
Management's Discussion and Analysis, and in Note 15
to the consolidated financial statements in 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" in Business
in this Form 10-K and the risk factor “Our business and
capital-related activities, including our ability to return
capital to shareholders and repurchase 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 testing” in Risk Factors in
this Form 10-K.
Information about our equity compensation plans
is in Security Ownership of Certain Beneficial Owners
and Management and Related Stockholder Matters,
and in Note 18 to the consolidated financial statements
in this Form 10-K, and is incorporated herein by
reference.
State Street Corporation | 52
SHAREHOLDER RETURN PERFORMANCE PRESENTATION
The graph presented below compares the cumulative total shareholder return on our 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 our common stock and in each index on
December 31, 2013. It also assumes reinvestment of common stock dividends.
The S&P Financial Index is a publicly available, capitalization-weighted index, comprised of 68 of the Standard
& Poor’s 500 companies, representing 27 diversified financial services companies, 22 insurance companies and 19
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
2013
2014
2015
2016
2017
2018
$
100
100
100
100
109
114
115
109
$
94
$
112
$
115
113
110
129
139
141
$
143
157
170
168
95
150
148
138
State Street Corporation | 53
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/or administration (in billions)
Assets under management (in billions)
Number of employees
RATIOS:
2018
2017
2016
2015
2014
$
9,305
$
8,905
$
8,116
$
8,278
$
8,010
2,671
6
2,304
(39)
2,084
7
2,088
(6)
2,260
4
11,982
11,170
10,207
10,360
10,274
15
8,968
2,999
400
—
2,599
(189)
2,410
6.48
6.40
1.78
63.07
2
8,269
2,899
722
—
2,177
(184)
1,993
5.32
5.24
1.60
97.61
$
$
$
10
8,077
2,120
(22)
1
2,143
(175)
1,968
5.03
4.97
1.44
77.72
12
8,050
2,298
318
—
1,980
(132)
1,848
4.53
4.47
1.32
66.36
$
$
$
10
7,827
2,437
415
—
2,022
(64)
1,958
4.62
4.53
1.16
78.50
$
$
$
$
$
$
$
$
$
$ 87,062
$ 97,579
$ 97,167
$ 100,022
$ 112,636
185,637
244,626
180,360
11,093
24,790
31,620
2,511
40,142
191,235
238,425
184,896
11,620
22,317
33,119
199,184
242,698
187,163
11,430
21,219
28,771
2,782
36,643
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
Return on average common shareholders' equity
12.2%
10.6%
10.5%
9.8%
9.8%
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(3)
Supplementary leverage ratio(4)
1.16
27.58
8.9
1.47
12.1
16.0
16.9
7.2
6.3
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
(1) Amounts represent preferred stock dividends and the allocation of earnings to participating securities using the two-class method.
(2) Ratios were calculated in conformity with the advanced approaches provisions of the Basel III final rule. Refer to Note 16 to the consolidated financial statements in
this Form 10-K.
(3) The tier 1 leverage ratio was calculated in conformity with the Basel III final rule.
(4) The supplementary leverage ratio was calculated using the tier 1 capital as calculated under the supplementary leverage ratio provisions of the Basel III final rule.
State Street Corporation | 54
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
Acquisition Costs
Restructuring and Repositioning Charges
Income Tax Expense
Line of Business Information
Investment Servicing
Investment Management
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
56
57
60
60
60
63
65
65
66
66
66
67
67
70
73
74
78
79
80
84
89
94
97
98
105
106
106
115
116
117
We use acronyms and other defined terms for certain business terms and abbreviations, as defined on the acronyms
list and glossary following the consolidated financial statements in this Form 10-K.
State Street Corporation | 55
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, 2018, we had consolidated
total assets of $244.63 billion, consolidated total
deposits of $180.36 billion, consolidated
total
shareholders' equity of $24.79 billion and over 40,000
employees. We operate in more than 100 geographic
markets worldwide,
the U.S., Canada,
including
Europe, the Middle East and Asia.
Our operations are organized into two lines of
Investment
Investment Servicing and
business,
Management, which are defined based on products and
services provided.
for
Investment Servicing provides services
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
operations
investment manager
outsourcing; performance,
risk and compliance
analytics; and financial data management to support
institutional investors. New products and services
resulting
from our acquisition of Charles River
Development on October 1, 2018 include: portfolio
modeling and construction; trade order management;
risk and compliance; and wealth
investment
management solutions.
Investment Management, through State Street
Global Advisors, provides a broad range of investment
management strategies and products for our clients.
Our investment management strategies and products
span the risk/reward spectrum, including core and
enhanced
indexing, multi-asset strategies, active
quantitative and fundamental active capabilities and
alternative investment strategies. Our AUM is currently
primarily weighted to indexed strategies. In addition, we
provide a breadth of services and solutions, including
investing,
environmental, social and governance
defined benefit and defined contribution and OCIO.
State Street Global Advisors is also a provider of ETFs,
including the SPDR® ETF brand. While management
fees are primarily determined by the values of AUM and
the investment strategies employed, management fees
reflect other factors as well, including the benchmarks
specified in the respective management agreements
related to performance fees.
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 in 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 in 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
to make estimates and
requires management
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;
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 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.
financial
Non-GAAP
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
this
this Form 10-K,
presented
Management’s Discussion and Analysis, is reconciled
including
in
State Street Corporation | 56
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
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
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
legal proceedings, market growth,
outcomes of
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" in this Form 10-K.
regulatory standards,
We provide additional disclosures required by
including
applicable bank
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”
at
our
section
www.statestreet.com.
corporate
website
of
We have included our website address in this
report as an inactive textual reference only. Information
on our website is not incorporated by reference in 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 in this Form 10-K.
OVERVIEW OF FINANCIAL RESULTS
TABLE 1: OVERVIEW OF FINANCIAL RESULTS
(Dollars in millions, except per
share amounts)
Total fee revenue(1)(2)(3)
Net interest income(2)
Gains (losses) related to investment
securities, net
Total revenue(1)(3)
Provision for loan losses
Total expenses(1)(3)
Income before income tax expense
Income tax expense (benefit)
Net income from non-controlling
interest
Years Ended December 31,
2018
2017
2016
$ 9,305
$ 8,905
$ 8,116
2,671
2,304
2,084
6
(39)
7
11,982
11,170
10,207
15
8,968
2,999
400
2
8,269
2,899
722
10
8,077
2,120
(22)
—
—
1
Net income
$ 2,599
$ 2,177
$ 2,143
Adjustments to net income:
Dividends on preferred stock(4)
$
(188)
$
(182)
$
(173)
Earnings allocated to
participating securities(5)
Net income available to common
shareholders
Earnings per common share:
(1)
(2)
(2)
$ 2,410
$ 1,993
$ 1,968
Basic
Diluted
$
6.48
6.40
$
5.32
5.24
$
5.03
4.97
Average common shares outstanding (in thousands):
Basic
Diluted
371,983
376,476
374,793
380,213
391,485
396,090
Cash dividends declared per
common share
$
1.78
$
1.60
$
1.44
Return on average common equity
12.2%
10.6%
10.5%
(1) The new revenue recognition standard contributed approximately $272 million in total
revenue and total expenses for 2018, compared to 2017, including approximately $190
million in management fees, $58 million in foreign exchange trading services and $24 million
across other revenue lines, and expenses contributed approximately $183 million in other
expenses, $59 million in transaction processing and $30 million across other expense line
items.
(2) Approximately $15 million of swap costs in 1Q18 were reclassified from processing fees
and other revenue within fee revenue to net interest income to conform to current
presentation.
(3) Charles River Development contributed approximately $121 million and $57 million in total
revenue and total expenses, respectively, in the fourth quarter of 2018, including
approximately $116 million in processing fees and other revenue and $5 million in other
revenue lines, and expenses contributed approximately $28 million in compensation and
employee benefits, $18 million in amortization of other intangible assets and $11 million in
other expense lines.
(4) Additional information about our preferred stock dividends is provided in Note 15 to the
consolidated financial statements in this Form 10-K.
(5) 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, 2018
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, 2018 to those
for the year ended December 31, 2017, 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 in this Form 10-K. In this Management’s
Discussion and Analysis, where we describe the effects
State Street Corporation | 57
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
of changes in foreign exchange rates, those effects are
determined by applying applicable weighted average
foreign exchange rates from the relevant 2017 period
to the relevant 2018 period results.
Financial Results and Highlights
• EPS of $6.40 in 2018 increased 22% compared
to $5.24 in 2017. Both years include the impact
of notable items.
2018 notable items included:
Repositioning charges of approximately
$300 million;
Legal and
related expenses of
approximately $50 million; and
Acquisition and restructuring costs
primarily related
to Charles River
Development of approximately $24
million.
2017 notable items included:
One-time estimated net impact of $270
the TCJA,
million associated with
including a one-time estimated tax
expense of approximately $250 million
and a one-time reduction in revenue of
approximately $20 million; and
Acquisition and restructuring costs
to GEAM and Beacon of
related
approximately $266 million.
•
•
2018 revenues were impacted by unfavorable
market conditions and fee compression. In light
of challenging market and industry headwinds,
we have launched a new expense program
designed to reduce costs.
2018 ROE of 12.2% increased from 10.6% in
2017. Pre-tax margin of 25.0% in 2018
decreased from 26.0% in 2017.
• Operating leverage was (1.2)% for 2018.
Operating leverage represents the difference
between the percentage change in total
revenue and the percentage change in total
expenses, in each case relative to the prior year
period.
represents
• Fee operating leverage was (4.0)% for 2018.
Fee operating
the
leverage
difference between the percentage change in
total fee revenue and the percentage change
in total expenses, in each case relative to the
prior year period. The negative fee operating
leverage is primarily due to higher expenses,
in part due to the aforementioned notable
items.
• On October 1, 2018, we completed our
acquisition of Charles River Development, a
provider of investment management front office
tools and solutions, for an all cash purchase
price of approximately $2.6 billion. We funded
the acquisition with a July 2018 issuance of
common stock of approximately $1.15 billion,
a September 2018 issuance of preferred stock
of approximately $500 million and
the
suspension of approximately $950 million of
share repurchases in 2018.
Total revenues contributed by Charles
River Development
fourth
quarter of 2018 were approximately
$121 million, including $116 million in
processing fees and other revenue
and $5 million in other revenue lines.
the
in
in
the
Total expenses contributed by Charles
River Development
fourth
quarter of 2018 were approximately
$57 million, including $28 million in
compensation and employee benefits,
$18 million in amortization of other
intangible assets and $11 million in
other expense lines.
• We have resumed our common stock purchase
program in the first quarter of 2019 and may
repurchase up to $600 million through June 30,
2019 under the 2018 Program.
Revenue
• Total revenue and fee revenue increased 7%
and 5%, respectively, in 2018 compared to
2017, primarily driven by higher management
fees and foreign exchange trading services
and, in the case of total revenue, higher NII,
partially offset by lower securities finance
revenue.
The
new
recognition
revenue
standard, effective January 1, 2018,
contributed approximately $272 million
to total revenue in 2018 compared to
2017.
Charles
River
Development
contributed approximately $121 million
to total revenue in 2018.
• Servicing fee revenue increased 1% in 2018
compared to 2017, primarily due to market
appreciation and net new business, largely
offset by challenging
industry conditions,
including fee pressure.
• Management fee revenue increased 15%, or
$235 million, in 2018 compared to 2017,
reflecting higher average global equity markets
during 2018. The new revenue recognition
standard
to
management fee revenue in 2018, compared
to 2017.
contributed $190 million
State Street Corporation | 58
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
• Securities finance revenue decreased 10% in
2018 compared to 2017, primarily due to
certain balance sheet repositioning efforts in
2018.
• Processing fees and other revenue increased
17% in 2018 compared to 2017, and reflects
approximately $116 million from Charles River
Development in 2018.
• NII increased 16% in 2018 compared to 2017,
primarily due to higher U.S. interest rates and
disciplined liability pricing, partially offset by a
mix shift
In 2018, we sold
approximately $26 billion of non-HQLA, of
which a significant portion has been reinvested
in HQLA.
to HQLA.
Expenses
increased 9%
to 2017, primarily due
• Total expenses
in 2018
compared
to
repositioning charges taken in 2018, the
adoption of the new revenue recognition
standard in 2018 and higher technology costs,
partially offset by net Beacon savings.
In 2018, we initiated a new expense
savings program and expect to realize
$350 million in gross expense savings
by the end of 2019. As part of that
program, we recorded a repositioning
charge in the fourth quarter of 2018 of
approximately $223 million, consisting
of $198 million of compensation and
employee benefits expenses and $25
million of occupancy expenses.
Including a charge taken in the second
quarter of 2018, total repositioning
charges were $300 million in 2018.
In 2018, we achieved approximately
$245 million of Beacon pre-tax year-
over-year savings, net of Beacon
investments.
Total expenses
in 2018
include
approximately $272 million and $57
million related to the adoption of the
new revenue recognition standard and
our acquisition of Charles River
Development, respectively.
AUC/A and AUM
• AUC/A decreased 5% in 2018 compared to
2017, primarily due to lower market levels. In
2018, newly announced asset servicing
mandates totaled approximately $1.9 trillion.
Servicing assets remaining to be installed in
future periods totaled approximately $385
billion as of December 31, 2018.
• AUM decreased 10% in 2018 compared to
2017, primarily driven by weaker period end
equity markets as well as institutional and cash
outflows, partially offset by ETF net inflows.
Capital
• We declared aggregate common stock
dividends of $1.78 per share, totaling $665
million in 2018, compared to $1.60 per share,
totaling $596 million in 2017, representing an
increase of approximately 12% on a per share
basis.
•
•
•
•
In the first quarter of 2018, we acquired 3.3
million shares of common stock at an average
per share cost of $105.31 and an aggregate
cost of approximately $350 million under our
prior common stock purchase program (the
2017 Program) approved by our Board.
In connection with our acquisition of Charles
River Development, we did not repurchase any
common stock under the common stock
purchase plan approved by our Board in June
2018 (the 2018 Program), nor did we
repurchase any common stock under the 2017
Program in the quarter ended June 30, 2018.
We have resumed our common stock purchase
program in the first quarter of 2019 and may
repurchase up to $600 million through June 30,
2019 under the 2018 Program.
In July 2018, we completed a public offering of
approximately 13.24 million shares of our
common stock. The offering price was $86.93
per share and net proceeds
totaled
approximately $1.15 billion.
issued 500,000
In September 2018, we
depositary shares each representing a 1/100th
ownership interest in a share of our Fixed-to-
Floating Rate Non-Cumulative Perpetual
Preferred Stock, Series H, without par value per
share, with a liquidation preference of $100,000
per share (equivalent to $1,000 per depositary
share) and an initial dividend rate of 5.625%
per annum. The net proceeds were
approximately $500 million.
• Our standardized CET1 capital ratio decreased
to 11.7% as of December 31, 2018 compared
to 11.9% as of December 31, 2017, and Tier 1
leverage ratio decreased to 7.2% as of
December 31, 2018 compared to 7.3% as of
December 31, 2017. The decreases are
primarily driven by higher deduction of goodwill
of $1.5 billion and intangible assets of $1.0
billion as a result of our acquisition of Charles
River Development, as well as the phase in of
the intangible assets of $0.3 billion (100% in
2018 compared to 80% in 2017).
State Street Corporation | 59
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
CONSOLIDATED RESULTS OF OPERATIONS
This section discusses our consolidated results of
operations for 2018 compared to 2017, as well as 2017
compared to 2016, and should be read in conjunction
with
financial statements and
accompanying condensed notes to the consolidated
financial statements in this Form 10-K.
the consolidated
Total Revenue
TABLE 2: TOTAL REVENUE
Years Ended December 31,
(Dollars in millions)
2018
2017
2016
Fee revenue:
%
Change
2018
vs.
2017
%
Change
2017
vs.
2016
Servicing fees
$ 5,421
$ 5,365
$ 5,073
1%
Management fees(1)
1,851
1,616
1,292
Foreign exchange
trading services(1)
Securities finance
Processing fees and
other(2)
Total fee revenue(2)
Net interest income:
1,201
1,071
1,099
543
289
606
247
562
90
9,305
8,905
8,116
Interest income
3,662
2,908
2,512
Interest expense
991
604
428
Net interest income
2,671
2,304
2,084
Gains (losses)
related to investment
securities, net
Total revenue(1)(2)
6
(39)
7
$11,982
$11,170
$10,207
15
12
(10)
17
5
26
64
16
nm
7
6%
25
(3)
8
174
10
16
41
11
nm
9
(1) The new revenue recognition standard contributed approximately $272 million in total
revenue for 2018, compared to 2017, including approximately $190 million in management
fees, $58 million in foreign exchange trading services and $24 million across other revenue
lines.
(2) Charles River Development contributed approximately $121 million in total revenue for
the fourth quarter of 2018, including approximately $116 million in processing fees and other
revenue and $5 million in other revenue lines.
nm Not meaningful
Fee Revenue
Table 2: Total Revenue, provides the breakout of
fee revenue for the years ended December 31, 2018,
2017 and 2016.
Servicing and management fees collectively made
up approximately 78% of the total fee revenue in 2018,
2017 and 2016.
Servicing Fee Revenue
factors
including changes
Generally, our servicing fee revenues are affected
by several
in market
valuations, client activity and asset flows, net new
business and the manner in which we price our services.
We provide a range of services to our clients, including
core custody services, accounting, reporting and
administration and middle office services, and the
nature and mix of services provided affects our servicing
fees. The basis for fees will differ across regions and
clients. In general, approximately 55% of our servicing
fee revenues have been variable due to changes in
asset valuations including changes in daily average
valuations of AUC/A; another 15% of our servicing fees
are impacted by the volume of activity in the funds we
serve; and the remaining 30% of our servicing fees tend
not to be variable in nature nor impacted by market
fluctuations or values.
Changes in Market Valuations
Our servicing fee revenue is impacted by both our
levels of and the geographic and product mix of our
AUC/A. Increases or decreases in market valuations
have a corresponding impact on the level of our AUC/
A and servicing fee revenues, though the degree of
impact will vary depending on asset types and classes
and geography of assets held within our clients’
portfolios.
Over the past five years, including the year ended
December 31, 2018, we estimate that worldwide market
valuations impacted our servicing fee revenues by
approximately (2)% to 5% annually and approximately
2% in 2018. See Table 3: Daily, Month-End and Year-
End Equity 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 and of client
portfolios can therefore differ from the performance of
In addition, our asset
the
industry
those
classifications may differ
classifications presented.
indices presented.
from
We estimate, using relevant information as of
December 31, 2018 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 fees are calculated, would result in a
corresponding change in our total servicing fee
revenues, on average and over time, of
approximately 3%; and
A 10% increase or decrease in worldwide fixed
income valuations, on a weighted average
basis, over the relevant periods for which our
servicing fees are calculated, would result in a
corresponding change in our total servicing fee
revenues, on average and over time, of
approximately 1%.
•
State Street Corporation | 60
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
TABLE 3: DAILY, MONTH-END AND YEAR-END EQUITY INDICES(1)
S&P 500®
MSCI EAFE®
MSCI® Emerging Markets
HFRI Asset Weighted
Composite®
Barclays Capital Global
Aggregate Bond Index
Years Ended December 31,
Years Ended December 31,
Years Ended December 31,
2018
2017
% Change
2018
2017
% Change
2018
2017
% Change
Daily Averages of Indices
Averages of Month-End Indices
Year-End Indices
2,746
1,965
1,093
NA
NA
2,449
1,886
1,028
NA
NA
12%
4
6
NA
NA
2,738
1,957
1,090
1,404
NA
2,465
1,900
1,036
1,352
NA
11%
3
5
4
NA
2,507
1,720
966
1,380
479
2,674
2,051
1,158
1,389
485
(6)%
(16)
(17)
(1)
(1)
(1) The index names listed in the table are service marks of their respective owners.
NA Not applicable
Client Activity and Asset Flows
Client activity and asset flows are impacted by the number of transactions we execute on behalf of our clients,
including FX settlements, equity and derivative trades and wire transfer activity, as well as actions by our clients to
change the asset class in which their assets are invested based on their risk acceptance tolerance. Industry trends,
such as client redemptions out of hedge funds, can also impact our servicing fee revenues.
Over the past five years, including the year ended December 31, 2018, we estimate that client activity and asset
flows, together, impacted our servicing fee revenues by approximately (1%) to 2% annually and approximately 1% in
2018. See Table 4: Industry Asset Flows for selected asset flow information. While the asset flows presented are
indicative of general market trends, the asset types and classes relevant to individual client portfolios can and do differ,
and our flows may differ from those market trends. In addition, our asset classifications may differ from those industry
classifications presented.
TABLE 4: INDUSTRY ASSET FLOWS
Pricing
(In billions)
North America - ICI Market Data(1)(2)
Long-Term Funds(3)
Money Market
ETF
Total ICI Flows
$
$
Europe - Broadridge Market Data(1)(4)
Long-Term Funds(3)
Money Market
Total Broadridge Flows
$
$
Years Ended December 31,
2018
2017
(349.6) $
119.8
310.9
81.1
$
(52.1) $
12.4
(39.7) $
66.8
81.2
470.8
618.8
713.5
75.7
789.2
(1) Industry data is provided for illustrative purposes only and is not intended to
reflect the Company's activity or its clients' activity.
(2) Source: Investment Company Institute. Investment Company Institute (ICI)
data includes funds not registered under the Investment Company Act of 1940.
Mutual fund data represents estimates of net new cash flow, which is new sales
minus redemptions combined with net exchanges, while ETF data represents
net issuance, which is gross issuance less gross redemptions. Data for mutual
funds that invest primarily in other mutual funds and ETFs that invest primarily
in other ETFs were excluded from the series. ICI classifies mutual funds and
ETFs based on language in the fund prospectus.
(3) The long-term fund flows reported by ICI are composed of North America
Market flows mainly in Equities, Hybrids and Fixed-Income Asset Classes. The
long-term fund flows reported by Broadridge are composed of EMEA Market
flows mainly in Equities, Fixed-Income and Multi Asset Classes.
(4) Source: © Copyright 2018, Broadridge Financial Solutions, Inc. Funds of
funds have been excluded from Broadridge data (to avoid double counting).
Therefore, a market total is the sum of all the investment categories excluding
the three funds of funds categories (in-house, ex-house and hedge). ETFs are
included in Broadridge’s database on mutual funds, but this excludes exchange-
traded commodity products that are not mutual funds.
The industry in which we operate has historically
faced pricing pressure, and our servicing fee revenues
are also affected by such pressures today. On average,
over the past 5 years, including the year ended
December 31, 2018, we estimate that pricing pressure
with respect to existing clients have impacted our
servicing fees by approximately (2%) annually, with the
impact ranging from (1%) to (4%) in any given year and
during the year ended December 31, 2018, the impact
was at the higher end of that range. Pricing concessions
can be a part of a contract renegotiation with a client
including terms that may benefit us, such as extending
the terms of our relationship with the client, expanding
the scope of services that we provide or reducing our
dependency on manual processes
the
standardization of the services we provide. The timing
of the impact of additional revenue generated by such
additional services, and the amount of revenue
generated, may differ from the impact of pricing
concessions on existing services due to the necessary
time required to onboard those new services and the
nature of those services. These same market pressures
also impact the fees we negotiate when we win business
from new clients.
through
State Street Corporation | 61
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
•
A 10% increase or decrease in worldwide fixed-
income valuations, on a weighted average
basis, over the relevant periods for which our
management fees are calculated, would result
in a corresponding change
total
management fee revenues, on average and
over time, of approximately 4%.
in our
Daily averages, month-end averages and year-
end indices demonstrate worldwide changes in equity
and debt markets that affect our management fee
revenue. Year-end indices affect the values of AUM as
of those dates. See Table 3: Daily, Month-End and Year-
End Equity Indices for selected indices.
Additional information about fee revenue is
provided under "Line of Business Information" included
in this Management's Discussion and Analysis.
Net New Business
Over the past five years, including the year ended
December 31, 2018, net new business, which includes
business both won and lost, has affected our servicing
fee revenues by approximately 2% on average with a
range of 1% to 3% annually and approximately 1% in
2018. New business can include: custody; product and
participant
level accounting; daily valuation and
administration; record-keeping; cash management;
trading
foreign exchange, brokerage and other
services; securities
finance; and other services.
Revenues associated with new servicing mandates
may vary based on the breadth of services provided,
the time required to install the assets, and the types of
assets installed.
Management 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, mutual funds and UCITS, 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.
fees
Asset-based management
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 account's performance.
In light of the above, we estimate, using relevant
information as of December 31, 2018 and assuming
that all other factors remain constant, including the
impact of business won and lost and client flows, that:
• A 10% increase or decrease in worldwide
equity valuations, on a weighted average basis,
over the relevant periods for which our
management fees are calculated, would result
in a corresponding change
total
management fee revenues, on average and
over time, of approximately 5%; and
in our
State Street Corporation | 62
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, 2018, 2017 and 2016. NII was $2,671 million for 2018, compared to $2,304 million and $2,084 million for 2017 and
2016, 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, resale 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 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.
See Table 5: Average Balances and Interest Rates - Fully Taxable-Equivalent Basis, for the breakout of NII on a
FTE basis for the years ended December 31, 2018, 2017 and 2016. NII on a FTE basis increased in 2018 compared
to 2017, primarily due to higher U.S. interest rates and a continued focus on disciplined liability pricing.
TABLE 5: AVERAGE BALANCES AND INTEREST RATES - FULLY TAXABLE-EQUIVALENT BASIS(1)
(Dollars in millions; fully taxable-equivalent basis)
Interest-bearing deposits with banks
Securities purchased under resale agreements(2)
Trading account assets
Investment securities
Loans and leases
Other interest-earning assets
2018
Interest
Revenue/
Expense
387
$
335
—
1,927
698
372
Average
Balance
$ 54,328
2,901
1,051
88,070
23,573
15,714
Average total interest-earning assets
$ 185,637
$
3,719
Interest-bearing deposits:
U.S.
Non-U.S.(3)
Total interest-bearing deposits(3)(4)
Securities sold under repurchase agreements
Federal funds purchased
Other short-term borrowings
Long-term debt
Other interest-bearing liabilities
$ 54,953
$
70,623
125,576
2,048
—
1,327
10,686
4,956
Average total interest-bearing liabilities
$ 144,593
$
Interest rate spread
256
107
363
13
—
17
389
209
991
Net interest income-fully taxable-equivalent basis
$
2,728
Net interest margin-fully taxable-equivalent basis
Tax-equivalent adjustment
Net interest income-GAAP basis
(57)
$
2,671
0.47% $ 30,623
$
0.31% $ 30,107
$
132
0.44%
(47)
(0.05)
2016
Interest
Revenue/
Expense
126
$
146
—
Years Ended December 31,
Rate
Average
Balance
0.71% $ 47,514
2017
Interest
Revenue/
Expense
180
$
Rate
Average
Balance
0.38% $ 53,091
11.55
—
2.19
2.96
2.37
2.00
0.15
0.29
0.62
—
1.28
3.64
4.20
0.68
1.32%
1.47%
2,131
1,011
95,779
21,916
22,884
264
12.38
(1)
(0.12)
2,558
921
1,891
519
222
1.97
2.37
0.97
1.61
100,738
1,962
19,013
22,863
384
61
$ 199,184
$
2,679
$ 191,235
$
3,075
91,937
122,560
3,683
—
1,313
11,595
4,607
$ 143,758
$
96
67
163
2
—
10
308
121
604
$
2,471
(167)
$
2,304
0.07
0.13
0.05
—
0.80
2.66
2.63
0.42
1.19%
1.29%
95,551
125,658
4,113
31
1,666
11,401
5,394
$ 148,263
$
85
1
—
7
260
75
428
$
2,251
(167)
$
2,084
Rate
0.24%
5.70
—
1.95
2.02
0.27
1.34
0.07
0.02
—
0.40
2.29
1.39
0.29
1.05%
1.13%
(1) Rates earned/paid on interest-earning assets and interest-bearing liabilities include the impact of hedge activities associated with our asset and liability management activities
where applicable.
(2) Reflects the impact of balance sheet netting under enforceable netting agreements of approximately $36 billion, $31 billion and $30 billion for the years ended December 31, 2018,
2017 and 2016, respectively. Excluding the impact of netting, the average interest rates would be approximately 0.87%, 0.79% and 0.43% for the years ended December 31, 2018,
2017 and 2016, respectively.
(3) Average rate includes the impact of FX swap costs of approximately $106 million, $141 million and $27 million for the years ended December 31, 2018, 2017 and 2016, respectively.
Average rates for total interest-bearing deposits excluding the impact of FX swap costs were 0.20%, 0.02% and 0.04% for the years ended December 31, 2018, 2017 and 2016,
respectively.
(4) Total deposits averaged $161.4 billion for 2018, compared to $163.8 billion and $170.5 billion for 2017 and 2016, respectively.
State Street Corporation | 63
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
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 in this Form 10-K.
total
Average
interest-earning assets were
$185.64 billion in 2018 compared to $191.24 billion in
2017. The decrease is largely driven by lower client
deposits, which includes both interest-bearing and non-
interest-bearing deposits and securities sold under
repurchase agreements.
Interest-bearing deposits with banks averaged
$54.33 billion in 2018 compared to $47.51 billion in
2017. 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 $2.90 billion in 2018 compared to $2.13 billion
in 2017. This reflects the impact of balance sheet netting
under enforceable netting agreements of approximately
$36 billion and $31 billion for 2018 and 2017,
respectively. We maintain an agreement with the Fixed
Income Clearing Corporation (FICC), a clearing
organization that enables us to net all securities sold
those
repurchase agreements against
under
purchased
agreements with
resale
counterparties that are also members of the clearing
organization. The increase in 2018 compared to 2017
is primarily due to the expansion of our program with
the FICC and new client activity.
under
Investment securities averaged $88.07 billion in
2018 compared to $95.78 billion in 2017. The decrease
in average investment securities was primarily driven
by our investment repositioning strategy to prioritize
capital efficient client lending while managing OCI
sensitivity. We sold approximately $26 billion of
securities, primarily non-HQLA, during 2018, with a
significant portion of the proceeds being reinvested in
HQLA, such as MBS and interest-bearing deposits with
banks.
Loans and leases averaged $23.57 billion in 2018
compared to $21.92 billion in 2017. The increase in
average loans and leases was primarily driven by higher
levels of mutual fund lending and commercial real estate
loans, as part of our effort to expand our commercial
and real estate loan program. Loans and leases also
includes U.S. and non-U.S. overdrafts, which provide
liquidity to clients in support of investment activities.
Average other interest-earning assets, largely
associated with our enhanced custody business,
decreased to $15.71 billion in 2018 from $22.88 billion
in 2017, primarily driven by a reduction in the level of
cash collateral posted. Enhanced custody 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 increased to $125.58 billion in 2018
from $122.56 billion in 2017. The increase was primarily
driven by a gradual shift from non-interest-bearing
deposits to 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, largely
associated with our tax-exempt investment program,
increased to $1.33 billion in 2018 from $1.31 billion in
2017.
Average long-term debt was $10.69 billion in 2018
compared to $11.60 billion in 2017. These amounts
reflect issuances and maturities of senior debt during
the respective periods, including the issuance of $1.0
billion of senior debt in December 2018.
Average other interest-bearing liabilities were
$4.96 billion in 2018 compared to $4.61 billion in 2017.
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 deposits
and funding sources; central bank actions; balance
sheet management activities; changes in the level and
slope of U.S. and non-U.S. interest rates; revised or
proposed regulatory capital or liquidity standards, or
interpretations of those standards; the yields earned on
securities purchased compared to the yields earned on
securities sold or matured and changes in the type and
amount of credit or other loans we extend.
Based on market conditions and other factors,
including regulatory standards, we continue to reinvest
the majority of the proceeds from pay-downs and
maturities of investment securities in highly-rated U.S.
and non-U.S. securities, such as U.S. Treasury and
agency securities, sovereign debt securities and federal
agency MBS. The pace at which we 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 impact
our reinvestment program and future levels of NII and
NIM.
State Street Corporation | 64
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Provision for Loan Losses
We recorded a provision for loan losses of $15
million in 2018 compared to $2 million and $10 million
in 2017 and 2016, respectively. The provision increased
in 2018 compared to 2017, primarily due to a higher
volume of loans to non-investment grade borrowers
composed of senior secured loans that 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 in this Form 10-K.
Expenses
Table 6: Expenses, provides the breakout of
expenses for the years ended December 31, 2018,
2017 and 2016.
TABLE 6: EXPENSES
Years Ended December 31,
(Dollars in millions)
2018
2017
2016
%
Change
2018
vs.
2017
%
Change
2017
vs.
2016
$ 4,780
$ 4,394
$ 4,353
9%
1%
Compensation and
employee benefits(1)
Information systems
and communications
Transaction
processing services(2)
Occupancy
Acquisition costs
Restructuring
charges, net
Amortization of other
intangible assets(1)
Other:
Professional
services
Regulatory fees
and assessments
Other(2)
Total other(2)
Total expenses(1) (2)
1,324
1,167
1,105
938
500
31
(7)
226
357
87
732
1,176
838
461
21
245
214
340
106
483
929
800
440
69
140
207
379
82
502
963
$ 8,968
$ 8,269
$ 8,077
Number of employees
at year-end
40,142
36,643
33,783
14
12
9
48
nm
6
5
(18)
52
27
9
10
6
5
5
(70)
75
3
(10)
29
(4)
(4)
2
8
(1) Charles River Development contributed approximately $57 million in total expenses for
the fourth quarter of 2018, including approximately $28 million in compensation and
employee benefits, $18 million in amortization of other intangible assets and $11 million in
other expense lines.
(2) The new revenue recognition standard contributed approximately $272 million in total
expenses for 2018, compared to 2017, including approximately $183 million in other
expenses, $59 million in transaction processing and $30 million across other expense line
items.
nm Not meaningful
Compensation and employee benefits expenses
increased 9% in 2018 compared to 2017, primarily due
to repositioning charges of $259 million in 2018, or two-
thirds of the 9% increase, as described below, as well
as annual merit increases, higher investments to
support new business and approximately $28 million
from Charles River Development, partially offset by net
Beacon savings and
lower performance based
incentive compensation.
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 net 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.
Headcount increased 10% in 2018 compared to
2017, primarily driven by growth in our low cost locations
and our acquisition of Charles River Development.
Headcount in high cost locations fell in 2018 compared
to 2017, primarily due to reductions from Beacon,
partially offset by increases resulting from the Charles
River Development acquisition.
Information
communications
systems and
expenses increased 14% in 2018 compared to 2017,
and 6% in 2017 compared to 2016. Both increases were
primarily
infrastructure
enhancements as well as additional investments to
support growth, regulatory initiatives and Beacon-
related investments.
technology
related
to
Transaction processing services expenses
increased 12% in 2018 compared to 2017, reflecting
the adoption of the new revenue recognition standard
and higher client volumes. Transaction processing
services expenses increased 5% in 2017 compared to
2016, primarily related to higher client volumes.
Occupancy expenses increased 9% in 2018
compared to 2017, primarily due to repositioning
charges of approximately $41 million in 2018, partially
offset by net Beacon savings. Occupancy expenses
increased 5% in 2017 compared to 2016, primarily due
to the GEAM acquisition and higher investments to
support new business.
Amortization of other intangible assets increased
6% in 2018 compared to 2017, primarily due to
contributions from Charles River Development of
approximately $18 million and accelerated amortization
associated with a business exit of approximately $16
million. Amortization of other
intangible assets
increased 3% in 2017 compared to 2016, primarily due
to GEAM intangible asset amortization.
increased 27%
Other expenses
in 2018,
compared to 2017, reflecting the adoption of the new
revenue
recognition standard which contributed
approximately $183 million as well as higher legal and
related expenses, partially offset by net Beacon
savings. Other expenses decreased 4% in 2017
State Street Corporation | 65
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
compared to 2016, primarily due to lower professional
services costs.
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, technology and systems, as
well as significant additional implementation and related
costs to enhance our regulatory compliance programs.
Regulatory compliance requirements are anticipated to
remain at least at the elevated levels we have
experienced over the past several years.
Acquisition Costs
We recorded approximately $31 million of
acquisition costs in 2018 related to our acquisition of
Charles River Development on October 1, 2018. In
2017, we recorded approximately $21 million of
acquisition costs primarily related to our acquisition of
the GEAM business on July 1, 2016. As we integrate
Charles River Development into our business, we
expect to incur a total of approximately $200 million,
including the $31 million in 2018, of acquisition costs,
including merger and integration costs, through 2021.
For further information on our acquisition of Charles
River Development, refer to Note 1 to the consolidated
financial statements in this Form 10-K.
Restructuring and Repositioning Charges
Repositioning Charges
In 2018, we initiated a new expense program to
accelerate efforts to become a higher-performing
organization and help navigate challenging market and
industry conditions. Through
increased resource
discipline, process re-engineering and automation, we
expect to realize $350 million in gross expense savings
in 2019, consisting primarily of compensation and
benefits expenses savings. As part of that program,
expenses for 2018 included a repositioning charge of
$300 million, including $259 million of compensation
and employee benefits and $41 million of occupancy
costs.
Beacon
In aggregate, we have
In 2018, we released $7 million of restructuring
accruals related to Beacon. In 2017, we recorded
restructuring charges of $245 million primarily related
recorded
to Beacon.
restructuring charges of approximately $380 million
related to Beacon, including $293 million in severance
costs and $87 million in real estate actions, information
technology application
rationalization and other
restructuring.
The following table presents aggregate activity for
the periods indicated.
TABLE 7: RESTRUCTURING AND REPOSITIONING
CHARGES
(In millions)
Accrual Balance at
December 31, 2015
Accruals for Business
Operations and Information
Technology
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
Accruals for Beacon
Accruals for Repositioning
Charges
Payments and Other
Adjustments
Accrual Balance at
December 31, 2018
Employee
Related
Costs
Real
Estate
Actions
Asset
and Other
Write-offs
Total
$
9
$
11
$
3
$
23
(2)
94
(64)
37
186
(57)
166
(7)
259
—
18
(12)
17
32
(17)
32
—
41
—
30
(2)
142
(31)
(107)
2
27
56
245
(26)
(100)
3
—
—
201
(7)
300
(115)
(36)
(2)
(153)
$
303
$
37
$
1
$
341
Income Tax Expense
Income tax expense (benefit) was $400 million in
2018, compared to $722 million and $(22) million in
2017 and 2016, respectively. Our effective tax rate for
2018 was 13.3%, compared to 24.9% and (1.0)% in
2017 and 2016, respectively. The 2018 income tax
expense included an additional deferred tax benefit of
$32 million related to adjustments from the TCJA
provisional estimate recorded in 2017. The 2017
income tax expense included a one-time estimated tax
expense of $250 million for the provisional impact of the
enactment of the TCJA. 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
tax
expense, including unrecognized tax benefits, and tax
contingencies are provided in Notes 13 and 22 to the
consolidated financial statements in this Form 10-K.
income
State Street Corporation | 66
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
Investment Servicing and
Management, which are defined based on products and
services provided. The results of operations for these
lines of business are not necessarily comparable with
those of other companies, including companies in the
financial services industry.
for
Investment Servicing provides services
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,
trading services; securities
brokerage and other
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. New products and services
from our acquisition of Charles River
resulting
Development on October 1, 2018 include: portfolio
modeling and construction; trade order management;
investment
risk and compliance; and wealth
management solutions.
Investment Management, through State Street
Global Advisors, provides a broad range of investment
management strategies and products for our clients.
Our investment management strategies and products
span the risk/reward spectrum, including core and
enhanced
indexing, multi-asset strategies, active
quantitative and fundamental active capabilities and
alternative investment strategies. Our AUM is currently
primarily weighted to indexed strategies. In addition, we
provide a breadth of services and solutions, including
environmental, social and governance
investing,
defined benefit and defined contribution and OCIO.
State Street Global Advisors is also a provider of ETFs,
including the SPDR® ETF brand. While management
fees are primarily determined by the values of AUM and
the investment strategies employed, management fees
reflect other factors as well, including the benchmarks
specified in the respective management agreements
related to performance fees.
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 in this Form 10-
K.
TABLE 8: INVESTMENT SERVICING LINE OF BUSINESS
RESULTS
(Dollars in millions,
except where
otherwise noted)
Years Ended December 31,
2018
2017
2016
%
Change
2018
vs.
2017
%
Change
2017
vs.
2016
Servicing fees
$ 5,429
$ 5,365
$ 5,073
1%
6%
Foreign exchange
trading services
Securities finance
Processing fees and
other (1)
Total fee revenue(1)
Net interest income
Gains (losses) related
to investment
securities, net
Total revenue(1)
Provision for loan
losses
1,071
543
294
7,337
2,691
999
606
240
7,210
2,309
1,038
562
119
6,792
2,081
6
(39)
7
10,034
9,480
8,880
7
(10)
23
2
17
nm
6
(4)
8
102
6
11
nm
7
15
2
10
650
(80)
Total expenses
7,034
6,717
6,660
Income before
income tax expense
Pre-tax margin
Average assets
(in billions)
$ 2,985
$ 2,761
$ 2,210
30%
29%
25%
$ 220.2
$ 214.0
$ 225.3
5
8
1
25
(1) Charles River Development contributed approximately $121 million and $57 million in total
revenue and total expenses, respectively, for the fourth quarter of 2018, including
approximately $116 million in processing fees and other and $5 million across other revenue
lines, and expenses contributed approximately $28 million in compensation and employee
benefits, $18 million in amortization of other intangible assets and $11 million in other expense
lines.
nm Not meaningful
Servicing Fees
Servicing fees increased 1% in 2018 compared to
2017, primarily due to market appreciation and net new
business,
industry
largely offset by challenging
conditions, including fee pressure.
Servicing fees 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. Servicing fees in 2016 included a revenue
reduction of $48 million from reimbursements related
to the manner in which we invoiced certain expenses
to our clients.
Servicing fees generated outside the U.S. were
approximately 47% of total servicing fees in 2018
compared to approximately 45% and 42% in 2017 and
2016, respectively.
State Street Corporation | 67
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
TABLE 9: ASSETS UNDER CUSTODY AND/OR ADMINISTRATION BY PRODUCT
(In billions)
Collective funds
Insurance and other products
Mutual funds
Pension products
Total
As of December 31,
2018
2017
2016
8,999
$
9,707
$
8,220
7,912
6,489
9,105
7,603
6,704
7,501
8,845
6,841
5,584
31,620
$
33,119
$
28,771
$
$
% Change
2018 vs. 2017
% Change
2017 vs. 2016
(7)
%
(10)
4
(3)
(5)
29
%
3
11
20
15
TABLE 10: ASSETS UNDER CUSTODY AND/OR ADMINISTRATION BY ASSET CLASS
As of December 31,
2018
2017
2016
% Change
2018 vs. 2017
% Change
2017 vs. 2016
(In billions)
Equities
Fixed-income
Short-term and other investments
Total
$
$
18,041
$
19,214
$
9,758
3,821
10,070
3,835
31,620
$
33,119
$
TABLE 11: ASSETS UNDER CUSTODY AND/OR ADMINISTRATION BY GEOGRAPHY(1)
(In billions)
Americas
Europe/Middle East/Africa
Asia/Pacific
Total
As of December 31,
2018
2017
2016
$
$
23,203
$
24,418
$
6,699
1,718
7,028
1,673
31,620
$
33,119
$
16,189
9,231
3,351
28,771
21,544
5,734
1,493
28,771
(6)%
(3)
—
(5)
19%
9
14
15
% Change
2018 vs. 2017
% Change
2017 vs. 2016
(5)%
(5)
3
(5)
13%
23
12
15
(1) Geographic mix is generally based on the domicile of the entity servicing the funds and is not necessarily representative of the underlying asset mix.
Asset servicing mandates newly announced in
2018 totaled approximately $1.9 trillion, which includes
a small number of large client mandates announced in
the first quarter of 2018. Servicing assets remaining to
be installed in future periods totaled approximately $385
billion as of December 31, 2018, which will be reflected
in AUC/A in future periods after installation and will
generate servicing fee revenue in subsequent periods.
The full revenue impact of such mandates will be
realized over several quarters as the assets are
installed and additional services are added over that
period.
New asset servicing mandates and servicing
assets remaining to be installed in future periods
exclude certain new business which has been
contracted, but for which the client has not yet provided
permission to publicly disclose and the expected
installation date extends beyond one quarter. These
excluded assets, which from time to time may be
significant, will be included in new asset servicing
mandates and reflected in servicing assets remaining
to be installed in the period in which the client provides
its permission. Servicing mandates and servicing
assets remaining to be installed in future periods are
presented on a gross basis and therefore also do not
include the impact of clients who have notified us during
the period of their intent to terminate or reduce their
relationship with us, which may from time to time be
significant.
With respect to these new servicing mandates,
once installed we may 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. Revenues associated
with new servicing mandates may vary based on the
breadth of services provided and the timing of
installation, and the types of assets.
For additional information about the impact of
worldwide equity and fixed-income valuations on our
fee revenue, as well as other key drivers of our servicing
fee revenue, refer to "Fee Revenue" in "Consolidated
Results of Operations" included in this Management's
Discussion and Analysis.
As a result of a decision to diversify providers, one
of our large clients has moved a portion of its assets,
largely common trust funds, to another service provider.
We remain a significant service provider to this client.
The transition, which began in 2018 and is largely
complete, represents approximately $1 trillion in assets
with respect to which we no longer derive revenue post-
transition.
Foreign Exchange Trading Services
Foreign exchange trading services revenue, as
presented in Table 8: Investment Servicing Line of
Business Results, increased 7% in 2018 compared to
State Street Corporation | 68
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
trading services
2017, primarily due to higher FX client volumes and
is
volatility. Foreign exchange
composed of revenue generated by FX trading, as well
as revenue generated by brokerage and other trading
services. FX trading and brokerage and other trading
services represented approximately 60% and 40%,
respectively, of our total foreign exchange trading
services revenue in both 2018 and 2017.
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
funds
serviced by third party custodians or prime
brokers, as well as those funds under custody
with us.
transactions
include
for
•
Indirect FX trading: Represent FX transactions
with clients or their investment managers
routed to our FX desk through our asset-
servicing operation, and to all of which, 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.
Our clients that utilize indirect FX trading can, in
addition to executing their FX transactions through
dealers not affiliated with us, transition from indirect FX
trading to either direct sales and trading execution,
including our “Street FX” service, or to one of our
electronic trading platforms. Street FX, in which we
continue to act as a principal market-maker, enables
our clients to define their FX execution strategy and
automate the FX trade execution process, both for funds
under custody with us as well as those under custody
at another bank.
We also earn foreign exchange trading services
revenue through "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
trading
electronic
These
transactions generate revenue through a “click”
fee.
platforms.
• Other trading, transition management and
brokerage revenue: As our clients look to us 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
via
transactions
commissions charged for trades transacted
during the management of these portfolios.
generate
revenue
Our transition management revenue has been
adversely affected by compliance issues in our U.K.
business during 2010 and 2011, including settlements
with the U.K. 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 continue to adversely affect
our results in future periods.
Securities Finance
Our securities finance business consists of three
components:
(1) an agency lending program for State Street
Global Advisors managed investment funds with a
broad range of investment objectives, which we refer
to as the State Street Global Advisors 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 our 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 from clients who have designated us as
an eligible borrower.
State Street Corporation | 69
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Securities finance revenue, as presented in Table
8: Investment Servicing Line of Business Results,
decreased 10% in 2018 compared to 2017, primarily
due to certain balance sheet repositioning efforts within
our enhanced custody business. Securities finance
revenue 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,
interpretations of those standards, and our own balance
sheet management
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.
activities, may
Processing Fees and Other
Processing fees and other revenue includes
diverse types of fees and revenue, including fees from
our structured products business, fees from software
licensing and maintenance, equity income from our joint
venture investments, gains and losses on sales of other
assets and amortization of our
tax-advantaged
investments.
Processing fees and other revenue, presented in
Table 8: Investment Servicing Line of Business Results,
increased 23% in 2018 compared to 2017, and reflects
approximately $116 million
from Charles River
Development in 2018.
Processing fees and other revenue increased
102% in 2017 compared to 2016, primarily due to pre-
tax gains in 2017 from the disposition of certain joint
venture interests and the sale of an equity trading
platform.
Expenses
Total expenses for Investment Servicing increased
5% in 2018 compared to 2017, primarily due to higher
technology costs, higher investments to support new
business, annual merit increases and $57 million of
expenses from Charles River Development, partially
offset by net Beacon savings and lower performance
based incentive compensation.
"Expenses"
Additional information about expenses is provided
under
"Consolidated Results of
Operations" included in this Management's Discussion
and Analysis.
in
Investment Management
TABLE 12: INVESTMENT MANAGEMENT LINE OF BUSINESS
RESULTS
(Dollars in millions,
except where
otherwise noted)
Management fees(1)
Foreign exchange
trading services(1)(2)
Processing fees and
other
Years Ended December 31,
2018
2017
2016
%
Change
2018
vs.
2017
%
Change
2017
vs.
2016
$ 1,851
$ 1,616
$1,292
15%
25%
130
(5)
72
7
61
81
18
(29)
(171)
(124)
Total fee revenue
1,976
1,695
1,324
Net interest income
(20)
(5)
Total revenue
Total expenses(1)
1,956
1,544
1,690
1,286
3
1,327
1,218
Income before
income tax expense
Pre-tax margin
Average assets
(in billions)
$
412
$
404
$ 109
21%
24%
8%
$
3.2
$
5.4
$
4.4
17
nm
16
20
2
28
nm
27
6
271
(1) The new revenue recognition standard contributed approximately $248 million in
Investment Management total revenue, including approximately $190 million in
management fees and $58 million in foreign exchange trading services, and $248
million in Investment Management total expenses for 2018 compared to 2017.
(2) Includes revenues from distributing and marketing activities for US mutual funds
and ETFs associated with State Street Global Advisors.
nm Not meaningful
Management Fees
Management fees increased 15%, or $235
million, in 2018 compared to 2017, reflecting higher
average global equity markets during 2018. The new
contributed
revenue
fee
approximately $190 million
revenue in 2018 compared to 2017.
to management
recognition
standard
fees
Management
increased 25%
in 2017
compared to 2016, primarily due to the full year of the
acquired GEAM business in 2017 compared to a half
year in 2016, higher global equity markets and higher
revenue yielding ETF inflows.
Management fees generated outside the U.S.
were approximately 27% of total management fees in
2018, compared to approximately 28% and 32% in 2017
and 2016, respectively.
State Street Corporation | 70
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
TABLE 13: ASSETS UNDER MANAGEMENT BY ASSET CLASS AND INVESTMENT APPROACH
(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
Total
As of December 31,
2018
2017
2016
% Change
2018 vs. 2017
% Change
2017 vs. 2016
$
80
$
95
$
1,464
1,544
1,650
1,745
81
341
422
287
19
113
132
21
105
126
77
337
414
330
18
129
147
23
123
146
73
1,401
1,474
70
308
378
333
19
107
126
28
129
157
$
2,511
$
2,782
$
2,468
(16)%
(11)
(12)
5
1
2
(13)
6
(12)
(10)
(9)
(15)
(14)
(10)
30%
18
18
10
9
10
(1)
(5)
21
17
(18)
(5)
(7)
13
(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. We are not the investment
manager for the SPDR® Gold Shares ETF and SPDR® Long Dollar Gold Trust ETF, but act as the marketing agent.
TABLE 14: EXCHANGE - TRADED FUNDS BY ASSET CLASS(1)
(In billions)
Alternative Investments(2)
Cash
Equity
Fixed-income
Total Exchange-Traded Funds
As of December 31,
2018
2017
2016
43
$
48
$
9
482
66
2
531
63
600
$
644
$
$
$
% Change
2018 vs. 2017
% Change
2017 vs. 2016
42
2
426
51
521
(10)%
350
(9)
5
(7)
14%
—
25
24
24
(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. We are not the investment
manager for the SPDR® Gold Shares ETF and SPDR® Long Dollar Gold Trust ETF, but act as the marketing agent.
TABLE 15: GEOGRAPHIC MIX OF ASSETS UNDER MANAGEMENT(1)
(In billions)
North America
Europe/Middle East/Africa
Asia/Pacific
Total
As of December 31,
2018
2017
2016
% Change
2018 vs. 2017
% Change
2017 vs. 2016
$
$
1,731
$
1,931
$
421
359
521
330
2,511
$
2,782
$
1,691
482
295
2,468
(10)%
(19)
9
(10)
14%
8
12
13
(1) Geographic mix is based on client location or fund management location.
State Street Corporation | 71
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, 2015
$
1,326
$
312
$
368
$
103
$
136
$
2,245
Long-term institutional flows, net(3)
ETF flows, net
Cash fund flows, net
Total flows, net
Market appreciation
Foreign exchange impact
Total market/foreign exchange impact
Acquisitions and transfers(4)
(57)
37
—
(20)
140
(10)
130
38
(6)
9
—
3
10
(3)
7
56
—
(37)
(37)
—
(2)
(2)
4
14
—
—
14
9
(3)
6
3
(8)
6
—
(2)
14
(2)
12
11
(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 flows, net(3)
ETF flows, net
Cash fund flows, net
Total flows, net
Market appreciation
Foreign exchange impact
Total market/foreign exchange impact
(74)
26
—
(48)
293
26
319
2
10
—
12
15
9
24
—
(8)
(8)
2
3
5
4
—
—
4
12
5
17
(21)
1
—
(20)
3
6
9
(89)
37
(8)
(60)
325
49
374
Balance as of December 31, 2017
$
1,745
$
414
$
330
$
147
$
146
$
2,782
Long-term institutional flows, net(3)
ETF flows, net
Cash fund flows, net
Total flows, net
Market appreciation (depreciation)
Foreign exchange impact
Total market/foreign exchange impact
(45)
(3)
—
(48)
(142)
(11)
(153)
12
7
—
19
(7)
(4)
(11)
—
6
(50)
(44)
3
(2)
1
(3)
—
—
(3)
(10)
(2)
(12)
(2)
(2)
—
(4)
(10)
(6)
(16)
(38)
8
(50)
(80)
(166)
(25)
(191)
Balance as of December 31, 2018
$
1,544
$
422
$
287
$
132
$
126
$
2,511
(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. We are not the investment
manager for the SPDR® Gold Shares ETF and SPDR® Long Dollar Gold Trust ETF, but act 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 $37 billion of new asset management
business which was awarded but not installed as of
December 31, 2018. 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, 2018 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.
Expenses
Total expenses for Investment Management
increased 20% in 2018 compared to 2017, reflecting
the impact from the new revenue recognition standard
to
which contributed approximately $248 million
Investment Management expenses in 2018.
"Expenses"
Additional information about expenses is provided
under
"Consolidated Results of
Operations" included in this Management's Discussion
and Analysis in this Form 10-K.
in
State Street Corporation | 72
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
FINANCIAL CONDITION
TABLE 17: AVERAGE STATEMENT OF CONDITION(1)
Investment Servicing and
The structure of our consolidated statement of
condition is primarily driven by the liabilities generated
by our
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-
repurchase
deposits;
bearing
agreements, which generally serve as short-term
investment alternatives for our clients.
demand
and
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.
(In millions)
Assets:
Interest-bearing deposits with
banks
Securities purchased under
resale agreements
Trading account assets
Investment securities
Loans and leases
Other interest-earning assets
Average total interest-earning
assets
Cash and due from banks
Other non-interest-earning assets
Years Ended December 31,
2018
2017
2016
Average
Balance
Average
Balance
Average
Balance
$
54,328
$
47,514
$
53,091
2,901
1,051
88,070
23,573
15,714
2,131
1,011
95,779
21,916
22,884
2,558
921
100,738
19,013
22,863
185,637
191,235
199,184
3,178
34,570
3,097
25,118
3,157
27,386
Average total assets
$ 223,385
$ 219,450
$ 229,727
Liabilities and shareholders’ equity:
Interest-bearing deposits:
U.S.
Non-U.S.
$
54,953
$
30,623
$
30,107
70,623
91,937
95,551
Total interest-bearing deposits(2)
125,576
122,560
125,658
Securities sold under repurchase
agreements
Federal funds purchased
Other short-term borrowings
Long-term debt
Other interest-bearing liabilities
Average total interest-bearing
liabilities
Non-interest-bearing deposits(2)
Other non-interest-bearing
liabilities
Preferred shareholders’ equity
Common shareholders’ equity
Average total liabilities and
shareholders’ equity
2,048
—
1,327
10,686
4,956
3,683
—
1,313
11,595
4,607
4,113
31
1,666
11,401
5,394
144,593
143,758
148,263
35,832
41,248
44,827
19,804
3,327
19,829
12,379
3,197
18,868
14,742
3,060
18,835
$ 223,385
$ 219,450
$ 229,727
(1) Additional information about our average statement of condition, primarily
our interest-earning assets and interest-bearing liabilities, is provided in "Net
Interest Income" included in this Management's Discussion and Analysis.
(2) Total deposits averaged $161.4 billion for 2018, compared to $163.8 billion
and $170.5 billion for 2017 and 2016, respectively.
State Street Corporation | 73
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,
2018
2017
2016
Direct obligations
$ 1,039
$
223
$ 4,263
Mortgage-backed securities
15,968
10,872
13,257
Total U.S. Treasury and federal agencies
17,007
11,095
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
541
583
—
593
1,717
1,682
1,574
3,358
1,542
—
1,447
6,347
6,695
2,947
12,793
10,721
6,602
6,108
5,596
1,351
272
905
8,124
6,535
2,516
5,836
5,613
Total non-U.S. debt securities
22,651
26,471
20,500
State and political subdivisions
Collateralized mortgage obligations
Other U.S. debt securities
U.S. equity securities(2)
Non-U.S. equity securities(2)
U.S. money-market mutual funds(2)
Non-U.S. money-market mutual funds(2)
1,918
197
1,658
—
—
—
—
9,151
1,054
2,560
46
—
397
—
10,322
2,593
2,469
42
3
409
16
Total
$ 45,148
$ 57,121
$ 61,998
Held-to-maturity(3):
U.S. Treasury and federal agencies:
Direct obligations
$ 14,794
$ 17,028
$ 17,527
Mortgage-backed securities
21,647
16,651
10,334
Total U.S. Treasury and federal agencies
36,441
33,679
27,861
Asset-backed securities:
Student loans(1)
Credit cards
Other
3,191
3,047
2,883
193
1
798
1
897
35
Total asset-backed securities
3,385
3,846
3,815
Non-U.S. debt securities:
Mortgage-backed securities
Asset-backed securities
Government securities
Other
Total non-U.S. debt securities
Collateralized mortgage obligations
638
223
358
46
1,265
823
939
263
474
48
1,724
1,209
1,150
531
286
113
2,080
1,413
Total
$ 41,914
$ 40,458
$ 35,169
(1) Primarily comprised 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 described in Note 1 to the consolidated financial statements in this Form
10-K, upon adoption of ASU 2016-01 in 2018, we reclassified money-market
funds and equity securities classified as AFS to held at fair value through profit
and loss in other assets.
(3) Includes securities at amortized cost or fair value on the date of transfer from
AFS.
Additional
investment
securities portfolio is provided in Note 3 to the
consolidated financial statements in this Form 10-K.
information about our
We manage our investment securities portfolio to
align with the interest rate and duration characteristics
of our client liabilities and in the context of the overall
structure of our consolidated statement of condition, in
consideration of the global interest rate environment.
We consider a well-diversified, high-credit quality
investment securities portfolio to be an important
element in the management of our consolidated
statement of condition.
Average duration of our investment securities
portfolio increased to 3.1 years as of December 31,
2018, compared to 2.7 years as of December 31, 2017.
The increase in securities duration reflects a shift
towards a strategy where the investment portfolio will
target less credit exposure and more HQLA interest rate
exposure.
In 2018, $1.2 billion of HTM securities, primarily
consisting of MBS and CMBS, were transferred to AFS
at book value and sold at a pre-tax loss of approximately
$36 million, due to our election to make a one-time
transfer of securities in connection with the adoption of
ASU 2017-12. For additional information on this new
standard, refer to Note 1 to the consolidated financial
statements in this Form 10-K.
In 2018, we sold approximately $26 billion of non-
HQLA securities, primarily ABS and municipal bonds,
resulting in a net pre-tax gain of approximately $9
million. A significant portion of the sales have been
reinvested in HQLA and such investments will continue
to occur over time with a portion likely to either be held
in cash or cash equivalents or used to fund client lending
activities.
In 2017, we sold $12.2 billion of AFS securities,
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 2018 and 2017, $2.1 billion and $496 million,
respectively, of agency MBS, previously classified as
AFS, were transferred to HTM. This transfer reflects our
intent to hold these securities until their maturity. These
securities were transferred at fair value, which included
a net unrealized loss of $53 million and $2.8 million as
of December 31, 2018 and 2017, 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 both December
31, 2018 and 2017.
State Street Corporation | 74
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
TABLE 19: INVESTMENT PORTFOLIO BY EXTERNAL
CREDIT RATING
December 31, 2018
December 31, 2017
AAA(1)
AA
A
BBB
Below BBB
76%
14
5
5
—
100%
74%
16
6
4
—
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 and also
includes Agency MBS securities which are not explicitly rated but which have
an explicit or assumed guarantee from the U.S. government.
As of December 31, 2018 and 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, 2018
December 31, 2017
US Agency MBS
Foreign Sovereign
US Treasuries
ABS
Other Credit
40%
19
18
11
12
100%
26%
12
17
22
23
100%
Non-U.S. Debt Securities
Approximately 27% of the aggregate carrying
value of our investment securities portfolio was non-
U.S. debt securities as of December 31, 2018,
compared to approximately 29% as of December 31,
2017.
TABLE 21: NON-U.S. DEBT SECURITIES
As of December 31,
2018
2017
$
2,847
$
(In millions)
Available-for-sale:
Australia
United Kingdom
Canada
France
Germany
Spain
Japan
Austria
Ireland
Netherlands
European(1)
Italy
Belgium
Finland
Hong Kong
Asian(1)
Sweden
Norway
Other(2)
Total
Held-to-maturity:
United Kingdom
Singapore
Netherlands
Australia
Germany
Spain
Other(3)
Total
$
$
$
2,580
2,185
1,875
1,547
1,504
1,352
1,312
1,301
1,116
1,087
1,010
952
789
458
338
186
94
118
22,651
363
242
187
158
115
92
108
$
$
4,717
5,721
3,066
2,500
529
1,413
1,319
234
787
1,175
—
1,645
1,193
299
666
—
538
514
155
26,471
410
353
372
235
127
104
123
1,265
$
1,724
(1) Consists entirely of supranational bonds.
(2) Included approximately $78 million as of December 31, 2018, related to
supranational bonds. Included approximately $37 million as of December 31,
2017, related to Portugal, which was related to MBS and auto loans.
(3) Included approximately $61 million and $75 million as of December 31, 2018
and December 31, 2017, respectively, related to Italy and Portugal, all of which
were related to MBS.
Approximately 74% and 80% of the aggregate
carrying value of these non-U.S. debt securities was
rated “AAA” or “AA” as of December 31, 2018 and
December 31, 2017, 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, 2018 and
December 31, 2017, approximately 31% and 61%,
respectively, of the aggregate carrying value of these
non-U.S. debt securities was floating-rate.
State Street Corporation | 75
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
As of December 31, 2018, our non-U.S. debt
securities had an average market-to-book ratio of
100.1%, and an aggregate pre-tax net unrealized gain
of approximately $37 million, composed of gross
unrealized gains of $118 million and gross unrealized
losses of $81 million. These unrealized amounts
included:
•
•
a pre-tax net unrealized loss of $32 million,
composed of gross unrealized gains of $40
million and gross unrealized losses of $72
million, associated with non-U.S. debt
securities AFS; and
a pre-tax net unrealized gain of $69 million,
composed of gross unrealized gains of $78
million and gross unrealized losses of $9
million, associated with non-U.S. debt
securities HTM.
As of December 31, 2018, the underlying collateral
for non-U.S. MBS and ABS primarily included U.K.,
Australian, Italian and Dutch mortgages as well as U.K.
and Eurozone consumer ABS. The securities listed
“Canada” were composed of Canadian
under
government securities and corporate debt and covered
bonds. The securities listed under “France” were
composed of sovereign bonds and corporate debt and
covered bonds. The securities listed under “Japan”
were substantially composed of Japanese government
securities.
Municipal Obligations
We carried approximately $1.92 billion of
municipal securities classified as state and political
subdivisions in our investment securities portfolio as of
December 31, 2018 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 $9.43 billion of credit and liquidity
facilities to municipal issuers.
TABLE 22: STATE AND MUNICIPAL OBLIGORS(1)
(Dollars in
millions)
December 31, 2018
State of Issuer:
Texas
California
New York
Massachusetts
Total
December 31, 2017
State of Issuer:
Texas
California
New York
Massachusetts
Washington
Total
Total
Municipal
Securities
Credit and
Liquidity
Facilities(2)
Total
% of Total
Municipal
Exposure
$
$
$
$
315
108
231
467
1,121
1,713
415
742
859
623
4,352
$
$
$
$
2,467
1,693
1,518
978
6,656
$ 2,782
1,801
1,749
1,445
$ 7,777
1,622
2,237
1,288
991
366
6,504
$ 3,335
2,652
2,030
1,850
989
$ 10,856
25%
16
15
13
18%
14
11
10
5
(1) Represented 5% or more of our aggregate municipal credit exposure of
approximately $11.35 billion and $18.47 billion across our businesses as of
December 31, 2018 and December 31, 2017, respectively.
(2) Includes municipal loans which are also presented within Table 24: U.S. and
Non-U.S. Loans and Leases.
Our aggregate municipal securities exposure
presented in Table 22: State and Municipal Obligors,
was
concentrated primarily with highly-rated
counterparties, with approximately 81% of the obligors
rated “AAA” or “AA” as of December 31, 2018. As of
that date, approximately 25% and 75% 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
to our
information with
assessment of OTTI of our municipal securities is
provided in Note 3 to the consolidated financial
statements in this Form 10-K.
respect
State Street Corporation | 76
—%
3.97
5.14
—
3.37
3.07
0.57
—
3.64
5.68
3.53
—
2.58%
3.44
3.19
—
3.51
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
TABLE 23: CONTRACTUAL MATURITIES AND YIELDS
As of December 31, 2018
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
Collateralized loan obligations
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
224
101
325
57
199
—
256
139
136
3,439
1,071
4,785
235
2
141
—% $
3.38
3.37
1.67
—
1.59
0.36
0.86
1.03
5.13
3.51
3.64
815
802
1,617
164
294
402
860
769
698
6,409
4,575
12,451
776
—
1,219
2.74% $
—
—% $
—
3.53
3.27
1.96
3.42
0.85
0.85
1.13
1.32
4.46
—
2.64
1,884
1,884
250
90
171
511
176
581
2,945
937
4,639
446
—
298
3.24
3.14
3.21
1.09
2.59
0.68
2.85
1.07
4.63
—
2.44
13,181
13,181
70
—
20
90
598
159
—
19
776
461
195
—
Total
$
5,744
$
16,923
$
7,778
$
14,703
Held-to-maturity(1):
U.S. Treasury and federal agencies:
Direct obligations
$
4,002
1.91% $
10,737
2.27% $
12
2.66% $
43
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
33
4,035
7
58
—
65
160
96
243
46
545
1
2.50
127
2.60
10,864
2.65
2.72
—
0.18
1.23
4.14
—
2.91
291
135
—
426
42
127
115
—
284
318
3.02
2.85
—
3.03
1.23
0.25
—
3.22
1,697
1,709
267
—
—
267
7
—
—
—
7
15
3.05
3.02
—
—
19,790
19,833
2,626
—
1
2,627
2.99
429
1.42
—
—
—
3.00
—
—
—
429
489
—
—
—
3.36
Total
$
4,646
$
11,892
$
1,998
$
23,378
(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 (21% as of December 31, 2018).
State Street Corporation | 77
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Impairment
Impairment exists when the fair value of an
individual security is below its amortized cost basis.
Impairment of a security is further assessed to
determine whether such impairment is other-than-
temporary. 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).
reviews of
We conduct periodic
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.
Additional information with respect to OTTI, net
impairment losses and gross unrealized losses is
provided in Note 3 to the consolidated financial
statements 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.
Loans and Leases
TABLE 24: U.S. AND NON- U.S. LOANS AND LEASES
(In millions)
Domestic:
Commercial and
financial
As of December 31,
2018
2017
2016
2015
2014
$ 19,479
$ 18,696
$ 16,412
$ 15,899
$ 14,515
Commercial real estate
Lease financing(1)
874
—
98
267
27
338
28
337
28
335
Total domestic
20,353
19,061
16,777
16,264
14,878
Non-U.S.:
Commercial and
financial
Lease financing(1)
Total non-U.S.
5,436
—
5,436
3,837
396
4,233
2,476
504
2,980
1,957
578
2,535
2,653
668
3,321
Total loans and leases
$ 25,789
$ 23,294
$ 19,757
$ 18,799
$ 18,199
Average loans and
leases
$ 23,573
$ 21,916
$ 19,013
$ 17,948
$ 15,912
(1) We wound down our lease financing business in 2018.
Total loans and leases as of December 31, 2018
increased compared to December 31, 2017, primarily
due to the expansion of the commercial real estate loan
portfolio and increase in non-U.S. commercial and
financial loans.
loans
As of December 31, 2018 and December 31, 2017,
our
totaled
investment
in senior secured
approximately $4.4 billion and $3.5 billion, respectively.
In addition, we had binding unfunded commitments as
of December 31, 2018 and December 31, 2017 of $238
million and $279 million, respectively, to participate in
such syndications. Additional information about these
unfunded commitments is provided in Note 12 to the
consolidated financial statements in this Form 10-K.
These senior secured loans, which are primarily
rated “speculative” under our
internal risk-rating
framework (refer to Note 4 to the consolidated financial
statements in this Form 10-K), are externally rated
“BBB,” “BB” or “B,” with approximately 90% and 89%
of the loans rated “BB” or “B” as of December 31, 2018
and December 31, 2017, respectively. Our investment
strategy involves generally limiting our investment to
larger, more liquid credits underwritten by major global
financial
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
in our portfolio.
institutions, applying our
Loans to municipalities included in the commercial
and financial segment were $0.9 billion and $2.1 billion
as of December 31, 2018 and December 31, 2017,
respectively.
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 in this Form 10-K.
No
loans were modified
troubled debt
restructurings for the years ended December 31, 2018
and 2017.
in
TABLE 25: CONTRACTUAL MATURITIES FOR LOANS AND
LEASES
(In millions)
Domestic:
As of December 31, 2018
Under 1
Year
1 to 5
Years
Over 5
Years
Total
Commercial and financial
$ 12,062
$
5,252
$
2,165
$ 19,479
Commercial real estate
Lease financing
Total domestic
Non-U.S.:
—
—
139
—
735
—
874
—
12,062
5,391
2,900
20,353
Commercial and financial
3,253
1,637
Lease financing
Total non-U.S.
—
—
3,253
1,637
546
—
546
5,436
—
5,436
Total loans and leases
$ 15,315
$
7,028
$
3,446
$ 25,789
State Street Corporation | 78
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
TABLE 26: CLASSIFICATION OF LOAN AND LEASE
BALANCES DUE AFTER ONE YEAR
(In millions)
As of December 31,
2018
Loans and leases with predetermined interest rates $
Loans and leases with floating or adjustable
interest rates
Total
$
778
9,696
10,474
TABLE 27: ALLOWANCE FOR LOAN AND LEASE LOSSES
Years Ended December 31,
(In millions)
2018
2017
2016
2015
2014
Allowance for loan and lease losses:
Beginning balance $
54
$
53
$
46
$
38
$
Provision for loan
and lease losses(1)
Charge-offs
15
(2)
2
(1)
10
(3)
12
(4)
Ending balance
$
67
$
54
$
53
$
46
$
28
10
—
38
(1) The provision for loan and lease losses is primarily related to commercial and
financial loans.
We recorded a provision for loan losses of $15
million in 2018 compared to $2 million and $10 million
in 2017 and 2016, respectively. The provision increased
in 2018 compared to 2017, primarily due to a higher
volume of loans to non-investment grade borrowers
composed of senior secured loans that we purchased
in connection with our participation in loan syndications
in the non-investment grade lending market. The
charge-offs of $2 million recorded in 2018 were
associated with loan sales of senior secured loans to
non-investment grade institutional borrowers.
As of December 31, 2018 and December 31, 2017,
approximately $60 million and $47 million, respectively,
of our allowance for loan and lease losses was 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.
Cross-Border Outstandings
including
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
advances;
financing,
investment securities; amounts related to foreign
exchange and interest rate contracts; and securities
finance.
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.
short-duration
In addition
independent credit
As market and economic conditions change, the
rating agencies may
major
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 28%, 26% and 28% of our consolidated
total assets as of December 31, 2018, 2017 and 2016,
respectively.
TABLE 28: CROSS-BORDER OUTSTANDINGS(1)
(In millions)
December 31, 2018
Germany
Japan
United Kingdom
Australia
Canada
Ireland
France
Luxembourg
December 31, 2017
Germany
Japan
United Kingdom
Australia
Canada
France
December 31, 2016
United Kingdom
Japan
Germany
Australia
Luxembourg
Canada
Investment
Securities and
Other Assets
Derivatives
and
Securities
on Loan
Total Cross-
Border
Outstandings
$
$
$
$
$
$
20,157
13,985
12,623
4,217
3,010
2,019
2,495
2,033
18,201
15,250
12,051
5,278
4,215
2,684
18,712
17,922
13,812
5,122
3,389
3,179
$
$
$
489
1,084
1,176
1,349
1,507
809
294
710
295
549
1,253
390
707
344
1,761
1,171
484
986
762
781
20,646
15,069
13,799
5,566
4,517
2,828
2,789
2,743
18,496
15,799
13,304
5,668
4,922
3,028
20,473
19,093
14,296
6,108
4,151
3,960
(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 both December 31, 2018 and 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 in France and the Netherlands,
respectively.
State Street Corporation | 79
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
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 "Risk Factors" in this Form
10-K.
function.
risk management
The scope of our business requires that we
balance these risks with a comprehensive and well-
integrated
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 us 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
for an
assessment of risks within a framework for evaluating
opportunities for the prudent use of capital that
appropriately balances risk and return.
internal controls, allows
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 our material risks;
• The establishment of our risk appetite and
limits and policies, and our
associated
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
risk
management practice. Additional information with
respect to our stress testing process and practices is
provided under
this Management's
Discussion and Analysis.
important
“Capital”
in our
tool
in
Disclosures about our management of significant
risks can be found on the following pages in this
Management's Discussion and Analysis.
Form 10-K
Page Number
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
81
84
89
94
97
98
105
106
State Street Corporation | 80
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Governance and Structure
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 and TOPS, 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 us.
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 us in connection with its business
activities. This governance structure is enhanced and
integrated
involvement,
particularly through ERM. The following chart presents
this structure.
through multi-disciplinary
Management Risk Governance Committee Structure
Executive Management Committees:
Management Risk and Capital Committee
(MRAC)
Business Conduct
Risk Committee
(BCRC)
Technology and Operational Risk Committee
(TORC)
Risk Committees:
Asset-Liability
Committee (ALCO)
Credit Risk and
Policy Committee
(CRPC)
Fiduciary Review
Committee
Operational Risk
Committee
Technology Risk
Committee
Trading and Market
Risk Committee
(TMRC)
Basel Oversight
Committee
(BOC)
New Business and
Product Approval
Committee
Global Transitions
Oversight
Committee
Executive
Information Security
Steering Committee
Recovery and
Resolution Planning
Executive Review
Board
Model Risk
Committee
(MRC)
Compliance and Ethics
Committee
CCAR Steering
Committee
State Street Global
Advisors Risk
Committee
Legal Entity Oversight
Committee
Country Risk
Committee
Conduct Standards
Committee
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MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
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
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.
limits and,
reviews
The CRO is responsible for our risk management
globally, leads ERM and has a dual reporting line to our
CEO and
its
responsibilities globally through a three-dimensional
organization structure:
the Board’s RC. ERM manages
•
•
“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.
this
top of
Sitting on
three-dimensional
is a centralized group
organization structure
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 our
business.
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 TOPS.
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, regulatory
and business risks, as well as compliance and
reputational risk and related policies.
In addition, the RC provides oversight of capital
policies and capital planning, 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 in
which executive officers participate and incentive,
retirement, welfare as well as equity plans in which
certain of our other employees participate. In addition,
the ECC oversees the alignment of our incentive
compensation arrangements with our safety and
soundness,
risk
the
management objectives, and
related policies,
arrangements and control processes consistent with
applicable related regulatory rules and guidance.
integration of
including
technology and operational
The TOPS leads and assists in the Board’s
oversight of
risk
management and the role of these risks in executing
our strategy and supporting our global business
requirements. The TOPS reviews strategic initiatives
from a technology and operational risk perspective and
reviews and approves technology-related risk matters.
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;
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MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
• The oversight of our
risk
identification, model risk governance, stress
testing and Recovery and Resolution Plan
programs; and
firm-wide
• 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 CCO 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 Risk Officer.
Risk Committees
The following risk committees, under the oversight
of the respective executive management committees,
have focused responsibilities for oversight of specific
areas of risk management:
Management Risk and Capital Committee
• 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;
• TMRC reviews the effectiveness of, and
approves, the market risk framework at least
annually; it is the senior oversight and decision-
making committee for risk management within
our global markets businesses; the TMRC is
responsible for the formulation of guidelines,
strategies and workflows with respect to the
measurement, monitoring and control of our
trading market risk, and also approves market
risk tolerance limits, collateral and margin
policies and trading authorities; the TMRC
meets regularly to monitor the management of
our trading market risk activities;
related
• BOC provides oversight and governance over
Basel
requirements,
regulatory
assesses compliance with respect to Basel
regulations and approves all material
methodologies and changes, policies and
reporting;
• The Recovery and Resolution Planning
Executive Review Board oversees
the
development of recovery and resolution plans
as required by banking regulators;
• MRC monitors the overall level of model risk
and provides oversight of
the model
governance process pertaining to financial
models, including the validation of key models
and
the ongoing monitoring of model
performance. The MRC may also, as
appropriate, mandate remedial actions and
compensating controls to be applied to models
to address modeling deficiencies as well as
other issues identified;
the stress
• The CCAR Steering Committee provides
primary supervision of
tests
performed in conformity with the Federal
Reserve's CCAR process and the Dodd-Frank
the overall
Act, and
management, review, and approval of all
material assumptions, methodologies, and
results of each stress scenario;
is responsible
for
committee
• The State Street Global Advisors Risk
Committee is the most senior oversight and
decision making
risk
management within State Street Global
Advisors; the committee is responsible for
overseeing the alignment of State Street Global
Advisors' strategy, and risk appetite, as well as
alignment with our corporate-wide strategies
and risk management standards; and
for
• The Country Risk Committee oversees the
identification,
assessment, monitoring,
reporting and mitigation, where necessary, of
country risks.
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MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Business Conduct Risk Committee
• The Fiduciary Review Committee reviews and
assesses
fiduciary risk management
programs of those units in which we serve in a
fiduciary capacity;
the
• 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,
legal
compliance,
and
regulatory
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;
• The Legal Entity Oversight Committee
establishes standards with respect to the
governance of our 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; and
• The Conduct Standards Committee provides
oversight of our enforcement of employee
conduct standards.
Technology and Operational Risk Committee
• 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,
the
including determining
implementation of those programs is designed
to identify, manage and control operational risk
in an effective and consistent manner across
the firm;
that
• The Technology Risk Committee is responsible
for the global oversight, review and monitoring
of operational, legal and regulatory compliance
and reputational risk that may result in a
significant
Information
Technology risk profile or a material financial
loss or reputational impact to global technology
services. The Committee serves as a forum to
provide regular reporting to TORC and escalate
technology risk and control issues to TORC, as
appropriate;
to our
change
the effectiveness of all Information Security
that controls are
Programs
measured and managed, and serves as an
escalation point for cyber-security issues; and
to promote
• The Global Transitions Oversight Committee is
responsible for establishing a framework to
monitor and oversee transitions between and
among our
legal entities against our
resolvability principles, to monitor compliance
with that framework to support optimization of
footprint
our global operating
through
increased consistency,
transparency and
sharing of best practices among our legal
entities, and to serve as a forum for review and
discussion of
internal
impacting
transitions among our legal entities.
issues
Credit Risk Management
Core Policies and Principles
loans and contingent commitments,
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
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 Executive Information Security Steering
Committee provides direction for the Enterprise
Information Security posture and program,
including cyber security protections, provides
enterprise-wide oversight and assessment of
The acceptance of credit risk by us 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
State Street Corporation | 84
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
country
risk profile; the markets served; counterparty, industry
regulatory
and
compliance. These policies and procedures also
implement a number of core principles, which include
the following:
concentrations;
and
• 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;
reviewed. Our
• Credit-approval authorities are assigned to
individuals according to their qualifications,
experience and training, and these authorities
are periodically
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;
risk. Counterparty
• We seek to avoid or limit undue concentrations
(or groups of
of
counterparties),
and
industry,
product-specific concentrations of risk are
subject to frequent review and approval in
accordance with our risk appetite;
country
• We determine
the creditworthiness of
counterparties through a risk assessment,
internal risk-rating
including
methodologies;
the use of
• We seek to 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 our business. 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 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 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
the
oversight, review and approval of the credit risk
guidelines and policies. Credit risk guidelines and
policies are reviewed periodically, but at least annually.
for
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
individual counterparties or groups of
to
counterparties.
CRPC provides periodic updates to MRAC and the
Board's RC.
Credit Ratings
We perform initial and ongoing reviews to exercise
due diligence on
the creditworthiness of our
counterparties when conducting any business with
them or approving any credit limits.
This due diligence process generally includes the
assignment of an internal credit rating, which is
determined by the use of internally developed and
validated methodologies, scorecards and a 15-grade
rating scale. This risk-rating process incorporates the
use of risk-rating tools in conjunction with management
judgment; qualitative and quantitative inputs are
captured in a replicable manner and, following a formal
review and approval process, an 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
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MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
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.
• 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
if businesses are
maintaining appropriate risk levels; and
to determine
• The determination of our regulatory capital
requirements for the AIRB provided in the
Basel framework.
Risk Parameter Estimates
Credit Risk Mitigation
Our internal risk-rating system seeks to promote
a clear and consistent approach to the determination of
appropriate credit risk classifications for our credit
counterparties and exposures, tracking the changes in
these counterparties and
risk associated with
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,
and
securities
repurchase agreements;
placements
finance,
• 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;
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
that
In our
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
trading
incur credit risk.
businesses, this collateral is typically in the form of cash
and highly-rated securities (government securities and
other bonds or equity securities). Credit risks in our non-
trading and securities finance businesses are also often
secured by bonds and equity securities and by other
types of assets. Collateral serves to reduce the risk of
loss inherent in an exposure by improving the prospect
of recovery in the event of a counterparty default.
However, rapidly changing market values of the
collateral we hold, unexpected increases in the credit
exposure to a client or counterparty, reductions in the
value or change in the type of securities held by us, as
well as operational errors or errors in the manner in
which we seek to exercise our rights, may reduce the
risk mitigation effects of collateral or result in other
security interests not being effective to reduce potential
credit exposure. While collateral is often an alternative
source of repayment, it generally does not replace the
requirement within our policies and guidelines for high-
quality underwriting standards. We also may choose to
incur credit exposure without the benefit of collateral or
other risk mitigating credits rights.
Our credit risk guidelines require that the collateral
we accept for risk mitigation purposes is of high quality,
can be reliably valued and can be liquidated if or when
required. Generally, when collateral is of lower quality,
more difficult to value or more challenging to liquidate,
higher discounts to market values are applied for the
purposes of measuring credit risk. For certain less liquid
collateral, longer liquidation periods are assumed when
determining the credit exposure.
All types of collateral are assessed regularly by
ERM, as is the basis on which the collateral is valued.
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MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
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. In the event we become
unable, due to operational constraints, actions by
regulators, changes in accounting principles, law or
regulation (or related interpretations) or other factors,
to net some or all of our offsetting exposures and
payment obligations under those agreements, we
would be required to gross up our assets and liabilities
on our statement of condition and our calculation of
RWA, accordingly. This would result in a potentially
material increase in our regulatory ratios, including
LCR, and present increased credit, liquidity, asset-and-
liability management and operational risks, some of
which could be material.
Guarantees
A guarantee is a financial instrument that results
in credit support being provided by a third party, (i.e.,
the protection provider) to the underlying obligor (the
beneficiary of the provided protection) on account of an
exposure owing by the obligor. The protection provider
may support the underlying exposure either in whole or
in part. Support of this kind may take different forms.
Typical forms of guarantees provided to us include
letters of credit, bankers’
financial guarantees,
acceptances, purchase undertaking agreements
contracts and insurance.
We have established a review process to evaluate
guarantees under the applicable requirements of our
policies and Basel III requirements. Governance for this
evaluation is covered under policies and procedures
that
reviews of documentation,
jurisdictions and credit quality of protection providers.
require
regular
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. We do 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 our business are undertaken by the
Credit Risk group, by individuals to whom credit
authority has been delegated, or by the Credit
Committee.
Credit limits are re-evaluated annually, or more
frequently as needed, and are revised periodically on
prevailing and anticipated market conditions, changes
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MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
in counterparty or country-specific credit ratings and
outlook, changes in our risk appetite for certain
counterparties,
and
enhancements to the measurement of credit utilization.
countries,
sectors
or
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
the
dimensions of counterparty, industry, country and
product-specific risks to facilitate the identification of
concentrations of risk and emerging trends.
is performed along
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
granular
counterparty
underwriting guidelines, are reviewed periodically and
approved by the CRPC.
selection
criteria
and
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
is
largest and
undertaken more frequently, utilizing financial
riskiest counterparties
this
information, market indicators and other
relevant credit and performance measures.
The nature and extent of
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.
list"
We maintain an active "watch
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
the early
identification of counterparties whose creditworthiness
is deteriorating; any counterparty may be placed on the
watch list by ERM at its sole discretion.
facilitate
to
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.
for our watch
report of all watch
The Credit Risk group maintains primary
list processes, and
responsibility
generates a monthly
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 us. Identified actions are documented and monitored.
Controls
the
integrity of our credit
GCR provides a separate level of surveillance and
oversight over
risk
management processes, including the internal risk-
rating system. GCR reviews counterparty credit ratings
for all identified sectors on an ongoing basis. GCR is
subject to oversight by the CRPC, and provides periodic
updates to the Board’s RC.
Specific activities of GCR include the following:
• Separate and objective assessments of our
credit and
to
determine the nature and extent of risk
undertaken by the business units;
counterparty exposures
State Street Corporation | 88
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
• Periodic credit process and credit product
reviews, focusing on and assessing credit
prudent
analysis,
transaction
underwriting
standards, administration and documentation,
risk-rating integrity and relevant trends;
compliance,
and
structure
policy
•
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 in this Form 10-K.
Liquidity Risk Management
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 our liquidity on a global, consolidated
basis. We also manage liquidity on a stand-alone basis
at our Parent Company, as well as at certain branches
and subsidiaries of State Street Bank. State Street Bank
generally has access to markets and funding sources
limited to banks, such as the federal funds market and
the Federal Reserve's discount window. The Parent
Company is managed to a more conservative liquidity
profile, reflecting narrower market access. Additionally,
the Parent Company typically holds, or has direct
access to, primarily through SSIF (a direct subsidiary
of the Parent Company), as discussed in "Supervision
and Regulation" in Business in this Form 10-K, enough
cash to meet its current debt maturities and cash needs,
as well as those projected over the next one-year
the Parent
period. Absent
Company, the liquid assets available at SSIF continue
to be available to the Parent Company. As of December
31, 2018, the value of our Parent Company's net liquid
assets totaled $486 million, compared with $532 million
as of December 31, 2017, which amount does not
include available liquidity through SSIF. As of December
31, 2018, our Parent Company and State Street Bank
have no senior notes or subordinated debentures
outstanding that will mature in the next twelve months.
financial distress at
including
interpretations of
As a SIFI, our liquidity risk management activities
are subject to heightened and evolving regulatory
those
requirements,
requirements, under specific U.S. and international
regulations and also resulting from published and
unpublished guidance, supervisory activities, such as
stress tests, resolution planning, examinations and
other regulatory interactions. Satisfaction of these
requirements could, in some cases, result in changes
in the composition of our investment portfolio, reduced
NII or NIM, a reduction in the level of certain business
activities or modifications to the way in which we deliver
our products and services. If we fail to meet regulatory
requirements to the satisfaction of our regulators, we
could receive negative regulatory stress test results,
incur a resolution plan deficiency or determination of a
non-credible resolution plan or otherwise receive an
adverse regulatory finding. Our efforts to satisfy, or our
failure to satisfy, these regulatory requirements could
materially adversely affect our business, financial
condition or results of operations.
Governance
responsible
Global Treasury
for our
is
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
the evaluation and
tests,
execution of stress
implementation of
the
regulatory
maintenance and execution of our liquidity guidelines
and
routine
management reporting to ALCO, MRAC and the
Board's RC.
funding plan, and
requirements,
contingency
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
State Street Corporation | 89
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
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
to several
principles that are equally important to our overall
liquidity risk management framework:
liquidity according
• 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, repurchase agreements,
FHLB products and certificates of deposit.
and
level
liquidity
longer-term strategic
• Stress testing and contingent funding planning
are
risk
management practices. Regular and ad hoc
liquidity stress testing are performed under
various severe but plausible scenarios at the
consolidated
significant
subsidiaries, including State Street Bank.
These tests contemplate severe market and
events specific to us 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
at
assumptions specific to us. 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
responsibilities and
roles,
management actions to be taken in the event of
deterioration of our liquidity profile caused by either an
event specific to us 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 HQLA. HQLA is the
amount of liquid assets that qualify for inclusion in the
LCR. As a banking organization, we are subject to a
minimum LCR under the LCR rule approved by U.S.
banking regulators. The LCR is intended to promote the
short-term resilience of internationally active banking
organizations, like us, 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.
HQLA primarily consists of unencumbered cash and
certain high quality liquid securities that qualify for
inclusion under the LCR rule. The LCR was fully
implemented beginning on January 1, 2017. We report
LCR to the Federal Reserve daily. For the quarters
ended December 31, 2018 and December 31, 2017,
daily average LCR for the Parent Company was 108%
and 112%, respectively. The average HQLA for the
Parent Company under the LCR final rule definition was
$91.67 billion and $65.35 billion for the quarters ended
December 31, 2018 and December 31, 2017,
respectively.
State Street Corporation | 90
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
We maintained average cash balances in excess
of regulatory requirements governing deposits with the
Federal Reserve of approximately $44.17 billion at the
Federal Reserve, the ECB and other non-U.S. central
banks as of December 31, 2018, compared to $33.58
billion as of December 31, 2017. The higher levels of
average cash balances with central banks was due to
normal deposit volatility. The increase in average HQLA
for the year ended December 31, 2018, compared to
the year ended December 31, 2017, was primarily a
result of the sale of approximately $26 billion in non-
HQLA securities during the year ended December 31,
2018, with a significant portion of the sales being
reinvested into HQLA.
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.
As of December 31, 2018, we had approximately $2
billion of outstanding borrowings from the FHLB. As of
December 31, 2017, we had no outstanding borrowings
from the FHLB.
liquidity with utilization subject
Access to primary, intra-day and contingent
liquidity provided by these utilities is an important source
of contingent
to
underlying conditions. As of December 31, 2018 and
December 31, 2017 we had no outstanding primary
credit borrowings from the FRBB discount window or
any other central bank facility.
In addition to the securities included in our asset
liquidity, we have significant amounts of other
unencumbered investment securities. These securities
are available sources of liquidity, although not as rapidly
deployed as those included in our asset liquidity.
The average fair value of total unencumbered
securities was $65.94 billion for the quarter ended
December 31, 2018, compared to $66.10 billion for the
quarter ended December 31, 2017.
Measures of liquidity include LCR and NSFR,
which are described in "Supervision and Regulation" in
Business in this Form 10-K.
Uses of Liquidity
Significant uses of our liquidity could result from
the following: withdrawals of client deposits; draw-
downs by our custody clients of lines of credit; advances
to clients to settle securities transactions; or other
permitted purposes. Such circumstances would
generally arise under stress conditions including
deterioration in credit ratings. A recurring use of our
liquidity involves our deployment of HQLA from our
investment portfolio to post collateral to financial
institutions serving as sources of securities under our
enhanced custody program.
We had unfunded commitments to extend credit
with gross contractual amounts totaling $28.95 billion
and $26.49 billion and standby letters of credit totaling
$2.99 billion and $3.16 billion as of December 31, 2018
and December 31, 2017, respectively. These amounts
do not reflect the value of any collateral. As of December
31, 2018, approximately 73% of our unfunded
commitments to extend credit and 27% of our standby
letters of 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" in Business in 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 our entities in various currencies. As of both
December 31, 2018 and 2017, approximately 60% of
our average total deposit balances were denominated
in U.S. dollars, approximately 20% in EUR, 10% in GBP
and 10% in all other currencies.
Short-Term Funding
liquidity
Our on-balance sheet liquid assets are also an
liquidity management
integral component of our
strategy. These assets provide
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
to source
incremental funding 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.
the ability
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 $1.08 billion and $2.84 billion as of December 31,
2018 and December 31, 2017, respectively.
State Street Corporation | 91
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
State Street Bank currently maintains a line of
credit with a financial institution of CAD 1.40 billion, or
approximately $1.03 billion, as of December 31, 2018,
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, 2018, 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
statement to meet current commitments and business
needs, including accommodating the transaction and
cash management needs of our clients. In addition,
State Street Bank also has current authorization from
the Board 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:
TABLE 29: CREDIT RATINGS
•
•
•
•
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.
the
impact of
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
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
provided in Note 10 to the consolidated financial
statements in 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:
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
Standard & Poor’s
Moody’s Investors Service
Fitch
As of December 31, 2018
A
A-
BBB
BBB
Stable
A-1+
AA-
AA-
A
Stable
A1
A2
A3
Baa1
Stable
P-1
Aa1
Aa3
Aa3
Stable
AA-
A+
BBB+
BBB
Stable
F1+
AA+
AA
A+
Stable
State Street Corporation | 92
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Contractual Cash Obligations and Other Commitments
The long-term contractual cash obligations included within Table 30: Long-Term Contractual Cash Obligations
were recorded in our consolidated statement of condition as of December 31, 2018, except for operating leases and
the interest portions of long-term debt and capital leases.
TABLE 30: LONG-TERM CONTRACTUAL CASH OBLIGATIONS
December 31, 2018
(In millions)
Long-term debt(1)(2)
Operating leases
Capital lease obligations(2)
Tax liability
Total contractual cash obligations
Payments Due by Period
Less than 1
year
1-3
years
4-5
years
Over 5
years
Total
$
$
— $
3,132
$
2,712
$
5,059
$
192
34
—
351
62
—
275
55
23
380
—
24
10,903
1,198
151
47
226
$
3,545
$
3,065
$
5,463
$
12,299
(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, 2018.
(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 in this Form 10-K.
Total contractual cash obligations shown in Table 30: 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 in 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, 2018 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 in this Form 10-K. We have obligations under pension and
other post-retirement benefit plans, with additional information provided in Note 19 to the consolidated financial
statements in this Form 10-K, which are not included in Table 30: Long-Term Contractual Cash Obligations.
TABLE 31: OTHER COMMERCIAL COMMITMENTS
(In millions)
Indemnified securities financing
Unfunded credit facilities
Standby letters of credit
Purchase obligations(2)
Total commercial commitments
$
$
Duration of Commitment as of December 31, 2018
Less than
1 year
1-3
years
4-5
years
Over 5
years
Total amounts
committed(1)
342,337
$
— $
— $
— $
18,838
814
64
5,600
1,057
89
3,979
1,114
33
535
—
27
342,337
28,952
2,985
213
362,053
$
6,746
$
5,126
$
562
$
374,487
(1) Total amounts committed reflect participations to independent third parties, if any.
(2) Amounts represent obligations pursuant to legally binding agreements, where we have agreed to purchase products or services with a specific minimum quantity
defined at a fixed, minimum or variable price over a specified period of time.
Additional information about the commitments presented in Table 31: Other Commercial Commitments, except
for purchase obligations, is provided in Note 12 to the consolidated financial statements in this Form 10-K.
State Street Corporation | 93
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
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 we fail to properly exercise
our fiduciary duties in our provision of products or
services to clients. Legal risk is the risk of loss resulting
from failure to comply with laws and contractual
obligations.
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
our business. 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
the
oversight,
management and measurement of operational risk.
validation and
verification of
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
Steering 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
reviews and approves
consistent manner and
operational risk guidelines intended to maintain a
consistent implementation of our corporate operational
risk policy and framework.
Ownership and Accountability
We have
implemented our operational risk
framework to support the broad mandate established
by our operational risk policy. This
framework
represents an integrated set of processes and tools that
assists us in the management and measurement of
operational risk, including our calculation of required
capital and RWA.
The framework takes a comprehensive view and
integrates the methods and tools used to manage and
measure operational risk. The framework utilizes
aspects of the COSO framework and other industry
leading practices, and is designed foremost to address
our risk management needs while complying with
regulatory
risk
framework is intended to provide a number of important
benefits, including:
requirements. The operational
• A common understanding of operational risk
management and its supporting processes;
• The clarification of responsibilities for the
management of operational risk across our
business;
• 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.
is
responsible
As with other
risks, senior business unit
management
for
the day-to-day
operational risk management of
their respective
is business unit management's
businesses.
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.
It
Consistency and Transparency
A number of corporate control functions are
directly responsible for implementing and assessing
various aspects of our operational risk framework, with
State Street Corporation | 94
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
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 our business. 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 our required capital
for operational risk;
• ERM’s MVG
independently validates
the
to measure
quantitative models used
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
the
compliance of our systems with information
security policies; and
requirements and monitors
• Corporate Audit performs separate reviews of
the application of operational risk management
practices and methodologies utilized across
our business.
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
risk
The objective of
identification and
assessments is to understand business unit strategy,
risk profile and potential exposures. It is achieved
through a series of risk assessments across our
identification,
business using
assessment and measurement of risk across a
frequency and severity
spectrum of potential
combinations. Three primary
risk assessment
programs, which occur annually, augmented by other
business-specific programs, are the core of this
component:
techniques
the
for
• The risk assessment program seeks
to
understand the risks associated with day-to-
day activities, and the effectiveness of controls
intended
to manage potential exposures
arising from these activities. These risks are
typically frequent in nature but generally not
severe in terms of exposure;
• The Material Risk Identification process utilizes
a bottom-up approach to identify our 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
loss
distribution approach model (see below); they
also provide inputs into stress testing; and
important benchmarks
for our
• 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 $3.68 billion and $46.06 billion,
respectively, as of December 31, 2018, compared to
$3.67 billion and $45.82 billion, respectively, as of
December 31, 2017; refer to the "Capital" section in
"Financial Condition," of this Management's Discussion
and Analysis.
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The LDA model incorporates the four required
operational risk elements described below:
•
in
included
types and
Internal loss event data is collected from across
our business 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
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
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
to
(LEDR)
analysis, management reporting and
the
calculation of required capital. Internal loss
event data provides our frequency and severity
information to our capital calculation process
for historical loss events experienced by us.
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;
to support processes related
• External loss event data provides information
with respect to loss event severity from other
financial institutions to inform our capital
in similar
estimation process of events
business units at other banking organizations.
This information supplements the data pool
available
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;
for use
• Scenario analysis workshops are conducted
across our business 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; and
• Business environment and internal control
factors are gathered as part of our scenario
analysis program to inform the scenario
analysis workshop participants of internal loss
event data and business-relevant metrics, such
as risk assessment program results, along with
industry loss event data and case studies
where appropriate. Business environment and
internal
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.
control
factors
are
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.
thereby enabling management
Operational risk reporting is intended to provide
transparency,
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
internal and external
of monitoring activities,
control
reviews and
regulatory
examinations,
assessments. These elements combine in a manner
designed to provide a view of potential and emerging
risks facing us and information that details its progress
on managing risks.
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AND RESULTS OF OPERATIONS
Effectiveness and Testing
The objective of effectiveness and testing is to
verify that internal controls are designed appropriately,
are consistent with corporate and regulatory standards,
and are operating effectively. It is achieved through a
series of assessments by both internal and external
parties,
independent
registered public accounting firms, business self-
assessments and other control function reviews, such
as a SOX testing program.
including Corporate Audit,
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
for
Documentation and guidelines allow
consistency and repeatability of the various processes
that support the operational risk framework across our
business.
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 our
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
risks within our
technology
technology risk policy and risk appetite framework
include:
• Third party vendor risk;
• Business disruption and technology resiliency
risk;
• Cyber and information security risk;
• Technology asset and configuration risk; and
• 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 TOPS, 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
our business. 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.
in
functions
Risk control
the business are
responsible for adopting and executing the Enterprise
Technology Risk Management (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
including ERM
management activities,
operational risk programs;
• Establishing, through TORC and TOPS 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
risk
risk
technology
risks and
to senior management
information
acceptance
committees and the Board;
• Promoting a strong technology risk culture
through communication;
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MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
• Serving as an escalation and challenge point
guidance,
risk
technology
for
expectations and clarifications;
policy
• 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.
Cyber-Security Risk Management
Cyber-security risk is managed as part of our
overall Information Technology Risk Management as
outlined above.
We recognize the significance of cyber-attacks
and have taken steps to mitigate the risks associated
with them. We have made significant investments in
building a mature cyber-security program to leverage
people, technology and processes to protect our
systems and the data in our care. We have also
implemented a program to help us better measure and
manage the cyber-security risk we face when we
engage with third parties for services.
All employees are required to adhere to our cyber-
security policy and standards. Our centralized
information security group provides education and
training. This training includes a required annual online
training class for all employees, multiple simulated
phishing attacks and regular information security
awareness materials.
Our business lines employ Information Security
Officers to help the business better understand and
manage their information security risks, as well as to
work with the centralized Information Security team to
drive awareness and compliance throughout the
business.
We use independent third parties to perform
ethical hacks of key systems to help us better
understand the effectiveness of our controls and to
better implement more effective controls, and we
engage with third parties to conduct reviews of our
overall program to help us better align our cyber-
security program with what is required of a large
financial services organization.
We have an incident response program in place
that is designed to enable a well-coordinated response
to mitigate the impact of cyber-attacks, recover from the
attack and
level of
communication to internal and external stakeholders.
the appropriate
to drive
the
The TORC assesses and manages
effectiveness of our cyber-security program, which is
overseen by the TOPS of our Board. The TOPS
receives regular cyber-security updates throughout the
year and is responsible for reviewing and approving the
program on an annual basis.
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
foreign exchange trading services revenue and to
manage potential earnings volatility. In addition, we
provide services related to derivatives in our role as both
a manager and a servicer of financial assets.
Our clients use derivatives to manage the financial
risks associated with their investment goals and
business activities. With the growth of cross-border
investing, our clients often enter into foreign exchange
forward contracts to convert currency for international
investments and to manage the currency risk in their
international
investment portfolios. As an active
participant in the foreign exchange markets, we provide
foreign exchange forward and option contracts in
support of these client needs, and also act as a dealer
in the currency markets.
As part of our trading activities, we assume
positions in the foreign exchange and interest rate
markets by buying and selling cash instruments and
entering into derivative instruments, including foreign
exchange forward contracts, foreign exchange and
interest rate options and interest rate swaps, interest
rate forward contracts and interest rate futures. As of
December 31, 2018, the notional amount of these
derivative contracts was $2.26 trillion, of which $2.24
trillion was composed of foreign exchange forward,
swap and spot contracts. We seek to match positions
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MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
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 our business 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,
Industry
among others,
Regulatory Authority and the U.S. Commodities Futures
Trading Commission.
the Financial
the SEC,
Risk Appetite
Our corporate market risk appetite is specified in
policy statements
the governance,
that outline
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;
• 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
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MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
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.
trading positions
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
include
Treasury group. These
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 and Stressed VaR
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
for our covered
stressed VaR-based measures
positions in conformity with regulatory requirements.
Our VaR model seeks to capture identified material risk
factors associated with our covered positions, including
risks arising from market movements such as changes
in foreign exchange rates, interest rates and option-
implied volatilities.
We have adopted standards and guidelines to
value our covered positions which govern our VaR- and
stressed VaR-based measures. Our regulatory VaR-
based measure is calculated based on historical
volatilities of market risk factors during a two-year
observation period calibrated to a one-tail, 99%
confidence interval and a ten-business-day holding
period. We also use the same platform to calculate a
one-tail, 99% confidence interval, one-business-day
VaR for internal risk management purposes. A 99% one-
tail confidence interval implies that daily trading losses
are not expected to exceed the estimated VaR more
than 1% of the time, or less than three business days
out of a year.
to change
Our market risk models, including our VaR model,
are subject
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
in connection with
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AND RESULTS OF OPERATIONS
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.
to
identify
twelve-month periods
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
that reflect
significant financial stress. The stressed VaR model is
designed
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,
is determined
the stress period
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 incorporated.
Value-at-Risk Measures
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
includes
risk
correlations among currency, interest rates and other
market rates.
factors and
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
(although
in market volatility
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
this
those
“backward-looking” limitation can cause VaR to
understate or overstate risk;
that are extreme
in nature;
• 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.
State Street Corporation | 101
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Stress Testing
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).
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.
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
include
constant
steepening, flattening and butterflies.
amount. Non-parallel
shifts
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 (P&L) outcomes observed from
daily market movements. We back-test our VaR model
using “clean” P&L, which excludes non-trading revenue
such as fees, commissions and 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 three back-testing exceptions in
2018 and one each in 2017 and 2016. The three back-
testing exceptions in 2018 occurred in the last four
months of the year when the markets experienced an
abrupt increase in volatility. The heightened volatility
follows several years of relatively benign market
conditions that saw the VIX routinely register as little as
10% or less. Following such periods, it is quite common
for VaR models calibrated to the most recent two years
of data to underestimate the trading gains or losses that
are experienced as volatility trends above levels that
were seen more recently. 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 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.
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. 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.
State Street Corporation | 102
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
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 years ended December 31,
2018 and 2017, respectively, as measured by our VaR
methodology. Diversification effect in the tables below
represents the difference between total VaR and the
sum of the VaRs for each trading activity. This effect
arises because the risks present in our trading activities
are not perfectly correlated.
TABLE 32: TEN-DAY VaR ASSOCIATED WITH TRADING ACTIVITIES FOR COVERED POSITIONS
Year Ended December 31, 2018
Year Ended December 31, 2017
(In thousands)
Year Ended
Average
Maximum
Minimum
Year Ended
Average
Maximum
Minimum
Global Markets
$
10,588
$
7,354
$
19,160
$
2,967
$
5,719
$
7,532
$
16,160
$
2,566
Global Treasury
Diversification
1,354
(1,435)
750
(634)
3,579
(3,348)
91
205
1,346
(1,503)
517
(544)
1,767
(1,808)
89
(111)
Total VaR
$
10,507
$
7,470
$
19,391
$
3,263
$
5,562
$
7,505
$
16,119
$
2,544
TABLE 33: TEN-DAY STRESSED VaR ASSOCIATED WITH TRADING ACTIVITIES FOR COVERED POSITIONS
Year Ended December 31, 2018
Year Ended December 31, 2017
(In thousands)
Year Ended
Average
Maximum
Minimum
Year Ended
Average
Maximum
Minimum
Global Markets
$
26,512
$
32,744
$
58,221
$
14,811
$
31,512
$
27,366
$
45,399
$
13,363
Global Treasury
Diversification
7,683
(7,919)
3,659
(4,101)
10,177
(10,179)
342
(325)
12,042
(13,905)
7,430
(6,334)
17,460
(15,964)
1,321
(797)
Total Stressed VaR
$
26,276
$
32,302
$
58,219
$
14,828
$
29,649
$
28,462
$
46,895
$
13,887
The average of our stressed VaR-based measure
was approximately $32 million for the year ended
December 31, 2018, compared to an average of
approximately $28 million for the year ended December
31, 2017.
While the average stressed VaR-based measure
increased, the decrease in our stressed VaR-based
measure at year end was mainly driven by lower end
of day foreign exchange positions and reduced basis
risk exposure in Korean Won forward rates as of
December 31, 2018 compared to December 31, 2017.
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, 2018 and 2017,
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. Diversification effect
tables below
represents the difference between total VaR and the
sum of the VaRs for each trading activity. This effect
arises because the risks present in our trading activities
are not perfectly correlated.
the
in
State Street Corporation | 103
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
TABLE 34: TEN-DAY VaR ASSOCIATED WITH TRADING ACTIVITIES BY RISK FACTOR(1)
(In thousands)
By component:
Global Markets
Global Treasury
Diversification
Total VaR
As of December 31, 2018(2)
As of December 31, 2017
Foreign Exchange
Risk
Interest Rate Risk
Foreign
Exchange Risk
Interest Rate
Risk
Volatility Risk
$
$
2,679
53
(39)
2,693
$
$
11,850
1,377
(1,436)
11,791
$
$
6,149
100
1
6,250
$
$
5,546
1,372
(1,078)
5,840
$
$
3
—
—
3
TABLE 35: TEN-DAY STRESSED VaR ASSOCIATED WITH TRADING ACTIVITIES BY RISK FACTOR(1)
(In thousands)
By component:
Global Markets
Global Treasury
Diversification
Total Stressed VaR
As of December 31, 2018(2)
As of December 31, 2017
Foreign Exchange
Risk
Interest Rate Risk
Foreign
Exchange Risk
Interest Rate
Risk
Volatility Risk
$
$
10,465
74
(132)
10,407
$
$
23,324
8,202
(7,835)
23,691
$
$
15,975
153
(23)
16,105
$
$
27,161
12,192
(14,176)
25,177
$
$
3
—
—
3
(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.
(2) As of December 31, 2018, we had no ten-day VaR or ten-day stressed VaR associated with volatility risk.
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 quantify NII sensitivity using an earnings
simulation model that includes our expectations for new
business growth, changes in balance sheet mix and
investment portfolio positioning. This measure
compares our baseline view of our NII over a twelve-
month horizon, based on our internal forecast of interest
rates, to a wide range of instantaneous and gradual rate
shocks. EVE sensitivity is a discounted cash flow model
designed to estimate fair value of assets and liabilities
under a series of interest rate shocks over a long-term
horizon. Each approach is routinely monitored as
market conditions change.
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. Each
scenario assumes no management action is taken to
mitigate the adverse effects of interest rate changes on
our financial performance. While investment securities
balances can fluctuate with the level of rates as
prepayment assumptions change, our deposit balances
remain consistent with the baseline.
TABLE 36: NII SENSITIVITY
(In millions)
Rate change:
December 31,
2018
2017
Benefit (Exposure)
+100 bps shock
$
371
$
–100 bps shock
+100 bps ramp
–100 bps ramp
(183)
148
(72)
435
(294)
177
(122)
to benefit
As of December 31, 2018, NII sensitivity remains
interest rates.
positioned
Compared to December 31, 2017, our asset sensitive
positioning to an instantaneous rise in rates is less
sensitive, primarily driven by an increase in U.S. client
deposit betas as a result of higher market rates.
from rising
State Street Corporation | 104
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
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 70% 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 30-40%
of the benefit is driven by U.S. rates.
The following table highlights our EVE sensitivity
to a +/-200 bps instantaneous rate shock, relative to
spot interest rates. Management compares the change
in EVE sensitivity against our aggregate tier 1 and tier
2 risk-based capital, calculated in conformity with
current applicable regulatory requirements. EVE
sensitivity is dependent on the timing of interest and
principal cash flows. Also, the measure only evaluates
the spot balance sheet and does not include the impact
of new business assumptions.
TABLE 37: EVE SENSITIVITY
(In millions)
Rate change:
+200 bps shock
–200 bps shock
December 31,
2018
2017
Benefit (Exposure)
$
(1,603) $
796
(1,507)
11
As of December 31, 2018, EVE sensitivity remains
exposed to upward shifts in interest rates. Compared
to December 31, 2017, the change in the up 200 bps
instantaneous shock was driven by higher U.S. interest
rates and a mix shift in client deposits to more floating-
rate, reducing deposit duration. The change in the down
200 bps instantaneous shock was primarily due to a
modeling enhancement for negative rate currencies.
The modeling enhancement allows for interest rate
shocks to go below zero for certain currencies, such as
Euro, where central banks have allowed negative rates.
The December 31, 2017 benefit, which does not reflect
the modeling enhancement, in the down 200 bps shock
would have increased approximately $1 billion under
the new modeling approach.
This update aligns our modeling approaches for
in both EVE and NII sensitivity
negative rates
simulations.
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
financial
management and a source of risk. In large banking
organizations like us, model results influence business
decisions, and model failure could have a harmful effect
on our financial performance. As a result, the Model
Risk Management Framework seeks to mitigate our
model risk.
significant advancement
in
Our model risk management program has three
principal components:
• A model risk governance program that defines
the
responsibilities,
roles and
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;
including
• A model development process that focuses on
sound design and computational accuracy, and
for
includes activities designed
test
robustness, stability and sensitivity
to
assumptions; and
to
• An independent model validation function
designed to verify that models are conceptually
sound,
are
performing as expected, and are in line with
their design objectives.
computationally
accurate,
Governance
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
or is permitted to be used by the MRC.
ERM’s Model Risk Management group
is
responsible for defining the corporate-wide model risk
governance framework, and maintains policies and
guidelines 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
reporting, model
performance monitoring,
tracking of new model
development status and committee-level review and
challenge.
risk
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
includes a
integrity
testing. Model development
State Street Corporation | 105
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
statement of purpose to align development with
intended use. It also includes a comparison of
alternative approaches to promote a sound modeling
approach.
Model developers conduct an assessment of data
quality and relevance. The development teams conduct
a variety of tests of the accuracy, robustness and
stability of each model.
Model owners submit models to the Model
Validation Group for validation on a regular basis, as
per existing policy.
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
its particular
assumptions or deficiencies. Based on the results of its
review, MVG issues a model use decision and may
require remedial actions and/or 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. If a model
owner disagrees with the results of a validation or any
other aspect of model risk, they are permitted to raise
the issue with the MRC for resolution.
limitations given
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 us attributable to strategic risk.
Management and control of strategic risks are generally
the responsibility of the business units, with oversight
from the control functions, as part of their overall
strategic planning and internal risk management
processes.
Capital
Managing our capital involves evaluating whether
our actual and projected
levels of capital are
commensurate with our risk profile, are in compliance
with all applicable regulatory requirements and are
sufficient to provide us with the financial flexibility to
undertake future strategic business initiatives. We
assess capital adequacy based on relevant regulatory
capital requirements, as well as our own internal capital
goals, targets and other relevant metrics.
Framework
Our objective with respect to management of our
capital is to maintain a strong capital base in order to
provide financial flexibility for our business needs,
including funding corporate growth and supporting
clients’ cash management needs, and to provide
protection against loss to depositors and creditors. We
strive to maintain an appropriate level of capital,
commensurate with our risk profile, on which an
attractive return to shareholders is expected to be
realized over both the short and long-term, while
protecting our obligations to depositors and creditors
and complying with regulatory capital requirements.
Our capital management focuses on our risk
exposures, the regulatory requirements applicable to
us with respect to multiple capital measures, the
evaluations and resulting credit ratings of the major
independent rating agencies, our return on capital at
both the consolidated and line-of-business level and our
capital position relative to our peers.
State Street Corporation | 106
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
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 we 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
for
to provide a comprehensive strategy
and
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
for
level. We review
these measures annually
appropriateness and relevance in relation to our
financial budget and capital plan.
Stress Testing
We administer a robust business-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 us, 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,
rate,
operational,
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.
fiduciary, business,
liquidity,
interest
In connection with the focus on our key risks, each
stress test incorporates idiosyncratic loss events
tailored to our 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 us, 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
the Federal Reserve assesses each
process,
organization’s capital adequacy, capital planning
process and plans to distribute capital, such as dividend
payments or stock purchase programs. Management
and Board risk committees review, challenge and
approve CCAR results and assumptions before
submission to the Federal Reserve.
Through the evaluation of our 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 for us.
State Street Corporation | 107
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Governance
Regulatory Capital
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,
forecasting and performance
budgeting,
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 Management group within Global Treasury is
responsible for the Capital Policy and guidelines,
development of the Capital Plan, the management of
global capital and capital optimization.
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
the assessment and
to
management of risk and capital. Our Capital Policy is
reviewed and approved annually by the Board's RC.
related
Global Systemically Important Bank
We are one among a group of 29 institutions
worldwide that have been identified by the FSB and the
BCBS as G-SIBs. Our designation as a G-SIB is based
on a number of factors, as evaluated by banking
regulators, and requires us to maintain an additional
capital buffer above the minimum capital ratios set forth
in the Basel III final rule.
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
transition
provisions for capital components and minimum ratio
requirements for CET1 capital, tier 1 capital and total
capital.
incorporates several multi-year
Additional information about G-SIBs is provided
under “Regulatory Capital Adequacy and Liquidity
Standards” in "Supervision and Regulation" in Business
in this Form 10-K.
We and State Street Bank, as advanced
approaches banking organizations, are subject to the
U.S. Basel III framework. Provisions of the Basel III final
rule became effective with full implementation on
January 1, 2019. We are also subject to the final market
risk capital rule issued by U.S. banking regulators
effective as of January 2013.
The Basel III final rule provides for two frameworks
for monitoring capital adequacy: the “standardized”
approach and the “advanced” approaches, applicable
to advanced approaches banking organizations, like us.
The standardized approach prescribes standardized
calculations for credit RWA, including specified risk
weights
for certain on- and off-balance sheet
exposures.
The advanced approaches consist of the AIRB
approach used for the calculation of RWA related to
credit risk, and the AMA approach used for the
calculation of RWA related to operational risk.
The final market risk capital rule requires us to use
internal models to calculate daily measures of VaR, that
reflect general market risk for certain of our trading
positions defined by the rule as “covered positions,” as
well as stressed-VaR measures to supplement the VaR
measures. The rule also requires a public disclosure
composed of qualitative and quantitative information
about the market risk associated with our trading
activities and our related VaR and stressed-VaR
measures. The qualitative and quantitative information
required by the rule is provided under "Market Risk" in
this Form 10-K.
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,
the capital conservation buffer and
including
countercyclical capital buffer. 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 requirement for the capital conservation buffer
became effective with full implementation on January
1, 2019. 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 RWA and, if deployed during
periods of excessive credit growth, a CET1
countercyclical capital buffer of up to 2.5% of total RWA,
above each of the minimum CET1, tier 1, and total risk-
based capital ratios. The countercyclical capital buffer
is currently set at zero by U.S. banking regulators.
State Street Corporation | 108
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
To maintain the status of the 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.
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 38: 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)
2019
2018
2017
2016
2015
2.500%
1.500
1.875%
1.125
1.250%
0.750
0.625%
0.375
—%
—
8.500
10.000
12.000
7.500
9.000
11.000
6.500
8.000
10.000
5.500
7.000
9.000
4.500
6.000
8.000
(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. The estimated resulting G-SIB surcharge for us is 1.5%.
(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 that
were phased-in beginning January 1, 2016 through January 1, 2019 based on an estimated 1.5% surcharge in all periods.
The specific calculation of our and State Street
Bank's risk-based capital ratios changed as the
provisions of the Basel III final rule related to the
numerator (capital) and denominator (RWA) were
phased in, and as our RWA calculated using the
advanced approaches changed due to changes in
methodology. These methodological changes 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 us 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 were
phased in, the ratios presented in the table for each
period are not directly comparable. Refer to the
footnotes following the table.
State Street Corporation | 109
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
TABLE 39: REGULATORY CAPITAL STRUCTURE AND RELATED REGULATORY CAPITAL RATIOS
(In millions)
Common shareholders' equity:
State Street
State Street Bank
Basel III
Advanced
Approaches
December 31,
2018
Basel III
Standardized
Approach
December 31,
2018
Basel III
Advanced
Approaches
December 31,
2017
Basel III
Standardized
Approach
December 31,
2017
Basel III
Advanced
Approaches
December 31,
2018
Basel III
Standardized
Approach
December 31,
2018
Basel III
Advanced
Approaches
December 31,
2017
Basel III
Standardized
Approach
December 31,
2017
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(1)
Other adjustments(2)
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
RWA:
Credit risk(3)
Operational risk(4)
Market risk
Total RWA
Adjusted quarterly average assets
$
$
$
$
10,565
20,606
(1,332)
(8,715)
21,124
(9,350)
(194)
11,580
3,690
—
—
15,270
778
—
14
—
16,062
47,738
46,060
1,517
95,315
211,924
$
$
$
$
$
10,565
20,606
(1,332)
(8,715)
21,124
(9,350)
(194)
11,580
3,690
—
—
15,270
778
—
83
—
16,131
97,303
NA
1,517
98,820
211,924
$
$
$
$
$
10,302
$
10,302
$
18,856
18,856
(972)
(9,029)
19,157
(6,877)
(76)
12,204
3,196
—
(18)
15,382
980
—
4
1
16,367
52,000
45,822
1,334
99,156
209,328
(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
$
$
$
$
12,894
14,261
(1,112)
—
26,043
(9,073)
(29)
16,941
—
—
—
16,941
776
—
11
—
17,728
45,565
44,494
1,517
91,576
209,413
$
$
$
$
$
12,894
14,261
(1,112)
—
26,043
(9,073)
(29)
16,941
—
—
—
$
11,612
$
11,612
12,312
12,312
(809)
—
(809)
—
23,115
23,115
(6,579)
(5)
16,531
—
—
—
(6,579)
(5)
16,531
—
—
—
16,941
776
16,531
983
16,531
983
—
83
—
17,800
94,776
NA
1,517
96,293
209,413
—
—
—
17,514
49,489
45,295
1,334
96,118
206,070
$
$
$
$
—
72
—
17,586
98,433
NA
1,334
99,767
206,070
$
$
$
$
2018 Minimum
Requirements
Including Capital
Conservation
Buffer and G-
SIB Surcharge(5)
2017 Minimum
Requirements
Including Capital
Conservation
Buffer and G-
SIB Surcharge(6)
7.5%
6.5%
12.1%
11.7%
12.3%
11.9%
18.5%
17.6%
17.2%
16.6%
9.0
11.0
8.0
10.0
16.0
16.9
15.5
16.3
15.5
16.5
15.0
16.0
18.5
19.4
17.6
18.5
17.2
18.2
16.6
17.6
Capital
Ratios:
CET1
capital
Tier 1
capital
Total capital
(1) Amounts for us and State Street Bank as of December 31, 2018 consisted of goodwill, net of associated deferred tax liabilities, and 100% of other intangible assets, net of associated deferred
tax liabilities. Amounts for us 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. Intangible assets, net of associated deferred tax liabilities is phased in as a deduction from capital, in conformity with the Basel III final rule.
(2) Other adjustments within CET1 capital primarily include the overfunded portion of our defined benefit pension plan obligation net of associated deferred tax liabilities, disallowed deferred tax
assets, and other required credit risk based deductions.
(3) Includes a CVA which reflects the risk of potential fair value adjustments for credit risk reflected in our valuation of over-the-counter derivative contracts. We used a simple CVA approach in
conformity with the Basel III advanced approaches.
(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 RWA under the advanced approaches depending
on the severity of the loss event and its categorization among the seven Basel-defined UOMs.
(5) Minimum requirements were phased in with full implementation beginning on January 1, 2019; minimum requirements listed are as of December 31, 2018. See Table 38: Basel III Final Rules
Transition Arrangements and Minimum Risk-Based Capital Ratios.
(6) Minimum requirements were phased in with full implementation beginning on January 1, 2019; minimum requirements listed are as of December 31, 2017. See Table 38: Basel III Final Rules
Transition Arrangements and Minimum Risk-Based Capital Ratios.
NA Not applicable
State Street Corporation | 110
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Our CET1 capital decreased $0.6 billion as of December 31, 2018 compared to December 31, 2017 primarily
driven by goodwill and intangible assets deduction of $2.2 billion, capital distributions of $1.2 billion from common and
preferred stock dividends and common stock repurchases, accumulated other comprehensive loss of $0.4 billion and
a $0.3 billion impact from the 2018 phase-in of the deduction of intangible assets (100% in 2018 compared to 80% in
2017), offset by net income of $2.6 billion for the year ended December 31, 2018 and the issuance of common stock
of $1.2 billion.
In the same comparative period, our tier 1 capital decreased $0.1 billion and total capital decreased $0.3 billion
under both advanced approaches and standardized approach due to the changes in our CET1 capital offset by the
issuance of preferred stock of approximately $500 million in the third quarter of 2018.
The table below presents a roll-forward of CET1 capital, tier 1 capital and total capital for the year ended December
31, 2018 and for the year ended December 31, 2017.
TABLE 40: CAPITAL ROLL-FORWARD
(In millions)
CET1 capital:
Basel III
Advanced
Approaches
December 31,
2018
Basel III
Standardized
Approach
December 31,
2018
Basel III
Advanced
Approaches
December 31,
2017
Basel III
Standardized
Approach
December 31,
2017
CET1 capital balance, beginning of period
$
12,204
$
12,204
$
11,624
$
11,624
Net income
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
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
2,599
314
(853)
(2,473)
(360)
149
(624)
2,599
314
(853)
(2,473)
(360)
149
(624)
2,177
(1,347)
(778)
(529)
964
93
580
2,177
(1,347)
(778)
(529)
964
93
580
11,580
11,580
12,204
12,204
15,382
15,382
(624)
494
—
18
(112)
15,270
985
(202)
10
(1)
(193)
792
(624)
494
—
18
(112)
15,270
1,053
(202)
11
(1)
(192)
861
14,717
580
—
—
85
665
15,382
1,192
(192)
(15)
—
(207)
985
14,717
580
—
—
85
665
15,382
1,250
(192)
(5)
—
(197)
1,053
16,367
16,435
15,909
15,967
(112)
(193)
(112)
(192)
665
(207)
665
(197)
Total capital balance, end of period
$
16,062
$
16,131
$
16,367
$
16,435
State Street Corporation | 111
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 RWA for the years
ended December 31, 2018 and 2017.
The following table presents a roll-forward of the
Basel III standardized approach RWA for the years
ended December 31, 2018 and 2017.
TABLE 41: ADVANCED APPROACHES RWA ROLL-
FORWARD
TABLE 42: STANDARDIZED APPROACH RWA ROLL-
FORWARD
(In millions)
December 31,
2018
December 31,
2017
Total RWA, beginning of period
$
99,156
$
99,301
Changes in credit RWA:
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
RWA
Net increase (decrease) in market
RWA
Net increase (decrease) in
operational RWA
(940)
(12)
(3,666)
(19)
2,914
30
(683)
440
(1,170)
(1,129)
1,545
(2,543)
(4,262)
183
238
(971)
(417)
1,243
99,156
Total RWA, end of period
$
95,315
$
(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, 2018, total advanced
approaches RWA decreased $3.8 billion compared to
December 31, 2017, primarily due to lower credit RWA.
The decrease in credit RWA was primarily due to the
sale of $26 billion of non-HQLA within the investment
securities portfolio in the year ended December 31,
2018 and lower exposure at default on FX contracts,
partially offset by increases in all other exposures.
(In millions)
Total RWA, beginning of period(1)
Changes in credit RWA:
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
RWA
Net increase (decrease) in market
RWA
December 31,
2018
December 31,
2017
$
102,683
$
99,876
(2,887)
3,104
(3,666)
(3,156)
1,729
2,589
(690)
2,058
(46)
(1,709)
2,605
(753)
(4,046)
3,224
183
(417)
Total RWA, end of period
$
98,820
$
102,683
(1) Standardized approach RWA as of the periods noted above were calculated
using our 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, 2018, total standardized
approach RWA decreased $3.9 billion compared to
December 31, 2017, primarily due to lower credit RWA.
The main drivers of the credit RWA change were the
sale of $26 billion of non-HQLA within the investment
securities portfolio and decreased
repo-style
transaction exposures. These decreases were partially
offset by higher overdrafts and loans with corporates
(both which have a higher prescribed risk weight under
the standardized approach), and increases in all other
exposures in the year ended December 31, 2018.
The regulatory capital ratios as of December 31,
2018, presented in Table 39: 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
reflect calculations and determinations with respect to
our capital and related matters as of December 31,
2018, based on our and external data, quantitative
formulae, statistical models, historical correlations and
assumptions, collectively referred to as “advanced
systems,” in effect and used by us for those purposes
as of the time we first reported such ratios in a quarterly
report on 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
State Street Corporation | 112
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
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 RWA 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 UOM, 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,
specific to us 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. The full effects of the Basel III
final rule on us and State Street Bank are therefore
subject to further evaluation and also to further
regulatory guidance, action or rule-making.
Regulatory Developments
In April 2018, the FRB issued a proposed rule
which would replace the current 2% supplementary
leverage ratio buffer for G-SIBs, with a buffer equal to
50% of their G-SIB buffer. This proposal would also
make conforming modifications to our TLAC and eligible
LTD requirements applicable to G-SIBs.
In addition, the FRB has issued a separate
proposed rule replacing the current 2.5% capital
conservation buffer with a firm specific buffer (referred
to as the Stress Capital Buffer or SCB), updated
annually and tailored to reflect the results of the most
recent Federal Reserve’s CCAR supervisory severely
adverse scenario stress test. The proposal also
introduces a Stress Leverage Buffer (SLB) applicable
to the tier 1 leverage ratio. Under the proposal, both the
SCB and SLB would become effective October 1, 2019.
Changes to the final rules, if and when proposed, may
be material and the application of the proposed rule
involves estimates which cannot reasonably be made
at present. Consequently, we have not estimated the
impact of the proposed rule.
The EGRRCPA, which was signed into law by the
U.S. President in May 2018, includes modifications to
the SLR requirements as applied to custody banks.
Specifically, the modifications would allow certain
central bank deposits to be excluded from the SLR
denominator, or total leverage exposure. In addition, the
Act may impact our TLAC and LTD requirements as the
definition of the supplementary leverage ratio has been
modified for custodial banks. Our estimates as to our
LTD needs at December 31, 2018, to satisfy TLAC and
LTD requirements, are subject to updates based on the
changing
landscape and additional
regulatory guidance and interpretation.
regulatory
Supplementary Leverage Ratio
In 2014, U.S. banking regulators issued final rules
implementing an SLR,
for certain bank holding
companies, like us, and their insured depository
institution subsidiaries, like State Street Bank, which we
refer to as the SLR final rule. 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) we maintain an SLR of at least 5% to avoid limitations
on capital distributions and discretionary bonus
payments. In addition to the SLR, we are 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.
TABLE 43: TIER 1 AND SUPPLEMENTARY LEVERAGE
RATIOS
(In millions)
State Street:
Tier 1 capital
Average assets
Less: adjustments for deductions from tier 1 capital
Adjusted average assets
Off-balance sheet exposures
Total assets for SLR
Tier 1 leverage ratio(1)
Supplementary leverage ratio
State Street Bank:
Tier 1 capital
Average assets
Less: adjustments for deductions from tier 1 capital
Adjusted average assets
Off-balance sheet exposures
Total assets for SLR
Tier 1 leverage ratio (1)
Supplementary leverage ratio
$
$
$
$
December 31,
2018
15,270
221,350
(9,426)
211,924
29,279
241,203
7.2%
6.3
16,941
218,402
(8,989)
209,413
29,368
238,781
8.1%
7.1
(1) Tier 1 leverage ratio as of December 31, 2018 were calculated in conformity with the Basel
III final rule.
State Street Corporation | 113
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Capital Actions
Preferred Stock
In September 2018, we issued 500,000 depositary shares, each representing 1/100th ownership interest in a
share of our fixed-to-floating rate non-cumulative perpetual preferred stock, Series H, without par value per share, with
a liquidation preference of $100,000 per share (equivalent to $1,000 per depositary share), in a public offering. The
aggregate proceeds, net of underwriting discounts, commissions and other issuance costs, were approximately $500
million, and were used to fund a portion of our acquisition of Charles River Development on October 1, 2018. Dividends
on the Series H Preferred stock are paid semi-annually and commenced on December 15, 2018, with the first dividend
paid on a pro-rata basis.
The following table summarizes selected terms of each of the series of the preferred stock issued and outstanding
as of December 31, 2018:
TABLE 44: 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
Series H
September 2018
500,000
1/100th
100,000
100,000
100,000
100,000
100,000
25
25
25
1,000
25
1,000
$
488 September 15, 2017
742 March 15, 2024
728 December 15, 2019
742 September 15, 2020
493 March 15, 2026
494 December 15, 2023
(1) On the redemption date, or any dividend declaration date thereafter, the preferred stock and corresponding depositary shares may be redeemed by us, in whole or in part, at the liquidation price
per share and liquidation price per depositary share plus any declared and unpaid dividends, without accumulation of any undeclared dividends.
(2) The preferred stock and corresponding depositary shares may be redeemed at our option in whole, but not in part, prior to the redemption date upon the occurrence of a regulatory capital treatment
event, as defined in the certificate of designation, at a redemption price equal to the liquidation price per share and liquidation price per depositary share plus any declared and unpaid dividends,
without accumulation of any undeclared dividends.
The following table presents the dividends declared for each of the series of preferred stock issued and outstanding
for the periods indicated:
TABLE 45: PREFERRED STOCK DIVIDENDS
Dividends
Declared per
Share
$
5,250
$
5,900
6,000
5,250
5,352
1,219
2018
Dividends
Declared per
Depositary
Share
Years Ended December 31,
Total
(In millions)
Dividends
Declared per
Share
2017
Dividends
Declared per
Depositary
Share
Total
(In millions)
1.32
1.48
1.52
52.50
1.32
12.18
$
$
$
5,250
$
5,900
6,000
5,250
5,352
—
26
44
45
40
27
6
188
1.32
1.48
1.52
52.50
1.32
—
$
$
26
44
45
40
27
—
182
Preferred Stock:
Series C
Series D
Series E
Series F
Series G
Series H
Total
In January 2019, 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 2019.
State Street Corporation | 114
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Common Stock
In July 2018, we completed a public offering of
approximately 13.24 million shares of our common
stock. The offering price was $86.93 per share and net
proceeds totaled approximately $1.15 billion, and were
used to fund a portion of our acquisition of Charles River
Development on October 1, 2018.
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 2018, the Federal
Reserve issued a conditional non-objection to our
capital plan submitted as part of the 2018 CCAR
submission; and in connection with such capital plan
our Board approved a common stock purchase program
authorizing the purchase of up to $1.2 billion of our
common stock through June 30, 2019 (the 2018
Program). In connection with our acquisition of Charles
River Development, we did not repurchase any
common stock during either the second quarter of 2018
under the 2017 Program or the third and fourth quarters
of 2018 under the 2018 Program. We have resumed
our common stock purchase program in the first quarter
of 2019 and may repurchase up to $600 million through
June 30, 2019 under the 2018 Program.
The table below presents the activity under our
common stock purchase program during the period
indicated:
TABLE 46: SHARES REPURCHASED
Year Ended December 31, 2018(1)
Shares
Acquired
(In millions)
Average Cost
per Share
Total
Acquired
(In millions)
2017 Program
3.3
$
105.31
$
350
(1) During the year ended December 31, 2018, there were no shares
repurchased under the 2018 Program.
The table below presents the dividends declared
on common stock for the periods indicated:
TABLE 47: COMMON STOCK DIVIDENDS
Years Ended December 31,
2018
2017
Dividends
Declared
per Share
1.78
$
Total
(In millions)
$
665
Dividends
Declared
per Share
1.60
$
Total
(In millions)
$
596
Common Stock
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 in 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 our capital positions, 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 $342.34 billion as
of December 31, 2018, compared to $381.82 billion as
of December 31, 2017. 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 $357.89 billion and $400.83 billion as
collateral for indemnified securities on loan as of
December 31, 2018 and December 31, 2017,
respectively.
The cash collateral held by us as agent is invested
on behalf of our clients. In certain cases, the cash
repurchase
in
collateral
agreements, for which we indemnify the client against
third-party
invested
is
State Street Corporation | 115
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
the principal
invested. We require
loss of
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
$357.89 billion and $400.83 billion, referenced above,
$42.61 billion and $61.27 billion was invested in
indemnified repurchase agreements as of December
31, 2018 and December 31, 2017, respectively. We or
our agents held $45.06 billion and $65.27 billion as
collateral for indemnified investments in repurchase
agreements as of December 31, 2018 and December
31, 2017, respectively.
Additional information about our securities finance
activities and other off-balance sheet arrangements is
provided in Notes 10, 12 and 14 to the consolidated
financial statements 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
financial
statements. Additional information on our significant
accounting policies, including references to applicable
footnotes, is provided in Note 1 to the consolidated
financial statements in this Form 10-K.
the consolidated
reported
in
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.
fair
recurring
associated with
Based on the sensitivity of reported financial
statement amounts to the underlying estimates and
assumptions, the more significant accounting policies
applied by us have been identified by management as
those
value
measurements, 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,
these
estimates and assumptions underlying
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-
estimates.
accounting
significant
mentioned
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 and liabilities, AFS debt securities,
certain equity securities and various types of derivative
financial instruments.
Changes in the fair value of these financial assets
and liabilities are recorded either as components of our
consolidated statement of income or as components of
other comprehensive income within shareholders'
equity in our consolidated statement of condition. In
addition to those financial assets and liabilities that we
carry at fair value in our consolidated financial
statements on a recurring basis, we estimate the fair
values of other financial assets and liabilities that we
carry at amortized cost in our consolidated statement
of condition, and we disclose these fair value estimates
in the notes to our consolidated financial statements.
We estimate the fair values of these financial assets
and liabilities using the definition of fair value described
below. Additional information with respect to the assets
and liabilities carried by us at fair value on a recurring
basis is provided in Note 2 to the consolidated financial
statements in 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).
State Street Corporation | 116
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
With respect
instruments, we
to derivative
evaluated the fair value impact of the credit risk of our
counterparties. We considered such factors as the
market-based probability of default by our
counterparties, and our current and expected potential
future net exposures by remaining maturities, in
determining the appropriate measurements of fair
value.
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 date.
Other intangible assets represent purchased long-lived
intangible assets, primarily client relationships, core
deposit intangible assets and technology 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. Other intangible assets are initially measured
at their acquisition date fair value, the determination of
which requires management judgment. Goodwill is not
amortized, while other intangible assets are amortized
over their estimated useful lives.
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. 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. 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.
During 2018, we assessed goodwill for impairment
using a qualitative assessment. Based on our
evaluation of the qualitative factors noted above, we
determined that it was more likely than not that the fair
value of each of the reporting units exceeded its
respective carrying amount.
Other 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
the estimated
for which there are identifiable cash flows that are
largely independent of the cash flows from other groups
of assets using the following process. First, we routinely
assess whether impairment indicators are present.
When impairment indicators are identified as being
future net
present, we compare
undiscounted cash flows of the intangible asset with its
carrying value. If the future net undiscounted cash flows
are greater than the carrying value, then there is no
intangible asset's net
impairment, but
undiscounted cash flows are less than its carrying value,
we are required to calculate impairment. An impairment
is recognized by writing the intangible asset down to its
fair value. We evaluate intangible assets for indicators
of impairment on a quarterly basis. There were no
impairments taken on other intangible assets in 2018.
the
if
Additional information about goodwill and other
intangible assets, including information by line of
business, is provided in Note 5 to the consolidated
financial statements in this Form 10-K.
Contingencies
Information on significant estimates and
judgments related with establishing litigation reserves
is discussed in Note 13 of the consolidated financial
statements in this Form 10-K.
RECENT ACCOUNTING DEVELOPMENTS
Information with respect to recent accounting
developments is provided in Note 1 to the consolidated
financial statements in this Form 10-K.
State Street Corporation | 117
ITEM 7A. QUANTITATIVE AND QUALITATIVE
DISCLOSURES ABOUT MARKET RISK
The information provided under “Market Risk
Management”
in our
Management's Discussion and Analysis in this Form 10-
K, is incorporated by reference herein.
"Financial Condition"
in
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" in Market for Registrant’s Common Equity,
Related Stockholder Matters and Issuer Purchases of
Equity Securities, and under "Capital" in “Financial
Condition” in our Management’s Discussion and
Analysis in this Form 10-K.
State Street Corporation | 118
Report of Ernst & Young LLP, Independent Registered Public Accounting Firm
To 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, 2018 and 2017, 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, 2018, 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, 2018 and 2017, and the results of its operations and its cash flows for each of the three years in the
period ended December 31, 2018, 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, 2018, 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 21, 2019 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 consolidated 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
consolidated 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 21, 2019
/s/ Ernst & Young LLP
State Street Corporation | 119
STATE STREET CORPORATION
CONSOLIDATED STATEMENT OF INCOME
(Dollars in millions, except per share amounts)
Years Ended December 31,
2018
2017
2016
Fee revenue:
Servicing fees
Management fees
Foreign exchange 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
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
$
5,421
$
5,365
$
1,851
1,201
543
289
9,305
3,662
991
2,671
9
(3)
—
6
1,616
1,071
606
247
8,905
2,908
604
2,304
(39)
—
—
(39)
5,073
1,292
1,099
562
90
8,116
2,512
428
2,084
10
(2)
(1)
7
11,982
11,170
10,207
15
2
10
4,780
1,324
938
500
24
226
1,176
8,968
2,999
400
—
2,599
2,410
6.48
6.40
$
$
$
4,394
1,167
838
461
266
214
929
8,269
2,899
722
—
2,177
1,993
5.32
5.24
$
$
$
4,353
1,105
800
440
209
207
963
8,077
2,120
(22)
1
2,143
1,968
5.03
4.97
$
$
$
371,983
376,476
374,793
380,213
391,485
396,090
$
1.78
$
1.60
$
1.44
The accompanying notes are an integral part of these consolidated financial statements.
State Street Corporation | 120
STATE STREET CORPORATION
CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME
(In millions)
Net income
Years Ended December 31,
2018
2017
2016
$
2,599
$
2,177
$
2,143
Other comprehensive income (loss), net of related taxes:
Foreign currency translation, net of related taxes of ($8), $21 and ($11),
respectively
Net unrealized gains (losses) on available-for-sale securities, net of
reclassification adjustment and net of related taxes of ($134), $272 and ($119),
respectively
Net unrealized gains (losses) on available-for-sale securities designated in fair
value hedges, net of related taxes of $9, $16 and $16, respectively
Other-than-temporary impairment on held-to-maturity securities related to factors
other than credit, net of related taxes of $2, $3 and $5, respectively
Net unrealized gains (losses) on cash flow hedges, net of related taxes of ($17),
($181) and ($42), respectively
Net unrealized gains (losses) on retirement plans, net of related taxes of $8, $8
and $1, respectively
Other comprehensive income (loss)
Total comprehensive income
(67)
(302)
24
4
(33)
27
(347)
900
367
22
3
(285)
24
1,031
(372)
(181)
23
7
(64)
(11)
(598)
$
2,252
$
3,208
$
1,545
The accompanying notes are an integral part of these consolidated financial statements.
State Street Corporation | 121
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 $41,351 and $40,255)
Loans and leases (less allowance for losses of $67 and $54)
Premises and equipment (net of accumulated depreciation of $4,152 and $3,881)
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
Series H, 5,000 shares issued and outstanding
Common stock, $1 par, 750,000,000 shares authorized:
503,879,642 and 503,879,642 shares issued, and 379,946,724 and 367,649,858 shares
outstanding
Surplus
Retained earnings
Accumulated other comprehensive income (loss)
Treasury stock, at cost (123,932,918 and 136,229,784 shares)
Total shareholders’ equity
Total liabilities and shareholders' equity
December 31,
2018
2017
$
3,597
$
73,040
4,679
860
45,148
41,914
25,722
2,214
3,203
7,446
2,369
34,434
$
$
244,626
$
44,804
$
66,235
69,321
180,360
1,082
3,092
24,209
11,093
2,107
67,227
3,241
1,093
57,121
40,458
23,240
2,186
3,099
6,022
1,613
31,018
238,425
47,175
50,139
87,582
184,896
2,842
1,144
15,606
11,620
219,836
216,108
491
742
728
742
493
494
504
10,061
20,606
(1,356)
(8,715)
24,790
$
244,626
$
491
742
728
742
493
—
504
9,799
18,856
(1,009)
(9,029)
22,317
238,425
The accompanying notes are an integral part of these consolidated financial statements.
State Street Corporation | 122
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, 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
vested, 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
Cash dividends declared:
Common stock - $1.60 per share
Preferred stock
Common stock acquired
Common stock awards vested
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
494
Net income
Other comprehensive income (loss)
Preferred stock issued
Common stock issued
Cash dividends declared:
Common stock - $1.78 per share
Preferred stock
Common stock acquired
Common stock awards vested
Other
2,599
(347)
2,599
(347)
494
586
(13,244)
564
1,150
(665)
(188)
4
44
(368)
3,324
(2,389)
12
(350)
101
(1)
(665)
(188)
(350)
145
(365)
Balance as of December 31, 2018
$
3,690
503,880
$
504
$ 10,061
$ 20,606
$
(1,356) 123,933
$ (8,715) $ 24,790
The accompanying notes are an integral part of these consolidated financial statements.
State Street Corporation | 123
STATE STREET CORPORATION
CONSOLIDATED STATEMENT OF CASH FLOWS
Years Ended December 31,
2018
2017
2016
$
2,599
$
2,177
$
2,143
(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
(Gains) losses related to investment securities, net
Change in trading account assets, net
Change in accrued interest and fees receivable, net
Change in collateral deposits, net
Change in unrealized (gains) losses on foreign exchange derivatives, net
Change in other assets, net
Change in accrued expenses and other liabilities, net
Other, net
Net cash provided by operating activities
Investing Activities:
Net (increase) decrease in interest-bearing deposits with banks
Net (increase) decrease in securities purchased under resale agreements
Proceeds from sales of available-for-sale securities
Proceeds from maturities of available-for-sale securities
Purchases of available-for-sale securities
Proceeds from maturities of held-to-maturity securities
Purchases of held-to-maturity securities
Net (increase) in loans and leases
Business acquisitions, net of cash acquired
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 (used in) provided by investing activities
Financing Activities:
Net increase (decrease) in time deposits
Net (decrease) increase in all other deposits
Net increase (decrease) in other short-term borrowings
Proceeds from issuance of long-term debt, net of issuance costs
Payments for long-term debt and obligations under capital leases
Proceeds from issuance of preferred stock, net of issuance costs
Proceeds from issuance of common stock, net of issuance costs
Repurchases 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
Cash and due from banks at beginning of period
Cash and due from banks at end of period
Supplemental disclosure:
Interest paid
Income taxes paid, net
(145)
226
977
(6)
233
26
7,326
(1,836)
260
397
400
10,457
(5,813)
(1,438)
26,082
14,645
(31,814)
6,296
(6,539)
(2,461)
(2,595)
(326)
(609)
—
76
(4,496)
6,673
(11,209)
188
995
(1,461)
495
1,150
(350)
—
(124)
(828)
—
(4,471)
1,490
2,107
95
214
871
39
(69)
(455)
1,819
3,267
(1,341)
9
307
6,933
3,708
(1,285)
12,439
28,878
(34,841)
4,028
(8,772)
(3,511)
—
(233)
(637)
172
102
48
(15,306)
13,040
(1,999)
747
(493)
—
—
(358)
207
722
(7)
(175)
(298)
(18)
(1,057)
1,772
(1,147)
506
2,290
4,403
1,448
1,401
30,070
(30,162)
7,942
(8,425)
(924)
(437)
(643)
(613)
—
170
4,230
8,488
(12,952)
(268)
1,492
(1,441)
493
—
(1,292)
(1,365)
—
(126)
(768)
9
(6,188)
793
1,314
13
(122)
(723)
(28)
(6,413)
107
1,207
1,314
$
$
3,597
$
2,107
$
$
981
549
$
593
345
441
371
The accompanying notes are an integral part of these consolidated financial statements.
State Street Corporation | 124
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. Revenue From Contracts
Note 26. Non- U.S. Activities
Note 27. Parent Company Financial Statements
126
130
138
146
149
150
151
151
152
153
158
161
162
164
166
168
170
170
172
172
173
173
176
176
178
180
180
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 | 125
STATE STREET CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1. Summary of Significant Accounting
Policies
Certain previously reported amounts have been
reclassified to conform to current-year presentation.
Basis of Presentation
company
headquartered
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
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 a suite of related
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
operations
investment manager
outsourcing; performance,
risk and compliance
analytics; and financial data management to support
institutional investors. New products and services
resulting
from our acquisition of Charles River
Development on October 1, 2018 include: portfolio
modeling and construction, trade order management,
risk and compliance and wealth
investment
management solutions.
Investment Management, through State Street
Global Advisors, provides a broad range of investment
management strategies and products for our clients.
Our investment management strategies and products
span the risk/reward spectrum, including core and
enhanced
indexing, multi-asset strategies, active
quantitative and fundamental active capabilities and
alternative investment strategies. Our AUM is currently
primarily weighted to indexed strategies. In addition, we
provide a breadth of services and solutions, including
investing,
environmental, social and governance
defined benefit and defined contribution and OCIO.
State Street Global Advisors is also a provider of ETFs,
including 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.
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
measured at fair value through earnings, except for
investments where a fair market value is not readily
available, which 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
investments
liquid, short-term
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
State Street Corporation | 126
STATE STREET CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
banks, allowing borrowers the right of collateral
substitution and/or short-notice termination. We revalue
these securities daily to determine if additional collateral
is necessary from the borrower to protect us against
credit exposure. We can use these securities as
collateral for repurchase agreements.
For securities sold under repurchase agreements
collateralized by our investment securities portfolio, the
dollar value of the securities remains in investment
securities in our consolidated statement of condition.
Where a master netting agreement exists or both parties
are members of a common clearing organization, resale
and
the same
counterparty or clearing house and maturity date are
recorded on a net basis.
repurchase agreements with
Fee and Net Interest Income
The majority of 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 the consideration specified in
contracts with our customers, and excludes taxes
collected from customers subsequently remitted to
governmental authorities. We recognize revenue as the
services are performed or at a point in time depending
on the nature of the services provided. Payments made
to third party service providers are generally recognized
on a gross basis when we control those services and
are deemed to be the principal. Additional information
about revenue from contracts with customers is
provided in Note 25.
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.
Other Significant Policies
The following table identifies our other significant
accounting policies and the note and page where a
detailed description of each policy can be found:
Fair Value
Investment Securities
Loans and Leases
Goodwill and Other Intangible
Assets
Derivative Financial Instruments
Offsetting Arrangements
Contingencies
Variable Interest Entities
Regulatory Capital
Equity-Based Compensation
Income Taxes
Earnings Per Common Share
Revenue from Contracts with
Customers
Note
Note
Note
Note
Note
Note
Note
Note
Note
Note
Note
Note
Note
2
3
4
5
10
11
13
14
16
18
22
23
25
Page
Page
Page
Page
Page
Page
Page
Page
Page
Page
Page
Page
Page
130
138
146
149
153
158
162
164
168
170
173
176
178
Acquisitions and Dispositions
On October 1, 2018, we acquired a 100% interest
in Charles River Development, a provider of investment
management front office tools and solutions, for an all
cash purchase price of approximately $2.6 billion.
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.
A significant portion of the purchase price is
allocated to goodwill and identifiable intangible assets.
Goodwill of $1.5 billion, of which approximately $1.4
billion is expected to be deductible for tax purposes, is
attributable to revenue and cost synergies expected to
arise from enhanced platform services and efficiencies,
revenue growth from future product and service
offerings and new customers, together with certain
intangible assets that do not qualify for separate
recognition. Identifiable intangible assets of $1.0 billion
arising from the acquisition are primarily related to
technology and client relationships which are amortized
on a straight line basis over a period of 10 and 18 years,
respectively. We determined the estimated fair value of
identifiable intangible assets acquired by applying the
income approach. Additional information about goodwill
and other intangible assets, including information by
line of business is provided in Note 5.
The purchase price accounting reflected in the
accompanying financial statements is provisional and
is based upon estimates and assumptions that are
subject to change within the measurement period (up
to one year from the acquisition date pursuant to ASC
805). The measurement period remains open pending
the completion of valuation procedures related to the
acquired assets and assumed liabilities, primarily the
identifiable intangible assets.
Our consolidated financial statements include the
operating results for the acquired business from the
date of acquisition, October 1, 2018. Charles River
Development contributed approximately $121 million
and $57 million in total revenue and total expenses,
respectively, for the year ended December 31, 2018.
Pro forma results of operations for this acquisition
have not been presented because the effects would not
have been material to our consolidated revenues or net
income.
State Street Corporation | 127
STATE STREET CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Recent Accounting Developments
Relevant standards that were recently issued but not yet adopted as of December 31, 2018:
Standard
Description
ASU 2016-02, Leases (Topic 842)
and relevant amendments
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
flows
associated with leases, as well as a maturity analysis of
lease liabilities.
for assets, expenses, and cash
2016-13,
ASU
Financial
Instruments-Credit Losses (Topic
326): Measurement of Credit
Losses on Financial Instruments
2017-04,
ASU
Intangibles-
Goodwill and Other (Topic 350):
Simplifying the Test for Goodwill
Impairment
ASU 2017-08, Receivables
-
Nonrefundable Fees and Other
310-20):
Costs
on
Premium
Purchased
Debt
Securities
amortization
Callable
(Subtopic
ASU 2018-02, Income Statement
- Reporting Comprehensive
Income
220):
(Topic
Reclassification of Certain Tax
Effects from Accumulated Other
Income
Comprehensive
incurred
replaces
the existing
The standard
loss
impairment guidance and 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. The
standard also amends existing impairment guidance for
available-for-sale securities, and credit losses 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. The guidance requires a cumulative effect of
initial application to be recognized in retained earnings at
the date of initial application.
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.
The standard shortens the amortization period for certain
purchased callable debt securities to the earliest call date.
The standard does not impact debt securities which are
held at a discount. The guidance requires a cumulative
effect of initial application to be recognized in retained
earnings at the beginning of the period of adoption.
This standard provides an election to reclassify the
stranded tax effects resulting from the enactment of the Tax
Cuts and Jobs Act of 2017, from accumulated other
earnings.
comprehensive
retained
income
to
Date of
Adoption
Effects on the financial statements or
other significant matters
January 1, 2019 We have adopted the new standard as of January
1, 2019. Upon adoption of the standard, we
recognized the required right-of-use assets of
approximately $0.9 billion and lease liabilities of
approximately $1.1 billion. This increase largely
relates to the present value of future minimum
lease payments due under existing operating
leases of office space. No material changes are
expected to the recognition of lease expenses in
Income. We
the Consolidated Statement of
adopted the standard by applying the transition
method whereby comparative periods will not be
restated, and no material adjustment to retained
earnings was required. For adoption we elected the
standard’s package of three practical expedients,
and (1) have not reassessed whether any expired
or existing contracts are or contain leases, (2) have
not reassessed the lease classification for any
expired or existing leases, and (3) have not
reassessed initial direct costs for any existing
leases. In addition, we made an accounting policy
election not to apply the recognition requirements
to short-term leases, and have elected the practical
expedient to not separate lease and nonlease
components.
January 1, 2020,
early adoption
permitted
We are continuing to assess the impact of the
standard on our consolidated financial statements.
We have established a steering committee to
provide cross-functional governance over the
project plan and key decisions, and are continuing
to develop key accounting policies, assess existing
credit loss models and processes against the new
guidance and address data requirements and
sources to ensure that the expected credit losses
are calculated in accordance with the standard. We
continue to develop and test new and modified
credit loss models and based on our analysis to
date, we expect the recognition of credit losses to
accelerate under the new standard. We are
continuing to assess the extent of the impact on
the allowance for credit losses which will be
impacted by our portfolio and the macroeconomic
factors on the date of adoption. We plan to adopt
the new guidance on January 1, 2020.
January 1, 2020,
early adoption
permitted
We are evaluating the impacts of early adoption,
and will apply this standard prospectively upon
adoption.
January 1, 2019 We have adopted the new standard as of January
1, 2019. No material adjustment to retained
earnings was required.
January 1, 2019 We have adopted the new standard as of January
1, 2019. Upon adoption of the standard we
reclassified approximately $84 million of stranded
tax effects from accumulated other comprehensive
income to retained earnings.
State Street Corporation | 128
STATE STREET CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Relevant standards that were recently issued but not yet adopted as of December 31, 2018 (continued):
Standard
Description
2018-13,
Fair Value
ASU
Measurement
820):
Disclosure Framework-Changes
to the Disclosure Requirements for
Fair Value Measurement
(Topic
The standard eliminates, amends and adds disclosure
requirements for fair value measurements.
2018-15,
ASU
Intangibles-
Goodwill and Other-Internal-Use
350-40):
Software
(Subtopic
Customer’s
for
Implementation Costs Incurred in
a Cloud Computing Arrangement
That Is a Service Contract (a
consensus of the FASB Emerging
Issues Task Force)
Accounting
This standard addresses accounting for fees paid by a
customer for implementation, set-up and other upfront
costs incurred in a cloud computing arrangement that is
hosted by the vendor, i.e., a service contract. The new
capitalization of
guidance aligns
implementation costs with guidance on internal-use
software.
treatment
for
Date of
Adoption
January 1, 2020,
early adoption
permitted,
including partial
early adoption.
Provisions that
eliminate or
amend
disclosures can
be early adopted
without early
adopting the new
disclosure
requirements.
January 1, 2020,
early adoption
permitted
Effects on the financial statements or
other significant matters
We have elected to early adopt the provisions of
the new standard
that eliminate or amend
disclosures as of December 31, 2018 and our
disclosures were modified accordingly. The
provisions of the new standard that add disclosures
will be adopted upon the effective date of the
standard.
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, 2018:
from
We adopted ASU 2014-09, Revenue
Contracts with Customers (Topic 606), effective
January 1, 2018. The standard provides companies
with a single model for recognizing revenue from
contracts with customers. The core principle requires a
company to recognize revenue to depict the transfer of
goods or services to customers in an amount that
reflects the consideration that it expects to be entitled
to in exchange for those goods or services. We used
the modified retrospective method of transition, which
requires the impact of applying the standard on prior
periods to be reflected in opening retained earnings
upon adoption. The adoption of the standard does not
have a material impact on the timing of recognition of
revenue in our consolidated statement of income, or our
consolidated statement of condition, and therefore no
adjustment has been made to retained earnings.
However, due to the updated principal and agent
guidance in the standard, certain costs we pay to third
parties on behalf of our clients previously reported in
our consolidated statement of income on a net basis,
primarily against the related management fee revenue
and foreign exchange trading services revenue, are
now reported on a gross basis in expenses.
revenue
guidance. The
For the year ended December 31, 2018, both
revenues and expenses increased by approximately
$272 million, primarily due to the updated principal and
agent
impact was
approximately $190 million in management fees, $58
million in foreign exchange trading services and $24
million across other revenue lines, and the expense
impact was approximately $183 million in other
expenses, $59 million in transaction processing and
$30 million across other expense line items. Adoption
of the standard had no impact on cash from or used in
operating, financing, or investing activities in our
consolidated statements of cash flows.
Improvements
to better portray
We adopted ASU 2017-12, Derivatives and
Hedging (Topic 815): Targeted
to
Accounting for Hedging Activities, effective October 1,
2018. The standard amends the hedge accounting
model
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
in certain
the application of hedge accounting
situations. The guidance permits a one-time
reclassification of debt securities eligible to be hedged
under the "last-of-layer" method from HTM to AFS upon
adoption. In the fourth quarter of 2018, we elected to
make a one-time transfer of qualifying securities with a
total book value of approximately $1.2 billion. We have
applied certain aspects of the updated standard to
existing hedges as permitted by the ASU, however, the
adoption did not have a material impact on our financial
statements.
(Subtopic
825-10): Recognition
We adopted ASU 2016-01, Financial Instruments-
and
Overall
Measurement of Financial Assets and Financial
Liabilities, effective January 1, 2018. Under the new
standard, all equity securities will be measured at fair
through earnings with certain exceptions,
value
including investments accounted for under the equity
method of accounting or where the fair market value of
an equity security is not readily available. Upon adoption
of the standard on January 1, 2018, we reclassified
approximately $397 million of money market funds and
$46 million of equity securities classified as AFS to held
at fair value through profit and loss in other assets. The
cumulative-effect transition adjustment recognized in
retained earnings on January 1, 2018, and the change
in fair value recognized through profit and loss for the
period ended December 31, 2018, were immaterial to
the financial statements.
State Street Corporation | 129
STATE STREET CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 2. Fair Value
Fair Value Measurements
We carry trading account assets and liabilities,
AFS debt securities, certain equity 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. Our level 1
financial assets also include actively traded 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 AFS
investment securities, as well as various types of foreign
exchange and interest rate derivative instruments.
Fair value for our AFS investment securities
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
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.
compares
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. We
consider factors such as the likelihood of default by 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, 2018
and 2017.
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 may be
internally developed. The following provides a more
detailed discussion of our financial assets and liabilities
that we may categorize in level 3 and the related
valuation methodology.
• The fair value of our investment securities
categorized in level 3 is measured using
information obtained from third-party sources,
State Street Corporation | 130
STATE STREET CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
typically non-binding broker/dealer quotes, or
through the use of internally-developed pricing
models. Management has evaluated
its
methodologies used to measure fair value, and
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 less observable.
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.
State Street Corporation | 131
STATE STREET CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Fair Value Measurements on a Recurring Basis
As of December 31, 2018
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
$
34
$
— $
(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
Collateralized loan obligations
Total asset-backed securities
Non-U.S. debt securities:
Mortgage-backed securities
Asset-backed securities
Government securities
Other(2)
Total non-U.S. debt securities
State and political subdivisions
Collateralized mortgage obligations
Other U.S. debt securities
146
—
180
1,039
—
1,039
—
—
—
—
—
—
—
—
—
—
—
—
179
501
680
—
15,968
15,968
541
583
—
1,124
1,682
943
12,793
6,544
21,962
1,918
195
1,658
42,825
16,382
—
16,382
395
$
—
—
—
—
—
—
—
—
—
593
593
—
631
—
58
689
—
2
—
1,284
4
—
4
—
$
(11,210)
—
(11,210)
—
34
325
501
860
1,039
15,968
17,007
541
583
593
1,717
1,682
1,574
12,793
6,602
22,651
1,918
197
1,658
45,148
5,176
13
5,189
395
51,592
4,958
71
214
5,243
5,243
Total AFS investment securities
1,039
Other assets:
Derivative instruments:
Foreign exchange contracts
Interest rate contracts
Total derivative instruments
Other
—
13
13
—
Total assets carried at fair value
$
1,232
$
60,282
$
1,288
$
(11,210) $
Liabilities:
Accrued expenses and other liabilities:
Derivative instruments:
Foreign exchange contracts
Interest rate contracts
Other derivative contracts
Total derivative instruments
—
—
—
—
Total liabilities carried at fair value
$
— $
16,518
71
214
16,803
16,803
$
4
—
—
4
4
(11,564)
—
—
(11,564)
$
(11,564) $
(1) Represents counterparty netting against level 2 financial assets and liabilities where a legally enforceable master netting agreement exists between us and the
counterparty. Netting also reflects asset and liability reductions of $987 million and $1,341 million, respectively, for cash collateral received from and provided to derivative
counterparties.
(2) As of December 31, 2018, the fair value of other non-U.S. debt securities included $1,295 million of covered bonds and $1,331 million of corporate bonds.
State Street Corporation | 132
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
(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
Collateralized loan obligations
Total asset-backed securities
Non-U.S. debt securities:
Mortgage-backed securities
Asset-backed securities
Government securities
Other(2)
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:
Derivatives 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
$
$
$
$
$
—
—
—
—
—
—
—
—
—
1,358
1,358
119
402
—
204
725
43
—
—
—
—
2,126
$
39
389
44
472
— $
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
—
11
—
—
—
—
—
—
—
—
—
—
—
—
—
—
11
—
8
1
9
492
$
11,596
—
—
11,596
67,201
$
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 us 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 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 | 133
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,
2018 and 2017, respectively. Transfers into and out of level 3 are reported as of the beginning of the period presented.
During the years ended December 31, 2018 and 2017, transfers into level 3 were mainly related to certain CMO, MBS
and ABS, including non-U.S. debt securities, for which fair value was measured using information obtained from third-
party sources, including non-binding broker/dealer quotes. During the years ended December 31, 2018 and 2017,
transfers out of level 3 were mainly related to certain CMO, 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, 2018
Total Realized and
Unrealized Gains (Losses)
Fair Value
as of
December 31,
2017
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,
2018(1)
Change in
Unrealized
Gains (Losses)
Related to
Financial
Instruments
Held as of
December 31,
2018
Total asset-backed securities
1,358
$
1,358
$
(In millions)
Assets:
AFS Investment securities:
Asset-backed securities:
Collateralized loan
obligations
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
Total AFS investment
securities
Derivative instruments:
Foreign exchange
contracts
Total derivative instruments
Total assets carried at fair
value
4
4
—
—
—
—
—
—
4
(3)
(3)
$
$
(7)
(7)
—
(4)
—
(4)
—
—
351
351
—
495
13
508
—
—
$ (636)
$
(268)
$
— $
(209)
$
(636)
(268)
—
(209)
—
(310)
(59)
(369)
(37)
—
—
(66)
(36)
(102)
(1)
(6)
—
114
—
114
—
8
(119)
—
(64)
(183)
(5)
—
593
593
—
631
58
689
—
2
(11)
859
(1,042)
(377)
122
(397)
1,284
—
—
6
6
—
—
—
—
—
—
—
—
$
4
4
119
402
204
725
43
—
2,126
1
1
$
2,127
$
1
$
(11)
$
865
$ (1,042)
$
(377)
$
122
$
(397)
$
1,288
$
(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 foreign exchange trading services.
State Street Corporation | 134
STATE STREET CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Fair Value Measurements Using Significant Unobservable Inputs
Year Ended December 31, 2017
Total Realized and
Unrealized Gains (Losses)
Fair Value
as of
December 31,
2016
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)
Change in
Unrealized
Gains (Losses)
Related to
Financial
Instruments
Held as of
December 31,
2017
(In millions)
Assets:
AFS Investment securities:
U.S. Treasury and federal agencies:
Mortgage-backed securities
$
— $
— $
— $
— $
— $
— $
25
$
(25)
$
200
1,035
1,235
119
370
5
494
—
24
19
—
(240)
(240)
—
(10)
(81)
(91)
—
—
(19)
—
(620)
(620)
2
(11)
31
22
(3)
—
—
—
275
275
—
67
—
67
5
—
—
(298)
—
(298)
—
(47)
—
(47)
—
(39)
—
—
—
1,358
1,358
119
402
204
725
43
—
—
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
Other assets:
Derivative instruments:
Foreign exchange contracts
Total derivative instruments
Total assets carried at fair
value
97
905
1,002
—
32
248
280
39
16
—
1,337
8
8
—
3
3
—
1
—
1
—
—
—
4
(7)
(7)
1
—
1
(2)
—
1
(1)
2
(1)
—
1
—
—
1,772
(350)
(601)
372
(409)
2,126
4
4
—
—
(4)
(4)
—
—
—
—
$
1
1
(3)
(3)
(3)
$
1,345
$
(3)
$
1
$
1,776
$ (350)
$
(605)
$
372
$
(409)
$
2,127
$
(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 foreign exchange trading services.
The following table presents quantitative information, as of the dates indicated, about the valuation techniques
and significant unobservable inputs used in the valuation of our level 3 financial assets and liabilities measured at fair
value on a recurring basis for which we use internally-developed pricing models. The significant unobservable inputs
for our level 3 financial assets and liabilities whose fair value is measured using pricing information from non-binding
broker/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:
Derivative Instruments, foreign exchange
contracts
Total
Liabilities:
Derivative instruments, foreign exchange
contracts
Total
Quantitative Information about Level 3 Fair Value Measurements
Fair Value
Weighted-Average
As of
December 31,
2018
As of
December 31,
2017
Valuation
Technique
Significant
Unobservable
Input(1)
As of
December 31,
2018
As of
December 31,
2017
$
$
$
$
4
4
4
4
$
$
$
$
1 Option model
Volatility
11.4%
7.2%
1
1 Option model
Volatility
11.4%
7.2%
1
(1) Significant changes in these unobservable inputs may result in significant changes in fair value measurement of the derivative instrument.
State Street Corporation | 135
STATE STREET CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Financial Instruments Not Carried at Fair Value
relevant market
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
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; and
• For financial instruments for which no quoted
market prices are available, fair value is estimated
using information obtained from independent third
parties, or by discounting the expected cash flows
using an estimated current market interest rate for
the financial instrument.
The generally short duration of certain of our
assets and liabilities results in a significant number of
financial instruments for which fair value equals or
closely approximates the amount recorded in our
consolidated statement of condition. These financial
instruments are reported in the following captions in our
consolidated statement of condition: cash and due from
banks; interest-bearing deposits with banks; securities
purchased under resale agreements; accrued interest
and fees receivable; deposits; securities sold under
repurchase agreements; 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, purchased
loans, commercial real estate
receivables and municipal loans is estimated using
information obtained from independent third parties or
by discounting expected future cash flows using current
rates at which similar loans would be made to borrowers
with similar credit ratings for the same remaining
maturities. Commitments to lend have no reported
value because their terms are at prevailing market rates.
State Street Corporation | 136
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.
(In millions)
December 31, 2018
Financial Assets:
Cash and due from banks
Interest-bearing deposits with banks
Securities purchased under resale agreements
Investment securities held-to-maturity
Net loans (excluding leases)(1)
Other(2)
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
Other(2)
Fair Value Hierarchy
Reported
Amount
Estimated
Fair Value
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)
$
3,597
$
3,597
$
3,597
$
— $
73,040
4,679
41,914
25,722
8,500
73,040
4,679
41,351
25,561
8,500
—
—
14,541
—
—
73,040
4,679
26,688
24,648
8,500
$
44,804
$
44,804
$
— $
44,804
$
66,235
69,321
1,082
3,092
11,093
8,500
66,235
69,321
1,082
3,092
11,048
8,500
—
—
—
—
—
—
66,235
69,321
1,082
3,092
10,865
8,500
—
—
—
122
913
—
—
—
—
—
—
183
—
(1) Includes $10 million of loans classified as held-for-sale that were measured at fair value on a non-recurring basis as of December 31, 2018.
(2) Represents a portion of underlying client assets related to our enhanced custody business, which clients have allowed us to transfer and re-pledge.
(In millions)
December 31, 2017
Financial Assets:
Fair Value Hierarchy
Reported
Amount
Estimated
Fair Value
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)
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.
State Street Corporation | 137
STATE STREET CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 3. Investment Securities
Investment securities held by us are classified as
either trading account assets, AFS, HTM or equity
securities held at fair value at the time of purchase and
reassessed periodically, based on management’s
intent.
As described in Note 1, upon adoption of ASU
2016-01 in 2018, we reclassified approximately $397
million of money market funds and $46 million of equity
securities to other assets, where they are held at fair
value with changes to fair value recorded through our
consolidated statement of income.
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 foreign exchange trading
services revenue in our consolidated statement of
income. AFS securities 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 | 138
STATE STREET CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following table presents the amortized cost, fair value and associated unrealized gains and losses of AFS
and HTM 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
Collateralized loan obligations
Total asset-backed securities
Non-U.S. debt securities:
Mortgage-backed securities
Asset-backed securities
Government securities
Other(2)
Total non-U.S. debt securities
State and political subdivisions(3)
Collateralized mortgage obligations
Other U.S. debt securities
U.S. equity securities(4)
U.S. money-market mutual funds(4)
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(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
December 31, 2018
Gross
Unrealized
Gains
Losses
Amortized
Cost
Fair
Value
Amortized
Cost
December 31, 2017
Gross
Unrealized
Gains
Losses
Fair
Value
$
1,035
$
16,112
17,147
538
609
594
1,741
1,687
1,580
12,816
6,600
22,683
1,905
200
1,683
—
—
4
37
41
4
—
1
5
—
—
22
18
40
20
—
1
—
—
$ — $
1,039
$
222
$
181
181
15,968
17,007
10,975
11,197
1
26
2
29
5
6
45
16
72
7
3
26
—
—
541
583
593
1,717
1,682
1,574
12,793
6,602
22,651
1,918
197
1,658
—
—
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
129
130
10,872
11,095
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
$
45,359
$ 107
$
318
$
45,148
$
56,952
$
437
$
268
$ 57,121
$
14,794
21,647
36,441
3,191
193
1
3,385
638
223
358
46
1,265
823
$ — $
24
24
35
—
—
35
77
—
1
—
78
38
199
518
717
10
—
—
10
9
—
—
—
9
2
$
14,595
$
17,028
$ — $
21,153
35,748
16,651
33,679
3,216
193
1
3,410
706
223
359
46
1,334
859
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
9
—
—
9
6
—
—
—
6
6
3,070
800
1
3,871
1,015
264
476
48
1,803
1,248
Total
$
41,914
$ 175
$
738
$
41,351
$
40,458
$
186
$
389
$ 40,255
(1) Primarily comprised 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, 2018 and December 31, 2017, the fair value of other non-U.S. debt securities included $1,295 million and $3,537 million, respectively, of covered
bonds and $1,331 million and $1,885 million, respectively, of corporate bonds.
(3) As of December 31, 2018 and December 31, 2017, the fair value of state and political subdivisions includes securities in trusts of $1,052 million and $1,247 million,
respectively. Additional information about these trusts is provided in Note 14.
(4) As described in Note 1 to the consolidated financial statements in this Form 10-K, upon adoption of ASU 2016-01 in 2018, we reclassified money-market funds and
equity securities classified as AFS to held at fair value through profit and loss in other assets.
State Street Corporation | 139
STATE STREET CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Aggregate investment securities with carrying
values of approximately $39 billion and $48 billion as
of December 31, 2018 and December 31, 2017,
respectively, were designated as pledged for public and
trust deposits, short-term borrowings and for other
purposes as provided by law.
In 2018, $1.2 billion of HTM securities, primarily
consisting of MBS and CMBS, were transferred to AFS
at book value and sold at a pre-tax loss of approximately
$36 million, due to our election to make a one-time
transfer of securities relating to the adoption of ASU
2017-12. Additional information on this new standard is
provided in Note 1.
In 2018, we sold approximately $26 billion of AFS
securities, primarily ABS and municipal bonds, resulting
in a net pre-tax gain of approximately $9 million. In 2017,
we sold $12.2 billion of AFS securities, 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 2018 and 2017, $2.1 billion and $496 million,
respectively, of agency MBS, previously classified as
AFS, were transferred to HTM. This transfer reflects our
intent to hold these securities until their maturity. These
securities were transferred at fair value, which included
a net unrealized loss of $53 million and $2.8 million as
of December 31, 2018 and 2017, 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 AFS and HTM 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, 2018
(In millions)
Available-for-sale:
Less than 12 months
12 months or longer
Total
Fair
Value
Gross
Unrealized
Losses
Fair
Value
Gross
Unrealized
Losses
Fair
Value
Gross
Unrealized
Losses
U.S. Treasury and federal agencies:
Mortgage-backed securities
Total U.S. Treasury and federal agencies
$
5,058
$
5,058
$
5,089
$
5,089
160
160
$
10,147
$
10,147
181
181
Asset-backed securities:
Student loans
Credit cards
Collateralized loan obligations
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
Total asset-backed securities
Non-U.S. debt securities:
Mortgage-backed securities
Total non-U.S. debt securities
Collateralized mortgage obligations
Total
21
21
—
—
2
2
4
6
45
12
67
3
3
14
106
90
548
744
1,407
1,479
5,478
2,167
10,531
365
181
861
218
493
—
711
118
—
—
226
344
244
14
484
1
26
—
27
1
—
—
4
5
4
—
12
324
583
548
1,455
1,525
1,479
5,478
2,393
10,875
609
195
1,345
$
$
17,740
$
110
$
6,886
$
208
$
24,626
$
2,192
$
45
$
12,403
$
6,502
8,694
481
481
184
184
102
103
148
10,648
23,051
4
4
2
2
1
536
536
119
119
51
154
415
569
6
6
7
7
1
$
14,595
$
17,150
31,745
1,017
1,017
303
303
153
$
9,461
$
155
$
23,757
$
583
$
33,218
$
738
State Street Corporation | 140
1
26
2
29
5
6
45
16
72
7
3
26
318
199
518
717
10
10
9
9
2
STATE STREET CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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
440
440
—
—
—
38
147
3
3
—
—
—
5,988
8,435
423
423
239
239
276
187
221
12,773
29,659
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 | 141
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, 2018. 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, 2018
(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
Collateralized loan obligations
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
$
$
$
224
101
325
57
199
—
256
139
136
3,439
1,071
4,785
235
2
141
$
815
802
1,617
$
— $
— $
1,039
1,884
1,884
13,181
13,181
15,968
17,007
164
294
402
860
769
698
6,409
4,575
12,451
776
—
1,219
250
90
171
511
176
581
2,945
937
4,639
446
—
298
70
—
20
90
598
159
—
19
776
461
195
—
541
583
593
1,717
1,682
1,574
12,793
6,602
22,651
1,918
197
1,658
5,744
$
16,923
$
7,778
$
14,703
$
45,148
4,002
$
10,737
$
12
$
43
$
14,794
33
4,035
127
10,864
1,697
1,709
19,790
19,833
21,647
36,441
7
58
—
65
160
96
243
46
545
1
291
135
—
426
42
127
115
—
284
318
267
—
—
267
7
—
—
—
7
15
2,626
—
1
2,627
429
—
—
—
429
489
3,191
193
1
3,385
638
223
358
46
1,265
823
$
4,646
$
11,892
$
1,998
$
23,378
$
41,914
State Street Corporation | 142
STATE STREET CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
$
— $
— $
(1)
includes:
Our review of impaired securities generally
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.
Years Ended December 31,
2018
2017
2016
$
205
$
74
$
15
(196)
(113)
(3)
—
(3)
—
—
—
(5)
(2)
(1)
(3)
$
6
$
(39) $
7
(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
$
(3) $
— $
(3)
—
(2)
(3)
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,
2018
2017
2016
Balance, beginning of period
$
77
$
79
$
105
Additions(1):
OTTI recognized
Deductions(2):
3
—
2
Realized losses on securities sold or
matured
(2)
(2)
(28)
Balance, end of period
$
78
$
77
$
79
(1) Additions represent securities with a first time credit impairment realized or when
a subsequent credit impairment has occurred.
(2) Deductions represent impairments on securities that have been sold or matured,
are required to be sold, or for which management intends to sell.
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,
in
amortization or accretion, accordingly.
resulting
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
reviews of
We conduct periodic
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).
•
•
•
•
•
•
the identification and evaluation of securities
that have indications of potential OTTI, such as
issuer-specific
including
deteriorating financial condition or bankruptcy;
concerns,
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;
the cause of the impairment and the financial
condition and near-term prospects of the
issuer;
State Street Corporation | 143
STATE STREET CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
•
•
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
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.
the
is
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 2018, 2017 and
2016 and changes in period-end unrealized losses, for
major security types as of December 31, 2018.
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 2018, 2017 or 2016.
The overall increase in unrealized losses on these
securities as of December 31, 2018 was primarily
attributable to interest rate increases in 2018 and to an
increase in total U.S. agency securities during 2018.
Asset-Backed Securities - Student Loans
composed of
Asset-backed securities collateralized by student
loans are primarily
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
traditional
consumer credit risk. We recorded no OTTI on these
securities in 2018, 2017 or 2016.
from
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 5.0 years as of December 31, 2018.
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 $4 million as of December 31,
2018. 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 2018, 2017 or 2016.
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 $3 million, less than $1
million and $2 million in 2018, 2017 and 2016,
respectively, on non-U.S. residential MBS, which
resulted from adverse changes in the timing of expected
future cash flows from the securities.
in
intervention
Our assessment of OTTI of these securities takes
the
into account government
corresponding mortgage markets and assumes a
baseline macroeconomic environment for this region,
factoring in slower economic growth and continued
In addition, we
government austerity measures.
perform stress testing and sensitivity analysis in order
to understand the impact of more severe assumptions
on potential OTTI.
State Street Corporation | 144
STATE STREET CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 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 2018, 2017 or 2016.
U.S. Non-Agency Residential Mortgage-Backed
Securities
We assess OTTI of our portfolio of U.S. non-
agency residential mortgage-backed securities using
cash flow models, tailored for each security, that
estimate the future cash flows from the underlying
mortgages, using the security-specific collateral and
transaction structure. Estimates of future cash flows are
subject to management judgment. The future cash
flows and performance of our portfolio of U.S. non-
agency residential mortgage-backed securities are a
function of a number of factors, including, but not limited
to, the condition of the U.S. economy, the condition of
the U.S. residential mortgage markets, and the level of
loan defaults, prepayments and
loss severities.
Management's estimates of future losses for each
security also consider the underwriting and historical
performance of each specific security, the underlying
collateral type, vintage, borrower profile, third-party
guarantees, current levels of subordination, geography
and other factors. We recorded no OTTI on these
securities in 2018, 2017 or 2016.
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 2018 and 2017.
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 $1,056
million related to 1,129 securities as of December 31,
2018 to be temporary, and not the result of any material
changes in the credit characteristics of the securities.
State Street Corporation | 145
STATE STREET CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 4. Loans and Leases
initially recorded at
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
fair value based on
been
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
the
commitment period when funding is not known or
expected.
fees and other
revenue over
As of December 31, 2018, we had no net
investment in leveraged lease financing compared to
$479 million as of December 31, 2017.
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(1)
Total domestic
Non-U.S.:
Commercial and financial:
Loans to investment funds
Senior secured bank loans
Lease financing(1)
Total non-U.S.
Total loans and leases
Allowance for loan and lease losses
Loans and leases, net of allowance
December 31,
2018
December 31,
2017
$
$
15,050
3,490
902
37
874
—
20,353
4,505
931
—
5,436
25,789
(67)
25,722
$
$
13,618
2,923
2,105
50
98
267
19,061
3,213
624
396
4,233
23,294
(54)
23,240
(1) Our leveraged lease portfolio was entirely sold off as of December 31, 2018.
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.
financial segment
The commercial and
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, 2018 and December 31, 2017, the loans
pledged as collateral totaled $6.5 billion and $1.9 billion,
respectively.
State Street Corporation | 146
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, 2018
(In millions)
Investment grade(1)
Speculative(2)
Substandard(3)
Total
December 31, 2017
(In millions)
Investment grade(1)
Speculative(2)
Special mention(4)
Total
Commercial and
Financial
Commercial Real
Estate
Lease
Financing
Total Loans and
Leases
$
$
$
$
19,599
$
5,308
8
24,915
$
874
—
—
874
Commercial and
Financial
Commercial Real
Estate
17,866
$
4,638
29
22,533
$
98
—
—
98
$
$
$
$
— $
—
—
— $
20,473
5,308
8
25,789
Lease
Financing
Total Loans and
Leases
663
$
—
—
663
$
18,627
4,638
29
23,294
(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 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) Substandard loans and leases consist of counterparties with well-defined weaknesses that jeopardize repayment with the possibility we will sustain some loss.
(4) Special mention loans consist of counterparties with potential weaknesses that, if uncorrected, may result in deterioration of repayment prospects.
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, 2018.
We review all loans individually for indicators of
impairment. Loans where such indicators exist are
evaluated individually for impairment at least quarterly.
For those loans where no such indicators are identified,
the loans are collectively evaluated for impairment.
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:
Individually evaluated
for impairment(1)
Collectively evaluated
for impairment
Total
December 31, 2018
December 31, 2017
Commercial
and
Financial
Commercial
Real Estate
Lease
Financing
Total Loans
and Leases
Commercial
and
Financial
Commercial
Real Estate
Lease
Financing
Total Loans
and Leases
$
$
8
$
— $
— $
8
$
— $
— $
— $
—
24,907
24,915
$
874
874
$
—
25,781
22,533
— $
25,789
$
22,533
$
98
98
$
663
663
$
23,294
23,294
(1) As of December 31, 2018, we had one loan for $8 million in the commercial and financial segment that was individually evaluated for impairment and deemed to be
impaired. This loan was subsequently paid in full in January 2019. As of December 31, 2017, there were no impaired loans.
State Street Corporation | 147
STATE STREET CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
In certain circumstances, we restructure troubled
to borrowers
loans by granting concessions
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. There were no
loans modified in troubled debt restructurings during the
years ended December 31, 2018 and 2017.
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, 2018 and
December 31, 2017, we had no loans or leases on non-
accrual status and no loans or leases 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, including a sale of a loan below
its carrying value, 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:
(In millions)
Allowance for loan and lease losses:
Years Ended December 31,
2018
2017
2016
Beginning balance
Provision for loan and lease losses(1)
Charge-offs(1)
$
54
15
(2)
$
53
$
2
(1)
Ending balance
$
67
$
54
$
46
10
(3)
53
(1) The provisions and charge-offs for loans and leases were primarily attributable to
exposure to senior secured loans to non-investment grade borrowers, purchased in
connection with our 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 primarily 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 | 148
STATE STREET CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 5. Goodwill and Other Intangible Assets
long-lived
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
intangible assets,
primarily client relationships, 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, technology assets, which are amortized
on a straight-line basis over periods ranging from three
to ten 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
in our
amortization recorded
consolidated statement of income.
in other expenses
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. There were no
impairments to goodwill or other intangible assets in
2018.
The following table presents changes in the carrying amount of goodwill during the periods indicated:
(In millions)
Goodwill:
Ending balance December 31, 2016
Acquisitions
Divestitures and other reductions
Foreign currency translation
Ending balance December 31, 2017
Acquisitions(1)
Foreign currency translation
Ending balance December 31, 2018
Investment
Servicing(1)
Investment
Management
Total
$
5,550
$
264
$
5,814
17
(9)
194
5,752
1,512
(84)
—
—
6
270
—
(4)
$
7,180
$
266
$
17
(9)
200
6,022
1,512
(88)
7,446
(1) Investment Servicing includes our acquisition of Charles River Development on October 1, 2018, 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, 2016
Acquisitions
Divestitures
Amortization
Foreign currency translation
Ending balance December 31, 2017
Acquisitions(1)
Amortization
Foreign currency translation
Ending balance December 31, 2018
Investment
Servicing(1)
Investment
Management
Total
$
1,539
$
211
$
1,750
16
(11)
(183)
71
1,432
1,007
(196)
(25)
—
—
(31)
1
181
—
(30)
—
$
2,218
$
151
$
16
(11)
(214)
72
1,613
1,007
(226)
(25)
2,369
(1) Investment Servicing includes our acquisition of Charles River Development on October 1, 2018, which is described in Note 1.
State Street Corporation | 149
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
Technology
Core deposits
Other
Total
December 31, 2018
December 31, 2017
Gross
Carrying
Amount
Accumulated
Amortization
Net
Carrying
Amount
Gross
Carrying
Amount
Accumulated
Amortization
Net
Carrying
Amount
$
3,262
$
(1,605) $
1,657
$
2,669
$
(1,470) $
1,199
389
676
103
(49)
(350)
(57)
340
326
46
47
686
95
(40)
(320)
(54)
7
366
41
$
4,430
$
(2,061) $
2,369
$
3,497
$
(1,884) $
1,613
Amortization expense related to other intangible
assets was $226 million, $214 million and $207 million
in 2018, 2017 and 2016, respectively.
Expected future amortization expense for other
intangible assets recorded as of December 31, 2018 is
as follows:
(In millions)
Years Ended December 31,
2019
2020
2021
2022
2023
Future
Amortization
$
245
243
236
233
232
Note 6. Other Assets
The following table presents the components of
other assets as of the dates indicated:
(In millions)
Securities borrowed(1)
Derivative instruments, net
Bank-owned life insurance
Investments in joint ventures and other
unconsolidated entities(2)
Collateral, net
Receivable for securities settlement
Prepaid expenses
Accounts receivable
Income taxes receivable
Deferred tax assets, net of valuation
allowance(3)
Deposits with clearing organizations
Other
Total
December 31,
2018
2017
$
19,575
$
19,404
5,189
3,323
2,912
1,354
531
493
343
129
113
58
414
4,013
3,242
2,259
473
188
364
348
97
113
120
397
$
34,434
$
31,018
(1) Refer to Note 11, for further information on the impact of collateral on our
financial statement presentation of securities borrowing and securities lending
transactions.
(2) Includes certain equity securities held at fair value through profit and loss
that were transferred from AFS as part of our adoption of ASU 2016-01. Refer
to Note 1, for further information on this new accounting standard.
(3) Deferred tax assets and liabilities recorded in our consolidated statement of
condition are netted within the same tax jurisdiction.
State Street Corporation | 150
STATE STREET CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 7. Deposits
As of December 31, 2018, we had $46.40 billion of time deposits outstanding, of which $4.52 billion were wholesale
CDs, $41.57 billion were derived from client deposits (payable on demand to such clients) and held in a time deposit
established by us as the agent and $314 million were non-U.S. and all of which are scheduled to mature in 2019. 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 us as the agent and $252 million were non-U.S. As of December 31, 2018 and 2017, all U.S. and non-
U.S. time deposits were in amounts of $100,000 or more. Demand deposit overdrafts of $5.44 billion and $3.24 billion
were included as loan balances at December 31, 2018 and 2017, respectively.
Note 8. Short-Term Borrowings
Our short-term borrowings include securities sold under repurchase agreements, short-term borrowings
associated with our tax-exempt investment program (more fully described in Note 14), and other short-term borrowings.
Collectively, short-term borrowings had weighted-average interest rates of 0.88% and 0.25% in 2018 and 2017,
respectively.
The following table presents 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:
2018
2017
2016
2018
2017
2016
2018
2017
2016
(Dollars in millions)
Securities Sold Under
Repurchase Agreements
Tax-Exempt
Investment Program
Other
Balance as of December 31
$
1,082
$
2,842
$
4,400
$
931
$
1,078
$
1,158
$
2,000
$
— $
3,441
2,048
4,302
3,683
5,572
4,113
1,078
1,023
1,158
1,127
1,726
1,512
2,000
nm
—
1
1.38 %
.03 %
.04 %
1.74%
1.45%
.67%
2.68%
.00%
.00%
.62
.05
.02
1.46
.79
.36
nm
.00
.17
—
29
31
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
nm Not meaningful
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 $1.10 billion underlying the repurchase agreements
remained in our investment securities portfolio as of
December 31, 2018.
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, 2018.
(In millions)
U.S. Government
Securities Sold
Amortized
Cost
Fair Value
Repurchase
Agreements(1)
Amortized
Cost
Overnight maturity
$
1,127
$
1,100
$
1,082
(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 $35.74
billion in 2018 compared to $31.15 billion in 2017.
State Street Bank currently maintains a line of
credit of CAD 1.40 billion, or approximately $1.03 billion,
as of December 31, 2018, 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, 2018 and
2017, there was no balance outstanding on this line of
credit.
State Street Corporation | 151
STATE STREET CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 9. Long-Term Debt
(Dollars in millions)
Issuance Date
Maturity Date
Coupon Rate
Seniority
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
May 15, 2013
December 16, 2024
May 15, 2023(2)
3.55%
2.55%
3.7%
3.3%
3.1%
Senior notes
Senior notes
Senior notes
Senior notes
Subordinated notes
Interest Due
Dates
2/18; 8/18(1)
2/18; 8/18
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
December 3, 2018
December 3, 2029
December 3, 2018
December 3, 2024
2.653%
4.375%
1.95%
2.65%
4.141%
3.776%
Fixed-to-floating rate
senior notes
Senior notes
Senior notes
Senior notes
Fixed-to-floating rate
senior notes
Fixed-to-floating rate
senior notes
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)
6/3; 12/3(1)
6/3; 12/3(1)
2/18; 5/18; 8/18;
11/18
2/15; 5/15; 8/15;
11/15
Floating-rate
Junior subordinated
debentures
7.35%
Senior notes
6/15; 12/15
4.956%
1.35%
Junior subordinated
debentures
Senior notes
3/15; 9/15
5/15; 11/15
May 15, 2028
June 15, 2026(3)
March 15, 2018
May 15, 2018
May 15, 1998
June 21, 1996
February 11, 2011
May 15, 2013
Parent Company
Long-term capital leases
State Street Bank issuances
As of December 31,
2018
2017
$
1,268
$
1,177
1,006
1,287
1,184
1,021
979
972
794
734
731
725
698
513
507
499
150
150
—
—
190
—
993
981
793
740
734
724
706
—
—
499
150
150
502
499
250
407
September 24, 2003
October 15, 2018(2)
5.25%
Subordinated notes
4/15; 10/15
Total long-term debt
$
11,093
$
11,620
(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, 2018 and 2017, the carrying value of long-term debt associated with these fair value hedges decreased $157 million
and $87 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 may not redeem notes prior to their maturity.
Parent Company
As of December 31, 2018 and 2017, long-term capital leases included $190 million and $244 million, respectively,
related to our One Lincoln Street headquarters building and related underground parking garage. Refer to Note 20 for
additional information.
State Street Corporation | 152
STATE STREET CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 10. Derivative Financial Instruments
We use derivative financial instruments to support
our clients' needs and to manage our interest rate and
currency risks. These financial instruments consist of
foreign exchange contracts such as forwards, futures
and options contracts; interest rate contracts such as
interest rate swaps (cross currency and single currency)
and futures; and other derivative contracts. Derivatives
instruments used for risk management purposes that
are highly effective in offsetting the risk being hedged
are generally designated as hedging instruments in
hedge accounting relationships while others are
economic hedges and not designated in hedge
in hedge
relationships. Derivatives
accounting
accounting relationships are disclosed according to the
type of hedge, such as, fair value, cash flow, or net
investment. Derivatives designated as hedging
instruments in hedge accounting relationships are
carried at fair value with change in fair value recognized
in the consolidated statement of income or OCI, as
appropriate. Derivatives not designated in hedge
accounting relationships include those derivatives
entered into to support client needs and derivatives
used to manage interest rate or foreign currency risk
associated with certain assets and liabilities. Such
derivatives are carried at fair value with changes in fair
value recognized in the consolidated statement of
income.
Derivatives Not Designated
Instruments
as Hedging
instruments,
We provide foreign exchange forward contracts
and options in support of our 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
foreign exchange
forward contracts, foreign exchange and interest rate
options, interest rate forward contracts, and interest rate
futures. The entire change in the fair value of our non-
hedging derivatives utilized in our trading activities are
recorded in foreign exchange trading services revenue,
and the entire change in fair value of our non-hedging
derivatives
asset-and-liability
management activities are recorded in net interest
income.
including
utilized
our
in
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
We adopted ASU 2017-12, in the fourth quarter of
2018, which better aligns hedge accounting with the
economics of our
risk management activities.
Additional information on this new standard is provided
in Note 1.
In connection with our asset-and-liability
management activities, we use derivative financial
instruments to manage our interest rate risk and foreign
currency risk for certain assets and liabilities. 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.
liability or
includes
the asset or
The risk management objective of a highly
effective hedging strategy that qualifies for hedge
accounting must be formally documented. The hedge
the derivative hedging
documentation
instrument,
forecasted
transaction, type of risk being hedged and method for
the derivative
assessing hedge effectiveness of
prospectively and retrospectively. We use quantitative
methods including regression analysis and cumulative
dollar offset method, comparing the change in the fair
value of the derivative to the change in fair value or the
cash flows of the hedged item. We may also utilize
qualitative methods such as matching critical terms and
evaluation of any changes in those critical terms.
Effectiveness is assessed and documented quarterly
and if determined that the derivative is not highly
effective at hedging
the designated risk hedge
accounting is discontinued.
We enter into stable value wrap derivative
contracts with unaffiliated stable value funds that allow
a stable value fund to provide book value coverage to
its participants. These derivatives contracts qualify as
guarantees as described in Note 12.
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 ours.
State Street Corporation | 153
STATE STREET CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Fair Value Hedges
Net Investment Hedges
Derivatives designated as fair value hedges are
utilized to mitigate the risk of changes in the fair values
of recognized assets and liabilities, including long-term
debt, AFS securities, and foreign currency investment
securities. 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 the derivative and
changes in fair value of the hedged item due to changes
in the hedged risk are recognized in earnings in the
same line item. As of January 1, 2018, we prospectively
changed the presentation of both hedging instruments
and hedged items designated as fair value hedges of
interest rate risk from processing fees and other
revenue to net interest income. If a hedge is terminated,
all remaining adjustments to the carrying amount of the
hedged item shall be amortized over a period that is
consistent with the amortization of other discounts or
premiums associated with the hedged item.
Cash Flow Hedges
liabilities or
Derivatives designated as cash flow hedges are
utilized to offset the variability of cash flows of
recognized assets or
forecasted
transactions. 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. Additionally, we
have entered into interest rate swap agreements 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.
Changes in fair value of the derivatives designated
as cash flow hedges are initially recorded in AOCI and
then reclassified into earnings in the same period or
periods during which the hedged forecasted transaction
affects earnings and are presented in the same income
statement line item as the earnings effect of the hedged
item. If the hedge relationship is terminated, the change
in fair value on the derivative recorded in AOCI is
reclassified into earnings consistent with the timing of
the hedged item. For hedge relationships that are
discontinued because a forecasted transaction is not
expected to occur according to the original hedge terms,
any related derivative values recorded in AOCI are
immediately recognized in earnings. As of December
31, 2018, the maximum maturity date of the underlying
loans is approximately 4.9 years.
Derivatives categorized as net investment hedges
are entered into to protect the net investment in our
foreign operations against adverse changes
in
exchange rates. We use foreign exchange forward
contracts to convert the foreign currency risk to U.S.
dollars to mitigate our exposure to fluctuations 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 OCI.
The following table presents the aggregate
contractual, or notional, amounts of derivative financial
instruments entered into in connection with our trading
and asset-and-liability management activities as of the
dates indicated:
December 31,
2018
2017
(In millions)
Derivatives not designated as
hedging instruments:
Interest rate contracts:
Futures
$
2,348
$
2,392
Foreign exchange contracts:
Forward, swap and spot
2,238,819
1,679,976
Options purchased
Options written
Futures
Commodity and equity contracts:
Commodity(1)
Equity(1)
Other:
Stable value contracts(2)
Deferred value awards(3)
Derivatives designated as
hedging instruments:
Interest rate contracts:
Swap agreements
Foreign exchange contracts:
578
576
49
—
—
350
302
50
16
50
26,634
434
26,653
473
10,596
11,047
Forward and swap
3,412
28,913
(1) Primarily composed of positions held by a consolidated sponsored investment fund.
(2) The notional value of the stable value contracts generally represents our maximum
exposure. However, exposure to various stable value contracts is contractually limited
to substantially lower amounts than the notional values, which represent the total
assets of the stable value funds.
(3) Represents grants of deferred value awards to employees; refer to discussion in
this note under "Derivatives Not Designated as Hedging Instruments."
Notional amounts are provided here as an
indication of the volume of our derivative activity and
serve as a reference to calculate the fair values of the
derivative.
State Street Corporation | 154
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.
(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
$
$
$
$
December 31,
December 31,
2018
2017
2018
2017
Derivative Assets(1)
Fair Value
Derivative Liabilities(2)
Fair Value
16,369
—
16,369
17
13
30
$
$
$
$
11,477
1
11,478
120
8
128
$
$
$
$
16,434
214
16,648
88
71
159
$
$
$
$
11,361
284
11,645
107
100
207
(1) Derivative assets are included within other assets in our consolidated statement of condition.
(2) 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)
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,
2018
2017
2016
Derivatives not designated as hedging instruments:
Foreign exchange contracts
Foreign exchange contracts
Foreign exchange trading services revenue
Interest expense(1)
Foreign exchange contracts
Processing fees and other revenue
Interest rate contracts
Interest rate contracts
Foreign exchange trading services revenue
Processing fees and other revenue(1)
Credit derivative contracts
Foreign exchange trading services revenue
Other derivative contracts
Foreign exchange trading services revenue
Other derivative contracts
Compensation and employee benefits
Total
$
$
632
$
662
723
$
(41)
—
(6)
(1)
—
5
—
(23)
8
—
—
—
(171)
509
$
(143)
474
$
—
—
(7)
1
(1)
(2)
(448)
205
(1) 2018 includes approximately $15 million of swap costs related to the first quarter of 2018 that were reclassified from Processing fees and other revenues to NII.
State Street Corporation | 155
STATE STREET CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following table shows the carrying amount and associated cumulative basis adjustments related to the
application of hedge accounting that is included in the carrying amount of hedged assets and liabilities in fair value
hedging relationships:
December 31, 2018
Hedged Items Currently Designated
Hedged Items No Longer Designated(1)
(In millions)
Long-term debt
Available-for-sale securities
Total
December 31, 2017
(In millions)
Long-term debt
Available-for-sale securities
Total
Carrying Amount of
Assets (Liabilities)(2)
Cumulative Hedge
Accounting Basis
Adjustments
Carrying Amount of
Assets (Liabilities)
Cumulative Hedge
Accounting Basis
Adjustments
8,270
$
1,496
9,766
$
(137) $
72
(65) $
1,197
$
50
1,247
$
(20)
1
(19)
Hedged Items Currently Designated
Hedged Items No Longer Designated(1)
Carrying Amount of
Assets (Liabilities)(2)
Cumulative Hedge
Accounting Basis
Adjustments
Carrying Amount of
Assets (Liabilities)
Cumulative Hedge
Accounting Basis
Adjustments
8,465
$
1,926
10,391
$
(95) $
106
11
$
1,400
$
894
2,294
$
8
1
9
$
$
$
$
(1) Represents hedged items no longer designated in qualifying fair value hedging relationships for which an associated basis adjustment exists at the balance sheet
date.
(2) Does not include the carrying amount of hedged items when only foreign currency risk is the designated hedged risk. The carrying amount excluded for investment
securities was $458 million and $763 million for December 31, 2018 and 2017, respectively. The carrying amount of assets (liabilities) excludes deposits of zero and
$13.2 billion for December 31, 2018 and 2017, respectively.
As of December 31, 2018 and 2017, the total notional amount of the interest rate swaps of fair value hedges was
$9.3 billion and $9.7 billion, respectively.
The following tables present the impact of our use of derivative financial instruments on our consolidated statement
of income for the periods indicated:
Location of
Gain (Loss) on
Derivative in
Consolidated
Statement of Income
(In millions)
Derivatives designated as fair value hedges:
Years Ended
December 31,
2018
2017
2016
Amount of Gain
(Loss) on Derivative
Recognized in
Consolidated
Statement of Income
Years Ended
December 31,
2018
2017
2016
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
Foreign exchange
contracts
Processing fees and
other revenue
$ (74) $ 18
$
(6)
Investment
securities
Foreign exchange
contracts
Processing fees and
other revenue
(328)
626
221
FX deposit
Processing fees and
other revenue
Processing fees and
other revenue
$ 74
$ (18) $
6
328
(626)
(221)
Interest rate
contracts(1)
Interest rate
contracts(1)
Interest rate
contracts(1)
Interest rate
contracts(1)
Total
Available-for-sale
securities(2)
—
Net interest income
(32)
Net interest income
Net interest income
Processing fees and
other revenue
Processing fees and
other revenue
31
(58)
—
—
—
—
39
— Long-term debt
Net interest income
Available-for-sale
securities(2)
Processing fees and
other revenue
43
(38)
(98) Long-term debt
Processing fees and
other revenue
—
—
—
—
(37)
(40)
39
100
49
—
—
$ (429) $ 645
$ 160
$ 419
$ (642) $ (155)
(1) As of January 1, 2018, we prospectively changed the presentation of gains (losses) on hedging instruments and hedge items designated as fair value hedges of
interest rate risk, and any resulting hedge ineffectiveness, from processing fees and other revenue to NII.
(2) In 2018, 2017 and 2016, $24 million, $22 million and $23 million, respectively, of net unrealized gains on AFS investment securities designated in fair value hedges
were recognized in OCI.
State Street Corporation | 156
STATE STREET CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended December 31,
2018
2017
2016
Years Ended December 31,
2018
2017
2016
Amount of Gain or (Loss) Recognized in Other
Comprehensive Income on Derivative
Location of Gain or
(Loss) Reclassified from
Accumulated Other
Comprehensive Income
into Income
Amount of Gain or (Loss) Reclassified from
Accumulated Other Comprehensive Income
into Income
(In millions)
Derivatives designated as
cash flow hedges:
Interest rate contracts
Foreign exchange contracts
Total
Derivatives designated as
net investment hedges:
$
$
(12) $
(12)
(24) $
(14) $
(104)
(118) $
Foreign exchange contracts $
Total
$
81
81
$
$
(160) $
(160) $
— Net interest income
(39) Net interest income
(39)
109
109
Gains (losses) related to
investment securities, net
$
$
$
$
(1) $
27
26
$
2
$
24
26
$
— $
— $
— $
— $
—
24
24
—
—
Derivatives Netting and Credit Contingencies
Credit Contingencies
Netting
Derivatives receivable and payable as well as cash
collateral from the same counterparty are netted in the
consolidated statement of condition
those
counterparties with whom we have legally binding
master netting agreements in place. In addition to cash
collateral received and transferred presented on a net
basis, we also receive and transfer collateral in the form
of securities, which mitigate credit risk but are not
eligible for netting. Additional information on netting is
provided in Note 11.
for
Certain of our derivatives are subject to master
netting agreements with our derivative counterparties
containing credit risk-related contingent features, which
requires us to maintain an investment grade credit rating
with the various credit rating agencies. If our rating falls
below investment grade, we would be in violation of the
provisions, and counterparties to the derivatives could
request immediate payment or demand full overnight
collateralization on derivatives instruments in net
liability positions. The aggregate fair value of all
derivatives with credit contingent features and in a
liability position as of December 31, 2018 totaled
approximately $2.1 billion, against which we provided
$1.1 billion of collateral in the normal course of
business. If our credit related contingent features
underlying these agreements were triggered as of
December 31, 2018, the maximum additional collateral
we would be required to post to our counterparties is
approximately $1.0 billion.
State Street Corporation | 157
STATE STREET CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 11. Offsetting Arrangements
Certain of our transactions are subject to master
netting agreements that allow us to net receivables and
payables by contract and settlement type. For those
legally enforceable contracts, we net receivables and
payables with the same counterparty on our statement
of condition.
In addition to netting receivables and payables
with our derivatives counterparty where a legal and
enforceable netting arrangement exist, we also net
related cash collateral received and transferred up to
the fair value exposure amount.
With
respect
to our securities
financing
arrangements, we net balances outstanding on our
consolidated statement of condition
those
transactions that met the netting requirements and were
transacted under a
legally enforceable netting
arrangement with the counterparty.
for
Securities received as collateral under securities
financing or derivatives transactions can be transferred
as collateral in many instances. The securities received
as proceeds under secured lending transactions are
recorded at a value that approximates 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, 2018 and December 31, 2017,
the value of securities received as collateral from third
parties where we are permitted to transfer or re-pledge
the securities totaled $11.69 billion and $2.47 billion,
respectively, and the fair value of the portion that had
been transferred or re-pledged as of the same dates
was $5.31 billion and $15 million, respectively. The
increase in 2018 is primarily attributable to underlying
client assets related to our enhanced custody business,
which assets clients have allowed us to transfer or re-
pledge.
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, 2018
(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
Gross Amounts Not Offset in
Statement of Condition
Cash and Securities
Received(4)
Net Amount(5)
$
16,386
$
(10,223) $
6,163
$
— $
6,163
13
—
NA
16,399
—
—
(987)
(11,210)
13
—
(987)
5,189
—
—
(220)
(220)
116,143
(91,889)
24,254
(22,872)
$
132,542
$
(103,099) $
29,443
$
(23,092) $
13
—
(1,207)
4,969
1,382
6,351
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
Gross Amounts Not Offset in
Statement of Condition
Cash and Securities
Received(4)
Net Amount(5)
$
11,597
$
(5,548) $
6,049
$
— $
6,049
8
1
NA
11,606
—
—
(2,045)
(7,593)
8
1
(2,045)
4,013
—
—
(124)
(124)
8
1
(2,169)
3,889
70,079
(47,434)
22,645
(22,645)
—
$
81,685
$
(55,027) $
26,658
$
(22,769) $
3,889
(1) Amounts include all transactions regardless of whether or not they are subject to an enforceable netting arrangement.
(2) Refer to Note 1 and Note 2 for additional information about the measurement basis of derivative 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 $24.3 billion as of December 31, 2018 were $4.7 billion of resale agreements and $19.6 billion of collateral provided related to securities borrowing. Included in the $22.6 billion
as of December 31, 2017 were $3.2 billion of resale agreements and $19.4 billion 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 | 158
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:
(In millions)
Derivatives:
Gross Amounts of
Recognized
Liabilities(1)(2)
Gross Amounts Offset
in Statement of
Condition(3)
Net Amounts of
Liabilities Presented in
Statement of Condition
Gross Amounts Not Offset in
Statement of Condition
Cash and Securities
Received(4)
Net Amount(5)
December 31, 2018
Foreign exchange contracts
$
16,522
$
(10,223) $
6,299
$
— $
6,299
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:
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
71
214
NA
16,807
—
—
(1,341)
(11,564)
71
214
(1,341)
5,243
—
—
(215)
(215)
104,494
(91,889)
12,605
(11,543)
$
121,301
$
(103,453) $
17,848
$
(11,758) $
71
214
(1,556)
5,028
1,062
6,090
Gross Amounts of
Recognized
Liabilities(1)(2)
Gross Amounts Offset
in Statement of
Condition(3)
Net Amounts of
Liabilities Presented in
Statement of Condition
Gross Amounts Not Offset in
Statement of Condition
Cash and Securities
Received(4)
Net Amount(5)
December 31, 2017
$
11,467
$
(5,548) $
5,919
$
— $
100
285
NA
11,852
—
—
(422)
(5,970)
100
285
(422)
5,882
—
—
(450)
(450)
54,127
(47,434)
6,693
(4,299)
$
65,979
$
(53,404) $
12,575
$
(4,749) $
5,919
100
285
(872)
5,432
2,394
7,826
(1) Amounts include all transactions regardless of whether or not they are subject to an enforceable netting arrangement.
(2) Refer to Note 1 and Note 2 for additional information about the measurement basis of derivative 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 $12.6 billion as of December 31, 2018 were $1.1 billion of repurchase agreements and $11.5 billion of collateral received related to securities lending
transactions. Included in the $6.7 billion as of December 31, 2017 were $2.8 billion of repurchase agreements and $3.9 billion of collateral received related to securities
lending transactions. 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 | 159
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 to 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 table summarizes 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:
As of December 31, 2018
As of December 31, 2017(1)
Overnight and
Continuous
Up to 30 Days
Total
Overnight and Continuous
U.S. Treasury and agency securities
$
88,904
$
— $
88,904
$
Total
Securities lending transactions:
US Treasury and agency securities
Corporate debt securities
Equity securities
Other(2)
Total
88,904
249
278
6,426
8,500
15,453
—
—
—
137
—
137
88,904
249
278
6,563
8,500
15,590
Gross amount of recognized liabilities for repurchase
agreements and securities lending
$
104,357
$
137
$
104,494
$
43,072
43,072
—
35
11,020
—
11,055
54,127
(1) As of December 31, 2017, there were no balances with contractual maturities up to 30 days.
(2) Represents a security interest in underlying client assets related to our enhanced custody business, which assets clients have allowed us to transfer and re-pledge.
State Street Corporation | 160
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:
Unfunded credit facilities
Guarantees(1):
Indemnified securities financing
Standby letters of credit
December 31,
2018
December 31,
2017
$
$
28,951
$
26,488
342,337
$
381,817
2,985
3,158
(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, 2018, approximately 73% of
our unfunded commitments to extend credit expire
within one year. Since many of these commitments are
expected to expire or renew without being drawn upon,
the gross contractual amounts do not necessarily
represent our future cash requirements.
Indemnified Securities Financing
On behalf of our clients, we lend their securities,
as agent, to brokers and other institutions. In most
circumstances, we indemnify our clients for the fair
market value of those securities against a failure of the
borrower to return such securities. We require the
borrowers to maintain collateral in an amount in excess
of 100% of the fair market value of the securities
borrowed. Securities on loan and the collateral are
revalued daily to determine if additional collateral is
necessary or if excess collateral is required to be
returned to the borrower. Collateral received in
connection with our securities lending services is held
by us as agent and is not recorded in our consolidated
statement of condition.
is
invested
third-party
The cash collateral held by us as agent is invested
on behalf of our clients. In certain cases, the cash
repurchase
in
collateral
agreements, for which we indemnify the client against
the 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,
2018
December 31,
2017
$
342,337
$
381,817
357,893
400,828
42,610
61,270
45,064
65,272
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 our
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
in our
consolidated statement of condition. As of December
31, 2018 and December 31, 2017, we had
approximately $19.58 billion and $19.40 billion,
respectively, of collateral provided and approximately
$11.52 billion and $3.85 billion, respectively, of collateral
received from clients in connection with our participation
in principal securities finance transactions.
liabilities, respectively,
Stable Value Protection
Stable value funds wrapped by us are high-quality
diversified portfolios of short-intermediate duration
fixed-income investments. Stable value contracts are
derivative contracts that also qualify as guarantees. The
notional amount under non-hedging derivatives,
provided in Note 10, generally represents our maximum
exposure under these derivatives contracts. However,
exposure
is
contractually limited to substantially lower amounts than
the notional values, which represent the total assets of
the stable value funds.
to various stable value contracts
Standby Letters of Credit
Standby
letters of credit provide credit
enhancement to our municipal clients to support the
issuance of capital markets financing.
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STATE STREET CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 awards or payments, 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 or development 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.
related
legal and
We evaluate our needs for accruals of loss
contingencies
regulatory
to
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, 2018, our aggregate accruals
for loss contingencies for legal and regulatory matters
totaled approximately $38 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
statements or on our reputation.
future consolidated
financial
As of December 31, 2018, for those matters for
which we have accrued probable loss contingencies
(including the Invoicing Matter described below) and for
other matters for which loss is reasonably possible (but
not probable) in future periods, and for which we are
able to estimate a range of reasonably possible loss,
our estimate of the aggregate reasonably possible loss
(in excess of any accrued amounts) ranges up to
approximately $300 million. Our estimate with respect
to the aggregate 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, which may change
quickly and significantly from time to time, particularly
if and as we engage with applicable governmental
agencies or plaintiffs in connection with a proceeding.
Also, the matters underlying the reasonably possible
loss will change from time to time. As a result, actual
results may vary significantly from the current estimate.
In certain pending matters, it is not currently
feasible to reasonably estimate the amount or a range
of reasonably possible loss, 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. An adverse
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 our actual losses from any legal
or regulatory proceeding for which we have provided
an estimate of the reasonably possible loss could
significantly exceed such estimate, and 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, no conclusion as to our
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
legal, governmental and
to significant
respect
regulatory matters.
Invoicing Matter
In 2015, we determined that we had incorrectly
invoiced clients for certain expenses. We have
reimbursed most of our affected customers for those
expenses, and we have implemented enhancements
to our billing processes. 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. In 2017, we
identified an additional area of incorrect expense billing
State Street Corporation | 162
STATE STREET CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
associated with mailing services in our retirement
services business. The accrual for loss contingencies
at December 31, 2018 included an estimate of the
amount we anticipate reimbursing clients due to that
error. We currently expect the cumulative total of our
payments to customers for these invoicing errors,
including the error in the retirement services business,
to be at least $380 million, all of which has been paid
or is accrued. However, we may identify additional
remediation costs.
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. In addition, we have received
a purported class action demand letter alleging that our
invoicing practices were unfair and deceptive under
Massachusetts law. A class of customers, or particular
customers, may assert that we have not paid to them
all amounts incorrectly invoiced, and may seek double
or treble damages under Massachusetts law.
We are also cooperating with investigations by
governmental and regulatory authorities on these
matters, including the civil and criminal divisions of the
DOJ, the SEC, the DOL and the Massachusetts
Attorney General, 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 settlement of
civil claims regarding our indirect foreign exchange
business. The staff of the SEC has informed us that it
intends to ask the SEC for permission to bring an action
against us asserting that we overcharged clients that
are registered investment companies for custody
expenses in violation of §§ 31(a), 34(b) and 37 of the
Investment Company Act of 1940, and Rules 31a-1(a)
and 31a-1(b) thereunder. We have submitted to the staff
of the SEC a response, which included a settlement
proposal, which the staff has indicated is too low, and
we remain in discussions with the staff as to a potential
settlement. Our aggregate accruals
loss
contingencies for legal and regulatory matters as of
December 31, 2018 include the amount of penalties
reflected in our settlement proposal. There can be no
for
assurance that any settlement, whether with the SEC
or other governmental authorities, will be reached or, if
so, the amount of the settlement or its impact on other
claims relating to these matters. In the first half of 2019,
it is likely that discussions will commence with the DOJ
regarding a potential resolution of their investigation
regarding this matter, which will then enable us to better
assess the potential penalties and/or other sanctions
they will be seeking. The aggregate amount of penalties
that may potentially be imposed upon us in connection
with the resolution of all outstanding investigations into
our historical billing practices could be multiples of the
potential penalties being discussed with the staff of the
SEC.
The outcome of any of these proceedings and, in
particular, any criminal sanction could materially
adversely affect our results of operations and could
for our
have significant collateral consequences
business and reputation.
Federal Reserve/Massachusetts Division of Banks
Written Agreement
the Federal Reserve and
relating
On June 1, 2015, we entered into a written
the
agreement with
Massachusetts Division of Banks
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.
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 shareholder of ours 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. The Court has
preliminarily approved a class settlement in this matter
for $4.9 million. The final fairness hearing is scheduled
to take place in April 2019. In addition, a shareholder of
ours has filed a derivative complaint against the
Company's past and present officers and directors to
recover 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
State Street Corporation | 163
STATE STREET CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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. Unrecognized tax benefits of
approximately $108 million as of December 31, 2018
increased from $94 million as of December 31, 2017.
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 2012. Management believes that we have
sufficiently accrued liabilities as of December 31, 2018
for potential 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 we do not have a variable interest in
the VIE, no further analysis is required and we do not
consolidate the VIE. If we hold 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. We are 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, 2018 and December 31, 2017, we
carried AFS
investment securities, composed of
securities related to state and political subdivisions, with
a fair value of $1.05 billion and $1.25 billion,
respectively, and other short-term borrowings of $0.93
billion and $1.08 billion,
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.
respectively,
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 us 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 3.6
years as of December 31, 2018, compared to
approximately 4.6 years as of December 31, 2017.
Under separate legal agreements, we provide
liquidity facilities to these trusts and, with respect to
certain securities, letters of credit. As of December 31,
2018, our commitments to the trusts under these
liquidity facilities and/or letters of credit totaled $946
million, and neither of the liquidity facilities nor 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 our general credit other than through the
liquidity facilities and letters of credit noted above.
Interests in Investment Funds
In the normal course of business, we manage
various types of investment funds through State Street
Global Advisors in which our clients are investors,
including State Street Global Advisors 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
State Street Corporation | 164
STATE STREET CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 foreign exchange 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, 2018, we do not have any
funds. As of
consolidated sponsored
December 31, 2017, the aggregate assets and liabilities
of our consolidated sponsored investment funds totaled
approximately $150 million and $50 million,
respectively.
investment
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.
investors’ ownership
The net assets of any consolidated fund are solely
available to settle the liabilities of the fund and to settle
any
requests,
including any seed capital invested in the fund by us.
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 our general credit.
redemption
loss
related
exposure
As of December 31, 2018 and December 31, 2017,
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
these
unconsolidated funds totaled approximately $70 million
and $72 million as of December 31, 2018 and December
31, 2017, 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
the
unconsolidated funds.
investments
to
in
State Street Corporation | 165
STATE STREET CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 15. Shareholders' Equity
Preferred Stock
In September 2018, we issued 500,000 depositary shares, each representing 1/100th ownership interest in a
share of our fixed-to-floating rate non-cumulative perpetual preferred stock, Series H, without par value per share, with
a liquidation preference of $100,000 per share (equivalent to $1,000 per depositary share), in a public offering. The
aggregate proceeds, net of underwriting discounts, commissions and other issuance costs, were approximately $500
million, and were used to fund a portion of our acquisition of Charles River Development on October 1, 2018. Dividends
on the Series H Preferred stock are paid semi-annually and commenced on December 15, 2018, with the first dividend
paid on a pro-rata basis.
The following table summarizes selected terms of each of the series of the preferred stock issued and outstanding
as of December 31, 2018:
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
Series H
September 2018
500,000
1/100th
100,000
100,000
100,000
100,000
100,000
25
25
25
1,000
25
1,000
$
488 September 15, 2017
742 March 15, 2024
728 December 15, 2019
742 September 15, 2020
493 March 15, 2026
494 December 15, 2023
(1) On the redemption date, or any dividend declaration date thereafter, the preferred stock and corresponding depositary shares may be redeemed by us, in whole or in
part, at the liquidation price per share and liquidation price per depositary share plus any declared and unpaid dividends, without accumulation of any undeclared
dividends.
(2) The preferred stock and corresponding depositary shares may be redeemed at our option in whole, but not in part, prior to the redemption date upon the occurrence
of a regulatory capital treatment event, as defined in the certificate of designation, at a redemption price equal to the liquidation price per share and liquidation price per
depositary share plus any declared and unpaid dividends, without accumulation of any undeclared dividends.
The following table presents the dividends declared for each of the series of preferred stock issued and outstanding
for the periods indicated:
Years Ended December 31,
2018
2017
Dividends
Declared per
Share
Dividends
Declared per
Depositary Share
Total
(In millions)
Dividends
Declared per
Share
Dividends
Declared per
Depositary Share
Total
(In millions)
$
5,250
$
1.32
$
5,900
6,000
5,250
5,352
1,219
1.48
1.52
52.50
1.32
12.18
26
44
45
40
27
6
$
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
—
$
188
$
182
Preferred Stock:
Series C
Series D
Series E
Series F
Series G
Series H
Total
In January 2019, 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 2019.
Common Stock
In July 2018, we completed a public offering of approximately 13.24 million shares of our common stock. The
offering price was $86.93 per share and net proceeds totaled approximately $1.15 billion, which were used to fund a
portion of our acquisition of Charles River Development on October 1, 2018.
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 2018, our Board approved a common
State Street Corporation | 166
STATE STREET CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
stock purchase program authorizing the purchase of up to $1.2 billion of our common stock through June 30, 2019
(the 2018 Program). We did not repurchase any common stock during either the second quarter of 2018 under the
2017 Program or the third and fourth quarters of 2018 under the 2018 Program. The table below presents the activity
under our common stock purchase program during the period indicated:
2017 Program
3.3
$
105.31
$
350
Year Ended December 31, 2018(1)
Shares Acquired
(In millions)
Average Cost per Share
Total Acquired
(In millions)
(1) During the year ended December 31, 2018, there were no shares repurchased under the 2018 Program.
The table below presents the dividends declared on common stock for the periods indicated:
Years Ended December 31,
2018
2017
Dividends Declared per
Share
Total
(In millions)
Dividends Declared per
Share
Total
(In millions)
Common Stock
$
1.78
$
665
$
1.60
$
596
Accumulated Other Comprehensive Income (Loss)
The following table presents the after-tax components of AOCI as of the dates indicated:
(In millions)
Years Ended December 31,
2018
2017
2016
Net unrealized (losses) gains on cash flow hedges
$
(89) $
(56) $
Net unrealized (losses) gains on available-for-sale securities portfolio
Net unrealized gains related to reclassified available-for-sale securities
Net unrealized (losses) gains 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
(193)
58
(135)
(40)
16
(2)
(143)
(963)
148
19
167
(64)
(65)
(6)
(170)
(815)
$
(1,356) $
(1,009) $
229
(225)
25
(200)
(86)
95
(9)
(194)
(1,875)
(2,040)
The following table presents changes in AOCI by component, net of related taxes, for the periods indicated:
(In millions)
Net
Unrealized
Gains
(Losses) on
Cash Flow
Hedges
Net
Unrealized
Gains
(Losses) on
Available-
for-Sale
Securities
Net Unrealized
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
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)
412
(23)
389
(160)
—
(160)
3
—
3
—
24
24
1,059
1,029
1
2
1,060
1,031
Balance as of December 31, 2017
$
(56) $
103
$
(65) $
(6) $
(170) $
(815) $
(1,009)
Other comprehensive income (loss) before
reclassifications
Amounts reclassified into (out of) earnings
Other comprehensive income (loss)
(33)
—
(33)
(285)
7
(278)
Balance as of December 31, 2018
$
(89) $
(175) $
81
—
81
16
6
(2)
4
—
27
27
(148)
—
(148)
(379)
32
(347)
$
(2) $
(143) $
(963) $
(1,356)
State Street Corporation | 167
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:
Years Ended December 31,
2018
2017
Amounts Reclassified into
(out of) Earnings
Affected Line Item in Consolidated Statement
of Income
Net realized gains (losses) from sales of available-for-sale securities, net of
related taxes of ($2) and $16, respectively
$
7
$
(23)
Net gains (losses) from sales of available-for-sale
securities
Held-to-maturity securities:
Other-than-temporary impairment on held-to-maturity securities related to
factors other than credit, net of related taxes of $1 and zero, respectively
Retirement plans:
Amortization of actuarial losses, net of related taxes of ($8) and ($8),
respectively
Foreign currency translation:
Sales of non-U.S. entities, net of related taxes
Total reclassifications into (out of) AOCI
$
(2)
27
—
32
Losses reclassified (from) to other comprehensive
income
—
24 Compensation and employee benefits expenses
$
1
2
Processing fees and other revenue
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, we and State
Street Bank, as advanced approaches banking
organizations, are subject to a permanent "capital floor"
in the calculation and assessment of regulatory capital
adequacy by U.S. banking regulators. Beginning on
January 1, 2015, we were required to calculate our risk-
based capital
the advanced
ratios using both
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
the
standardized approach and the advanced approaches.
ratio calculated under
lower of each
The methods for the calculation of our and State
Street Bank's risk-based capital ratios have changed
as the provisions of the Basel III final rule related to the
numerator (capital) and denominator (RWA) were
phased in, and as we calculated our RWA using the
advanced approaches. These ongoing methodological
changes have resulted 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, 2018, we and State Street
Bank exceeded all regulatory capital adequacy
requirements to which we were subject. As of December
31, 2018, State Street Bank was categorized as “well
capitalized” under the applicable regulatory capital
adequacy
“well
capitalized” ratio guidelines to which it was subject.
Management believes that no conditions or events have
occurred since December 31, 2018 that have changed
the capital categorization of State Street Bank.
framework, and exceeded all
The following table presents the regulatory capital
structure, total RWA, related regulatory capital ratios
and the minimum required regulatory capital ratios for
us 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 were
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 | 168
STATE STREET CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In millions)
Common shareholders' equity:
State Street
State Street Bank
Basel III
Advanced
Approaches
December 31,
2018
Basel III
Standardized
Approach
December 31,
2018
Basel III
Advanced
Approaches
December 31,
2017
Basel III
Standardized
Approach
December 31,
2017
Basel III
Advanced
Approaches
December 31,
2018
Basel III
Standardized
Approach
December 31,
2018
Basel III
Advanced
Approaches
December 31,
2017
Basel III
Standardized
Approach
December 31,
2017
Common stock and related surplus
$
10,565
$
10,565
$
10,302
$
10,302
$
12,894
$
12,894
$
11,612
$
11,612
Retained earnings
20,606
20,606
18,856
18,856
14,261
14,261
12,312
12,312
(972)
(9,029)
19,157
(972)
(9,029)
19,157
(1,112)
(1,112)
—
—
(809)
—
(809)
—
26,043
26,043
23,115
23,115
Accumulated other comprehensive income
(loss)
Treasury stock, at cost
Total
Regulatory capital adjustments:
Goodwill and other intangible assets, net
of associated deferred tax liabilities(1)
Other adjustments(2)
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
RWA:
Credit risk(3)
Operational risk(4)
Market risk
Total RWA
Adjusted quarterly average assets
(1,332)
(8,715)
21,124
(9,350)
(194)
11,580
3,690
—
—
15,270
778
—
14
—
16,062
47,738
46,060
1,517
95,315
211,924
$
$
$
$
(1,332)
(8,715)
21,124
(9,350)
(194)
11,580
3,690
—
—
15,270
778
—
83
—
(6,877)
(6,877)
(76)
(76)
12,204
3,196
—
(18)
15,382
980
—
4
1
12,204
3,196
—
(18)
15,382
980
—
72
1
$
$
$
$
16,131
$
16,367
$
16,435
97,303
$
52,000
$ 101,349
NA
1,517
45,822
1,334
NA
1,334
98,820
$
99,156
$ 102,683
211,924
$ 209,328
$ 209,328
(9,073)
(29)
16,941
—
—
—
(9,073)
(6,579)
(6,579)
(29)
(5)
(5)
16,941
16,531
16,531
—
—
—
—
—
—
—
—
—
16,941
776
16,941
776
16,531
983
16,531
983
—
11
—
17,728
45,565
44,494
1,517
91,576
209,413
$
$
$
$
$
$
$
$
—
83
—
—
—
—
—
72
—
17,800
$
17,514
$
17,586
94,776
$
49,489
$
98,433
NA
1,517
45,295
1,334
NA
1,334
96,293
$
96,118
$
99,767
209,413
$ 206,070
$ 206,070
2018 Minimum
Requirements
Including
Capital
Conservation
Buffer and
G-SIB
Surcharge(5)
2017 Minimum
Requirements
Including
Capital
Conservation
Buffer and
G-SIB
Surcharge(6)
7.5%
6.5%
12.1%
11.7%
12.3%
11.9%
18.5%
17.6%
17.2%
16.6%
9.0
11.0
8.0
10.0
16.0
16.9
15.5
16.3
15.5
16.5
15.0
16.0
18.5
19.4
17.6
18.5
17.2
18.2
16.6
17.6
Capital
Ratios:
Common
equity tier 1
capital
Tier 1 capital
Total capital
(1) Amounts for us and State Street Bank as of December 31, 2018 consisted of goodwill, net of associated deferred tax liabilities, and 100% of other intangible assets, net of associated deferred
tax liabilities. Amounts for us and State Street Bank as of December 31, 2017 consisted of goodwill, net of deferred tax liabilities and 80% 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.
(2) Other adjustments within CET1 primarily include the overfunded portion of the firm’s defined benefit pension plan obligation net of associated deferred tax liabilities, disallowed deferred tax
assets, and other required credit risk based deductions.
(3) Includes a CVA which reflects the risk of potential fair value adjustments for credit risk reflected in our valuation of over-the-counter derivative contracts. We used a simple CVA approach in
conformity with the Basel III advanced approaches.
(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 RWA under the advanced approaches depending
on the severity of the loss event and its categorization among the seven Basel-defined UOMs.
(5) Minimum requirements were phased in with full implementation beginning on January 1, 2019; minimum requirements listed are as of December 31, 2018.
(6) Minimum requirements were phased in with full implementation beginning on January 1, 2019; minimum requirements listed are as of December 31, 2017.
NA Not applicable
State Street Corporation | 169
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:
Years Ended December 31,
2018
2017
2016
Interest-bearing deposits with banks
$
387
$
180
$
126
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:
Interest-bearing deposits
Securities sold under repurchase
agreements
Other short-term borrowings
Long-term debt
Other interest-bearing liabilities
Total interest expense
Net interest income
1,178
143
560
335
687
372
854
226
658
264
504
222
821
224
756
146
378
61
3,662
2,908
2,512
363
13
17
389
209
991
163
2
10
308
121
604
85
1
7
260
75
428
$
2,671
$
2,304
$
2,084
Note 18. Equity-Based Compensation
We record compensation expense for equity-
based awards, such as 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 eligibility of the award to receive dividends. The fair
value of stock appreciation rights is determined using
the Black-Scholes valuation model.
Compensation expense related to equity-based
awards with service-only conditions and terms that
provide for a graded vesting schedule is recognized on
a straight-line basis over the required service period for
the entire award. Compensation expense related to
equity-based awards with performance conditions and
terms that provide for a graded vesting schedule is
recognized over the requisite service period for each
separately vesting tranche of the award, and is based
on the probable outcome of the performance conditions
at each reporting date. Compensation expense is
adjusted for assumptions with respect to the estimated
amount of awards that will be forfeited prior to vesting,
and for employees who have met certain retirement
eligibility criteria. Compensation expense for common
stock awards granted to employees meeting early
retirement eligibility criteria is fully expensed on the
grant date.
Dividend equivalents for certain equity-based
awards are paid on stock units on a current basis prior
to vesting and distribution.
termination, cancellation,
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,
forfeiture or
repurchase of awards granted under the 2006 Plan. As
of December 31, 2018, a total of 18.9 million shares
from the 2006 Plan have been added to and may be
issued from the 2017 Plan. As of December 31, 2018,
a cumulative total of 3.9 million shares had been
awarded under the 2017 Plan and 68.9 million shares
had been awarded under the 2006 Plan. As of
December 31, 2017, we had cumulative totals of 0.4
million shares awarded under the 2017 Plan and 68.9
million shares awarded under the 2006 Plan. As of
December 31, 2016, we had a cumulative total of 65.7
million shares 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, 2018, fewer than
1 million shares had been awarded under the 2017 Plan
but not delivered, and have become available for re-
issue. As of December 31, 2018, a total of 23.6 million
shares were available for future issuance under the
2017 Plan.
The exercise price of stock appreciation rights may
not be less than the fair value of such shares on the
date of grant. 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 stock appreciation rights have been
granted since 2009.
For deferred stock awards granted under the
Plans, no common stock is issued at the time of grant
and the award does not possess dividend and voting
rights. Generally, these grants vest over one to four
years. Performance awards granted are earned over a
performance period based on the achievement of
defined goals, generally over three years. Payment for
performance awards is made in shares of our common
stock equal to its fair market value per share, based on
the performance of certain financial ratios, after the
conclusion of each performance period.
Beginning with 2012, malus-based forfeiture
provisions were included in deferred stock awards
granted to employees identified as “material risk-
takers,” as defined by management. These malus-
State Street Corporation | 170
STATE STREET CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
that
risks
resulted
that exposed us
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
to
in a material
inappropriate
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.
to
related
Compensation expense
stock
appreciation
rights, 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 $262 million,
$243 million and $268 million for the years ended
December 31, 2018, 2017 and 2016, respectively. Such
expense for 2018, 2017 and 2016 excluded $45 million,
$15 million and $9 million, respectively, associated with
acceleration of expense in connection with targeted
staff reductions. This expense was included in the
severance-related
associated
restructuring or repositioning charges recorded in each
respective year.
portion
the
of
The following table presents information about
stock appreciation rights activity during the years
indicated. For the year ended December 31, 2018, no
stock appreciation rights were exercised. The total
intrinsic value of stock appreciation rights exercised
during the years ended December 31, 2017 and 2016
was $5 million and $1 million, respectively. As of
December 31, 2018, there was no unrecognized
compensation cost related to stock appreciation rights.
Weighted
-Average
Exercise
Price
Weighted-
Average
Remaining
Contractual
Term
(In years)
Total
Intrinsic
Value
(In millions)
Shares
(In thousands)
Stock Appreciation Rights:
Outstanding as of
December 31, 2016
Exercised
Forfeited or expired
Outstanding as of
December 31, 2017
955
$
77.52
(595)
(360)
81.71
70.59
0
$
—
0
$
—
Deferred Stock Awards:
Outstanding as of
December 31, 2016
Granted
Vested
Forfeited
Outstanding as of
December 31, 2017
Granted
Vested
Forfeited
Outstanding as of
December 31, 2018
Shares
(In thousands)
Weighted-Average
Grant Date Fair
Value
7,814
$
2,977
(3,686)
(257)
6,848
2,500
(3,235)
(138)
5,975
$
60.01
76.38
62.88
63.56
65.44
101.25
70.98
80.6
77.07
The total fair value of deferred stock awards vested
for the years ended December 31, 2018, 2017 and
2016, based on the weighted average grant date fair
value in each respective year, was $230 million, $232
million and $275 million, respectively. As of December
31, 2018, total unrecognized compensation cost related
to deferred stock awards, net of estimated forfeitures,
was $249 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, 2016
Granted
Forfeited
Paid out
Outstanding as of
December 31, 2017
Granted
Forfeited
Paid out
Outstanding as of
December 31, 2018
1,247
$
534
0
(233)
1,548
1,067
(1)
(457)
2,157
$
60.37
76.27
—
58.91
66.09
74.68
101.26
70.58
69.36
The total fair value of performance awards vested
for the years ended December 31, 2018, 2017 and
2016, based on the weighted average grant date fair
value in each respective year, was $32 million, $14
million and $21 million, respectively. As of December
31, 2018, total unrecognized compensation cost related
to performance awards, net of estimated forfeitures,
was $62 million, which is expected to be recognized
over a weighted-average period of 2.1 years.
We utilize either treasury shares or authorized but
unissued shares to satisfy the issuance of common
stock under our equity incentive plans. We do not have
a specific policy concerning purchases of our common
stock to satisfy stock issuances. We have a general
policy concerning purchases of our common stock to
meet issuances under our employee benefit plans,
including 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
State Street Corporation | 171
STATE STREET CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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. Additional information on our common stock
purchase program is provided in Note 15.
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. We have 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 $11 million, $15 million and $16 million in
2018, 2017 and 2016, 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 $1.21 billion, $110 million and $12 million,
respectively, as of December 31, 2018 and $1.32 billion,
$125 million and $16 million, respectively, as of
December 31, 2017. 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 $1 million and $9 million as of
December 31, 2018 and 2017, respectively. The non-
supplemental
qualified
retirement plans were
underfunded by $110 million and $125 million as of
December 31, 2018 and 2017, respectively. The other
post-retirement benefit plans were underfunded by $12
million and $16 million as of December 31, 2018 and
2017, 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 $170 million, $146 million, and $132
million in 2018, 2017 and 2016, respectively.
Note 20. Occupancy Expense and Information
Systems and Communications Expense
leasehold
Occupancy expense and information systems and
include depreciation of
communications expense
computer
buildings,
hardware and software, equipment, and furniture and
fixtures. Total depreciation expense in 2018, 2017 and
2016 was $599 million, $526 million and $472 million,
respectively.
improvements,
We lease 810,000 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
219,000 square feet of the building. As of December
31, 2018 and 2017, an aggregate net book value of
$102 million and $159 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 2018, 2017 and 2016,
interest expense related
lease
obligations, reflected in NII, was $17 million, $20 million
and $22 million, respectively. As of December 31, 2018
and 2017, accumulated amortization of capital lease
assets was $352 million and $401 million, respectively.
these capital
to
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.
State Street Corporation | 172
STATE STREET CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
$
340
$
379
the periods indicated:
Total rental expense net of sublease revenue in
2018, 2017 and 2016 amounted to $185 million, $229
million and $194 million, respectively. Total rental
expense was reduced by sublease revenue of $5 million
in both 2018 and 2017, and $4 million in 2016.
(In millions)
2019
2020
2021
2022
2023
Thereafter
Total minimum lease payments
Less amount representing interest payments
Present value of minimum lease payments
Note 21. Expenses
The following table presents the components of
indicated:
the
expenses
periods
for
other
Years Ended December 31,
2018
2017
2016
(In millions)
Professional services
$
Sales advertising public relations
Insurance
Regulatory fees and assessments
Bank operations
Litigation
Other
357
115
97
87
70
7
443
Total other expenses
$ 1,176
$
67
118
106
80
(15)
233
929
$
52
93
82
62
50
245
963
Acquisition Costs
We recorded $31 million of acquisition costs in 2018
related to our acquisition of Charles River Development
on October 1, 2018. In 2017, we recorded approximately
$21 million of acquisition costs primarily related to our
acquisition of the GEAM business on July 1, 2016. As
we integrate Charles River Development into our
business, we expect to incur approximately $200 million,
including the $31 million in 2018, of acquisition costs,
including merger and integration costs, through 2021.
For further information on our acquisition of Charles
River Development, refer to Note 1.
Restructuring and Repositioning Charges
Repositioning Charges
In 2018, we initiated a new expense program to
accelerate efforts to become a higher-performing
organization and help navigate challenging market and
industry conditions. As part of that program, expenses
for 2018 included a repositioning charge of $300 million,
including $259 million of compensation and employee
benefits and $41 million of occupancy costs.
The following table presents a summary of future
minimum lease payments under non-cancelable capital
and operating leases as of December 31, 2018.
Aggregate future minimum rental commitments have
been
rental
reduced by aggregate sublease
commitments of $46 million for capital leases and $16
million for operating leases.
Capital
Leases
Operating
Leases
$
34
31
31
31
24
—
192
181
170
147
128
380
Total
$
226
212
201
178
152
380
151
$
1,198
$
1,349
(31)
120
$
$
Beacon
In 2018, we released $7 million of restructuring
accruals related to Beacon. In 2017, we recorded
restructuring charges of $245 million primarily related to
Beacon.
The following table presents aggregate activity for
(In millions)
Accrual Balance at
December 31, 2015
Accruals for Business
Operations and
Information Technology
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
Accruals for Beacon
Accruals for
Repositioning Charges
Payments and Other
Adjustments
Accrual Balance at
December 31, 2018
Employee
Related
Costs
Real
Estate
Actions
Asset
and Other
Write-offs
Total
$
9
$
11
$
3
$
23
(2)
94
(64)
$
37
$
186
(57)
$
166
$
(7)
259
(115)
—
18
(12)
17
32
(17)
32
—
41
$
$
—
30
(2)
142
(31)
(107)
$
$
2
27
(26)
3
—
—
56
245
(100)
201
(7)
300
(36)
(2)
(153)
$
303
$
37
$
1
$
341
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
in our
differences between amounts
consolidated financial statements and their respective
tax bases. The measurement of tax assets and liabilities
State Street Corporation | 173
reported
STATE STREET CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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)
2018
2017
2016
Years Ended December 31,
Current:
Federal
State
Non-U.S.
Total current expense
Deferred:
Federal
State
Non-U.S.
Total deferred expense (benefit)
$
27
$
229
$
(14)
144
374
545
(134)
(25)
14
(145)
18
380
627
49
65
(19)
95
30
320
336
(311)
38
(85)
(358)
Total income tax expense
(benefit)
$
$
400
(22)
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:
722
$
U.S. federal income tax rate
21.0%
35.0%
35.0 %
Years Ended December 31,
2018
2017
2016
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
Litigation expense
Other, net
Effective tax rate
3.0
(2.1)
(6.9)
(0.6)
—
(1.1)
—
—
0.3
1.9
(4.5)
(6.8)
(7.4)
15.7
(6.8)
(0.7)
—
—
(0.3)
(1.5)
2.0
(6.1)
(13.6)
(7.7)
—
—
(6.8)
(4.3)
1.4
(0.9)
13.3%
24.9%
(1)%
(1) Business tax credits include low-income housing, production and investment
tax credits.
On December 22, 2017, the U.S. 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 certain
foreign subsidiaries. The TCJA also introduced the
Global Intangible Low-Taxed Income (GILTI), a new
minimum tax to be imposed on foreign subsidiary
earnings and an alternative tax for excess base erosion
payments. In applying the guidance in Staff Accounting
Bulletin No. 118 (SAB 118), the 2017 income tax
expense included an estimated deferred tax benefit of
$197 million attributable to certain U.S. deferred tax
assets and liabilities and a provisional $454 million
liability attributable to the one-time transition tax on total
post-1986 earnings and profits (E&P) of foreign
subsidiaries previously deferred from U.S. income
taxes.
At December 31, 2018, the accounting for income
tax effects of the TCJA has been completed. The 2018
income tax expense included an additional deferred tax
benefit of approximately $32 million related to the TCJA
in 2017 mainly
provisional estimate
attributable
temporary
differences. Our completed analysis of cumulative E&P
did not result in a change in estimate for the transition
tax liability.
recorded
the remeasurement of
to
Beginning in 2018, the TCJA subjects a U.S.
shareholder to current tax on GILTI earned by certain
foreign subsidiaries. We have elected to recognize the
resulting tax on GILTI as a period expense in the period
the tax is incurred. As such, we have included an
estimate of this liability in our estimated annual effective
tax rate. This adjustment increased our effective tax rate
by 0.2% in 2018, which is reflected in the prior
reconciliation table under "Other, net".
Undistributed indefinitely reinvested earnings of
certain foreign subsidiaries amounted to approximately
$3.8 billion at December 31, 2018. As a result, no
provision has been recorded for state and local or
foreign withholding income taxes. If a distribution were
to occur, we would be subject to state, local and to
foreign withholding tax. It is expected that any
distribution will be exempt from federal income tax.
Although the foreign withholding tax is generally
creditable against U.S. federal income tax, certain credit
utilization limitations may result in a net cost.
State Street Corporation | 174
STATE STREET CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The
following
significant
components of our gross deferred tax assets and gross
deferred tax liabilities as of the dates indicated:
table presents
(In millions)
Deferred tax assets:
Unrealized losses on investment
securities, net
Deferred compensation
Pension plan
Accrued expenses
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
Other
Total deferred tax liabilities
$
$
$
$
December 31,
2018
2017
$
146
134
55
156
50
274
153
—
968
17
159
82
132
18
231
101
27
767
(138)
(88)
830
$
679
— $
184
755
6
158
$
—
$ 1,103
744
—
206
11
961
The table below summarizes the deferred tax
assets and related valuation allowances recognized as
of December 31, 2018:
(In millions)
General business
Credits
NOLs - Non-U.S.
Other Carryforwards
NOLs - State
Deferred
Tax
Asset
Valuation
Allowance
Expiration
$
274
$
— 2035-2038
55
88
11
(41)
(88)
2019-2028,
None
2037-2039 /
None
(9) 2019-2036
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.
At December 31, 2018, 2017 and 2016, the gross
unrecognized tax benefits, excluding interest, were
$108 million, $94 million and $71 million, respectively.
Of this, the amounts that would reduce the effective tax
rate, if recognized, are $100 million, $87 million and $63
million, respectively. The reduction in the effective tax
rate includes the federal benefit for unrecognized state
tax benefits.
The following table presents activity related to
unrecognized tax benefits as of the dates indicated:
(In millions)
2018
2017
2016
Beginning balance
$
94
$
71
$
63
December 31,
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
Decreases related to a lapse of
the applicable statute of
limitations
(40)
(14)
(13)
12
44
(2)
26
11
—
94
$
7
14
—
71
Ending balance
$
108
$
It is reasonably possible that of the $108 million of
unrecognized tax benefits as of December 31, 2018, up
to $25 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, 2018 for tax exposures and related
interest expense.
Income tax expense included related interest and
penalties of approximately $1 million and $3 million in
2018 and 2017, respectively. Total accrued interest and
penalties were approximately $8 million, $8 million and
$5 million as of December 31, 2018, 2017 and 2016,
respectively.
State Street Corporation | 175
STATE STREET CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 23. Earnings Per Common Share
Note 24. Line of Business Information
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,
2018
2017
2016
$ 2,599
$ 2,177
$ 2,143
Preferred stock dividends
(188)
(182)
(173)
Dividends and undistributed earnings
allocated to participating securities(1)
Net income available to common
shareholders
Average common shares outstanding
(In thousands):
(1)
(2)
(2)
$ 2,410
$ 1,993
$ 1,968
Basic average common shares
371,983
374,793
391,485
Effect of dilutive securities: equity-based
awards
Diluted average common shares
Anti-dilutive securities(2)
Earnings per common share:
Basic
Diluted(3)
4,493
5,420
4,605
376,476
380,213
396,090
1,011
188
2,143
$
6.48
$
5.32
$
5.03
6.40
5.24
4.97
(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. Additional information about equity-based awards is provided in Note
18.
(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.
Our operations are organized into two lines of
business:
Investment
Investment Servicing and
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.
insurance companies,
Investment Servicing provides services for U.S.
mutual funds, collective investment funds and other
investment pools, corporate and public retirement
plans,
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
operations
investment manager
outsourcing; performance,
risk and compliance
analytics; and financial data management to support
institutional investors. New products and services
resulting
from our acquisition of Charles River
Development on October 1, 2018 include: portfolio
modeling and construction; trade order management;
risk and compliance; and wealth
investment
management solutions.
Investment Management, through State Street
Global Advisors, provides a broad range of investment
management strategies and products for our clients.
Our investment management strategies and products
span the risk/reward spectrum, including core and
enhanced
indexing, multi-asset strategies, active
quantitative and fundamental active capabilities and
alternative investment strategies. Our AUM is currently
primarily weighted to indexed strategies. In addition, we
provide a breadth of services and solutions, including
environmental, social and governance
investing,
defined benefit and defined contribution and OCIO.
State Street Global Advisors is also a provider of ETFs,
including 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
State Street Corporation | 176
STATE STREET CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 foreign exchange 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, including Charles
River Development, 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
line, along with management
in each business
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, 2018 included net costs of $398 million composed
of the following:
• Net
repositioning
to
organizational changes and management
streamlining of $300 million;
charges
related
• Business exit costs of $24 million;
•
Legal and related expenses of $50 million; and
• Net acquisition and restructuring costs of $24
million.
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 following is a summary of our line of business results for the periods indicated. The amounts in the “Other”
columns were not allocated to our 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 2018.
Years Ended December 31,
(Dollars in millions)
2018
2017
2016
2018
2017
2016
2018
Investment
Servicing
Investment
Management(1)
$ 5,429
$5,365
$5,073
$ — $ — $ — $
—
1,851
1,616
1,292
—
1,071
543
294
7,337
2,691
—
999
606
240
7,210
2,309
1,038
562
119
6,792
2,081
6
(39)
7
130
—
(5)
72
—
7
61
—
(29)
1,976
1,695
1,324
(20)
—
(5)
—
3
—
10,034
9,480
8,880
1,956
1,690
1,327
15
2
10
—
—
—
Other
2017
2016
2018
Total
2017
2016
$ — $ — $ 5,421
$ 5,365
$ 5,073
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
1,851
1,616
1,292
1,201
543
289
9,305
2,671
1,071
606
247
8,905
2,304
1,099
562
90
8,116
2,084
6
(39)
7
11,982
11,170
10,207
15
2
10
(8)
—
—
—
—
(8)
—
—
(8)
—
Servicing fees
Management fees(1)
Foreign exchange trading
services(1)
Securities finance
Processing fees and
other(2)
Total fee revenue(1)(2)
Net interest income
Gains (losses) related to
investment securities, net
Total revenue(1)(2)
Provision for loan losses
Total expenses(1)(2)
Income before income
tax expense
7,034
6,717
6,660
1,544
1,286
1,218
390
266
199
8,968
8,269
8,077
$ 2,985
$2,761
$2,210
$ 412
$ 404
$ 109
$ (398)
$ (266)
$ (199)
$ 2,999
$ 2,899
$ 2,120
Pre-tax margin
30%
29%
25%
21%
24%
8%
25%
26%
21%
Average assets (in billions) $ 220.2
$214.0
$225.3
$
3.2
$
5.4
$
4.4
$ 223.4
$ 219.4
$ 229.7
(1) The new revenue recognition standard contributed approximately $248 million in Investment Management total revenue, including approximately $190 million in
management fees and $58 million in foreign exchange trading services, and $248 million in Investment Management total expenses for 2018 compared to 2017.
(2) Investment Servicing includes results from our acquisition of Charles River Development on October 1, 2018, which is described in Note 1.
State Street Corporation | 177
STATE STREET CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 25. Revenue from Contracts with Customers
Investment Servicing
We account for revenue from contracts with
customers in accordance with Topic 606, which we
adopted on January 1, 2018. Further discussion of our
adoption, including the impact on our consolidated
financial statements, is provided in Note 1.
The amount of revenue that we recognize is
measured based on the consideration specified in
contracts with our customers, and excludes taxes
collected from customers subsequently remitted to
governmental authorities. We recognize revenue when
a performance obligation is satisfied over time as the
services are performed or at a point in time depending
on the nature of the services provided as further
discussed below. Revenue recognition guidance
related to contracts with customers excludes our NII,
revenue earned on security lending transactions
entered into as principal, realized gains/losses on
securities, revenue earned on foreign exchange activity,
loans and related fees, and gains/losses on hedging
and derivatives, to which we apply other applicable U.S.
GAAP guidance.
For
contracts with multiple performance
obligations, or contracts that have been combined, we
allocate the contracts' transaction price to each
performance obligation using our best estimate of the
standalone selling price. Our contractual fees are
negotiated on a customer by customer basis and are
representative of standalone selling price utilized for
allocating revenue when there are multiple performance
obligations.
Substantially all of our services are provided as a
distinct series of daily performance obligations that the
customer simultaneously benefits from as they are
performed. Payments may be made to third party
service providers and the expense is recognized gross
when we control those services as we are deemed the
principal.
include
termination penalties. Therefore,
Contract durations may vary from short to long-
term or may be open ended. Termination notice periods
are in line with general market practice and typically do
for
not
substantially all of our revenues, the duration of the
contract and the enforceable rights and obligations do
not extend beyond the services that are performed daily
or at the transaction level. In instances where we have
substantive termination penalties, the duration of the
contract may extend through the date of substantive
termination penalties.
and/or
and/or
Revenue from contracts with customers related to
servicing fees is recognized over time as our customers
benefit from the custody, administration, accounting,
transfer agency and other related asset services as they
are performed. At contract inception, no revenue is
estimated as the fees are dependent on assets under
custody
actual
administration
transactions which are susceptible to market factors
outside of our control. Therefore, revenue is recognized
using a time-based output method as the customers
benefit from the services over time and as the assets
under custody or
transactions are known or
determinable during each reporting period based on
contractual fee schedules. Payments made to third
party service providers, such as sub-custodians, are
generally recognized gross as we control those services
and is deemed to be a principal in such arrangements.
trading services revenue
includes revenue generated from providing access and
use of electronic trading platforms and other trading,
transition management and brokerage services.
Electronic FX services are dependent on the volume of
actual transactions initiated through our electronic
exchange platforms. Revenue is recognized over time
using a time-based measure as access to, and use of,
the electronic exchange platforms is made available to
the customer and the activity is determinable. Revenue
related to other trading, transition management and
brokerage services is recognized when the customer
obtains the benefit of such services which may be over
time or at a point in time upon trade execution.
Foreign exchange
Securities finance revenue is related to services
for providing agency lending programs to State Street
Global Advisors managed investment funds and third-
party investment managers and asset owners. This
securities finance revenue is recognized over time
using a time-based measure as our customers benefit
from these lending services over time.
Revenue related to the front office solutions
provided by Charles River Development is primarily
driven by the sale of software to be installed on premise
and Software as a Service (SaaS) arrangements, where
the customer does not take possession of the software.
Revenue for a sale of software to be installed on premise
is recognized at a point in time when the customer
benefits from obtaining access to and use of the
software
for a SaaS related
arrangement is recognized over time as services are
provided.
license. Revenue
State Street Corporation | 178
STATE STREET CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Investment Management
Revenue from contracts with customers related to investment management, investment research and investment
advisory services provided through State Street Global Advisors is recognized over time as our customers benefit from
the services as they are performed. Substantially all of our investment management fees are determined by the value
of assets under management and the investment strategies employed. At contract inception, no revenue is estimated
as the fees are dependent on assets under management which are susceptible to market factors outside of our control.
Therefore, substantially all of our Investment Management services revenue is recognized using a time-based
output method as the customers benefit from the services over time and as the assets under management are known
or determinable during each reporting period based on contractual fee schedules. Payments made to third party service
providers, such as payments to others in unitary fee arrangements, are generally recognized on a gross basis when
State Street Global Advisors controls those services and is deemed to be a principal in such transactions.
Revenue by category
In the following table, revenue is disaggregated by our two lines of business and by revenue stream for which
the nature, amount, timing and uncertainty of revenue and cash flows are affected by economic factors. The amounts
in the “Other” columns were not allocated to our business lines.
Investment Servicing
Investment Management
Other
Total
(Dollars in millions)
Topic 606
revenue
All other
revenue
Total
Topic 606
revenue
All other
revenue
Total
Topic 606
revenue
All other
revenue
Total
2018
Servicing fees
$
5,429
$
— $
5,429
$
— $
— $
— $
(8) $
— $
(8) $
5,421
Year Ended December 31, 2018
—
1,851
Management fees
Foreign exchange trading
services
Securities finance
Processing fees and other
Total fee revenue
Net interest income
Gains (losses) related to
investment securities, net
—
361
308
209
6,307
—
—
—
710
235
85
1,030
2,691
1,071
543
294
7,337
2,691
6
6
130
—
—
1,981
—
—
—
—
—
(5)
(5)
(20)
—
1,851
130
—
(5)
1,976
(20)
—
—
—
—
—
(8)
—
—
—
—
—
—
—
—
—
—
—
—
—
(8)
—
—
1,851
1,201
543
289
9,305
2,671
6
Total revenue
$
6,307
$
3,727
$ 10,034
$
1,981
$
(25) $
1,956
$
(8) $
— $
(8) $ 11,982
Contract balances and contract costs
As of December 31, 2018 and December 31, 2017, net receivables of $2.7 billion and $2.6 billion, respectively,
are included in accrued interest and fees receivable, representing amounts billed or currently billable to or due from
our customers related to revenue from contracts with customers. As performance obligations are satisfied, we have
an unconditional right to payment and billing is generally performed monthly; therefore, we do not have significant
contract assets or liabilities.
No adjustments are made to the promised amount of consideration for the effects of a significant financing
component as the period between when we transfer a promised service to a customer and when the customer pays
for that service is expected to be one year or less.
State Street Corporation | 179
STATE STREET CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 26. 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.
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.(1)
2018
U.S.
Total
Non-U.S.(1)
2017
U.S.
Total
Non-U.S.(1)
2016
U.S.
Total
$
5,178
$
6,804
$ 11,982
$
4,734
$
6,436
$ 11,170
$
4,419
$
5,788
$ 10,207
Years Ended December 31,
1,664
1,335
2,999
1,230
1,669
2,899
1,047
1,073
2,120
(1) Geographic mix is generally based on the domicile of the entity servicing the funds and is not necessarily representative of the underlying asset mix.
Non-U.S. assets were $81.7 billion and $82.1 billion as of December 31, 2018 and 2017, respectively.
Note 27. Parent Company Financial Statements
The following tables present the financial statements of the Parent Company without consolidation of its banking
and non-banking subsidiaries, as of and for the years indicated:
Statement of Income - Parent Company
(In millions)
Years Ended December 31,
2018
2017
2016
Cash dividends from consolidated banking subsidiary
$
785
$
2,224
$
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
41
58
884
381
115
496
(127)
515
1,950
134
12
127
2,363
297
94
391
(86)
2,058
20
99
Net income
$
2,599
$
2,177
$
640
75
92
807
249
107
356
(47)
498
1,629
16
2,143
State Street Corporation | 180
STATE STREET CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Statement of Condition - Parent Company
(In millions)
Assets:
Interest-bearing deposits with consolidated banking subsidiary
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
Statement of Cash Flows - Parent Company
(In millions)
Net cash provided by operating activities
Investing Activities:
Net decrease (increase) in interest-bearing deposits with consolidated banking
subsidiary
Purchases of available-for-sale securities
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 (used in) provided by investing activities
Financing Activities:
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 issuance of common stock, net of issuance costs
Repurchases of common stock
Repurchases of common stock for employee tax withholding
Payments for cash dividends
Net cash provided (used in) financing activities
Net change
Cash and due from banks at beginning of year
Cash and due from banks at end of year
As of December 31,
2018
2017
$
486
357
224
26,019
6,726
106
64
2,337
96
532
361
43
23,080
6,762
63
273
2,843
263
36,415
$
34,220
685
$
10,940
11,625
24,790
36,415
$
917
10,986
11,903
22,317
34,220
$
$
$
$
Years Ended December 31,
2018
2017
2016
$
2,250
$
2,047
$
417
46
(224)
(4,883)
2,472
—
—
(2,589)
996
(1,000)
495
1,150
(350)
(124)
(828)
339
—
—
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)
—
—
—
State Street Corporation | 181
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,
2018
2017
2016
Average
Balance
Interest
Average
Rate
Average
Balance
Interest
Average
Rate
Average
Balance
Interest
Average
Rate
Interest-bearing deposits with U.S. banks
$ 18,081
$
1.91% $ 16,790
$
184
1.10% $ 19,639
$
36,247
2,901
1,051
48,449
5,481
34,140
23,147
426
15,714
345
42
335
—
1,178
189
560
687
11
372
.12
11.55
—
2.43
3.45
1.64
2.97
2.53
2.37
2.00
30,724
2,131
1,011
43,273
9,928
42,578
21,149
767
22,884
(4)
(.01)
33,452
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
102
24
146
—
821
385
756
354
30
61
.52%
.07
5.70
—
1.76
3.73
1.72
1.95
3.44
.27
1.34
191,235
3,075
3,097
25,118
$ 219,450
199,184
2,679
3,157
27,386
$ 229,727
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
185,637
3,719
3,178
34,570
$ 223,385
121
135
107
363
13
—
17
389
209
991
$ 17,081
$
37,872
70,623
125,576
2,048
—
1,327
10,686
4,956
144,593
19,187
16,260
385
19,804
23,156
72
24
67
163
2
—
10
308
121
604
.71% $ 12,020
$
.36
.15
.29
.62
—
1.28
3.64
4.20
.68
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
.61% $ 19,223
$
127
.66%
5
(47)
85
1
—
7
260
75
428
.05
(.05)
.07
.02
—
.40
2.29
1.39
.29
.13
.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
Total liabilities and shareholders’ equity
$ 223,385
$ 219,450
$ 229,727
Net interest income, fully taxable-equivalent basis
$ 2,728
$ 2,471
$ 2,251
Excess of rate earned over rate paid
Net interest margin(3)
1.32%
1.47
1.19%
1.29
1.05%
1.13
(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% for periods ending in 2016 and 2017, and a tax rate of 21% for periods ending in 2018, 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
$57 million, $167 million and $167 million for the years ended December 31, 2018, 2017 and 2016, respectively, and were substantially related to tax-exempt securities
(state and political subdivisions).
(2) Non-U.S. non-interest-bearing deposits were $1,165 million, $762 million and $337 million as of December 31, 2018, 2017 and 2016, respectively.
(3) NIM is calculated by dividing fully taxable-equivalent NII by average total interest-earning assets.
State Street Corporation | 182
STATISTICAL DISCLOSURE BY BANK HOLDING COMPANIES (CONTINUED)
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,
(Dollars in millions; fully
taxable-equivalent basis)
Interest income related to:
2018 Compared to 2017
2017 Compared to 2016
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
$
14
$
147
$
161
$
(15) $
97
$
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
(1)
95
—
102
(169)
(131)
47
(9)
(70)
(122)
30
24
(15)
(1)
—
—
(24)
9
23
Net interest income
$
(145) $
47
(24)
1
222
(20)
32
142
(1)
220
766
19
87
55
12
—
7
105
79
364
402
46
71
1
324
(189)
(99)
189
(10)
150
644
49
111
40
11
—
7
81
88
$
387
257
$
(2)
(24)
—
(58)
(15)
(22)
59
(4)
—
(81)
(48)
4
2
—
—
(1)
4
(11)
(50)
(31) $
(26)
142
(1)
91
8
(75)
85
(5)
161
477
(7)
15
112
1
—
4
44
57
226
251
$
82
(28)
118
(1)
33
(7)
(97)
144
(9)
161
396
(55)
19
114
1
—
3
48
46
176
220
State Street Corporation | 183
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
Net income available to common shareholders
Earnings per common share(1):
Basic
Diluted
Average common shares outstanding:
Basic
Diluted
4Q18
3Q18
2Q18
1Q18
4Q17
3Q17
2Q17
1Q17
$
2,289
$
2,280
$
2,358
$
2,378
$
2,230
$
2,242
$
2,235
$
2,198
982
285
697
—
916
244
672
(1)
907
248
659
9
2,986
2,951
3,026
8
5
2
2,474
2,079
2,159
504
65
439
398
$
$
867
102
765
709
$
$
865
131
734
698
$
$
857
214
643
(2)
3,019
—
2,256
763
102
661
605
$
$
1.05
$
1.89
$
1.91
$
1.65
$
1.04
1.87
1.88
1.62
797
181
616
—
761
158
603
1
700
125
575
—
650
140
510
(40)
2,846
2,846
2,810
2,668
(2)
3
3
(2)
2,131
2,021
2,031
2,086
717
347
370
334
.91
.89
$
$
$
822
137
685
629
$
$
776
156
620
584
$
$
1.69
$
1.56
$
1.66
1.53
584
82
502
446
1.17
1.15
$
$
$
379,741
374,963
365,619
367,439
369,934
372,765
375,395
381,224
383,651
379,383
370,410
372,619
375,477
378,518
380,915
386,417
Dividends per common share
$
.47
$
.47
$
.42
$
.42
$
.42
$
.42
$
.38
$
.38
(1) Basic and diluted earnings per common share for full-year 2018 and basic earnings per common share for full-year 2017 do not equal the sum of the four quarters
for the year.
State Street Corporation | 184
ABS
AFS
AIFMD
AIRB(1)
ALLL
AMA
AML
AOCI
APAC
ASU
AUC/A
AUM
BCBS
BCRC
BOC
bps
BRRD
CAP
CCAR
CCO
CD
CET1(1)
CFTC
CIS
CLO
CMO
COSO
CRE
CRO
CRPC
CVA
DIF
DOJ
DOL
ACRONYMS
Asset-backed securities
Available-for-sale
Alternative Investment Fund Managers Directive
Advanced Internal Ratings-Based Approach
Allowance for loan and lease losses
Advanced Measurement Approach
Anti-money laundering
GEAM
G-SIB
HQLA(1)
HTM
IDI
ISDA
LCR(1)
General Electric Asset Management
Global systemically important bank
High-quality liquid assets
Held-to-maturity
Insured depository institution
International Swaps and Derivatives Association
Liquidity coverage ratio
Accumulated other comprehensive income (loss)
LDA model
Loss distribution approach model
Asia Pacific
Accounting Standards Update
Assets under custody and/or administration
Assets under management
Basel Committee on Banking Supervision
Business Conduct Risk Committee
Basel Oversight Committee
Basis points
Bank Recovery and Resolution Directive
Capital adequacy process
Comprehensive Capital Analysis and Review
Chief Compliance Officer
Certificates of deposit
Common equity tier 1
Commodity Futures Trading Commission
Corporate Information Security
Collateralized loan obligations
Collateralized mortgage obligations
LIBOR
LTD
MBS
MiFID
MiFID II
MiFIR
MRAC
MRC
MVG
NII
NIM
NOL
NSFR(1)
NYSE
OCI
OCC
OCIO
OFAC
London Interbank Offered Rate
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 Operating Loss
Net stable funding ratio
New York Stock Exchange
Other comprehensive income (loss)
Office of the Comptroller of the Currency
Outsourced Chief Investment Officer
Office of Foreign Assets Control
Committee of Sponsoring Organizations of the Treadway Commission
ORM
Operational risk management
Commercial real estate
Chief Risk Officer
Credit Risk & Policy Committee
Credit valuation adjustment
Deposit Insurance Fund
Department of Justice
Department of Labor
E&A Committee
Examining and Audit Committee
EAD(1)
ECB
ECC
Exposure-at-default
European Central Bank
Executive Compensation Committee
EGRRCPA
Economic Growth, Regulatory Relief, and Consumer Protection Act
EMEA
EMIR
EPS
ERISA
ERM
eSLR
ETF
EVE
FASB
FDIC
FFELP
FHLB
FRBB
FSB
FSOC
FX
GAAP
GCR
GDPR
Europe, Middle East, and Africa
European Market Infrastructure Resolution
Earnings per share
Employee Retirement Income Security Act
Enterprise Risk Management
Enhanced supplementary leverage ratio
Exchange-Traded Fund
Economic value of equity
Financial Accounting Standards Board
Federal Deposit Insurance Corporation
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
Generally accepted accounting principles
Global credit review
General Data Protection Regulation
(1) As defined by the applicable U.S. regulations.
OTC
OTTI
PCA
Over-the-counter
Other-than-temporary-impairment
Prompt corrective action
PCAOB
Public Company Accounting Oversight Board
PD(1)
P&L
RC
ROE
RWA(1)
SCB
SCCL
SEC
SERP
SIFI
SLB
SLR(1)
SOX
SPDR
Probability-of-default
Profit-and-loss
Risk Committee
Return on average common equity
Risk-weighted asset
Stress Capital Buffer
Single-counterparty credit limits
Securities and Exchange Commission
Supplemental executive retirement plans
Systemically important financial institutions
Stress Leverage Buffer
Supplementary leverage ratio
Sarbanes-Oxley Act of 2002
Spider; Standard and Poor's depository receipt
SPOE Strategy
Single Point of Entry Strategy
SSIF
TCJA
TLAC(1)
TMRC
TOPS
TORC
UCITS
U.K. FCA
U.K. PRA
UOM
VaR
VIE
VIX
State Street Intermediate Funding, LLC
Tax Cuts and Jobs Act
Total loss-absorbing capacity
Trading and Markets Risk Committee
Technology and Operations Committee
Technology and Operational Risk Committee
Undertakings for Collective Investments in Transferable Securities
United Kingdom Financial Conduct Authority
United Kingdom Prudential Regulation Authority
Unit of measure
Value-at-Risk
Variable interest entity
Volatility Index
State Street Corporation | 185
GLOSSARY
Asset-backed securities: A financial security backed by collateralized
assets, other than real estate or mortgage backed securities.
Assets under custody and/or 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 AUC/A service
for a client’s assets, the value of the asset is only counted once in the
total amount of AUC/A.
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. CRE loans are term loans secured by
commercial and multifamily properties with strong competitive
positions in major domestic markets, stable cash flows, modest
leverage and experienced institutional ownership.
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.
Deposit beta: A measure of how much of an interest rate increase is
expected to be passed on to client interest-bearing accounts, on
average.
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.
Depot bank: A German term, specified by the country's law on
investment companies, which essentially corresponds to 'custodian'.
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.
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 | 186
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE
None.
ITEM 9A. CONTROLS AND PROCEDURES
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 year ended December 31, 2018, 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, 2018.
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, 2018, 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 | 187
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, 2018. Management's assessment of the effectiveness of the Company's
internal control over financial reporting as of December 31, 2018 did not include the internal controls of Charles River
Systems, Inc., which we acquired on October 1, 2018 and is included in our 2018 consolidated financial statements.
In the aggregate, Charles River Systems, Inc. constituted less than 1% of our total assets and total shareholders' equity
as of December 31, 2018 and approximately 1% and 2% of our total revenues and net income, respectively, for the
year then ended. 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, 2018, 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 | 188
Report of Ernst & Young LLP, 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, 2018, 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,
2018, based on the COSO criteria.
As indicated in the accompanying Management’s Report on Internal Control Over Financial Reporting,
management’s assessment of and conclusion on the effectiveness of internal control over financial reporting did not
include the internal controls of Charles River Systems, Inc., which is included in the 2018 consolidated financial
statements of the Corporation and constituted less than 1% of total assets and total shareholders’ equity as of December
31, 2018, and approximately 1% and 2% of total revenues and net income, respectively, for the year then ended. Our
audit of internal control over financial reporting of the Corporation also did not include an evaluation of the internal
control over financial reporting of Charles River Systems, Inc.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board
(United States) (“PCAOB”), the 2018 consolidated financial statements of the Corporation and our report dated
February 21, 2019 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 21, 2019
State Street Corporation | 189
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 2019 Annual Meeting of
Shareholders, to be filed pursuant to Regulation 14A on or before April 30, 2019, referred to as the 2019 Proxy Statement,
under the caption "Election of Directors." Information concerning compliance with Section 16(a) of the Exchange Act
will appear in our 2019 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 2019 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 2019 Proxy Statement under the caption "Executive
Compensation." Such information is incorporated herein by reference.
State Street Corporation | 190
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 2019
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, 2018. 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
8,132 (2) $
24 (3)
8,156
—
—
—
23,573
—
23,573
(1) Excludes deferred stock awards and performance awards for which there is no exercise price.
(2) Consists of 5,975 shares subject to deferred stock awards, zero shares subject to stock options, zero stock appreciation rights and 2,157 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.
Pursuant to State Street’s Deferred Compensation
Plan for Directors, non-employee directors may elect to
defer the receipt of 0% or 100% of their (1) retainers,
(2) meeting fees or (3) annual equity grant award. Non-
employee directors also may elect to receive their
retainers in cash or shares of common stock. Non-
employee directors who elect to defer the cash payment
of their retainers or meeting fees may choose from four
notional investment fund returns for such deferred cash.
Deferrals of common stock are adjusted to reflect the
hypothetical reinvestment in additional shares of
common stock for any dividends or distributions on
State Street common stock. Deferred amounts will be
paid (a) as elected by the non-employee director, on
either the date of their termination of service on the
Board or on the earlier of such termination and a future
date specified, and (b) in the form elected by the non-
employee director as either a lump sum or in
installments over a two- to five-year period.
Stock awards totaling 217,867 shares of common
stock were outstanding as of December 31, 2018;
awards made through June 30, 2003, totaling 23,606
shares outstanding as of December 31, 2018, 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, 2006 or 2017 Equity Incentive Plan, which were
approved by shareholders.
State Street Corporation | 191
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
Information concerning certain relationships and related transactions and director independence will appear in
our 2019 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 2019 Proxy Statement under the caption “Examining and Audit
Committee Matters.” Such information is incorporated herein by reference.
PART IV.
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES
(A)(1) FINANCIAL STATEMENTS
The following consolidated financial statements of State Street are included in Item 8 hereof:
Report of Independent Registered Public Accounting Firm
Consolidated Statement of Income - Years ended December 31, 2018, 2017 and 2016
Consolidated Statement of Comprehensive Income - Years ended December 31, 2018, 2017 and 2016
Consolidated Statement of Condition - As of December 31, 2018 and 2017
Consolidated Statement of Changes in Shareholders' Equity - Years ended December 31, 2018, 2017 and
2016
Consolidated Statement of Cash Flows - Years ended December 31, 2018, 2017 and 2016
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 in 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 | 192
* 3.1
* 3.2
* 4.1 (P)
* 4.2
* 4.3
* 4.4
* 4.5
* 4.6
* 4.7
* 10.1†
* 10.2†
* 10.3†
EXHIBIT INDEX
Restated Articles of Organization, as amended (filed as Exhibit 3.1 to State Street’s Quarterly
Report on Form 10-Q (File No. 001-07511) for the quarter ended September 30, 2018 filed with
the SEC on October 31, 2018 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)
Deposit Agreement dated September 27, 2018, among State Street Corporation, American Stock
Transfer & Trust Company, LLC (as depositary) and the holders from time to time of the
depositary receipts (filed as Exhibit 4.3 to State Street’s Current Report on Form 8-K (File No.
001-07511) filed with the SEC on September 27, 2018 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, First Amendment thereto, and form of award
agreement thereunder (filed as Exhibit 10.3 to State Street's Quarterly Report on Form 10-Q (File
No. 001-07511) for the quarter ended March 31, 2018 filed with the SEC on May 3, 2018 and
incorporated herein by reference)
* 10.4†
Second Amendment to the Supplemental Cash Incentive Plan
State Street Corporation | 193
* 10.5†
* 10.6†
* 10.7†
* 10.8†
* 10.9†
* 10.10†
* 10.11†
* 10.12†
* 10.13†
* 10.14
SSGA Long Term Incentive Plan, as amended and restated, and form of award agreement
thereunder (filed as Exhibit 10.5 to State Street's Quarterly Report on Form 10-Q (File No.
001-07511) for the quarter ended March 31, 2018 filed with the SEC on May 3, 2018 and
incorporated herein by reference)
Second Amendment to the SSGA Long Term Incentive Plan
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)
State Street's 2017 Stock Incentive Plan, and forms of award agreements thereunder (filed as
Exhibit 10.4 to State Street's Quarterly Report on Form 10-Q (File No. 001-07511) for the quarter
ended March 31, 2018 filed with the SEC on May 3, 2018 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)
Deferred Compensation Plan for Directors of State Street Corporation, Restated January 1, 2019
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)
* 10.15†
Description of compensation arrangements for non-employee directors
* 10.16†
* 10.17A†
* 10.17B†
* 10.17C†
* 10.17D†
State Street’s Executive Compensation Trust Agreement dated June 1, 2002 (Rabbi Trust), as
amended (filed as Exhibit 10.22 to State Street's Annual Report on Form 10-K (File No.
001-07511) for the year ended December 31, 2017 filed with the SEC on February 26, 2018 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)
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)
State Street Corporation | 194
* 10.18†
* 10.19†
* 10.20†
* 10.21†
* 10.22†
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)
Form of amended and restated employment agreement entered into on December 13, 2018 with
each of Joseph L. Hooley, Ronald P. O'Hanley, Eric W. Aboaf, Andrew Erickson and Cyrus
Taraporevala (filed as Exhibit 10.1 to State Street's Current Report on Form 8-K (File No.
001-07511) filed with the SEC on December 14, 2018 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)
Employment Letter Agreements entered into with Andrew Erickson dated August 21, 2012,
November 19, 2012, and May 25, 2016 (filed as Exhibit 10.2 to State Street’s Quarterly Report on
Form 10-Q (File No. 001-07511) filed with the SEC on May 3, 2018 and incorporated herein by
reference)
* 10.23†
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)
* 10.24†
State Street Corporation Incentive Compensation Program, Effective January 1, 2019
* 10.25†
State Street Corporation Cash Award Plan, Effective January 1, 2019
* 21
* 23
31.1
31.2
32
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, 2018, 2017 and 2016, (ii)
consolidated statement of comprehensive income for the years ended December 31, 2018, 2017 and 2016,
(iii) consolidated statement of condition as of December 31, 2018 and December 31, 2017, (iv) consolidated statement
of changes in shareholders' equity for the years ended December 31, 2018, 2017 and 2016, (v) consolidated statement
of cash flows for the years ended December 31, 2018, 2017 and 2016, and (vi) notes to consolidated financial
statements.
State Street Corporation | 195
Pursuant to the requirement of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has
duly caused this report to be signed on its behalf by the undersigned, on February 21, 2019, hereunto duly authorized.
SIGNATURES
STATE STREET CORPORATION
By /s/ ERIC W. ABOAF
ERIC W. ABOAF,
Executive Vice President and
Chief Financial Officer
By /s/ IAN W. APPLEYARD
IAN W. APPLEYARD,
Executive Vice President, Global Controller and
Chief Accounting Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below on
February 21, 2019 by the following persons on behalf of the registrant and in the capacities indicated.
OFFICERS:
/s/ RONALD P. O'HANLEY
RONALD P. O'HANLEY,
President and Chief Executive Officer
/s/ ERIC W. ABOAF
ERIC W. ABOAF,
Executive Vice President and
Chief Financial Officer
/s/ IAN W. APPLEYARD
IAN W. APPLEYARD,
Executive Vice President, Global Controller and
Chief Accounting Officer
DIRECTORS:
/s/ JOSEPH L. HOOLEY
JOSEPH L. HOOLEY
/s/ KENNETT F. BURNES
KENNETT F. BURNES
/s/ PATRICK de SAINT-AIGNAN
PATRICK de SAINT-AIGNAN
/s/ LYNN A. DUGLE
LYNN A. DUGLE
/s/ AMELIA C. FAWCETT
AMELIA C. FAWCETT
/s/ WILLIAM C. FREDA
WILLIAM C. FREDA
/s/ RONALD P. O'HANLEY
RONALD P. O'HANLEY
/s/ SARA MATHEW
SARA MATHEW
/s/ WILLIAM L. MEANEY
WILLIAM L. MEANEY
/s/ SEAN O'SULLIVAN
SEAN O'SULLIVAN
/s/ RICHARD P. SERGEL
RICHARD P. SERGEL
/s/ GREGORY L. SUMME
GREGORY L. SUMME
State Street Corporation | 196
EXHIBIT 31.1
I, Ronald P. O'Hanley, certify that:
1.
I have reviewed this Annual Report on Form 10-K of State Street Corporation;
RULE 13a-14(a)/15d-14(a) CERTIFICATION
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a
material fact necessary to make the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly
present, in all material respects, the financial condition, results of operations and cash flows of the registrant as
of, and for, the periods presented in this report;
4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls
and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial
reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be
designed under our supervision, to ensure that material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those entities, particularly during the period
in which this report is being prepared;
(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting
to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial
reporting and the preparation of financial statements for external purposes in accordance with generally
accepted accounting principles;
(c) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report
our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period
covered by this report based on such evaluation; and
(d) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred
during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual
report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control
over financial reporting; and
5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control
over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors
(or persons performing the equivalent functions):
(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial
reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize
and report financial information; and
(b) Any fraud, whether or not material, that involves management or other employees who have a significant role
in the registrant's internal control over financial reporting.
Date: February 21, 2019
By:
/s/ RONALD P. O'HANLEY
Ronald P. O'Hanley,
President 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 21, 2019
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, 2018 fully complies with the
requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, and the information contained in this
Report fairly presents, in all material respects, the financial condition and results of operations of State Street
Corporation.
Date: February 21, 2019
By:
Date: February 21, 2019
By:
/s/ RONALD P. O'HANLEY
Ronald P. O'Hanley,
President and Chief Executive Officer
/s/ ERIC W. ABOAF
Eric W. Aboaf,
Executive Vice President and
Chief Financial Officer
BOARD OF DIRECTORS
March 19, 2019
Joseph L. Hooley
Chairman, State Street Corporation
Sara Mathew
Retired Chairman and Chief Executive Officer, Dun & Bradstreet,
commercial data and analytics firm
Kennett F. Burnes
William L. Meaney
Lead Director, State Street Corporation
Retired Chairman, President and Chief Executive Officer, Cabot
Corporation, manufacturer of specialty chemicals and performance
materials
President, Chief Executive Officer and Director, Iron Mountain Inc.,
global storage and information management provider
Patrick de Saint-Aignan
Ronald P. O’Hanley
Retired Managing Director and Advisory Director for Morgan Stanley,
global financial services
President and Chief Executive Officer,
State Street Corporation
Lynn A. Dugle
Sean O’Sullivan
Retired Chairman and Chief Executive Officer, Engility Holdings, Inc.,
technology consulting company
Retired Group Managing Director and Group Chief Operating
Officer, HSBC Holdings, plc., banking and financial services
organization
Amelia C. Fawcett
Richard P. Sergel
Chairman, Kinnevik AB, a long-term oriented investment company
based in Sweden
Retired President and Chief Executive Officer,
North American Electric Reliability Corporation, self-
regulatory authority for the bulk electricity system
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 19, 2019
Ronald P. O’Hanley
President and Chief Executive Officer
Andrew P. Kuritzkes
Executive Vice President and Chief Risk Officer
Eric W. Aboaf
Executive Vice President and Chief Financial Officer
Louis D. Maiuri
Executive Vice President and Chief Operating Officer
Jeffrey N. Carp
Executive Vice President, Chief Legal Officer and Secretary
Donna M. Milrod
Executive Vice President and Head of Global Clients Division
Andrew J. Erickson
Executive Vice President, Head of Global Services
Elizabeth Nolan
Executive Vice President, Chief Executive Officer for Europe,
Middle East and Africa and Head of Global Delivery
Hannah M. Grove
Executive Vice President and Chief Marketing Officer
Antoine Shagoury
Executive Vice President and Global Chief Information Officer
Kathryn M. Horgan
Executive Vice President and Chief Human Resources and
Citizenship Officer
Cyrus Taraporevala
Executive Vice President and President and Chief Executive
Officer of State Street Global Advisors
Karen C. Keenan
Executive Vice President, Chief Administrative Officer and
Head of Global Markets
Australia
Melbourne
Sydney
Austria
Vienna
Belgium
Brussels
Brunei Darussalam
Jerudong
Canada
Montreal
Toronto
Vancouver
Cayman Islands
George Town, Grand Cayman
Channel Islands
Guernsey
Saint Peter Port
Jersey
Saint Helier
Denmark
Copenhagen
France
Paris
Germany
Frankfurt
Leipzig
Munich
India
Bangalore
Chennai
Coimbatore
Hyderabad
Mumbai
Pune
Thane West
Vijayawada
Ireland
Drogheda
Dublin
Kilkenny
Naas
STATE STREET WORLDWIDE
Italy
Milan
Turin
Japan
Fukuoka
Tokyo
Luxembourg
Luxembourg
Malaysia
Kuala Lumpur
Netherlands
Amsterdam
Norway
Trondheim
People's Republic of China
Beijing
Hangzhou
Hong Kong
Shanghai
Philippines
Quezon City
Taguig City
Poland
Gdansk
Krakow
Singapore
Singapore
South Korea
Seoul
Switzerland
Zurich
Taiwan
Taipei City
Thailand
Bangkok
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Abu Dhabi
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United Kingdom
England
London
Scotland
Edinburgh
United States
California
Irvine
Los Angeles
Redwood City
Sacramento
San Francisco
Connecticut
Stamford
Florida
Jacksonville
Georgia
Atlanta
Illinois
Chicago
Indiana
Indianapolis
Massachusetts
Boston
Burlington
Cambridge
Hadley
Quincy
Missouri
Kansas City
New Jersey
Clifton
Princeton
New York
New York
North Carolina
Durham
Pennsylvania
Berwyn
Texas
Austin
2018 Annual Report
to Shareholders
9
19-33478-0319