statestreet.com
S
T
A
T
E
S
T
R
E
E
T
2
0
1
9
A
N
N
U
A
L
R
E
P
O
R
T
Annual Report
to Shareholders
2019
State Street Corporation
State Street Financial Center
One Lincoln Street
Boston, MA 02111
20-33748-0320
©2020 State Street Corporation
To my fellow shareholders,
As I write this letter, the world is facing one
of its greatest peacetime challenges ever.
COVID-19 is a global public health crisis that
has caused a rapid and violent curtailment
of economic activity, which in turn is imposing
great stress on financial markets and systems.
Ronald P. O’Hanley
Chairman, President and CEO
2
11
Unlike in 2008, when a breakdown in the financial
companies, endowments and foundations, official
economy led to a disruption of the real economy,
institutions and financial advisers so that people
today we are seeing the real economy, undermined
can retire with dignity, cutting-edge research
by a public health crisis, transmitting damage to the
and philanthropy can be funded and the world’s
financial economy.
governments can invest in the infrastructure of the
future. These are just a few of the reasons we take
After laying out our business strategy and new
our mission and our position in the global financial
value proposition for institutional investors in last
system so seriously, knowing that institutional capital
year’s letter, 2020 marks an important turning point
now plays a bigger role than ever before in driving
for us as we begin to implement this new way of
economic growth.
becoming a better provider for our clients. While none
of us anticipated the pandemic that has disrupted the
How we achieve our purpose is also changing. Growing
global economy and our lives in such a short time,
business pressures on asset managers and asset owners
the crisis has sharpened the urgency with which
even before the pandemic mean that the scope of our
we are now seeking to support our clients around
mission must extend beyond our core asset servicing
the world with more comprehensive services and a
areas of custody and fund accounting and core asset
global operating model that can adapt quickly to their
management capabilities. The rise of passive investing,
changing needs. On a daily basis, we see opportunities
elusive alpha, lower-for-even-longer interest rates and
to deliver on our core value to clients that we are
rising operational costs and complexity are changing the
indeed “stronger together.”
business of investing and prompting institutional investors
Purpose and Strategy for a
New Industry Paradigm
to re-engineer their businesses to be successful. And
these institutions need our help to do so.
Underpinning our purpose is our fundamental belief
that the current business challenges facing our
In these difficult times, we are more committed than
clients require that we engage with and serve them in
ever to harnessing the full potential of State Street’s
more comprehensive and strategic ways than before
capabilities, talent, and ingenuity to help achieve
in order to make them stronger. In an increasingly
better outcomes for the world’s investors and the
competitive marketplace, our clients are looking for a
people they serve.
new kind of partnership. They want to focus solely on
That is State Street’s purpose. It means we are
more of the investment operations that will help them
dedicated to managing and servicing investments
streamline their businesses, reduce costs and better
for asset managers, pension fund sponsors, insurance
extract competitive advantages from their data.
the activities that differentiate them, while we take on
3
We are more committed than ever to harnessing the full
potential of State Street’s capabilities, talent and ingenuity
to help achieve better outcomes for the world’s investors
and the people they serve.
Those evolving needs are at the heart of State Street’s
2019 Financial Performance
strategy to become our clients’ essential partner
by building the industry’s first data-driven front-
The first half of 2019 was challenging, following the
to-back servicing platform (State Street AlphaSM)
dramatic global equity market sell-off in late 2018
and providing the technology scale our clients need
and continued servicing fee pressure. As a result of
to grow. To ensure we execute that strategy, we are
these headwinds, it was clear that we needed to take
transforming how we deliver asset servicing and asset
aggressive management actions to stabilize revenues
management excellence by building a high-performing
and reduce expenses while keeping client satisfaction
organization that exceeds our clients’ expectations
at the center of all we do. We made demonstrable
when it comes to responsiveness, problem-solving
progress in these areas in 2019, with markedly improved
and results, and at the same time allows us to attract
results in the second half of the year.
the industry’s best talent.
Assets under custody and administration ended the
Our strategy is aimed at creating a new, more
year at a record $34.4 trillion. Total business wins in
strategic client symbiosis that helps us grow with our
2019 amounted to just over $1.8 trillion, including four
clients’ evolving asset management, servicing and
front-to-back Alpha platform wins. Servicing assets yet
data intelligence needs over the long term. Helping
to be installed stood at $1.2 trillion at the end of 2019.
our clients successfully grow their businesses and
achieve their investment goals is the best way to
At State Street Global Advisors, assets under
generate long-term value for you, our shareholders.
management increased to a record $3.1 trillion
While we have much work ahead of us, we made
by the end of the year, supported by higher market
measurable progress toward these goals in 2019.
levels and over $100 billion in total net inflows
driven by strong ETF, institutional and cash net flows.
Total revenue in 2019 decreased 3 percent compared
to 2018 to $11.8 billion, primarily driven by challenging
4
industry conditions, lower U.S. market interest rates and
2019 Financial Highlights
low foreign exchange volatility. Amidst that, the revenues
of our front-office service provider that we acquired in
October 2018, Charles River Development (CRD), were
strong, improving from its 2018 standalone performance
and demonstrating many of the opportunities presented
by the acquisition. We achieved earnings per share of
$5.38 and return on equity of 9.4 percent (ex-notables,
$6.17 and 10.8 percent, respectively).i
During 2019 we worked hard to improve our operational
efficiency and reduce expenses. We launched a
comprehensive firm-wide expense savings program
to manage down expenses. Initially targeting
$350 million of gross expense savings, we finished
the year exceeding that goal, with $415 million in
gross expense savings.ii
As a result of balance sheet improvement following
the 2019 Comprehensive Capital Analysis and Review
(CCAR) stress test, we increased our quarterly common
dividend by 11% to $0.52 per share. We achieved strong
capital ratios. Further, we generated a total capital
payout of 116 percent to our shareholders, returning
$2.3 billion during 2019, consisting of $1.6 billion
of common share repurchases and $728 million of
common stock dividends during the year.
While we made measurable progress toward our cost
savings targets in 2019, we have more to do to improve our
margins and reach our medium-term goals. Optimizing
our technology infrastructure and continuing to drive
client-centered revenue growth will be a key priority.
5
$34.4T
Assets under custody
and/or administration
$1.8T
Newly announced asset
servicing mandates
$3.1T
Assets under management
$11.8B
Total revenue
$9.4%
Return on equity
Our strategy is aimed at creating a new, more strategic
client symbiosis that helps us grow with our clients’ evolving
asset management, servicing and data intelligence needs
over the long term.
2019 Business Highlights
The development of the State Street Alpha front-to-
back platform is redefining and strengthening our
The servicing needs for State Street’s clients are
fundamental value proposition for our clients. Driven by
fundamentally changing and so we must adapt our
this distinctive capability, we are now working with the
capabilities in response. At the same time, we need to
industry’s largest asset managers and asset owners
align our services to the distinctive requirements of
to help them improve their investment operations from
different kinds of investors including pension funds,
start to finish. The Alpha platform is also transforming
insurance companies, sovereign wealth funds or large
the way we engage with clients beyond our core
asset managers.
custody and fund accounting capabilities. These are
C-level engagements as these leaders look to better
In 2019 we were pleased to see significant progress
optimize their overall business models.
in client service quality, with especially strong
improvements in our client onboarding process.
We also made important changes to our own operating
That enabled us to scale rapidly and take on large
model in 2019 by combining technology, operations
tranches of business while also meeting client
and delivery teams in order to align our IT priorities
service requirements.
more closely to client and business needs and to
emphasize scalability and resiliency. While continuing
As part of our improved client coverage model, our
to innovate, we also are on a path toward reducing
Global Client division is now fully operational, allowing
our overall technology cost growth with organizational
us to better partner with our largest clients. This new
streamlining, targeted outsourcing, vendor consolidation
model is helping us deliver on our goal of becoming an
and cloud optimization. That realignment is also helping
essential partner to our clients.
us service our clients more efficiently and effectively
while building a high-performing, resilient, and risk-
excellent organization.
6
Within our asset management business,
materiality framework and Global Advisors’
State Street Global Advisors, we also see
own governance insights from its asset stewardship
the needs of institutional asset owners changing.
team. With this score, companies can address their
Challenging market conditions necessitate having
ESG profile and identify areas for improvement.
a strategic investment management partner
who can help asset owners think through their
Lastly, I have heard from many clients that they value
most difficult investment challenges, bring new
the leadership we showed in 2019 on important industry
insights and perspectives, and construct resilient
issues like diversity, climate change risk and technology
and capital-efficient portfolios that are aligned
disruption. These are issues our clients are grappling
with their long-term liabilities.
with, and they welcome our insights. At State Street,
we believe we must engage with policymakers on issues
As our clients face greater portfolio and operational
that are relevant to our clients and to our industry and
complexities, they are also looking to us to
which benefit from our deep investment practitioner
provide innovative solutions that help them become
expertise. And we see the measurable and positive
better investors through our enhanced trading and
impact our engagement has: for example, three years
front-office capabilities. We are already seeing those
after the launch of Global Advisors’ Fearless Girl
innovations emerge.
campaign to increase the number of women on boards,
we find that 681 companies with previously all-male
For example, our FX transaction cost analysis
boards have added a female director.
application from BestX has transformed how
quantitative investors design and test their trading
We also believe that as a business we can only be as
algorithms, leading the tool to be named the best
successful as the broader economy and society in
execution product of the year for three years in a
which we operate. That is why we maintain an active
row.iii Other firsts in 2019 included: Global Markets’
presence in the communities we serve and support
renminbi-denominated trades on our FX Connect
local initiatives around important issues such as
platform to help the growing number of investors
gender diversity, education access and employability
looking to hedge their investments in China, and
and climate change risk. In response to the COVID-19
Global Treasury’s first-in-the-industry SOFOR-based
pandemic, State Street has provided financial support
subordinated debt issuance, as investors move away
across the globe to key public health organizations and
from the once-dominant LIBOR benchmark. Further,
crisis responders through our State Street Foundation
as investor interest in ESG issues grows, Global
as well as matching employee contributions, and we
Advisors launched a new ESG scoring system called the
are facilitating volunteer opportunities for employees
R-Factor (“R” for responsible investing) based on the
who want to help.
Sustainability Accounting Standards Board’s (SASB)
7
Looking Ahead
as the operational scale and straight-through
processing derived from these changes will help
We are pleased by the renewed sense of purpose and
us to service clients more quickly and effectively.
energy our employees are bringing to State Street’s
Moreover, as our clients have faced the pandemic
transformation, even in the midst of the current
outbreak and related market volatility, our global
challenges. We will continue to execute on our core
operating model has allowed us to segment
strategic goals with an emphasis on the following:
operations and transition work to support our
clients’ investment servicing needs during the crisis.
1. Be an Essential Partner: Trusted,
Strategic and Proactive
3. Implement Cultural Transformation to
Building on the client coverage model developed
Create a High-Performing Organization
for our large asset manager clients, we will
Recognizing that we have an ambitious strategy
extend that model to our other client segments,
for transforming our business and how we
recognizing that asset owners, insurance
serve our clients, we have launched an internal,
companies, alternatives managers and official
bottom-up program to accelerate the cultural
institutions have distinctive needs. Our asset
shift we need to execute on our strategy. This
management business is also focusing on building
includes flattening decision-making in the
out a more comprehensive set of solutions that
organization and reducing organizational silos and
addresses the key asset allocation and risk
complexity. Already we are seeing improvements
management challenges facing asset owners,
in how businesses are working in concert to
including growing interest in climate- resilient
respond more quickly and comprehensively
portfolios and other ESG-related investment
to client needs, which has been especially
challenges. Global Advisors is also continuing to
important during the current global crisis.
expand its suite of low-cost and thematic ETFs.
4. Enhance Operational Resiliency
2. Develop a Scalable, Configurable and
As we take on more of our clients’ operations,
Resilient End-to-End Operating Model
we are focused on ensuring a high level of operational
Our focus here is to improve productivity and
resiliency. Tightly aligning our technology, service
transform our cost base through process
delivery and risk excellence teams is meant to
simplification, automation and organizational
help us deliver “always on” services to our clients
redesign. We will also adopt productivity measures
around the world while maintaining State Street’s
to drive continuous improvement and implement our
overall risk excellence.
technology and operations resiliency plans. These
efforts are aimed at improving client service quality,
8
5. Execute on Behalf of Our Shareholders
While we cannot predict the scope and duration of the
All of these efforts are aimed at generating value
pandemic, we will remain laser-focused on our priorities:
for you, our shareholders, while we continue to
work to close the margin and return on equity
• Supporting our employees and our communities
(ROE) gaps between us and our industry peers.
Managing Through the Crisis
I shall finish where I began. As I write this letter in
March, we face the worst global health crisis since
the 1918 influenza pandemic and a rapidly broadening
economic crisis. The financial market situation
is changing on a daily basis. Given State Street’s
important role in the infrastructure of the global
financial system, we are in constant communication
with policymakers to offer our considerable resources
in support of global investors. Since the financial
crisis, our capital and holdings of high-quality liquid
assets have more than doubled, and we are subject
to the Federal Reserve Board’s most stringent stress
testing and recovery and resolution regimes.
This is a moment when we all must come together to
solve a global challenge that affects each one of us.
As a global company operating in 29 countries, we
have been addressing the coronavirus outbreak since
its inception and have been able to adapt our global
operating model to the rapidly changing needs of our
clients as well as to the safety concerns of our nearly
40,000 global employees.
• Providing service excellence to our clients
• Driving value for our shareholders
We remain confident in the soundness of our strategy
to deliver long-term value to our shareholders,
our clients, our employees and the communities in
which we live and work. We expect that our global
reach, our talent, our deep experience in financial
markets and our capital position will enable us to
manage through this current crisis, and to realize our
vision of becoming the leading asset servicer, asset
manager and data insights provider to the owners and
managers of the world’s capital.
Thank you for your continued confidence and
investment in us, and I extend my best wishes
to you and your families to stay safe and healthy
during these difficult times.
R ON A L D P. O’H A NL E Y
Chairman, President and CEO
March 20, 2020
9
Endnotes
i Results excluding notable items are non-GAAP measures. Refer to the reconciliation of non-GAAP financial information below.
YEARS ENDED
% CHANGE
DECEMBER 31, 2018
DECEMBER 31, 2019
2019 VS. 2018
DILUTED EARNINGS PER SHARE
Diluted earnings per share, GAAP-basis
$ 6.39
$ 5.38
(15.8)%
Less: Notable items
Acquisition and restructuring costs
Repositioning charges
Legal and related
Other income
Preferred securities redemption(1)
Diluted earnings per share,
excluding notable items
0.05
0.65
0.12
-
-
$ 7.21
0.16
0.22
0.44
(0.09)
0.06
$ 6.17
(14.4)%
RETURN ON AVERAGE COMMON EQUITY
Return on average common equity, GAAP-basis
12.1 %
9.4 %
(270) bps
Less: Notable items
Acquisition and restructuring costs
Repositioning charges
Legal and related
Other income
Preferred securities redemption(1)
Tax impact of notable items
Return on average common equity,
excluding notable items
0.1
1.6
0.3
-
-
(0.4)
13.7 %
0.4
0.5
0.7
(0.2)
0.1
(0.1)
10.8 %
(290) bps
(1) We redeemed all outstanding Series E noncumulative perpetual preferred stock on December 15, 2019 at a redemption price of $750 million ($100,000 per share
equivalent to $25.00 per depositary share) plus accrued and unpaid dividends. The difference between the redemption value and the net carrying value of $22 million
resulted in an EPS impact of approximately ($.06) per share in 2019.
ii 2019 total expenses increased by 0.2% compared to 2018 on a GAAP basis.
iii Named Best Execution Product of the Year at the 2019 Markets Technology Awards, hosted by Risk.net, for the third year in a row.
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.
10
10
(cid:38)(cid:50)(cid:53)(cid:51)(cid:50)(cid:53)(cid:36)(cid:55)(cid:40)(cid:3)(cid:44)(cid:49)(cid:41)(cid:50)(cid:53)(cid:48)(cid:36)(cid:55)(cid:44)(cid:50)(cid:49)
(cid:38)(cid:50)(cid:53)(cid:51)(cid:50)(cid:53)(cid:36)(cid:55)(cid:40)(cid:3)(cid:43)(cid:40)(cid:36)(cid:39)(cid:52)(cid:56)(cid:36)(cid:53)(cid:55)(cid:40)(cid:53)(cid:54)(cid:3)
(cid:54)(cid:87)(cid:68)(cid:87)(cid:72)(cid:3)(cid:54)(cid:87)(cid:85)(cid:72)(cid:72)(cid:87)(cid:3)(cid:38)(cid:82)(cid:85)(cid:83)(cid:82)(cid:85)(cid:68)(cid:87)(cid:76)(cid:82)(cid:81)
(cid:54)(cid:87)(cid:68)(cid:87)(cid:72)(cid:3)(cid:54)(cid:87)(cid:85)(cid:72)(cid:72)(cid:87)(cid:3)(cid:41)(cid:76)(cid:81)(cid:68)(cid:81)(cid:70)(cid:76)(cid:68)(cid:79)(cid:3)(cid:38)(cid:72)(cid:81)(cid:87)(cid:72)(cid:85)(cid:3)
(cid:50)(cid:81)(cid:72)(cid:3)(cid:47)(cid:76)(cid:81)(cid:70)(cid:82)(cid:79)(cid:81)(cid:3)(cid:54)(cid:87)(cid:85)(cid:72)(cid:72)(cid:87)
(cid:37)(cid:82)(cid:86)(cid:87)(cid:82)(cid:81)(cid:15)(cid:3)(cid:48)(cid:68)(cid:86)(cid:86)(cid:68)(cid:70)(cid:75)(cid:88)(cid:86)(cid:72)(cid:87)(cid:87)(cid:86)(cid:3)(cid:19)(cid:21)(cid:20)(cid:20)(cid:20)(cid:16)(cid:21)(cid:28)(cid:19)(cid:19)(cid:3)
(cid:58)(cid:72)(cid:69)(cid:86)(cid:76)(cid:87)(cid:72)(cid:29)(cid:3)(cid:90)(cid:90)(cid:90)(cid:17)(cid:86)(cid:87)(cid:68)(cid:87)(cid:72)(cid:86)(cid:87)(cid:85)(cid:72)(cid:72)(cid:87)(cid:17)(cid:70)(cid:82)(cid:80)(cid:3)
(cid:42)(cid:72)(cid:81)(cid:72)(cid:85)(cid:68)(cid:79)(cid:3)(cid:44)(cid:81)(cid:84)(cid:88)(cid:76)(cid:85)(cid:76)(cid:72)(cid:86)(cid:29)(cid:3)(cid:14)(cid:20)(cid:3)(cid:25)(cid:20)(cid:26)(cid:18)(cid:26)(cid:27)(cid:25)(cid:16)(cid:22)(cid:19)(cid:19)(cid:19)(cid:3)
(cid:36)(cid:49)(cid:49)(cid:56)(cid:36)(cid:47)(cid:3)(cid:48)(cid:40)(cid:40)(cid:55)(cid:44)(cid:49)(cid:42)
(cid:58)(cid:72)(cid:71)(cid:81)(cid:72)(cid:86)(cid:71)(cid:68)(cid:92)(cid:15)(cid:3)(cid:48)(cid:68)(cid:92)(cid:3)(cid:21)(cid:19)(cid:15)(cid:3)(cid:21)(cid:19)(cid:21)(cid:19)(cid:15)(cid:3)(cid:28)(cid:29)(cid:19)(cid:19)(cid:3)(cid:68)(cid:17)(cid:80)(cid:17)(cid:3)(cid:70)(cid:82)(cid:81)(cid:71)(cid:88)(cid:70)(cid:87)(cid:72)(cid:71)(cid:3)(cid:82)(cid:81)(cid:79)(cid:76)(cid:81)(cid:72)(cid:3)(cid:87)(cid:75)(cid:85)(cid:82)(cid:88)(cid:74)(cid:75)(cid:3)(cid:68)(cid:3)(cid:79)(cid:76)(cid:89)(cid:72)(cid:3)(cid:68)(cid:88)(cid:71)(cid:76)(cid:82)(cid:70)(cid:68)(cid:86)(cid:87)(cid:3)(cid:68)(cid:87)(cid:29)(cid:3)
(cid:90)(cid:90)(cid:90)(cid:17)(cid:89)(cid:76)(cid:85)(cid:87)(cid:88)(cid:68)(cid:79)(cid:86)(cid:75)(cid:68)(cid:85)(cid:72)(cid:75)(cid:82)(cid:79)(cid:71)(cid:72)(cid:85)(cid:80)(cid:72)(cid:72)(cid:87)(cid:76)(cid:81)(cid:74)(cid:17)(cid:70)(cid:82)(cid:80)(cid:18)(cid:54)(cid:55)(cid:55)(cid:21)(cid:19)(cid:21)(cid:19)(cid:3)
(cid:55)(cid:53)(cid:36)(cid:49)(cid:54)(cid:41)(cid:40)(cid:53)(cid:3)(cid:36)(cid:42)(cid:40)(cid:49)(cid:55)(cid:3)
(cid:53)(cid:72)(cid:74)(cid:76)(cid:86)(cid:87)(cid:72)(cid:85)(cid:72)(cid:71)(cid:3) (cid:86)(cid:75)(cid:68)(cid:85)(cid:72)(cid:75)(cid:82)(cid:79)(cid:71)(cid:72)(cid:85)(cid:86)(cid:3) (cid:90)(cid:76)(cid:86)(cid:75)(cid:76)(cid:81)(cid:74)(cid:3) (cid:87)(cid:82)(cid:3) (cid:70)(cid:75)(cid:68)(cid:81)(cid:74)(cid:72)(cid:3) (cid:81)(cid:68)(cid:80)(cid:72)(cid:3) (cid:82)(cid:85)(cid:3) (cid:68)(cid:71)(cid:71)(cid:85)(cid:72)(cid:86)(cid:86)(cid:3) (cid:76)(cid:81)(cid:73)(cid:82)(cid:85)(cid:80)(cid:68)(cid:87)(cid:76)(cid:82)(cid:81)(cid:3) (cid:82)(cid:81)(cid:3) (cid:87)(cid:75)(cid:72)(cid:76)(cid:85)(cid:3) (cid:86)(cid:75)(cid:68)(cid:85)(cid:72)(cid:86)(cid:15)
(cid:87)(cid:85)(cid:68)(cid:81)(cid:86)(cid:73)(cid:72)(cid:85)(cid:3) (cid:82)(cid:90)(cid:81)(cid:72)(cid:85)(cid:86)(cid:75)(cid:76)(cid:83)(cid:3) (cid:82)(cid:73)(cid:3) (cid:86)(cid:87)(cid:82)(cid:70)(cid:78)(cid:15)(cid:3) (cid:71)(cid:72)(cid:83)(cid:82)(cid:86)(cid:76)(cid:87)(cid:3) (cid:70)(cid:72)(cid:85)(cid:87)(cid:76)(cid:73)(cid:76)(cid:70)(cid:68)(cid:87)(cid:72)(cid:86)(cid:15)(cid:3) (cid:85)(cid:72)(cid:83)(cid:82)(cid:85)(cid:87)(cid:3) (cid:79)(cid:82)(cid:86)(cid:87) (cid:70)(cid:72)(cid:85)(cid:87)(cid:76)(cid:73)(cid:76)(cid:70)(cid:68)(cid:87)(cid:72)(cid:86)(cid:15)(cid:3) (cid:70)(cid:82)(cid:81)(cid:86)(cid:82)(cid:79)(cid:76)(cid:71)(cid:68)(cid:87)(cid:72)(cid:3) (cid:68)(cid:70)(cid:70)(cid:82)(cid:88)(cid:81)(cid:87)(cid:86)(cid:15)
(cid:68)(cid:88)(cid:87)(cid:75)(cid:82)(cid:85)(cid:76)(cid:93)(cid:72)(cid:3) (cid:71)(cid:76)(cid:85)(cid:72)(cid:70)(cid:87)(cid:3) (cid:71)(cid:72)(cid:83)(cid:82)(cid:86)(cid:76)(cid:87)(cid:3) (cid:82)(cid:73)(cid:3) (cid:71)(cid:76)(cid:89)(cid:76)(cid:71)(cid:72)(cid:81)(cid:71)(cid:86)(cid:15)(cid:3) (cid:82)(cid:85)(cid:3) (cid:85)(cid:72)(cid:70)(cid:72)(cid:76)(cid:89)(cid:72)(cid:3) (cid:76)(cid:81)(cid:73)(cid:82)(cid:85)(cid:80)(cid:68)(cid:87)(cid:76)(cid:82)(cid:81)(cid:3) (cid:82)(cid:81)(cid:3) (cid:82)(cid:88)(cid:85)(cid:3) (cid:71)(cid:76)(cid:89)(cid:76)(cid:71)(cid:72)(cid:81)(cid:71)(cid:3) (cid:85)(cid:72)(cid:76)(cid:81)(cid:89)(cid:72)(cid:86)(cid:87)(cid:80)(cid:72)(cid:81)(cid:87)(cid:3) (cid:83)(cid:79)(cid:68)(cid:81)(cid:3)
(cid:86)(cid:75)(cid:82)(cid:88)(cid:79)(cid:71)(cid:3)(cid:70)(cid:82)(cid:81)(cid:87)(cid:68)(cid:70)(cid:87)(cid:29)(cid:3)
(cid:36)(cid:80)(cid:72)(cid:85)(cid:76)(cid:70)(cid:68)(cid:81)(cid:3)(cid:54)(cid:87)(cid:82)(cid:70)(cid:78)(cid:3)(cid:55)(cid:85)(cid:68)(cid:81)(cid:86)(cid:73)(cid:72)(cid:85)(cid:3)(cid:9)(cid:3)(cid:55)(cid:85)(cid:88)(cid:86)(cid:87)(cid:3)(cid:38)(cid:82)(cid:17)(cid:15)(cid:3)(cid:47)(cid:47)(cid:38)
(cid:50)(cid:83)(cid:72)(cid:85)(cid:68)(cid:87)(cid:76)(cid:82)(cid:81)(cid:86)(cid:3)(cid:38)(cid:72)(cid:81)(cid:87)(cid:72)(cid:85)
(cid:25)(cid:21)(cid:19)(cid:20)(cid:3)(cid:20)(cid:24)(cid:87)(cid:75)(cid:3)(cid:36)(cid:89)(cid:72)(cid:81)(cid:88)(cid:72)(cid:3)
(cid:37)(cid:85)(cid:82)(cid:82)(cid:78)(cid:79)(cid:92)(cid:81)(cid:15)(cid:3)(cid:49)(cid:60)(cid:3)(cid:3)(cid:20)(cid:20)(cid:21)(cid:20)(cid:28)
(cid:51)(cid:75)(cid:82)(cid:81)(cid:72)(cid:29)(cid:3)(cid:14)(cid:20)(cid:3)(cid:27)(cid:19)(cid:19)(cid:18)(cid:28)(cid:22)(cid:26)(cid:16)(cid:24)(cid:23)(cid:23)(cid:28)(cid:3)(cid:3)
(cid:58)(cid:72)(cid:69)(cid:86)(cid:76)(cid:87)(cid:72)(cid:29)(cid:3)(cid:90)(cid:90)(cid:90)(cid:17)(cid:68)(cid:86)(cid:87)(cid:73)(cid:76)(cid:81)(cid:68)(cid:81)(cid:70)(cid:76)(cid:68)(cid:79)(cid:17)(cid:70)(cid:82)(cid:80)(cid:3)
(cid:40)(cid:16)(cid:80)(cid:68)(cid:76)(cid:79)(cid:29)(cid:3)(cid:75)(cid:72)(cid:79)(cid:83)(cid:35)(cid:68)(cid:86)(cid:87)(cid:73)(cid:76)(cid:81)(cid:68)(cid:81)(cid:70)(cid:76)(cid:68)(cid:79)(cid:17)(cid:70)(cid:82)(cid:80)
(cid:54)(cid:55)(cid:50)(cid:38)(cid:46)(cid:3)(cid:47)(cid:44)(cid:54)(cid:55)(cid:44)(cid:49)(cid:42)(cid:54)(cid:3)
(cid:54)(cid:87)(cid:68)(cid:87)(cid:72)(cid:3) (cid:54)(cid:87)(cid:85)(cid:72)(cid:72)(cid:87)(cid:182)(cid:86)(cid:3) (cid:70)(cid:82)(cid:80)(cid:80)(cid:82)(cid:81)(cid:3) (cid:86)(cid:87)(cid:82)(cid:70)(cid:78)(cid:3) (cid:76)(cid:86)(cid:3) (cid:79)(cid:76)(cid:86)(cid:87)(cid:72)(cid:71)(cid:3) (cid:82)(cid:81)(cid:3) (cid:87)(cid:75)(cid:72)(cid:3) (cid:49)(cid:72)(cid:90)(cid:3) (cid:60)(cid:82)(cid:85)(cid:78)(cid:3) (cid:54)(cid:87)(cid:82)(cid:70)(cid:78)(cid:3) (cid:40)(cid:91)(cid:70)(cid:75)(cid:68)(cid:81)(cid:74)(cid:72)(cid:3) (cid:88)(cid:81)(cid:71)(cid:72)(cid:85)(cid:3) (cid:87)(cid:75)(cid:72)(cid:3) (cid:87)(cid:76)(cid:70)(cid:78)(cid:72)(cid:85)(cid:3)
(cid:86)(cid:92)(cid:80)(cid:69)(cid:82)(cid:79)(cid:3)(cid:54)(cid:55)(cid:55)(cid:17)
(cid:54)(cid:43)(cid:36)(cid:53)(cid:40)(cid:43)(cid:50)(cid:47)(cid:39)(cid:40)(cid:53)(cid:3)(cid:44)(cid:49)(cid:41)(cid:50)(cid:53)(cid:48)(cid:36)(cid:55)(cid:44)(cid:50)(cid:49)
(cid:41)(cid:82)(cid:85)(cid:3)(cid:87)(cid:76)(cid:80)(cid:72)(cid:79)(cid:92)(cid:3)(cid:76)(cid:81)(cid:73)(cid:82)(cid:85)(cid:80)(cid:68)(cid:87)(cid:76)(cid:82)(cid:81)(cid:3)(cid:68)(cid:69)(cid:82)(cid:88)(cid:87)(cid:3)(cid:54)(cid:87)(cid:68)(cid:87)(cid:72)(cid:3)(cid:54)(cid:87)(cid:85)(cid:72)(cid:72)(cid:87)(cid:182)(cid:86)(cid:3)(cid:70)(cid:82)(cid:81)(cid:86)(cid:82)(cid:79)(cid:76)(cid:71)(cid:68)(cid:87)(cid:72)(cid:71)(cid:3)(cid:73)(cid:76)(cid:81)(cid:68)(cid:81)(cid:70)(cid:76)(cid:68)(cid:79)(cid:3)(cid:85)(cid:72)(cid:86)(cid:88)(cid:79)(cid:87)(cid:86)(cid:3)(cid:68)(cid:81)(cid:71)(cid:3)(cid:82)(cid:87)(cid:75)(cid:72)(cid:85)(cid:3)(cid:80)(cid:68)(cid:87)(cid:87)(cid:72)(cid:85)(cid:86)
(cid:82)(cid:73)(cid:3)(cid:76)(cid:81)(cid:87)(cid:72)(cid:85)(cid:72)(cid:86)(cid:87)(cid:3)(cid:87)(cid:82)(cid:3)(cid:86)(cid:75)(cid:68)(cid:85)(cid:72)(cid:75)(cid:82)(cid:79)(cid:71)(cid:72)(cid:85)(cid:86)(cid:15)(cid:3)(cid:68)(cid:81)(cid:71)(cid:3)(cid:87)(cid:82)(cid:3)(cid:85)(cid:72)(cid:84)(cid:88)(cid:72)(cid:86)(cid:87)(cid:3)(cid:70)(cid:82)(cid:83)(cid:76)(cid:72)(cid:86)(cid:3)(cid:82)(cid:73)(cid:3)(cid:82)(cid:88)(cid:85)(cid:3)(cid:81)(cid:72)(cid:90)(cid:86)(cid:3)(cid:85)(cid:72)(cid:79)(cid:72)(cid:68)(cid:86)(cid:72)(cid:86)(cid:3)(cid:68)(cid:81)(cid:71)(cid:3)(cid:73)(cid:76)(cid:81)(cid:68)(cid:81)(cid:70)(cid:76)(cid:68)(cid:79)(cid:3)(cid:85)(cid:72)(cid:83)(cid:82)(cid:85)(cid:87)(cid:86)(cid:3)(cid:69)(cid:92)(cid:3)
(cid:80)(cid:68)(cid:76)(cid:79)(cid:15)(cid:3)(cid:83)(cid:79)(cid:72)(cid:68)(cid:86)(cid:72)(cid:3)(cid:89)(cid:76)(cid:86)(cid:76)(cid:87)(cid:3)(cid:82)(cid:88)(cid:85)(cid:3)(cid:90)(cid:72)(cid:69)(cid:16)(cid:86)(cid:76)(cid:87)(cid:72)(cid:3)(cid:68)(cid:87)(cid:29)
(cid:90)(cid:90)(cid:90)(cid:17)(cid:86)(cid:87)(cid:68)(cid:87)(cid:72)(cid:86)(cid:87)(cid:85)(cid:72)(cid:72)(cid:87)(cid:17)(cid:70)(cid:82)(cid:80)(cid:18)(cid:86)(cid:87)(cid:82)(cid:70)(cid:78)(cid:75)(cid:82)(cid:79)(cid:71)(cid:72)(cid:85)(cid:3)
(cid:41)(cid:82)(cid:85)(cid:3) (cid:70)(cid:82)(cid:83)(cid:76)(cid:72)(cid:86)(cid:3) (cid:82)(cid:73)(cid:3) (cid:82)(cid:88)(cid:85)(cid:3) (cid:41)(cid:82)(cid:85)(cid:80)(cid:86)(cid:3) (cid:20)(cid:19)(cid:16)(cid:52)(cid:15)(cid:3) (cid:84)(cid:88)(cid:68)(cid:85)(cid:87)(cid:72)(cid:85)(cid:79)(cid:92)(cid:3) (cid:72)(cid:68)(cid:85)(cid:81)(cid:76)(cid:81)(cid:74)(cid:86)(cid:3) (cid:83)(cid:85)(cid:72)(cid:86)(cid:86)(cid:3) (cid:85)(cid:72)(cid:79)(cid:72)(cid:68)(cid:86)(cid:72)(cid:86)(cid:15)(cid:3) (cid:41)(cid:82)(cid:85)(cid:80)(cid:86)(cid:3) (cid:27)(cid:16)(cid:46)(cid:3) (cid:82)(cid:85)(cid:3)(cid:68)(cid:71)(cid:71)(cid:76)(cid:87)(cid:76)(cid:82)(cid:81)(cid:68)(cid:79)
(cid:70)(cid:82)(cid:83)(cid:76)(cid:72)(cid:86)(cid:3)(cid:82)(cid:73)(cid:3)(cid:87)(cid:75)(cid:76)(cid:86)(cid:3)(cid:36)(cid:81)(cid:81)(cid:88)(cid:68)(cid:79)(cid:3)(cid:53)(cid:72)(cid:83)(cid:82)(cid:85)(cid:87)(cid:15)(cid:3)(cid:83)(cid:79)(cid:72)(cid:68)(cid:86)(cid:72)(cid:3)(cid:89)(cid:76)(cid:86)(cid:76)(cid:87)(cid:3)(cid:82)(cid:88)(cid:85)(cid:3)(cid:90)(cid:72)(cid:69)(cid:86)(cid:76)(cid:87)(cid:72)(cid:3)(cid:82)(cid:85)(cid:3)(cid:90)(cid:85)(cid:76)(cid:87)(cid:72)(cid:3)(cid:87)(cid:82)(cid:3)(cid:44)(cid:81)(cid:89)(cid:72)(cid:86)(cid:87)(cid:82)(cid:85)(cid:3)(cid:53)(cid:72)(cid:79)(cid:68)(cid:87)(cid:76)(cid:82)(cid:81)(cid:86)(cid:3)(cid:68)(cid:87)(cid:3)(cid:38)(cid:82)(cid:85)(cid:83)(cid:82)(cid:85)(cid:68)(cid:87)(cid:72)(cid:3)
(cid:43)(cid:72)(cid:68)(cid:71)(cid:84)(cid:88)(cid:68)(cid:85)(cid:87)(cid:72)(cid:85)(cid:86)(cid:17)(cid:3)(cid:38)(cid:82)(cid:83)(cid:76)(cid:72)(cid:86)(cid:3)(cid:68)(cid:85)(cid:72)(cid:3)(cid:83)(cid:85)(cid:82)(cid:89)(cid:76)(cid:71)(cid:72)(cid:71)(cid:3)(cid:90)(cid:76)(cid:87)(cid:75)(cid:82)(cid:88)(cid:87)(cid:3)(cid:70)(cid:75)(cid:68)(cid:85)(cid:74)(cid:72)(cid:17)
(cid:44)(cid:81)(cid:89)(cid:72)(cid:86)(cid:87)(cid:82)(cid:85)(cid:86)(cid:3)(cid:68)(cid:81)(cid:71)(cid:3)(cid:68)(cid:81)(cid:68)(cid:79)(cid:92)(cid:86)(cid:87)(cid:86)(cid:3)(cid:76)(cid:81)(cid:87)(cid:72)(cid:85)(cid:72)(cid:86)(cid:87)(cid:72)(cid:71)(cid:3)(cid:76)(cid:81)(cid:3)(cid:68)(cid:71)(cid:71)(cid:76)(cid:87)(cid:76)(cid:82)(cid:81)(cid:68)(cid:79)(cid:3)(cid:73)(cid:76)(cid:81)(cid:68)(cid:81)(cid:70)(cid:76)(cid:68)(cid:79)(cid:3)(cid:76)(cid:81)(cid:73)(cid:82)(cid:85)(cid:80)(cid:68)(cid:87)(cid:76)(cid:82)(cid:81)(cid:3)(cid:80)(cid:68)(cid:92)(cid:3)(cid:70)(cid:82)(cid:81)(cid:87)(cid:68)(cid:70)(cid:87)(cid:3)(cid:82)(cid:88)(cid:85)(cid:3)(cid:44)(cid:81)(cid:89)(cid:72)(cid:86)(cid:87)(cid:82)(cid:85)
(cid:53)(cid:72)(cid:79)(cid:68)(cid:87)(cid:76)(cid:82)(cid:81)(cid:86)(cid:3)(cid:71)(cid:72)(cid:83)(cid:68)(cid:85)(cid:87)(cid:80)(cid:72)(cid:81)(cid:87)(cid:3)(cid:68)(cid:87)(cid:3)(cid:38)(cid:82)(cid:85)(cid:83)(cid:82)(cid:85)(cid:68)(cid:87)(cid:72)(cid:3)(cid:43)(cid:72)(cid:68)(cid:71)(cid:84)(cid:88)(cid:68)(cid:85)(cid:87)(cid:72)(cid:85)(cid:86)(cid:15)(cid:3)(cid:87)(cid:72)(cid:79)(cid:72)(cid:83)(cid:75)(cid:82)(cid:81)(cid:72)(cid:3)(cid:14)(cid:20)(cid:3)(cid:25)(cid:20)(cid:26)(cid:18)(cid:25)(cid:25)(cid:23)(cid:16)(cid:22)(cid:23)(cid:26)(cid:26)(cid:17)(cid:3)
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, 2019
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 offices)
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
Fixed-to-Floating Rate Non-Cumulative Perpetual Preferred Stock, Series G, without
par value per share
Trading
Symbol(s)
STT
Name of each exchange on which
registered
New York Stock Exchange
STT.PRC.CL
New York Stock Exchange
STT.PRD
New York Stock Exchange
STT.PRG
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 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 ($56.06) 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, 2019) was approximately $20.81 billion.
The number of shares of the registrant’s common stock outstanding as of January 31, 2020 was 354,342,408.
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 2020 Annual Meeting of Shareholders to be filed pursuant to Regulation 14A on or before April 29, 2020 (Part III).
STATE STREET CORPORATION
ANNUAL REPORT ON FORM 10-K FOR THE YEAR ENDED
December 31, 2019
TABLE OF CONTENTS
PART I
Item 1
Item 1A
Item 1B
Item 2
Item 3
Item 4
Supplemental Item Information about our Executive Officers
PART II
Item 5
Business
Risk Factors
Unresolved Staff Comments
Properties
Legal Proceedings
Mine Safety Disclosures
Item 6
Item 7
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
General
Overview of Financial Results
Consolidated Results of Operations
Total 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
Item 7A
Item 8
Quantitative and Qualitative Disclosures About Market Risk
Financial Statements and Supplementary Data
Page
4
18
48
48
48
48
49
52
54
55
55
57
61
61
64
67
67
67
67
68
68
69
72
74
75
78
79
80
84
89
93
97
98
105
106
106
115
115
117
117
117
State Street Corporation | 2
Consolidated statement of income
Consolidated statement of comprehensive income
Consolidated statement of condition
Consolidated statement of changes in shareholders' equity
Consolidated statement of cash flows
Note 1. Summary of Significant Accounting Policies
Note 2. Fair Value
Note 3. Investment Securities
Note 4. Loans
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 with customers
Note 26. Non-U.S. Activities
Note 27. Parent Company Financial Statements
Note 28. Subsequent Events
Item 9
Item 9A
Item 9B
PART III
Item 10
Item 11
Item 12
Item 13
Item 14
PART IV
Item 15
Item 16
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
120
121
122
123
124
125
128
135
141
143
145
145
145
146
147
152
155
156
158
159
162
164
164
165
166
167
168
169
170
172
174
174
175
180
180
183
183
183
183
184
184
184
184
185
188
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 $34.36 trillion of
AUC/A and $3.12 trillion of AUM as of December 31,
2019.
As of December 31, 2019, we had consolidated
total assets of $245.61 billion, consolidated total
deposits of $181.87 billion, consolidated
total
shareholders' equity of $24.43 billion and over 39,000
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 Human
Resources Committee, the Nominating and Corporate
Governance Committee, the Risk 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 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
investors cannot
institutional
globe. As most
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
level
include: custody; product and participant
accounting; daily pricing and administration; master
trust and master custody; depotbank services (a fund
oversight role created by non-U.S. regulation); record-
foreign exchange,
keeping; cash management;
State Street Corporation | 4
brokerage and other trading services; securities
finance and enhanced custody products; deposit and
lease
short-term
investment
investment manager and alternative
financing;
investment manager
outsourcing;
operations
performance, risk and compliance analytics; and
financial data management to support institutional
investors.
loans and
facilities;
Included within our Investment Servicing line of
business is Charles River Systems, Inc. (CRD), which
we acquired on October 1, 2018. As a result of our
acquisition of CRD, we are extending our core
capabilities by creating our State Street AlphaSM
platform (State Street Alpha) that combines our core
back and middle office services with front office
for portfolio
solutions across all asset classes
management, trading and compliance. Products and
services related to CRD 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, 2019, we serviced AUC/A of approximately $25.02
trillion in the Americas, approximately $7.33 trillion in
Europe and the Middle East and approximately $2.02
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 Global Fiduciary Solutions (formerly
Outsourced Chief Investment Officer). 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. As of December 31, 2019,
State Street Global Advisors had AUM of approximately
$3.12 trillion.
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.
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/
investment banks, benefits consultants,
dealers,
investment analytics 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
in
for our business. Technological
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 our State Street Alpha, 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
financial
operations and activities. Most other
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.
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 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 rule (refer
“Regulatory Capital Adequacy and Liquidity
to
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,
the Bank
Recovery and Resolution Directive, the European
Market
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).
Infrastructure Regulation
(EMIR),
and
agencies
regulatory
Many aspects of our business are subject to
regulation by other U.S. federal and state governmental
and
self-regulatory
organizations (including securities exchanges), and by
non-U.S. governmental and regulatory agencies and
self-regulatory organizations. Some aspects of our
public disclosure, corporate governance principles and
internal control systems are subject to the Sarbanes-
Oxley Act of 2002 (SOX), the Dodd-Frank Act and
regulations and rules of the SEC and the New York
Stock Exchange.
Regulatory Capital Adequacy and Liquidity
Standards
Basel III Rule
The Parent Company and State Street Bank, as
advanced approaches banking organizations, are
subject to the Basel III framework in the U.S. Provisions
State Street Corporation | 6
of the Basel III rule that became fully implemented as
of January 1, 2019. Since January 2013, we have been
subject to the 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 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 rule requires:
•
a minimum CET1 risk-based capital ratio of
4.5% and a minimum SLR of 3% for advanced
approaches banking organizations;
a minimum tier 1 risk-based capital ratio of 6%;
a minimum total capital ratio of 8%;
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
standardized
approach to replace the calculation of credit
RWA under Basel I; and
the advanced approaches for the calculation of
credit RWA.
previously
described
•
•
•
•
•
Under the Basel III 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.
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,
five series of preferred equity
outstanding as of December 31, 2019. 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
includes
capital ratio, buffer, and G-SIB surcharge requirements
became 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
primarily
in
deductible
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 rule.
financial and
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
• 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.
complexity,
Method 2 at December 31, 2019 is the binding
methodology for us, and our applicable surcharge for
2019 was calculated to be 1.5% based on a calculation
date of December 31, 2017. Based on a calculation date
of December 31, 2018, our G-SIB capital surcharge for
2020 will be
to 1.0%. Assuming a
countercyclical buffer of 0%, the minimum capital ratios
as of January 1, 2020, including a capital conservation
buffer of 2.5% and a G-SIB surcharge of 1.0% in 2020,
are 8.0% for CET1 capital, 9.5% for tier 1 risk-based
capital and 11.5% for total risk-based capital, in order
for us to make capital distributions and discretionary
bonus payments without limitation.
reduced
Since January 1, 2018,
the U.S. banking
regulators have required (i) the eight U.S. G-SIBs,
including us, to maintain a minimum SLR of 5% in order
to avoid any limitations on distributions to shareholders
and discretionary bonus payments to certain executives
and (ii) the insured depository institution subsidiaries of
such G-SIBs (in our case, State Street Bank) to maintain
a minimum SLR of 6% to be considered well-capitalized.
On April 11, 2018, the Federal Reserve proposed
modifications to the SLR that would replace the current
2% SLR buffer applicable to us with a SLR buffer equal
to 50% of our applicable G-SIB capital surcharge.
Currently we are subject to a 2% leverage buffer under
the Basel III rule, subject to the Federal Reserve’s
proposed changes to the SLR. If we fail to maintain the
2% leverage buffer, we will be subject to restrictions
regarding capital distributions and discretionary
executive bonus payments, which will be increasingly
stringent based upon the extent of the shortfall.
State Street Corporation | 7
total
leverage exposure,
Furthermore, EGRRCPA directed
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 a quarterly average of on-balance sheet assets
and does not include any off-balance sheet exposures.
the U.S.
banking regulators to amend their regulations to
exclude certain central bank balances from the
measure of
the SLR
denominator, for custody banks (including the Parent
Company and State Street Bank). 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. In
November 2019, the Federal Reserve and the other
U.S. federal banking agencies adopted a final rule that
establishes a deduction for central bank deposits from
a custodial banking organization’s total leverage
exposure equal to the lesser of (i) the total amount of
funds the custodial banking organization and its
consolidated subsidiaries have on deposit at qualifying
central banks and (ii) the total amount of client funds on
deposit at the custodial banking organization that are
linked to fiduciary or custodial and safekeeping
accounts. The rule becomes effective on April 1, 2020.
In the quarter ended December 31, 2019, we estimated
$48.87 billion of average balances held on deposit at
the SLR
central banks will be excluded
denominator under our interpretation of the rule, which
would impact the SLR by approximately 150 bps. The
TLAC and LTD that State Street is required to hold as
calculated under the current requirements will also be
reduced as a consequence of the rule.
from
Under the Basel III rule, a banking organization
would be able to make capital distributions (subject to
other regulatory constraints, such as regulatory 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 was 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 rules that would replace 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.
On November 19, 2019, the U.S. federal banking
regulators issued a final rule that, among other things,
implements 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 final rule, which
contains some modifications from the related proposal
issued by the U.S. federal banking regulators on
October 30, 2018, we will 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 under our advanced
to
approaches calculation. We will be required
determine the amount of these exposures using the SA-
CCR under our standardized approach capital
calculation. In addition, the final rule provides a
simplified formula we will be required to use to
determine the RWA amount of our central counterparty
default fund contributions. The final rule also requires
us to incorporate the SA-CCR into the calculation of our
total leverage exposure for the purpose of calculating
SLR. The effective date of this final rule implementing
the SA-CCR is April 1, 2020, with a mandatory
compliance
approaches
organizations, like us, of January 1, 2022.
advanced
date
for
lower of each
ratio calculated under
As required by the Dodd-Frank Act, we and State
Street Bank, as advanced approaches banking
organizations, are subject to a permanent "capital floor,"
also referred to as the Collins Amendment, in the
assessment of our regulatory capital adequacy,
including
the capital conservation buffer and
countercyclical capital buffer described above in this
"Supervision and Regulation" section. Our risk-based
capital ratios for regulatory assessment purposes are
the
the
standardized approach and the advanced approaches.
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.
Failure to meet current and future regulatory
capital requirements could subject us to a variety of
enforcement actions, including the termination of State
Street Bank's deposit insurance by the FDIC, and to
certain restrictions on our business, including those that
are described above
“Supervision and
in
Regulation” section.
this
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.
State Street Corporation | 8
For additional information about our regulatory
capital position and our regulatory capital adequacy, as
regulatory capital
well as current and
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
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.
The requirements are intended to improve the resiliency
and resolvability of certain U.S. banking organizations
through enhanced prudential standards. The TLAC rule
(i.e.,
imposes:
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.
(1) external TLAC
requirements
Among other things, the TLAC rule required us to
comply with minimum requirements for external TLAC
and external LTD as of January 1, 2019. Specifically,
as of January 1, 2019, 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 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 rule. With our 2020
G-SIB surcharge of 1.0%, our LTD RWA requirement
will decrease from 7.5% to 7.0% as of January 1, 2020.
We requested and received from the Federal
Reserve, an extension from January 1, 2019 to April 1,
2020, for compliance with the LTD SLR requirements
of the rule to align with the implementation of EGRRCPA
discussed above.
Liquidity Coverage Ratio and Net Stable Funding
Ratio
In addition to capital standards, the Basel III rule
introduced two quantitative liquidity standards: the LCR
and the NSFR.
We are subject to the rule issued by the U.S.
banking regulators implementing the Basel Committee
on Banking Supervision's (BCBS) LCR in the U.S. 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 under a prescribed stress
environment. We report LCR to the Federal Reserve
daily and are required to calculate and maintain an LCR
that is equal to or greater than 100%. 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
In general, HQLA
adequate amount of 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 Office of the
Comptroller of the Currency (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 rule, we must conduct periodic stress
testing of our business operations and submit an annual
capital plan to the Federal Reserve, taking into account
the results of separate stress tests designed by us and
by the Federal Reserve.
State Street Corporation | 9
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
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
the proposed capital
requirements after making
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. 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.
In June 2019, we received the results of the
Federal Reserve's review of our 2019 capital plan in
connection with its 2019 annual CCAR process. The
Federal Reserve did not object to our capital plan as
part of the 2019 CCAR process. In connection with the
capital plan, our Board approved a common stock
purchase program authorizing the purchase of up to
$2.0 billion of our common stock from July 1, 2019
through June 30, 2020 (the 2019 Program). We
repurchased a total of $1.0 billion of our common stock
in the third and fourth quarters of 2019 under the 2019
Program.
In June 2018, our Board approved a common
stock purchase program authorizing the purchase of up
to $1.2 billion of our common stock from July 1, 2018
through June 30, 2019 (the 2018 Program). We
repurchased a total of $600 million of our common stock
in the first and second quarters of 2019 under the 2018
Program.
Stock purchases may be made using various types
of mechanisms, including open market purchases,
accelerated share repurchases or transactions off
market, and may be made under Rule 10b5-1 trading
programs. The timing of stock purchases, types of
transactions and number of shares purchased will
depend on several factors, including market conditions
and State Street’s capital positions,
financial
performance and
investment opportunities. Our
common stock purchase programs do 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.
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 2019, we
provided summary results of our 2019 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 adopted a final rule in October 2019
this
that, among other
modification.
implemented
things,
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, 2019.
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
State Street Corporation | 10
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.
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 approaches or SLR or TLAC
requirements, inclusive of applicable buffers.
The proposed stress buffer requirements are not
yet effective. However, we expect the Federal Reserve
may
the proposed
requirements and re-propose other elements, which re-
proposals will again be subject to public comment.
finalize certain elements of
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 in the Volcker Rule regulations,
subject to exemptions for market-making related
activities, risk-mitigating hedging, underwriting and
certain other activities. The Volcker Rule also requires
banking entities to either restructure or divest certain
ownership interests in, and relationships with, covered
funds (as such terms are defined in the Volcker Rule
regulations).
The 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 Volcker Rule
regulations as currently in effect. Such compliance
program restricts our ability in the future to service
certain types of funds, in particular covered funds for
which State Street Global Advisors acts as an advisor
relationships.
of
and
Consequently, Volcker Rule compliance entails both the
cost of a compliance program and loss of certain
revenue and future opportunities.
trustee
certain
types
In October 2019, the Federal Reserve and the
other federal financial regulatory agencies responsible
for the Volcker Rule regulations adopted an interagency
final rule that revised certain elements of those
regulations. The 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. These revisions became
effective on January 1, 2020, with compliance required
by January 1, 2021. We do not expect the revisions to
have a material impact on us. We understand the
agencies responsible for the Volcker Rule regulations
intend to issue a separate proposal recommending
changes focused on the covered funds provisions which
generally prohibit any banking entity from acquiring or
retaining an ownership interest in, sponsoring, or having
certain relationships with, a hedge fund or private equity
fund.
Enhanced Prudential Standards
The Dodd-Frank Act, as amended by
the
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
institutions,
and settlement activities of
financial
to prudential supervision and
them
subjecting
State Street Corporation | 11
regulation, and, assisted by the Office of Financial
Research within the U.S. Department of the Treasury
can gather data and reports from financial institutions,
including us.
Under the Federal Reserve's enhanced prudential
standards regulation under the Dodd-Frank Act, as
amended by the EGRRCPA, we are required to comply
with various
risk management
liquidity-related
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
the NSFR. The
implemented,
LCR and, when
regulations
and
establish
also
responsibilities for our risk committee and mandate risk
management standards.
requirements
for
that established SCCL
On June 14, 2018, the Federal Reserve finalized
rules
large banking
organizations. U.S. G-SIBs, including us, are subject to
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
net credit exposures
to any other unaffiliated
counterparty. The final SCCL rules became effective
for us on January 1, 2020.
financial
The Federal Reserve has established a 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 rule, certain
qualified financial contracts generally must expressly
provide that transfer restrictions and default rights
against a U.S. G-SIB, or subsidiary of a U.S. G-SIB, are
limited to the same extent as they would be under the
Federal Deposit Insurance Act and Title II of the Dodd-
Frank Act and their implementing regulations. In
addition, certain qualified financial contracts may not,
among other things, permit the exercise of any cross-
default right against a U.S. G-SIB or subsidiary of a U.S.
G-SIB based on an affiliate’s entry into insolvency,
resolution or similar proceedings, subject to certain
creditor protections. There is a phased-in compliance
schedule based on counterparty type, and the first
compliance date was January 1, 2019.
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
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
that require
issue rules
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.
Recovery and 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
and maximizing value
the benefit of our
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 updated 2019 165(d) resolution
plan describing our preferred resolution strategy to the
Federal Reserve and FDIC (the Agencies) before July
1, 2019, and our resolution strategy is materially
consistent with our prior resolution strategy. The
submitted 2019 resolution plan was reviewed by the
Agencies, which did not identify any deficiencies in the
plan, but did identify one shortcoming related to the
implementation of governance mechanisms. The
Agencies have requested we submit our remediation
project plan to address this feedback by March 31,
2020. Our next resolution plan is due July 1, 2021.
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.
the Parent
the support agreement,
Company pre-funded SSIF by contributing certain of its
assets (primarily its liquid assets, cash deposits,
investments in intercompany debt, investments in
Under
State Street Corporation | 12
marketable securities and other cash and non-cash
equivalent investments) to SSIF at the time it entered
into the support agreement and will continue to
contribute such assets, to the extent available, on an
ongoing basis. In consideration for these contributions,
SSIF has agreed in the support agreement to provide
capital and liquidity support to the Parent Company and
all of the Beneficiary Entities in accordance with the
Parent Company’s capital and liquidity policies. Under
the support agreement, the Parent Company is only
permitted to 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 obligate SSIF 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.
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
to
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 on
any of our affiliates being or remaining a Beneficiary
Entity or receiving capital or liquidity support pursuant
to the support agreement, 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.
A “Recapitalization Event” is defined under the
support agreement as the earlier occurrence of: (1) one
or more capital and liquidity thresholds being breached
or (2) the authorization by the Parent Company's Board
of Directors for the Parent Company to commence
bankruptcy proceedings. The 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 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. 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 our 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 will not downgrade, place on negative watch
or change their outlook on our debt credit ratings in
response to our resolution plan or the support
agreement, either generally or with respect to 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 insured depository
institution (IDI) plan. In April 2019, the FDIC issued an
advance notice of proposed rulemaking in which it
invited comment on potential revisions to its IDI plan
requirements. Until the FDIC’s revisions to its IDI plan
State Street Corporation | 13
requirements are finalized, no IDI plans will be required
to be filed.
Additionally, we are required to submit a recovery
plan for State Street to the Federal Reserve. This plan
includes detailed governance triggers and contingency
actions that can be implemented in a timely manner in
the event of extreme financial distress in those entities.
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. For the FDIC to be
appointed as our receiver, two-thirds of the FDIC Board
and two-thirds of the Federal Reserve Board must
recommend appointment, and the U.S. Treasury
Secretary, in consultation with the U.S. President, must
then make certain extraordinary financial distress and
systemic risk determinations. Absent such actions, we,
as a bank holding company, would remain subject to
the U.S. Bankruptcy Code.
The orderly liquidation authority went into effect in
2010, and rulemaking is proceeding incrementally, 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 rules
with respect to margin requirements for uncleared
derivatives transactions.
State Street Bank has registered provisionally with
the CFTC as a swap dealer. As a provisionally
registered swap dealer, State Street Bank is subject to
significant regulatory obligations regarding its swap
activity and
the supervision, examination and
enforcement powers of the CFTC and other regulators.
The CFTC has granted State Street Bank a limited-
purpose swap dealer designation. Under this limited-
purpose designation,
interest rate swap activity
engaged in by State Street Bank’s Global Treasury
group is not subject to certain of the swap regulatory
requirements otherwise applicable to swaps entered
into by a registered swap dealer, subject to a number
of conditions. For all other swap transactions, our swap
activities remain subject to all applicable swap dealer
regulations.
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.
to
Our banking subsidiaries are subject
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.
State Street Corporation | 14
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, are limited in the
aggregate for all affiliates to 20% of State Street Bank's
capital and surplus, and in some cases are also subject
to strict collateral requirements. Derivatives, securities
borrowing and securities lending transactions between
State Street Bank and its affiliates became subject to
these restrictions pursuant to the Dodd-Frank Act. The
Dodd-Frank Act also expanded
the scope of
transactions required to be collateralized. In addition,
the Volcker Rule generally prohibits similar transactions
between the Parent Company or any of its affiliates and
covered funds for which we or any of our affiliates serve
as the investment manager, investment adviser,
commodity trading advisor or sponsor and other
covered funds organized and offered pursuant to
specific exemptions in the Volcker Rule regulations.
Federal law also requires that certain transactions
by a bank with affiliates be on terms and under
circumstances, including credit standards, that are
substantially the same, or at least as favorable to the
bank, as those prevailing at the time for comparable
transactions involving other non-affiliated companies.
Alternatively,
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
firm under
the Markets
authorized and regulated by the United Kingdom
Financial Conduct Authority (U.K. FCA) and is an
in Financial
investment
Instruments Directive. 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
perform a variety of activities,
including asset
management. State Street Global Advisors Asia Limited
also holds permits as a qualified foreign institutional
Investor (QFII) and a renminbi qualified foreign
institutional
the
Securities Regulatory Commission in the People’s
Republic of China, and in Korea is registered with the
Financial Services Commission as a cross-border
investment advisory company and a cross-border
discretionary investment management company. In
addition, a major portion of our investment management
activities are conducted by State Street Global Advisors
Trust Company, which is a subsidiary of State Street
Bank and a Massachusetts chartered trust company
subject to the supervision of the Massachusetts
Commissioner of Banks and the Federal Reserve with
respect to these activities.
(RQFII), approved by
investor
related
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
to
investment management and trusteeship of collective
trust funds and separate accounts offered to employee
benefit plans is subject to Employee Retirement Income
Security Act (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 CRD. In addition,
we have a subsidiary, SwapEX, LLC, registered with
the CFTC in the U.S. as a swap execution facility.
State Street Corporation | 15
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 United
Kingdom Prudential Regulation Authority 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
in
Luxembourg; our German banking group is also subject
to direct supervision by the European Central Bank
under the ECB Single Supervisory Mechanism; the
Securities and Futures Commission regulates our asset
management activities in Hong Kong; the Australian
Prudential Regulation Authority and the Australian
Securities and Investments Commission regulate our
activities in Australia; and the Financial Services
Agency and the Bank of Japan regulate our activities in
Japan. We have established policies, procedures and
systems designed to comply with the requirements of
these organizations. However, as a global financial
services institution, we face complexity, costs and risks
related to regulation.
regulates our activities
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 in the relevant banking
regulations, 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 Office of Foreign
Assets Control (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 Deposit Insurance Fund (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.
State Street Corporation | 16
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
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.
Cyber Risk Management
In October 2016, the Federal Reserve, FDIC and
OCC issued an advance notice of proposed rulemaking
regarding enhanced cyber risk management standards,
which would apply to a wide range of large financial
institutions and their third-party service providers,
including us and our banking subsidiaries. The
proposed standards would expand existing cyber-
security 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. Although the FDIC and OCC in 2019 each
withdrew the advance notice of proposed rulemaking,
the Federal Reserve has not withdrawn the advance
notice and may still propose such a rule.
Further discussion of cyber-security
risk
management is provided in "Information Technology
Risk Management" included in our Management's
Discussion and Analysis in this Form 10-K.
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
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
State Street Corporation | 17
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,”
“Loans and Leases” section included in our
Management’s Discussion and Analysis (Item 7) and
financial
Note 4,
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.
the consolidated
to
“Loans and Leases” and
“Cross-Border
Outstandings” sections of Management’s Discussion
and Analysis (Item 7) - disclose information regarding
loan
our cross-border outstandings and other
concentrations.
to
“Loans,”
the consolidated
“Credit Risk Management” section included in
Management’s Discussion and Analysis (Item 7) and
financial
Note 4,
statements (Item 8) - present the allocation of the
allowance for loan losses, and a description of factors
which
in
determining amounts of additions or reductions to the
allowance, if any, charged or credited to results of
operations.
influenced management’s
judgment
“Distribution of Average Assets, Liabilities and
Shareholders’ Equity; Interest Rates and Interest
Differential”
- discloses deposit
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
and
operations,
savings
investment portfolio
transformation
strategies,
initiatives,
cost
performance, dividend and stock purchase programs,
outcomes of legal proceedings, market growth,
acquisitions, joint ventures and divestitures, client
growth and new
technologies, services and
opportunities, as well as industry, governmental,
regulatory, economic and market trends, initiatives
and developments, the business environment and
other matters that do not relate strictly to historical
facts.
Terminology such as “plan,” “expect,” “intend,”
“objective,” “forecast,” “outlook,” “believe,” “priority,”
“anticipate,” “estimate,” “seek,” “may,” “will,” “trend,”
“target,” “strategy” and “goal,” or similar statements or
variations of such terms, are intended to identify
forward-looking statements, although not all forward-
looking statements contain such terms.
expectations
on management's
Forward-looking statements are subject to various
risks and uncertainties, which change over time, are
based
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
the factors described below under the headings "Risk
Factors Summary" and "Risk Factors" and elsewhere
in this Form 10-K, including under "Management's
Discussion and Analysis."
in our
is expressed
Actual outcomes and results may differ materially
from what
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
State Street Corporation | 18
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 Summary
together with
The below summary risks provide an overview of
many of the risks we are exposed to in the normal course
of our business activities. As a result, the below
summary risks do not contain all of the information that
may be important to you, and you should read the
summary risks
the more detailed
discussion of risks set forth following this section under
the heading "Risk Factors," as well as elsewhere in this
"Management's
Form 10-K under
Discussion and Analysis." Additional risks, beyond
those summarized below or discussed in "Risk Factors"
and "Management's Discussion and Analysis", 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. Consistent with the foregoing, we are exposed
to a variety of risks, including risks associated with:
•
the heading
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 FX
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 software
and processing fees 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
funding,
particularly the deposits of our clients; and
demands upon our liquidity, including the liquidity
demands and requirements of our clients;
the level, volatility and uncertainty of interest rates;
the expected discontinuation of Interbank Offered
Rates including London Interbank Offered Rate
(LIBOR); the valuation of the U.S. dollar relative
to other currencies in which we record revenue or
the sources of such
in
•
•
•
•
•
•
•
in our
the securities
accrue expenses; the performance and volatility
of securities, credit, currency and other markets in
the U.S. and internationally; and the impact of
monetary and fiscal policy in the U.S. and
internationally on prevailing rates of interest and
currency exchange rates in the markets in which
we provide services to our clients;
the credit quality, credit-agency ratings and fair
values of
investment
securities portfolio, a deterioration or downgrade
of which could lead to OTTI of such securities and
the recognition of an impairment loss in our
consolidated statement of income;
our ability to attract and retain 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; our
ability to deploy deposits in a profitable manner
consistent with our liquidity needs, regulatory
requirements and risk profile; and the risks
associated with the potential liquidity mismatch
between short-term deposit funding and longer
term investments;
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
stress
planning
requirements and implementation of international
standards applicable to financial institutions, such
as those proposed by the Basel Committee and
European legislation (such as Undertakings for
Collective Investments in Transferable Securities
(UCITS) V, the Money Market Fund Regulation
and the Markets in Financial Instruments Directive
(MiFID
Instruments
Regulation (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 requirements
applicable to derivatives, restrictions on banking
and financial activities and the manner in which
we structure and implement our global operations
and servicing relationships. In addition, our
regulatory posture and related expenses have
been and will continue
to be affected by
heightened standards and changes in regulatory
expectations for global systemically important
financial institutions applicable to, among other
things, risk management, liquidity and capital
planning, cyber-security, resiliency, resolution
planning and compliance programs, as well as
changes
enforcement
governmental
approaches to perceived failures to comply with
regulatory or legal obligations;
in Financial
II)/Markets
resolution
testing
and
in
State Street Corporation | 19
•
•
•
•
•
•
investments
acquisitions,
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;
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 our
operating model and the adequacy and resiliency
of our controls or compliance programs;
a cyber-security incident, or a failure to protect our
systems and our, our clients' and others'
information against cyber-attacks, could result in
the theft, loss, unauthorized access to, disclosure,
use or alteration of information, system failures,
or loss of access to information; any such incident
or failure could adversely impact our ability to
conduct our businesses, damage our reputation
and cause losses, potentially materially;
our ability to expand our use of technology to
enhance the efficiency, accuracy and reliability of
our operations and our dependencies on
information
and
consolidate systems, particularly those relying
to adequately
upon older
incorporate
and
resiliency
business
into our operations,
information technology infrastructure and systems
management; to implement robust management
processes into our technology development and
maintenance programs; and to control risks
related to use of technology, including cyber-crime
and inadvertent data disclosures;
our ability to identify and address threats to our
technology, and
cyber-security,
technology;
continuity
replace
to
those of our
information technology infrastructure and systems
(including
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;
our ability to control operational and resiliency
risks, data security breach risks and outsourcing
risks; our ability to protect our intellectual property
rights; the possibility of errors in the quantitative
models we use to manage our business; and the
possibility that our controls will prove insufficient,
fail or be circumvented;
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
the DOJ and
prosecution agreement with
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
to our client relationships or our
damage
reputation, adverse actions or penalties imposed
by governmental authorities and costs associated
with remediation of identified deficiencies;
the results of, and costs associated with,
inquiries and
governmental or
regulatory
State Street Corporation | 20
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
its
for
from our
losses arising
litigation and similar claims,
investigations,
disputes, or civil or criminal proceedings;
changes or potential changes in the amount of
compensation we receive from clients for our
services, and the mix of services provided by us
that clients choose;
the large institutional clients on which we focus are
often able to exert considerable market influence
and have diverse investment activities, and this,
combined with strong competitive market forces,
subjects us to significant pressure to reduce the
fees we charge, to potentially significant changes
in our 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;
the potential
investments in sponsored investment funds;
the possibility that our clients will incur substantial
losses in investment pools for which we act as
agent; the possibility of significant reductions in
the liquidity or valuation of assets underlying those
pools and the potential that clients will seek to hold
us liable for such losses; 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;
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;
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 CRD, and joint
ventures will not achieve their anticipated financial,
operational and product innovation benefits or will
not be
the
integrated successfully, or
integration will take longer than anticipated; that
expected synergies will not be achieved or
to, among other
that
requirements;
unexpected negative synergies or liabilities will be
experienced; that client and deposit retention
goals will not be met; that other regulatory or
operational challenges will be experienced; and
that disruptions from the transaction will harm our
relationships with our clients, our employees or
regulators;
our ability to integrate CRD's front office software
solutions with our middle and back office
capabilities to develop our front-to-middle-to-back
office State Street Alpha that is competitive,
generates revenues in line with our expectations
and meets our clients'
the
dependency of State Street Alpha on
enhancements to our data management and the
risks to our servicing model associated with
increased exposure to client data;
our ability to recognize evolving needs of our
clients and to develop products that are responsive
the
to such
performance of and demand for the products and
services we offer; and the potential for new
products and services to impose additional costs
on us and expose us to increased operational risk;
our ability to grow revenue, manage expenses,
attract and retain highly skilled people and raise
the capital necessary to achieve our business
goals and comply with regulatory requirements
and expectations;
changes in accounting standards and practices;
and
the impact of the U.S. tax legislation enacted in
2017, and changes in tax legislation and in the
interpretation of existing tax laws by U.S. and non-
U.S. tax authorities that affect the amount of taxes
due.
trends and profitable
to us;
•
•
•
•
•
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
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
institutions
financial
and
State Street Corporation | 21
concentrations could expose us to financial loss.
The financial markets are characterized by
extensive interdependencies among numerous parties,
including banks, central banks, broker/dealers,
insurance companies and other financial institutions.
These financial institutions also include collective
investment funds, such as mutual funds, UCITS and
hedge funds that share these interdependencies. Many
financial institutions, including collective investment
funds, also hold, or are exposed to, loans, sovereign
debt, fixed-income securities, derivatives, counterparty
and other forms of credit risk in amounts that are
material to their financial condition. As a result of our
own business practices and these interdependencies,
we and many of our clients have concentrated
counterparty exposure to other financial institutions and
collective investment funds, particularly large and
complex institutions, sovereign issuers, mutual funds,
UCITS and hedge funds. Although we have procedures
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.
Additional areas where we experience exposure
to credit risk include:
•
• Short-term credit. The degree of client demand
for short-term credit tends to increase during
periods of market turbulence, which may
expose us to further counterparty-related risks.
For example, investors in collective investment
vehicles for which we act as custodian may
experience significant redemption activity due
to adverse market or economic news. Our
relationship with our clients and the nature of
the settlement process for some types of
payments may result in the extension of short-
term credit in such circumstances. We also
provide committed lines of credit to support
such activity. For some types of clients, we
provide credit to allow them to leverage their
portfolios, which may expose us to potential
loss if the client experiences investment losses
or other credit difficulties.
Industry and country risks. In addition to our
exposure to financial institutions, we are from
time to time exposed to concentrated credit risk
level. This
at an
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.
industry or country
industries,
These
• 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
in all
us. Our sub-custodians operate
jurisdictions
invest,
in which our clients
including emerging and other underdeveloped
markets that entail heightened risks. These
State Street Corporation | 22
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 or an
operational error, including the failure to
provide credit. 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
facilitate
connection with
settlement of
foreign
exchange
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.
trades and related
the process
activities,
to
lending program, we
• Securities lending and repurchase agreement
indemnification. On behalf of clients enrolled in
lend
our securities
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 posted by 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.
in connection with
the proceeds of
from
these securities or
Borrowers are generally required to provide
collateral equal to a contractually agreed
percentage equal to or in excess of the fair
market value of the loaned securities. As the
fair market value of the loaned securities or
collateral changes, additional collateral is
provided by the borrower or collateral is
returned to the borrower. In addition, our
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.
• Private equity subscription
finance credit
facilities. We provide credit facilities to private
equity funds. The portfolio consists of capital
call lines of credit, the repayment of which is
dependent on the receipt of capital calls from
the underlying limited partner investors in the
State Street Corporation | 23
funds managed by these firms.
grade
facilities
borrowers
• 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.
• Senior secured bank loans. In recent years, we
have increased our investment in senior
secured bank loans, both in the U.S. and in
Europe. We invest in these loans to non-
investment
through
participation in loan syndications in the non-
investment grade lending market. We rate
these loans as "speculative" under our internal
risk-rating framework, and these loans have
significant exposure to credit losses relative to
higher-rated loans. We are therefore at a higher
risk of default with respect to these investments
relative to other of our investments activities. In
addition, unlike other financial institutions that
may have an active role in managing individual
loan compliance, our investment in these loans
is generally as a passive investor with limited
control. As this portfolio grows and becomes
more seasoned, our allowance for loan losses
related to these loans may increase through
additional provisions for credit losses.
• Commercial Real Estate. We
finance
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
the underlying collateral
management of
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 impact value or
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.
• 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
regulators, changes
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
in accounting
by
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.
Under evolving regulatory restrictions on credit
exposure we may be required to limit our exposures to
specific
issuers or counterparties or groups of
counterparties, including financial institutions and
sovereign issuers, to levels that we may currently
exceed. These credit exposure restrictions under such
evolving regulations 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
International Swaps and Derivatives Association 2015
Universal Resolution Stay Protocol and as such are
subject to restrictions against the exercise of rights and
remedies against fellow adherents, including other
major financial institutions, in the event they or an
affiliate of theirs enters into resolution. Although our
overall business is subject to these factors, several of
our activities are particularly sensitive to them including
our currency trading business and our securities finance
business.
Given the limited number of strong counterparties
in the current market, we are not able to mitigate all of
our and our clients' counterparty credit risk.
Our investment securities portfolio, consolidated
financial condition and consolidated results of
operations could be adversely affected by changes
in market factors, including interest rates, credit
spreads and credit performance.
Our investment securities portfolio represented
approximately 39% of our total assets as of December
State Street Corporation | 24
31, 2019. The gross interest income associated with
our investment portfolio represented approximately
15% of our total gross revenue for the year ended
December 31, 2019 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
changes in interest rates, credit spreads, credit
performance (including 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. 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 prior historical
averages. 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 continued disparity between interest rates in
the U.S. and international markets, especially to the
extent that interest rates remain low or negative 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 prior historical
levels of NII and NIM. For additional information
regarding these liquidity requirements, refer to the
“Liquidity Coverage Ratio and Net Stable Funding
Ratio” section of “Supervision and Regulation” 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.
Our investment securities portfolio represents a
greater proportion of our consolidated statement of
condition and our loan portfolio represents a smaller
proportion (approximately 11% of our total assets as of
December 31, 2019), in comparison to many other
major financial institutions. In some respects, the
accounting and regulatory treatment of our investment
securities portfolio may be less favorable to us than a
more traditional held-for-investment lending portfolio.
For example, under the Basel III rule, after-tax changes
in the fair value of AFS investment securities, such as
those which represent a majority of our investment
portfolio, are included in tier 1 capital. Since loans held
for investment are not subject to a fair value accounting
framework, changes in the fair value of loans (other than
incurred credit losses) are not similarly included in the
determination of tier 1 capital under the Basel III rule.
Due to this differing treatment, we may experience
increased variability in our tier 1 capital relative to other
loan-and-lease
major
institutions whose
financial
their
portfolios represent a
consolidated total assets than ours.
larger proportion of
Additional risks associated with our investment
portfolio include:
• Asset class concentration. Our investment
portfolio continues
to have significant
concentrations in several classes of securities,
including agency residential MBS, commercial
MBS and other ABS, and securities with
concentrated exposure to consumers. These
classes and types of securities experienced
significant liquidity, valuation and credit quality
deterioration during the financial crisis that
began in mid-2007. We also hold non-U.S.
government securities, 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.
repayment
• 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. In addition, in
general, deterioration in credit quality, or
in management's expectations
changes
or
regarding
in
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 rule could be adversely
affected. This risk is greater with portfolios of
investment securities that contain credit risk
than with holdings of U.S. Treasury securities.
• Effects of interest rates. Our investment
State Street Corporation | 25
experience
timing
intent
to
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
our
interest-bearing
liabilities. These factors are influenced, among other
things, by a variety of economic and market forces and
expectations, including monetary policy and other
activities of central banks, such as the Federal Reserve
and ECB, that we do not control. Our ability to anticipate
changes in these factors or to hedge the related on- and
off-balance sheet exposures, and the cost of any such
hedging activity, can significantly influence the success
of our asset-and-liability management activities and the
resulting level of our NII and NIM. The impact of changes
in interest rates and related factors will depend on the
relative duration and fixed- or floating-rate nature of our
assets and liabilities. Sustained lower interest rates, a
flat or inverted yield curve and narrow credit spreads
generally have a constraining effect on our NII. In
addition, our ability to change deposit rates in response
to changes in interest rates and other market and
related
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.
limited by client
factors
is
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 and loan portfolio 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 and loan portfolios 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. Since the
financial crisis, the level of client deposits held by us
has tended to increase during times of market
disruption; 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, when they manifest, 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 volume and
volatility in global financial markets, the interest rates
that we are prepared to pay for these deposits, the loss
deposits
State Street Corporation | 26
or gain of one or more clients, client interest in reducing
non-interest bearing deposits, the perception of safety
of these deposits or short-term obligations relative to
alternative short-term investments available to our
clients,
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 capital markets, and
including
The Parent Company is a non-operating holding
company and generally maintains only limited cash and
other liquid resources at any time primarily to meet
anticipated near-term obligations. To effectively
manage our liquidity we routinely transfer assets among
affiliated entities, subsidiaries and branches. Internal or
external factors, such as regulatory requirements and
standards, including resolution planning, influence our
liquidity management and may limit our ability to
effectively transfer liquidity internally which could,
among other things, restrict our ability to fund
operations, dividends or stock repurchases, require us
to seek external and potentially more costly capital and
impact our liquidity position.
In addition, while not obligations of 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
the markets'
markets are highly dependent on
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.
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-
stress capital ratios are determined
to be
insufficient as a result of regulatory capital stress
testing.
Basel III and Dodd-Frank Act
We are required to calculate our risk-based capital
ratios under both the Basel III advanced approaches
and the Basel III standardized approach, and we are
subject to the more stringent of the risk-based capital
ratios calculated under the advanced approaches and
those calculated under the standardized approach in
the assessment of our capital adequacy.
In implementing 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 rule or their interpretations as they
apply to us, including changes to these standards or
interpretations made
implementing
provisions of
the Dodd-Frank Act, which could
adversely affect us and our ability to comply with the
Basel III rule.
in regulations
Along with the Basel III rule, banking regulators
also introduced additional requirements, such as the
SLR, LCR and the proposed NSFR, each of which
presents compliance risks.
liquidity
For example, the specification of the various
elements of the NSFR in the final rule could have a
material effect on our business activities, including the
management and composition of our investment
securities portfolio and our ability to extend credit
through committed facilities, loans to our clients or our
principal securities lending activities. In addition, further
requirements are under
capital and
consideration by U.S. and
international banking
regulators. Any of these rules could have a material
effect on our capital and liquidity planning and related
activities, including the management and composition
of our investment securities portfolio and our ability to
extend committed contingent credit facilities to our
clients. The full effects of these rules, and of other
regulatory initiatives related to capital or liquidity, on us
and State Street Bank are subject to further regulatory
guidance, action or rule-making.
State Street Corporation | 27
Systemic Importance
As a G-SIB, we are generally subject to the most
stringent provisions under the Basel III rule. For
example, we are subject to the Federal Reserve's 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 rule". For additional information on these
requirements,
“Regulatory Capital
Adequacy and Liquidity Standards” section under
“Supervision and Regulation” in Business in this Form
10-K.
refer
the
to
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
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 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
of capital could result in a change in our capital plan
instructions and
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,
and
impose capital
requirements in excess of our expectations or require
us to maintain levels of liquidity that are higher than we
may expect and which may adversely affect our
consolidated
that our
implementation of capital and liquidity requirements
under regulatory initiatives or our current capital
structure are determined not to conform with current
and future capital requirements, our ability to deploy
capital in the operation of our business or our ability to
distribute capital to shareholders or to 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 CCAR. Likewise,
in the event that regulators in other jurisdictions in which
we have banking subsidiaries determine that our capital
or liquidity levels do not conform with current and future
regulatory requirements, our ability to deploy capital,
our levels of liquidity or our business operations in those
jurisdictions may be adversely affected.
For additional
information about
the above
matters, refer to “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 2019 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 software and processing fee revenue.
The level of these fees is influenced by several
factors, including 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
State Street Corporation | 28
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
operations,
in European
economies could have an adverse effect on our
consolidated results of operations or financial
condition.
Economic growth continues to slow in Europe, with
key economies, including Germany, drifting towards
recession despite new stimulus from the European
Central Bank, and concerns remain with regard to
sovereign debt sustainability,
interdependencies
among financial institutions and sovereigns and political
and other risks, including potential market disruptions
associated with political conflicts and disputes and
migrant flows in one or more European nations. In
addition, continued uncertainty
the external
environment for Europe, specifically with prospects for
weaker external trade, have led to increased concern
around the near- to medium-term outlook for economic
progress in Europe.
in
In addition, uncertainty around implications of the
United Kingdom's exit from the E.U., known as Brexit,
and related developments, present risks which include
potential negative impacts to economic activity or to
cooperation in the future relationship between the U.K
and E.U. and the resulting consequences for market
access for financial services. In order to conform to
anticipated restrictions on activity between the E.U. and
the U.K. following Brexit, and based on a hard Brexit
scenario, we have developed and implemented plans
that seek to maintain our servicing and operational
capabilities, in all material respects, independent of the
final outcome. There can be no assurance, however,
that our plans will address effectively, in whole or in part,
all potential contingencies associated with Brexit, that
we may not experience additional costs or inefficiencies
associated with our European activities or client
dissatisfaction, delays in receiving regulatory approvals
or other difficulties in executing our regional strategy.
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.
could
adversely
Geopolitical and economic conditions and
developments
affect us,
particularly if we face increased uncertainty and
unpredictability in managing our businesses.
financial markets can suffer
volatility,
from
Global
substantial
illiquidity and disruption,
particularly as a result of geopolitical disruptions, slower
economic growth and a shifting monetary policy stance
from key central banks. 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
uncertain market and economic conditions. These risks
could be compounded by tighter monetary policy
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 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
State Street Corporation | 29
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 or debt in
order to maintain our credit ratings, in response to
regulatory changes, including capital rules, or for other
purposes, including financing acquisitions and joint
ventures. For example, in November 2019 and January
2020, we issued additional long-term debt in order to
maintain levels to satisfy our internal requirements
based on 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 CRD.
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 or debt,
if needed, on terms acceptable to us. Any diminished
ability to raise additional capital or debt, if needed, could
adversely affect our business and our ability to
implement our business plan, capital plan and strategic
goals, including the financing of acquisitions and joint
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 financings, acquisitions and joint ventures,
and some of which relate to general industry conditions.
We anticipate that the rating agencies will continue to
review our ratings regularly based on our consolidated
results of operations and developments
in our
businesses, including regulatory considerations such
as resolution planning. One or more of the major
independent credit rating agencies have in the past
downgraded, and may in the future downgrade, our
credit ratings, or have negatively revised their outlook
for our credit ratings. The current market and regulatory
environment and our exposure to financial institutions
and other counterparties, including sovereign entities,
increase the risk that we may not maintain our current
ratings, and we cannot provide assurance that we will
continue
to maintain our current credit ratings.
Downgrades in our credit ratings may adversely affect
our borrowing costs, our capital costs and our ability to
raise capital and, in turn, our liquidity. A failure to
maintain an acceptable credit rating may also preclude
us from being competitive in various products.
Additionally, our counterparties, as well as our
clients, rely on our financial strength and stability and
evaluate the risks of doing business with us. If we
experience diminished financial strength or stability,
actual or perceived, due to 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.
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
an environment in which 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.
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
State Street Corporation | 30
institution with substantial
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 difficult to predict
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 increased expenses or changes in the
demand for our services, or on the U.S.-domestic or
global economies or financial markets. We expect that
our business will remain subject to extensive regulation
and supervision. Several other aspects of the regulatory
environment in which we operate, and related risks, are
discussed below. Additional information is provided
under "Supervision and Regulation” 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
together with applicable TLAC
SPOE Strategy,
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 our 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 no assurance that there would be sufficient
recapitalization resources available to ensure that State
Street Bank and our other material entities are
adequately capitalized following the triggering of the
requirements to provide capital and/or liquidity under
the support agreement; and (4) there can be no
assurance that credit rating agencies, in response to
our resolution plan or the support agreement, will not
downgrade, place on negative watch or change their
outlook on our debt credit ratings, generally or on
specific debt securities. Additional information about the
SPOE Strategy, including related risks, is provided
under "Recovery and Resolution Planning" in Business
in this Form 10-K.
Systemic Importance
Our qualification in the U.S. as a SIFI, and our
designation by the Financial Stability Board as a G-SIB,
to which certain regulatory capital surcharges may
apply, subjects us to incrementally higher capital and
prudential requirements, increased scrutiny of our
activities
regulatory
requirements or heightened regulatory expectations as
compared to those applicable to some of the financial
institutions with which we compete as a custodian or
additional
potential
and
State Street Corporation | 31
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,
regulatory
including
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
information security,
resiliency and outsourcing
oversight requirements, including with respect to
affiliated entities, of multiple jurisdictions and enable our
clients to comply with information security, resiliency
and outsourcing oversight 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
increased
compliance and other costs that would adversely affect
our business, operations or profitability. Geopolitical
events such as the U.K.’s planned exit from the
European Union also have the potential to increase the
complexity and cost of regulatory compliance.
the U.S. could create
in
In addition to U.S. regulatory initiatives, we are
further affected by non-U.S. regulatory initiatives,
including the Risk Reduction Package, the Investment
Firm Review, the Central Securities Depositories
Regulation, the Shareholder Rights Directive and the
Securities Financing Transactions Regulation. 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
non-bank finance 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, voting power, governance and other
concerns with passive investment strategies continue
to be the subject 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, 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.
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
regulatory
clients
to comply with any
fail
to
State Street Corporation | 32
and
requirements, we may be liable to them for losses and
expenses that they incur. In recent years, regulatory
increased
enforcement
oversight
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
financial
consolidated results of operations and
condition.
it could continue
trend continues,
have
For additional information, see the risk factor, “Our
businesses may be adversely affected by government
enforcement and litigation.”
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.
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 and to maintain
that data securely. In recent years, several financial
services firms have suffered successful cyber-attacks
launched both domestically and from abroad, resulting
in the disruption of services to clients, loss or
misappropriation of sensitive or private data and
reputational harm. We also have been subjected to
cyber-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 (or that we may be
unaware of a prior attack). Cyber-threats are
sophisticated and continually evolving. We may not
implement effective systems and other measures to
effectively identify, detect, prevent, mitigate, recover
from or remediate the full diversity of cyber-threats or
improve and adapt such systems and measures as such
threats evolve and advance.
A cyber-security incident, or a failure to protect our
technology infrastructure, systems and information and
our clients and others' information against cyber-
security threats, could result in the theft, loss,
unauthorized access to, disclosure, misuse or alteration
of information, system failures or outages or loss of
access to information. The expectations of our clients
and regulators with respect to the resiliency of our
systems and the adequacy of our control environment
with respect to such systems has and is expected to
increase as
the
consequences of
those attacks become more
pronounced. We may not be successful in meeting
those expectations or in our efforts to identify, detect,
the risk of cyber-attacks and
to maintain an adequate
prevent, mitigate and respond to such cyber-incidents
or for our systems to recover in a manner that does not
disrupt our ability to provide services to our clients. The
failure
technology
infrastructure and applications with effective cyber-
security controls could impact operations, adversely
affect our financial results, result in loss of business,
damage our reputation or impact our ability to comply
with regulatory obligations, leading to regulatory fines
and sanctions. We may be required to expend
significant additional resources to modify, investigate or
remediate vulnerabilities or other exposures arising
from cyber-security threats.
or
data
electrical
volumes,
Our computer, communications, data processing,
networks, backup, business continuity, disaster
recovery or other operating, information or technology
systems, facilities and activities have suffered and in
the future may suffer disruptions or otherwise fail to
operate properly or become disabled, overloaded or
damaged as a result of a number of factors, including
events that are wholly or partially beyond our control,
which can adversely affect our ability to process
transactions, provide services or maintain systems
availability, maintain information security, compliance
and internal controls or otherwise appropriately conduct
our business activities. For example, in addition to
cyber-attacks, there could be sudden increases in
or
transaction
telecommunications outages, natural disasters, or
employee or contractor error or malfeasance. Third
parties may also attempt to place individuals within
State Street or fraudulently induce employees, vendors,
clients or other users of our systems to disclose
sensitive information in order to gain access to our data
or that of our clients or other parties. Any such
disruptions or failures may require us, among other
things, to reconstruct lost data (which may not be
possible), reimburse our clients' costs associated with
such disruption or failure, result in loss of client business
or damage our information technology infrastructure or
systems or those of our clients or other parties. While
we have not in the past suffered material harm or other
adverse effects from such disruptions or failures, we
may not successfully prevent, respond to or recover
from such disruptions or failures in the future, and any
such disruption or failure could adversely impact our
ability
to conduct our businesses, damage our
reputation and cause losses, potentially materially.
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 financial intermediaries and
technology infrastructure and 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 have been and may
in the future be adversely affected, perhaps materially,
State Street Corporation | 33
by failures, terminations, errors or malfeasance by, or
attacks or constraints on, one or more financial,
technology, infrastructure or government institutions or
intermediaries with whom we or they are interconnected
or conduct business.
In particular, we, like other financial services firms,
will continue to face increasing cyber-threats, including
computer viruses, malicious code, distributed denial of
service attacks, phishing attacks, ransomware, hacker
attacks, limited availability of services, unauthorized
access, information security breaches or employee or
contractor error or malfeasance that could result in the
unauthorized release, gathering, monitoring, misuse,
loss or destruction of our, our clients' or other parties'
confidential, personal, proprietary or other information
or otherwise disrupt, compromise or damage our or our
clients' or other parties' business assets, operations and
activities. These and similar types of threats are
occurring globally with greater frequency and intensity,
and we may not anticipate or implement effective
preventative measures against, or identify and detect
one or more, such threats, particularly because the
techniques used change frequently or may not be
recognized until after they are launched. 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 may be
required to expend significant additional resources to
modify, investigate or remediate vulnerabilities or other
exposures arising from cyber-security threats. We
therefore could experience significant related costs and
legal and
lost or
constrained ability to provide our services or maintain
systems availability to clients, regulatory inquiries,
enforcements, actions and fines, litigation, damage to
our reputation or property and enhanced competition.
financial exposures,
including
Due to our dependence on technology and the
important role it plays in our business operations, we
are attempting to improve and update 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 increasing
client and regulatory security, resiliency and other
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 risks that we may not
adequately anticipate the market or technological
trends, regulatory expectations or client needs or
experience unexpected challenges that could cause
financial, reputational and operational harm. 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, inhibit our ability to meet regulatory
requirements and subject us to regulatory inquires.
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.
trading or
committing
to exceed
limitations,
We have in the past failed and may in the future
fail to identify and manage risks related to a variety of
aspects of our business, including, but not limited to
cyber-security, information technology risk, operational
risk and resiliency, 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. We cannot provide assurance
that those controls, procedures, policies and systems
are or will be adequate to identify and manage internal
and external risks, including risks related to service
providers, in our various businesses. The risk of
individuals, either employees or contractors, engaging
in conduct harmful or misleading to clients or to us, such
as consciously circumventing established control
investment
mechanisms
management
fraud or
improperly selling products or services to clients, is
particularly challenging to manage through a control
framework. In addition, we are subject to increased
resiliency risk, and cyber-attacks from governmental
and non-governmental actors are becoming more
sophisticated and presenting increased risks, all
requiring continuous reinvestment, enhancement and
improvement in and of our information technology and
operational infrastructure, controls and personnel
which may not be effectively or timely deployed or
integrated. Moreover, the financial and reputational
impact of control or conduct failures can be significant.
Persistent or repeated issues with respect to controls,
information technology resiliency or individual conduct
have raised and may in the future raise concerns among
regulators regarding our culture, governance and
control environment. There can be no assurance that
our efforts to address such risks will be effective. 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.
State Street Corporation | 34
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. To the extent that our risk
framework is ineffective, either because it fails to keep
pace with changes in the financial markets, regulatory
or industry requirements, technology and cyber-
security
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, and subject to regulatory inquiry or action
against us.
developments,
businesses,
our
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, including research, investment management,
trading services and investment servicing that expose
us to operational risk. In addition, these services
generate a broad array of complex and specialized
servicing, confidentiality and fiduciary requirements,
many of which involve the opportunity for human,
systems or process errors. We face the risk that the
control policies, procedures and systems we have
established to comply with our operational or security
requirements will fail, will be inadequate or will become
outdated. We also face the potential for loss resulting
from inadequate or failed internal processes, employee
supervision or monitoring mechanisms, service-
provider processes or other systems or controls, which
could materially affect our future consolidated results of
operations. Given the volume and magnitude of
transactions we process on a daily basis, operational
losses represent a potentially significant financial risk
for our business. Operational errors that result in us
remitting funds to a failing or bankrupt entity may be
irreversible, and may subject us to losses.
We may also be subject to disruptions from
external events that are wholly or partially beyond our
control, which could cause delays or disruptions to
operational functions, including information processing
and financial market settlement functions. In addition,
our clients, vendors and counterparties could suffer
from such events. Should these events affect us, or the
clients, vendors or counterparties with which we
results of
conduct business, our consolidated
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.
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 DOJ under which
we agreed to retain an independent compliance and
ethics monitor for a term which has now been extended
to 2021 (subject to further 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
of
These
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.
recommendations.
the monitor's
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
regarding our
increased prudential expectations
compliance programs, culture and risk management.
State Street Corporation | 35
Our failure to implement enhanced compliance and risk
management procedures in a manner and in a time
frame deemed to be responsive by the applicable
regulatory authority could adversely
impact our
relationship with such regulatory authority and could
lead to restrictions on our activities or other sanctions.
Moreover, the identification of new or additional facts
and circumstances suggesting inappropriate or non-
compliant conduct, whether identified by the monitor or
a regulatory authority, in the course of an inspection, or
independently by us could lead to new governmental
proceedings or the re-opening of matters that were
previously resolved. The presence of the monitor, as
well
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.
frequently subject
The businesses in which we operate are highly-
regulated and subject to extensive external scrutiny that
may be directed generally to participants in the
businesses or markets in which we are involved or may
be specifically directed at us, including as a result of
whistleblower and qui tam claims. In the course of our
business, we are
to various
law enforcement
regulatory, governmental and
inquiries, investigative demands and subpoenas, and
from time to time, our clients, or the government on its
own behalf or on behalf of our clients or others, make
claims and take legal action relating to, among other
things, our performance of our fiduciary, contractual or
regulatory responsibilities. Often, the announcement of
any such matters, or of any settlement of a claim or
action, whether it involves us or others in our industry,
may spur the initiation of similar claims by other clients
or governmental parties. Regulatory authorities have,
and are likely to continue to, initiate cross industry
reviews when a material issue is identified at a financial
institution. Such
involve costs and
management time and may lead to proceedings relating
to our own activities.
inquiries
the attention of
for disgorgement, demands
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
In government settlements since
operations for the period in which we establish a reserve
with respect to such potential liability or upon our
the
reputation.
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.
the
increase
likelihood
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
against us in pending or future legal proceedings. See
section “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
reputation.” Government
harm our business or
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
State Street Corporation | 36
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
estimated range will change from time to time, and
actual results may vary significantly from the estimate
at any time.
the risks of
to
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 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 required remediation. In 2017,
we identified an additional area of incorrect expense
billing associated with mailing services in our retirement
services business. 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 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 and the DOL which reviews 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
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.
resulted
to settle
its claims
that we violated
In June 2019, we reached an agreement with the
the
SEC
recordkeeping provisions of Section 34(b) of the
Investment Company Act of 1940 and caused violations
of Section 31(a) of the Investment Company Act and
Rules 31a-1(a) and 31a-1(b) thereunder in connection
with our overcharges of customers which are registered
investment companies. In reaching this settlement, we
neither admitted nor denied the claims contained in the
SEC’s order, and agreed to pay a civil monetary penalty
of $40 million. Also in June 2019, we reached an
agreement with the Massachusetts Attorney General’s
office to resolve its claims related to this matter. In
reaching this settlement, we neither admitted nor
denied the claims in the order and agreed to pay a civil
monetary penalty of $5.5 million.
In late January 2020, the DOJ outlined a
framework for a possible resolution of their review. We
intend to attempt to negotiate a settlement of this matter
with the DOJ. We expect that any settlement with the
State Street Corporation | 37
DOJ will include both financial and non-financial
provisions. Separately, we have inquired of the DOL as
to the status of their review. There can be no assurance
that any settlement with the DOJ or DOL will be reached
on financial or other terms acceptable to us or at all.
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 is not currently known. We have increased
our
the pending
government investigations and civil litigation with
respect to this matter. However, our ultimate liability with
respect to this matter might be significantly in excess
of our current accrual.
legal accrual with respect
to
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.
lines. We expect
In 2015, we determined we had incorrectly
invoiced some of our Investment Servicing clients for
certain expenses. At that time, we began the process
of remediating these errors, improving our billing
processes and controls in the asset servicing business
and other businesses, and testing these improved
billing processes and controls. As a result of ongoing
reviews, we continue to modify, enhance, and, where
necessary, replace our existing global billing processes
and implement and test controls for the new system.
The objective of this billing transformation program is
to obtain greater billing accuracy and consistency
across business
this billing
transformation program to be substantially completed
over the next two or more years. Because of the scale
of our business
identifying and remediating all
weaknesses and inefficiencies in our billing processes
cannot be implemented in all our business units
concurrently. Accordingly the costs to remediate billing
errors which may be discovered in that process, would
likely be incurred over a period that we are now unable
accurately to determine. As we work through this
process, we have discovered and may continue to
discover areas where we believe our billing processes
need improvement, where we believe we have made
billing errors with respect to particular customers and
categories of fees and expenses, and where we believe
billing arrangements between ourselves and particular
customers should be clarified. Such discoveries may
lead to increased expense and decreased revenues,
the need to remediate prior billing errors, government
investigations, or litigation that may materially impact
our business, financial results and reputation.
theft,
Any
other
misappropriation or inadvertent disclosure of, or
confidential
inappropriate
damage
access
loss,
the
to,
or
to
information we possess could have an adverse
impact on our business and could subject us to
regulatory actions, litigation and other adverse
effects.
Our businesses and relationships with clients are
dependent on our ability to maintain the confidentiality
of our and our clients' trade secrets and other
confidential information (including client transactional
and holdings data and personal data about our clients,
our clients' clients and our employees). Unauthorized
access, or failure of our controls with respect to granting
access to our systems, has in the past occurred and
may in the future occur, resulting in theft, loss, damage
to or other misappropriation of such information. In
addition, our and our vendors’ personnel have in the
past and may in the future inadvertently or deliberately
disclose client or other confidential information. Any
theft, loss, damage to 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 personal information, the risks of
enhanced regulatory scrutiny and the potential financial
liabilities are exacerbated, particularly under data
protection regulations such as the GDPR.
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
public
insurance companies,
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 decided to move the servicing for a
portion of its assets, largely common trust funds, to
another
represented
approximately $1 trillion in assets with respect to which
we will no longer derive revenue. Our AUM or AUC/A
provider. The
transition
State Street Corporation | 38
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.
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 our
failure
technology
transformation.
to properly
implement
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. Many features of
our present initiatives include investment in systems
integration and new
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. These initiatives 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. The
technologies and also
transition to new operating processes and technology
infrastructure may also 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,
business continuity and 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 to significant 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 security and 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
State Street Alpha and integration of CRD requires
substantial systems development and expense. We
may not have the resources to pursue all of these
objectives simultaneously.
Development and completion of new products and
services, including our State Street Alpha, may
impose additional costs on us,
involve
dependencies on third parties and may expose us
to increased operational and model risk.
ledger
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
distributed
technology (“Blockchain"), and
developing potentially industry-changing new products,
services and industry standards. For example, in 2018,
we acquired CRD, and we are
the
capabilities we acquired in that transaction to create our
State Street Alpha combining the offerings within our
Investment Servicing business line. The introduction of
new products and services can require significant time
and resources, including regulatory approvals and the
development and implementation of technical data
management,
validation
requirements and effective security and resiliency
elements. New products and services, such as State
Street Alpha, often also involve dependencies on third
parties to, among other things, access innovative
technologies, develop new distribution channels or form
collaborative product and service offerings, and can
and model
leveraging
control
State Street Corporation | 39
the significant and ongoing
require complex strategic alliances and joint venture
relationships. Substantial risks and uncertainties are
associated with the introduction of new products and
services, strategic alliances and joint ventures including
rapid technological change in the industry, our ability to
access technical, data and other information from our
clients,
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. New products or services
may fail to operate or perform as expected and may not
be suitable for the intended client. 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,
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 completion of our State Street
Alpha, could have a material adverse effect on our
business and reputation, consolidated results of
operations or financial condition.
alternatives,
competitive
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 distribution
channels, technologies or services, develop closer or
more collaborative relationships with our business
partners, bolster existing capabilities, efficiently deploy
capital or leverage cost savings or other business or
financial opportunities. We may not achieve the
expected benefits of these transactions, which could
result in increased costs, lowered revenues, ineffective
deployment of capital, regulatory concerns, exit costs
or diminished competitive position or reputation.
Transactions of this nature also involve a number
of risks and financial, accounting, tax, regulatory,
strategic, managerial, operational, cultural and
employment challenges, which could adversely affect
our consolidated results of operations and financial
condition. For example, the businesses that we acquire
or our strategic alliances or joint ventures may under-
perform relative to the price paid or the resources
committed by us; we may not achieve anticipated
revenue growth or cost savings; or we may otherwise
be adversely affected by acquisition-related charges.
The intellectual property of an acquired business may
be an important component of the value that we agree
to pay for such a business. However, such acquisitions
are subject to the risks that the acquired business may
not own the intellectual property that we believe we are
acquiring, that the intellectual property is dependent on
licenses from third parties, that the acquired business
infringes on the intellectual property rights of others,
that the technology does not have the acceptance in
the marketplace that we anticipated or that the
technology requires significant investment to remain
competitive. The integration of an acquired business's
information technology infrastructure into ours has in
the past and may in the future also expose us to
additional security and resiliency risks. Further, past
acquisitions have resulted in the recognition of goodwill
and other significant
in our
consolidated statement of condition. For example, we
recorded goodwill and
intangible assets of
approximately $2.46 billion associated with our
acquisition of CRD in 2018. These assets are not
eligible
in regulatory capital under
applicable requirements. In addition, we may be
required to record impairment in our consolidated
statement of income in future periods if we determine
that the value of these assets has declined.
intangible assets
inclusion
for
Through our acquisitions or joint ventures, we may
also assume unknown or undisclosed business,
operational, tax, regulatory and other liabilities, fail to
properly assess known contingent liabilities or assume
businesses with internal control deficiencies. While in
most of our transactions we seek to mitigate these risks
through, among other
things, due diligence,
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
State Street Corporation | 40
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 CRD and
our 2016 acquisition of the General Electric Asset
Management (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
losses, reductions or renegotiations likely will reduce
the expected benefits of the acquisition, including
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
technology
integration, with associated risk of defects, security
breaches and
lapses 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, as well as fiduciary and other
risks associated with client retention. Acquisitions of
Asset Management businesses similarly
involve
fiduciary and similar risks associated with client
retention, distribution channels and additional servicing
opportunities.
involve extensive
information
resiliency
following
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, business partners or
employees, maintain regulatory compliance or achieve
the anticipated benefits of the acquisition. Integration
efforts may also divert management attention and
resources.
Our acquisition of CRD 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 CRD on October
1, 2018. The success of the acquisition, including the
achievement of anticipated growth opportunities and
cost synergies of the acquisition, is subject to a number
of uncertainties and will depend, in part, on our ability
to successfully combine and integrate CRD’s business
into our business in an efficient and effective manner.
The combined company may
face significant
challenges in implementing such integration, including
challenges related to:
•
•
•
•
•
•
•
•
•
integrating CRD'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 CRD’s clients, some of which are our
competitors;
retaining key management and
personnel;
technical
integrating CRD’s software solutions with our
existing products and services and related
operations
including
performance, risk and compliance analytics,
investment manager operations outsourcing,
accounting, administration and custody;
systems,
and
accelerating
of
enhancements to the features and functions of
CRD’s software solutions;
development
the
coordinating and
internal
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
State Street Corporation | 41
•
performance shortfalls as a result of the
diversion of management’s attention and
the
resources
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
increased
outsourcing may expose us
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, including with respect to indemnification and
information security, and to the risk that we may not
satisfy applicable regulatory responsibilities regarding
the management and oversight of third parties and
outsourcing providers. Our geographic footprint also
exposes us to the relevant macroeconomic, political,
legal and similar risks generally involved in doing
business in the jurisdictions in which we establish lower-
cost locations or joint ventures or in which our
outsourcing vendors locate their operations. The
increased elements of risk that arise from certain
in some
operating processes being conducted
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
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.
financial benefits of
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
performance. Those
business
dependencies include 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 terms. We need
to enhance our processes and systems to account for
the new alternative rates-based instruments as they
come
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.
to market,
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
State Street Corporation | 42
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 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
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 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 transition management revenue
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 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 clients or service providers with whom
we may engage in the development or implementation
State Street Corporation | 43
in
infringement
is enhanced
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.
risk
The quantitative models we use to manage our
business may contain errors that result
in
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 trading activities, hedging, asset-
and-liability management and whether to change
business strategy. Weaknesses in the underlying
model, inadequate model assumptions, normal model
limitations, inappropriate model use, weaknesses in
model implementation or poor data quality, could result
in unanticipated and adverse consequences, including
material
loss and material non-compliance with
regulatory requirements or expectations. Because of
our widespread usage of models, potential weaknesses
in our MRM practices pose an ongoing risk to us.
We also may fail to accurately quantify the
magnitude of the risks we face. Our measurement
methodologies rely on many assumptions and historical
analyses and correlations. These assumptions may be
incorrect, and the historical correlations on which we
rely may not continue to be relevant. Consequently, the
measurements that we make for regulatory purposes
may not adequately capture or express the true risk
profiles of our businesses. Moreover, as businesses
and markets evolve, our measurements may not
accurately reflect
this evolution. While our risk
measures may indicate sufficient capitalization, they
may underestimate the level of capital necessary to
conduct our businesses.
Additionally, our disclosure
controls and
procedures may not be effective in every circumstance,
and, similarly, it is possible we may identify a material
weakness or significant deficiency in internal control
over financial reporting. Any such lapses or deficiencies
may materially and adversely affect our business and
consolidated results of operations or consolidated
financial condition, restrict our ability to access the
capital markets, require us to expend significant
resources to correct the lapses or deficiencies, expose
us to regulatory or legal proceedings, subject us to fines,
penalties or judgments or harm our reputation.
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
to
funds generate
management fee revenue, as well as servicing fees
from our other businesses. From time to time, we may
invest in the funds, which we refer to as seed capital,
in order for the funds to establish a performance history
for newly launched strategies. These funds may meet
the definition of variable interest entities, as defined by
U.S. GAAP, and if we are deemed to be the primary
beneficiary of these funds, we may be required to
consolidate these funds in our consolidated financial
statements under U.S. GAAP. The funds follow
specialized investment company accounting rules
which prescribe fair value for the underlying investment
securities held by the funds.
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.
State Street Corporation | 44
Our reputation and business prospects may be
damaged if our clients incur substantial losses in
investment pools in which we act as agent or are
restricted in redeeming their interests in these
investment pools.
We manage assets on behalf of clients in several
forms, including in collective investment pools, money
market funds, securities finance collateral pools, cash
collateral and other cash products and short-term
investment funds. Our management of collective
investment pools on behalf of clients exposes us to
reputational risk and operational losses. If our clients
incur substantial investment losses in these pools,
receive redemptions as in-kind distributions rather than
in cash, or experience significant under-performance
relative to the market or our competitors' products, our
reputation could be significantly harmed, which harm
could significantly and adversely affect the prospects of
our associated business units. Because we often
implement investment and operational decisions and
actions over multiple investment pools to achieve scale,
we face the risk that losses, even small losses, may
have a significant effect in the aggregate.
Within our Investment Management business, we
manage investment pools, such as mutual funds and
collective investment funds that generally offer our
clients the ability to withdraw their investments on short
notice, generally daily or monthly. This feature requires
that we manage those pools in a manner that takes into
account both maximizing the long-term return on the
investment pool and retaining sufficient liquidity to meet
reasonably anticipated liquidity requirements of our
clients. The importance of maintaining liquidity varies
by product type, but it is a particularly important feature
in money market funds and other products designed to
maintain a constant net asset value of $1.00. In the past,
we have imposed restrictions on cash redemptions from
the agency lending collateral pools, as the per-unit
market value of those funds' assets had declined below
the constant $1.00 the funds employ to effect purchase
and redemption transactions. Both the decline of the
funds' net asset value below $1.00 and the imposition
of restrictions on redemptions had a significant client,
reputational and regulatory impact on us, and the
recurrence of such or similar circumstances in the future
could adversely impact our consolidated results of
operations and financial condition. We have also in the
past continued to process purchase and redemption of
units of investment products designed to maintain a
constant net asset value at $1.00 although the fair
market value of the fund’s assets were less than $1.00.
If in the future we were to continue to process purchases
and redemptions from such products at $1.00 when the
fair market value of our collateral pools' assets is less
than $1.00, we could be exposed to significant liability.
If higher than normal demands for liquidity from
our clients were to occur, managing the liquidity
requirements of our collective investment pools could
to consolidate
become more difficult. If such liquidity problems were
to recur, our relationships with our clients may be
in certain
adversely affected, and, we could,
circumstances, be
the
required
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.
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 personnel. 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 personnel, 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.
State Street Corporation | 45
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
investment
companies, such as custody banks,
advisors, broker/dealers, outsourcing companies and
data processing companies. Further consolidation
within the financial services industry could also pose
challenges to us in the markets we serve, including
potentially
increased downward pricing pressure
across our businesses.
Some of our competitors including our competitors
in core services, have substantially greater capital
resources than we do or are not subject to as stringent
capital or other regulatory requirements as are we. In
some of our businesses, we are service providers to
significant competitors. These competitors are in some
instances significant clients, and the retention of these
clients involves additional risks, such as the avoidance
of actual or perceived conflicts of interest and the
maintenance of high levels of service quality and intra-
company confidentiality. The ability of a competitor to
offer comparable or improved products or services at a
lower price would likely negatively affect our ability to
maintain or increase our profitability. Many of our core
services are subject to contracts that have relatively
short terms or may be terminated by our client after a
short notice period. In addition, pricing pressures as a
result of the activities of competitors, client pricing
reviews, and rebids, as well as the introduction of new
products, may result in a reduction in the prices we can
charge for our products and services.
Long-term contracts expose us to pricing and
performance risk.
We enter into long-term contracts to provide
middle office or investment manager and alternative
investment manager operations outsourcing services
to clients, including services related to certain trading
activities, cash reporting, settlement and reconciliation
activities, collateral management and information
technology development. We also may enter into
longer-term arrangements with respect to custody, fund
administration and depository services. These
arrangements generally set forth our fee schedule for
the term of the contract and, absent a change in service
requirements, do not permit us to re-price the contract
for changes in our costs or for market pricing. The long-
term contracts for these relationships require, in some
cases, considerable up-front
investment by us,
including technology and conversion costs, and carry
the risk that pricing for the products and services we
provide might not prove adequate to generate expected
operating margins over the term of the contracts.
The profitability of these contracts is largely a
function of our ability to accurately calculate pricing for
our services, efficiently assume our contractual
responsibilities in a timely manner, control our costs and
maintain the relationship with the client for an adequate
period of time to recover our up-front investment. Our
estimate of the profitability of these arrangements can
be adversely affected by declines in the assets under
the clients' management, whether due to general
declines in the securities markets or client-specific
these
issues.
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.
State Street Corporation | 46
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 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
historical
the
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 on certain of these provisions and
depending on that guidance, 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
is
aforementioned risks, our effective
dependent on the nature and geographic composition
of our pre-tax earnings and could be negatively affected
by changes in these factors.
tax rate
We may incur losses as a result of unforeseen
events
terrorist attacks, natural
disasters, the emergence of a pandemic or acts of
embezzlement.
including
Acts of
terrorism, natural disasters or
the
emergence of a pandemic could significantly affect our
business. We have instituted disaster recovery and
continuity plans to address risks from terrorism, natural
disasters and pandemic; however, anticipating or
addressing all potential contingencies is not possible
for events of this nature. Acts of terrorism, either
targeted or broad in scope, or natural disasters could
damage our physical facilities, harm our employees and
disrupt our operations. A pandemic, or concern about a
possible pandemic, could lead to operational difficulties
and impair our ability to manage our business. Acts of
terrorism, natural disasters and pandemics could also
negatively affect our clients, counterparties and service
providers, as well as result in disruptions in general
economic activity and the financial markets.
State Street Corporation | 47
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 three buildings located in Quincy, Massachusetts, one of which we own and two of which
we lease, along with the Channel Center and Summer Street, other leased office buildings located in Boston, all of
which function as our principal facilities.
We occupy a total of approximately 7.8 million square feet of office space and related facilities worldwide, of which
approximately 6.8 million square feet are leased. The following table provides information on certain of our office space
and related facilities:
Principal Properties(1)
City
U.S. and Canada:
State Street Financial Center
Channel Center
Summer Street
District Avenue
Heritage Drive
John Adams Building
Josiah Quincy Building
Grafton Data Center
Westborough Data Center
Summer Street
Pennsylvania Avenue
College Road East
Avenue of the Americas
Adelaide Street East
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
Ecoworld 7
Knowledge City Salarpuria
Knowledge City Octave
Boston
Boston
Boston
Burlington
Quincy
Quincy
Quincy
Grafton
Westborough
Stamford
Kansas City
Princeton
New York
Toronto
London
Munich
Dublin
Milan
Luxembourg
Gdansk
Krakow
Krakow
Krakow
Sydney
Hangzhou
Hangzhou
Bangalore
Bangalore
Hyderabad
Hyderabad
State/
Country
MA
MA
MA
MA
MA
MA
MA
MA
MA
CT
MO
NJ
NY
Canada
England
Germany
Ireland
Italy
Luxembourg
Poland
Poland
Poland
Poland
Australia
China
China
India
India
India
India
Owned/
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
Leased
Leased
(1) We lease other properties in the above regions which consists of 42 locations in the U.S. and Canada, 34 locations in Europe, Middle East, and Africa
(EMEA) and 38 locations in Asia Pacific.
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 | 48
INFORMATION ABOUT OUR EXECUTIVE OFFICERS
The following table presents certain information with respect to each of our executive officers as of February 20,
2020.
Name
Ronald P. O'Hanley
Eric W. Aboaf
Ian W. Appleyard
Jorg Ambrosius
Francisco Aristeguieta
Tracy Atkinson
Aunoy Banerjee
Jeffrey N. Carp
Nadine Chakar
Andrew J. Erickson
Brian Franz
Hannah M. Grove
Kathryn M. Horgan
Andrew P. Kuritzkes
John Lehner
Louis D. Maiuri
Ian Martin
Donna M. Milrod
Elizabeth Nolan
John Plansky
Cyrus Taraporevala
Age
63
55
55
49
54
55
41
63
55
50
54
56
54
59
54
55
58
52
57
55
53
Position
Chairman, President and Chief Executive Officer
Executive Vice President and Chief Financial Officer
Executive Vice President, Global Controller and Chief Accounting Officer
Executive Vice President and Head of Europe, Middle East and Africa
Executive Vice President and Chief Executive Officer for International Business
Executive Vice President and Acting Chief Administrative Officer
Executive Vice President and Chief Transformation Officer
Executive Vice President, Chief Legal Officer and Secretary
Executive Vice President and Head of Global Markets
Executive Vice President and Head of Global Services
Executive Vice President and Chief Information Officer
Executive Vice President and Chief Marketing Officer
Executive Vice President and Chief Human Resources and Citizenship Officer
Executive Vice President and Chief Risk Officer
Executive Vice President and Head of Global Services, North America
Executive Vice President and Chief Operating Officer
Executive Vice President and Head of Asia Pacific
Executive Vice President and Head of Global Clients Division
Executive Vice President and Head of Global Delivery
Executive Vice President, Head of Global Exchange and Chief Executive Officer of Charles
River Development
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.
Mr. O'Hanley joined State Street in April 2015 and
since January 1, 2019 has served as the President and
Chief Executive Officer. He was appointed Chairman of
the Board effective January 1, 2020. 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,
the 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.
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
from April 2015
to December 2016, with
firm,
responsibility for all finance functions and corporate
development. From 2003 to March 2015, he served in
several senior management positions for Citigroup, a
global investment banking and financial services
corporation, including as global treasurer and as the
chief financial officer of the institutional client group,
which included the custody business.
Mr. 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. Ambrosius joined State Street in 2001 and
since July 2019 has served as Executive Vice President
and head of Europe, the Middle East and Africa. Prior
to this role, he served as co-head of Global Services,
Europe, the Middle East and Africa from August 2018
to June 2019. Prior to that role, he was head of Sector
Solutions, Europe, the Middle East and Africa from
January 2019 to June 2019. Mr. Ambrosius has held
several other positions within State Street during his
over 18 years with State Street.
Mr. Aristeguieta joined State Street in July 2019
as Executive Vice President and Chief Executive Officer
State Street Corporation | 49
of International Business. Prior to joining State Street,
Mr. Aristeguieta was Chief Executive Officer of Asia for
Citigroup, an international investment banking and
financial services provider, from June 2015 to June
2019. Prior to that role, he served as Chief Executive
Officer of Citigroup Latin America from January 2013 to
June 2015 and before
led Citigroup’s
in Latin America
Transaction Services Group
encompassing securities servicing, trade and cash
management, and served as vice chairman of Banco
de Chile.
that he
Ms. Atkinson joined State Street in 2008 and since
May 2019 has served as Executive Vice President and
Acting Chief Administrative Officer. Prior to this role, she
served as Executive Vice President and Chief
Compliance Officer from 2017 to 2019 and as Treasurer
from 2016 to 2017. Ms. Atkinson has served as an
Executive Vice President of State Street since joining
in 2008 and has held many leadership positions in
investor
finance,
relations, business unit finance and enterprise decision
support and was previously Resolution Officer for State
Street. Prior to joining State Street, Ms. Atkinson served
in leadership positions at Massachusetts Financial
Services
at
PricewaterhouseCoopers, where she led risk and
controls assurance reviews for financial services firms.
Ms. Atkinson has informed us that she will retire in the
second quarter of 2020.
including oversight of
treasury,
partner
was
and
a
Mr. Banerjee joined State Street in February 2016
and has served as Executive Vice President and Chief
Transformation Officer since September 2019. From
February 2016 to August 2019, he served as an
Executive Vice President in State Street’s finance
division where he was responsible for enterprise-wide
financial management, budgeting, forecasting and
strategic financial planning and procurement. Prior to
joining State Street, Mr. Banerjee was a Managing
Director in Markets & Securities Services for Citigroup,
an international investment banking and financial
services provider, from January 2015 to February 2016
and Director of Markets & Securities Services for
Citigroup from March 2013 to March 2014.
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. Carp has informed us that he will
retire in summer 2020.
Ms. Chakar joined State Street in March 2019 as
Executive Vice President and head of Global Markets.
Prior to joining State Street, Ms. Chakar served as the
global head of operations for the global wealth and asset
management division of Manulife Financial, an
international insurance company and financial services
provider, from March 2016 to March 2019. Prior to that,
Ms. Chakar served as Executive Vice President and led
the global asset servicing teams for BNY Mellon, a
global banking and financial services corporation,
institutions,
where she was head of
eCommerce strategy and research, and financial
markets infrastructure from January 2012 to August
2015. Ms. Chakar joined BNY Mellon in 1989 and held
a variety of senior management positions during her
tenure.
financial
Mr. Erickson joined State Street in April 1991 and
since November 2017 has served as Executive Vice
President and head of the 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 the 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 State Street.
Mr. Franz joined State Street in January 2020 as
Chief Information Officer. Prior to this role, Mr Franz
served as Chief Productivity Officer and Chief
Information Officer at Diageo PLC,
a British
multinational alcoholic beverages company, with
responsibility for enterprise operations, technology and
business service functions. Prior to joining Diageo in
2008, he was Chief Information Officer at PepsiCo
International, and before that in leadership roles at
General Electric, including GE Capital, and AT&T.
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.
State Street Corporation | 50
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. Lehner joined State Street in November 2016
and since September 2019 has served as Executive
Vice President and head of Global Services, North
America. Prior to this role, Mr. Lehner served as
Executive Vice President and head of Investment
Manager Services from November 2016 to September
2019. Prior to joining State Street, Mr. Lehner served
as Chief Executive Officer of BNY Mellon Technology
Solutions, a BNY Mellon company, from January 2015
to November 2016, President and Chief Executive
Officer of Eagle Investment Systems, a BNY Mellon
subsidiary, from January 2010 to January 2015 and
Chairman of Eagle Investment Systems from January
2015 to November 2016.
Mr. Maiuri joined State Street in October 2013 and
since February 2019 has served as Executive Vice
President and Chief Operating Officer. Prior to this role,
Mr. Maiuri served as Executive Vice President and head
of State Street Global Markets from June 2016 to
February 2019 and head of State Street Global
Exchange from July 2015 to January 2017. 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.
Mr. Martin joined State Street in 1993 and since
January 2019 has served as Executive Vice President
and head of Asia Pacific. Prior to this role, he served as
the head of Global Services and Global Exchange for
Asia Pacific from May 2016 to December 2018. Mr.
Martin has held various senior management positions
with State Street since 1993, including head of Global
Markets for Asia Pacific, head of Global Services for
Australia, Southeast Asia and Pacific, head of Foreign
Exchange for Asia Pacific and Treasury manager of the
Sydney branch.
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
has served as Head of Global Delivery since February
2019. Prior to that, she served as Chief Executive
Officer for Europe, the Middle East and Africa from
January 2018 to July 2019 and as part of her transition
from that role she remains responsible for some of our
UK-regulated activities. Prior to that, she served as
Executive Vice President and co-head of State Street
Global Services for Europe, the Middle East and Africa
from January 2017 to January 2018. Prior to that role,
she served as head of European Banking from October
2015 to January 2017. Before joining State Street, from
January 2015 to October 2015, Ms. Nolan served as
managing director at Deutsche Bank in the global
custody and clearing business. Prior to that role, Ms.
Nolan spent 12 years at J.P. Morgan in various senior
leadership roles, including from 2009 to 2014 as the
head of client services and client onboarding globally
for markets and investor services.
Mr. Plansky joined State Street in January 2017
and has served as Executive Vice President and Chief
Executive Officer of CRD since October 2018 and head
of State Street Global Exchange since January 2017.
Before joining State Street, Mr. Plansky led the U.S.
Strategy business and U.S. Global Platforms business
for PricewaterhouseCoopers,
international
professional services firm, from April 2014 to November
2016. Prior to the acquisition of Booz & Co. by
PricewaterhouseCoopers, he was a senior partner at
Booz & Co. leading the technology practice and serving
as a senior advisor to global financial institutions.
an
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 Managed
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 | 51
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
2,367 shareholders of record as of January 31, 2020.
In June 2019, our Board approved a common
stock purchase program authorizing the purchase of up
to $2.0 billion of our common stock from July 1, 2019
through June 30, 2020 (the 2019 Program). As of
December 31, 2019, we had approximately $1.0 billion
remaining under the 2019 Program. The following table
presents purchases of our common stock and related
information for each of the months in the quarter ended
December 31, 2019. All shares of our common stock
purchased during the quarter ended December 31,
2019 were purchased under the 2019 Program.
(Dollars in
millions
except per
share
amounts;
shares in
thousands)
Period:
October 1 -
October 31,
2019
November 1 -
November 30,
2019
December 1 -
December 31,
2019
Total
Total
Number of
shares
purchased
Average
price per
share
Total number of
shares purchased
as part of publicly
announced
program
Approximate
dollar value
of shares that
may yet be
purchased
under
publicly
announced
program
609
$
66.62
609
$
1,459
2,389
72.82
2,389
1,285
3,651
78.19
3,651
1,000
6,649
$
75.20
6,649
$
1,000
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
timing of stock
10b5-1
purchases, types of transactions and number of shares
purchased will depend on several factors, including
market conditions, our capital position, our financial
investment opportunities. Our
performance and
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,
semi-annually or quarterly (but not more frequently) and
can declare non-cash dividends at any time. Under
Massachusetts banking
for purposes of
determining the amount of cash dividends that are
payable by State Street Bank, “net profits” is defined as
an amount equal to the remainder of all earnings from
current operations plus actual recoveries on loans and
investments and other assets, after deducting from the
total thereof all current operating expenses, actual
losses, accrued dividends on preferred stock, if any, and
all federal and state taxes.
law,
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.
State Street Corporation | 52
Prior Federal Reserve approval also must be obtained if a proposed dividend would exceed State Street Bank's
“undivided profits” (retained earnings) as reported in its Call Reports. State Street Bank may include in its undivided
profits amounts contained in its surplus account, if the amounts reflect transfers of undivided profits made in prior
periods and if the Federal Reserve's approval for the transfer back to undivided profits has been obtained.
Under the PCA provisions adopted pursuant to the FDIC Improvement Act of 1991, State Street Bank may not
pay a dividend when it is deemed, under the PCA framework, to be under-capitalized, or when the payment of the
dividend would cause State Street Bank to be under-capitalized. If State Street Bank is under-capitalized for purposes
of the PCA framework, it must cease paying dividends for so long as it is deemed to be under-capitalized. Once earnings
have begun to improve and an adequate capital position has been restored, dividend payments may resume in
accordance with federal and state statutory limitations and guidelines.
Currently, any payment of future common stock dividends by our Parent Company to its shareholders is subject
to the review of our capital plan by the Federal Reserve in connection with its CCAR process. Information about
dividends declared by our Parent Company and dividends from our subsidiary banks is provided under "Capital" in
“Financial Condition” 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.
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, 2014. It also assumes reinvestment of common stock dividends.
The S&P Financial Index is a publicly available, capitalization-weighted index, comprised of 66 of the Standard
& Poor’s 500 companies, representing 26 diversified financial services companies, 22 insurance companies and 18
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.
2014
2015
2016
2017
2018
2019
State Street Corporation $
S&P 500 Index
S&P Financial Index
KBW Bank Index
$
100
100
100
100
$
86
101
98
100
$
103
113
121
129
$
132
138
148
153
$
87
132
128
126
113
174
170
172
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
Total other income
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(2)
2019(1)
2018(1)
2017
2016
2015
$
9,147
$
9,454
$
9,001
$
8,200
$
8,351
2,566
43
2,671
2,304
2,084
2,088
6
(39)
7
(6)
11,756
12,131
11,266
10,291
10,433
10
9,034
2,712
470
—
15
9,015
3,101
508
—
2
8,269
2,995
839
—
10
8,077
2,204
67
1
12
8,050
2,371
398
—
$
2,242
$
2,593
$
2,156
$
2,138
$
1,973
(233)
(189)
(184)
(175)
(132)
Net income available to common shareholders
$
2,009
$
2,404
$
1,972
$
1,963
$
1,841
PER COMMON SHARE:
Earnings per common share:
Basic
Diluted
Cash dividends declared
Closing market price (at year end)
AS OF DECEMBER 31:
Investment securities
$
$
5.43
5.38
1.98
6.46
6.39
1.78
$
5.26
5.19
1.60
$
$
5.01
4.96
1.44
4.51
4.45
1.32
79.10
63.07
97.61
77.72
66.36
$ 95,597
$ 87,062
$ 97,579
$ 97,167
$ 100,022
Average total interest-earning assets
181,891
185,637
191,235
199,184
220,456
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:
245,610
244,596
238,392
242,689
245,149
181,872
180,360
184,896
187,163
191,627
12,509
24,431
34,358
3,116
39,103
11,093
24,737
31,620
2,511
40,142
11,620
22,270
33,119
2,782
36,643
11,430
21,193
28,771
2,468
33,783
11,497
21,082
27,508
2,245
32,356
Return on average common shareholders' equity
9.4%
12.1%
10.5%
10.4%
9.7%
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(3)
Tier 1 capital ratio(3)
Total capital ratio(3)
Tier 1 leverage ratio(4)
Supplementary leverage ratio(5)
1.0
36.8
9.6
1.42
11.7
14.5
15.6
6.9
6.1
1.2
27.6
8.9
1.47
12.1
16.0
16.9
7.2
6.3
1.0
30.2
8.6
1.29
12.3
15.5
16.5
7.3
6.5
0.9
28.5
8.2
1.13
11.7
14.8
16.0
6.5
5.9
0.8
29.1
7.6
1.03
12.5
15.3
17.4
6.9
6.2
(1) CRD was acquired on October 1, 2018. 2018 includes results of CRD for one quarter. 2019 includes results of CRD for a full year. Additional information about CRD
is included in our Management's Discussion and Analysis.
(2) Amounts represent preferred stock dividends and the allocation of earnings to participating securities using the two-class method.
(3) Ratios were calculated in conformity with the advanced approaches provisions of the Basel III rule. Refer to Note 16 to the consolidated financial statements in this
Form 10-K.
(4) The tier 1 leverage ratio was calculated in conformity with the Basel III rule.
(5) The SLR was calculated using the tier 1 capital as calculated under the SLR provisions of the Basel III rule.
State Street Corporation | 54
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
ITEM 7. MANAGEMENT’S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
GENERAL
As of December 31, 2019, we had consolidated
total assets of $245.61 billion, consolidated total
deposits of $181.87 billion, consolidated
total
shareholders' equity of $24.43 billion and over 39,000
employees. We operate in more than 100 geographic
the U.S., Canada,
including
markets worldwide,
Europe, the Middle East and Asia.
Our operations are organized into two lines of
business,
Investment
Investment Servicing and
Management, which are defined based on products and
services provided.
regulation);
record-keeping;
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
level accounting; daily pricing and
participant
administration; master trust and master custody;
depotbank services (a fund oversight role created by
non-U.S.
cash
management; foreign exchange, brokerage and other
trading services; securities finance and enhanced
custody products; deposit and short-term investment
financing;
facilities;
investment
lease
manager and alternative
investment manager
risk and
operations outsourcing; performance,
compliance analytics; and financial data management
to support institutional investors. Our CRD business
also falls within our Investment Servicing line of
business and includes products and services, such as:
portfolio modeling and construction;
trade order
management; investment risk and compliance; and
wealth management solutions.
loans and
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 Global
(formerly Outsourced Chief
Fiduciary Solutions
Investment Officer). 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
to
respective management agreements
performance fees.
related
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
requires management
to make estimates and
assumptions in its application of certain accounting
policies that materially affect the reported amounts of
assets, liabilities, equity, revenue and expenses.
The significant accounting policies that require us
to make judgments, estimates and assumptions that
are difficult, subjective or complex about matters that
are uncertain and may change in subsequent periods
include:
•
•
•
accounting for fair value measurements;
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 that management uses in evaluating our
business and activities. Non-GAAP
financial
information should be considered in addition to, and not
as a substitute for or superior to, financial information
prepared in conformity with U.S. GAAP. Any non-GAAP
financial information presented in this Form 10-K,
State Street Corporation | 55
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
including this Management’s Discussion and Analysis,
is reconciled to its most directly comparable currently
applicable regulatory ratio or U.S. GAAP-basis
measure. We further believe that our presentation of
fully taxable-equivalent NII, a non-GAAP measure,
which reports non-taxable revenue, such as interest
investment
income associated with
securities, on a fully taxable-equivalent basis, facilitates
an investor's understanding and analysis of our
underlying financial performance and trends.
tax-exempt
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, cost savings and transformation
initiatives, investment portfolio performance, dividend
and stock purchase programs, outcomes of legal
proceedings, market growth, acquisitions,
joint
ventures and divestitures, client growth and new
technologies, services and opportunities, as well as
industry, governmental, 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
applicable bank
including
supplemental qualitative and quantitative information
with respect to regulatory capital (including market risk
associated with our trading activities) and the liquidity
coverage ratio, summary results of 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 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.
State Street Corporation | 56
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
OVERVIEW OF FINANCIAL RESULTS
TABLE 1: OVERVIEW OF FINANCIAL RESULTS
(Dollars in millions, except per share amounts)
Total fee revenue(1)(2)
Net interest income
Total other income
Total revenue(1)(2)
Provision for loan losses
Total expenses(1)(2)
Income before income tax expense
Income tax expense
Net income
Adjustments to net income:
Dividends on preferred stock(3)
Earnings allocated to participating securities(4)
Net income available to common shareholders
Earnings per common share:
Basic
Diluted
Average common shares outstanding (in thousands):
Basic
Diluted
Cash dividends declared per common share
Return on average common equity
Pre-tax margin
Years Ended December 31,
2019
2018
2017
$
9,147
$
9,454
$
2,566
43
11,756
10
9,034
2,712
470
2,671
6
12,131
15
9,015
3,101
508
$
$
$
$
2,242
$
2,593
$
(232)
$
(188)
$
(1)
2,009
5.43
5.38
$
$
(1)
2,404
6.46
6.39
$
$
9,001
2,304
(39)
11,266
2
8,269
2,995
839
2,156
(182)
(2)
1,972
5.26
5.19
369,911
373,666
371,983
376,476
374,793
380,213
$
1.98
$
1.78
$
9.4%
23.1
12.1%
25.6
1.60
10.5%
26.6
(1) CRD contributed approximately $385 million and $201 million in total revenue and total expenses, respectively, in 2019. Revenue includes approximately $370 million
in software and processing fees and $15 million in brokerage and other trading services within foreign exchange trading services, and expenses include approximately
$148 million in compensation and employee benefits and $53 million in other expense lines. In addition, CRD-related expenses in 2019 include $65 million in amortization
of other intangible assets.
CRD contributed approximately $119 million and $39 million in total revenue and total expenses, respectively, in 2018. Revenue includes approximately $114 million in
software and processing fees and $5 million in brokerage and other trading services within foreign exchange trading services, and expenses include approximately $28
million in compensation and employee benefits and $11 million in other expense lines. In addition, CRD-related expenses in 2018 include $18 million in amortization of
other intangible assets.
(2) The revenue recognition standard impact was approximately $319 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 $71 million across all other revenue lines, and expenses contributed approximately
$183 million in other expenses, $106 million in transaction processing and $30 million across other expense line items.
(3) Additional information about our preferred stock dividends is provided in Note 15 to the consolidated financial statements in this Form 10-K.
(4) Represents the portion of net income available to common equity allocated to participating securities, composed of unvested and fully vested SERP (Supplemental
executive retirement plans) 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.
State Street Corporation | 57
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
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, 2019
presented in Table 1: Overview of Financial Results.
More detailed information about our consolidated
financial results, including the comparison of our
financial results for the year ended December 31, 2019
to those for the year ended December 31, 2018, 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.
The comparison of our financial results for the year
ended December 31, 2018 to those for the year ended
December 31, 2017, is included in our Management's
Discussion and Analysis in the Annual Report on Form
10-K for the fiscal year ended December 31, 2018 filed
with the SEC on February 21, 2019, as amended by
Exhibit 99.2 to our Current Report on Form 8-K filed
with the SEC on May 2, 2019.
For the fourth quarter of 2019, we recorded a
charge of $140 million to increase our legal accrual for
government investigations and civil litigation associated
with our invoicing matter first reported in December
2015. This additional legal accrual relates to events that
developed subsequent to January 17, 2020, the date
we originally announced our financial results for the
fourth quarter and year ended December 31, 2019, and
was reported on February 20, 2020. The effects of the
additional accrual are reflected in the financial and other
information reported in this Form 10-K.
In this Management’s Discussion and Analysis,
where we describe the effects of changes in FX rates,
those effects are determined by applying applicable
weighted average FX rates from the relevant 2018
period to the relevant 2019 period results.
Financial Results and Highlights
• EPS of $5.38
in 2019 decreased 16%
compared to $6.39 in 2018. Both years include
the impact of notable items:
•
2019 notable items included:
repositioning
approximately $110 million;
charges
of
acquisition and restructuring costs of
approximately $77 million, primarily
related to CRD;
gain of approximately $44 million on
the extinguishment of approximately
$297 million of our outstanding floating
rate junior subordinated debentures
due 2047 following a cash tender offer;
legal and
approximately $172 million; and
related expenses of
to
costs of $22 million due
the
redemption of all outstanding Series E
non-cumulative perpetual preferred
stock
the difference
between the redemption value and the
net carrying value of the preferred
stock.
representing
•
2018 notable items included:
repositioning
approximately $300 million;
charges
of
legal and
approximately $50 million; and
related expenses of
acquisition and restructuring costs
of
primarily
approximately $24 million.
to CRD
related
contributed
• CRD was acquired on October 1, 2018. Total
revenue
by CRD was
approximately $385 million and $119 million in
2019 and 2018, respectively. Total expenses
contributed by CRD were approximately $201
million and $39 million in 2019 and 2018,
addition, CRD-related
respectively.
expenses include $65 million and $18 million
in amortization of other intangible assets in
2019 and 2018, respectively.
In
• Total expenses were up slightly in 2019
compared to 2018, including the impact of the
incremental legal reserve, and reflect our
successfully executed previously announced
2019 expense savings program. That program
achieved approximately $415 million in gross
savings in 2019 through expense savings of
approximately $230 million
resource
discipline initiatives and $185 million in process
re-engineering and automation benefits,
exceeding our revised goal of $400 million
gross savings in 2019 (itself reflecting an
increase from our initial goal of $350 million
gross savings).
in
•
In 2019, return on equity of 9.4% decreased
from 12.1% in 2018, primarily due to a decrease
to common
in net
shareholders. Pre-tax margin of 23.1% in 2019
decreased from 25.6% in 2018, primarily due
to a decrease in total revenue.
income available
• Operating leverage was (3.3)% in 2019.
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.
• We purchased a total of approximately $1.6
billion and $350 million of our common stock in
2019 and 2018, respectively. These purchases
were all conducted under share purchase
State Street Corporation | 58
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
current
programs approved by our Board of Directors.
Our
share purchase program
authorizes the purchase of up to $2.0 billion of
our common stock from July 1, 2019 through
June 30, 2020 (the 2019 Program). $1.0 billion
remains available for repurchases under that
program in the first and second quarters of
2020. The lower level of common stock
repurchases in 2018 reflects our funding plan
for our acquisition of CRD, which included an
issuance of approximately $1.15 billion of
common stock and a suspension of
approximately $950 million of common stock
repurchases in 2018.
Revenue
• Total revenue and fee revenue both decreased
3% in 2019 compared to 2018, primarily driven
by decreases in servicing fees, management
fees, foreign exchange trading services and
securities finance revenues and, in the case of
total revenue, by NII. These decreases were
partially offset by higher software and
processing fee revenue in 2019, which includes
a full year of revenue from CRD. Total fee
revenue in the second half of 2019 was
approximately $4.63 billion compared to $4.52
billion in the first half of 2019, representing a
2% increase, primarily driven by higher equity
markets as well as moderating fee pressure in
the second half of the year.
Total revenues contributed by CRD in
2019 were approximately $385 million,
including $370 million in software and
processing fees and $15 million in
brokerage and other trading services,
within
trading
foreign exchange
services.
• Servicing fee revenue decreased 6% in 2019
compared to 2018, primarily due to elevated
fee pressure and lower client activity and flows.
• Management fee revenue decreased 4% in
2019 compared to 2018, primarily reflecting the
run rate impact of late 2018 outflows and mix
changes away from higher fee products,
partially offset by higher equity market levels.
• Foreign exchange trading services decreased
7% in 2019 compared to 2018 primarily due to
lower market volatility.
• Securities finance revenue decreased 13% in
2019 compared to 2018, reflecting lower
securities on loan, enhanced custody balances
and spreads, and the impact of balance sheet
optimization efforts implemented in the second
half of 2018.
• Software and processing
revenue
increased 64% in 2019 compared to 2018
primarily due to $370 million from CRD, which
we acquired in October 2018.
fees
• NII decreased 4% in 2019 compared to 2018,
primarily due to lower average non-interest
bearing client deposit balances and lower long-
end U.S. market rates, partially offset by FICC,
investment portfolio and loan growth.
Expenses
• Total expenses were up slightly in 2019
compared to 2018, primarily reflecting the
impact of the incremental legal reserve of $140
million, technology infrastructure investments
and the impact of the CRD acquisition, partially
offset by savings from resource discipline,
process
re-engineering and automation
initiatives and lower repositioning charges in
2019 compared to 2018.
of
$98 million
We recorded a repositioning charge in
2019 of approximately $110 million,
of
consisting
compensation and employee benefits
expenses and $12 million of
occupancy expenses, to further drive
information
process
and
technology
organization rationalization in 2020.
optimizations
automation,
Total expenses contributed by CRD in
2019 and 2018 were approximately
$201 million and $39 million,
respectively, including $148 million
and $28 million in compensation and
employee benefits and $53 million and
$11 million in other expense lines,
respectively. In addition, CRD-related
expenses in 2019 and 2018 included
$65 million and
$18 million,
respectively in amortization of other
intangible assets.
We recorded a $140 million increase
to our legal accrual for government
litigation
investigations and civil
associated with our invoicing matter
first reported in December 2015. The
accrual reflects our intention to seek to
resolve these matters.
AUC/A and AUM
• AUC/A increased 9% as of December 31, 2019
compared to December 31, 2018, primarily due
to higher end of period market levels and client
flows, partially offset by a previously
announced client transition. In 2019, newly
announced asset servicing mandates totaled
approximately $1.84 trillion, in line with a high
State Street Corporation | 59
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
of $1.89 trillion in 2018, primarily driven by
additional services for an existing large asset
manager client. Servicing assets remaining to
be
totaled
approximately $1.17 trillion as of December 31,
2019.
future periods
installed
in
• AUM increased 24% as of December 31, 2019
compared to December 31, 2018, primarily due
to higher end of period market levels and net
inflows, driven by institutional, ETF and cash
inflows.
Capital and Capital Redemptions
•
In 2019, we returned a total of approximately
$2.33 billion to our shareholders in the form of
common stock dividends and share purchases.
We declared aggregate common stock
dividends of $1.98 per share, totaling
$728 million in 2019, compared to
$1.78 per share, totaling $665 million
in 2018, representing an increase of
approximately 11% on a per share
basis.
In 2019, we acquired 24.9 million
shares of common stock at an average
per share cost of $64.30 and an
aggregate cost of approximately $1.6
billion. In 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. These purchases were all
conducted under share purchase
programs approved by our Board of
Directors.
•
In June 2019, the Federal Reserve issued a
non-objection to our capital plan included as
part of our 2019 CCAR submission. Pursuant
to that plan, our Board authorized the 2019
Program and we increased our quarterly
common stock dividend to $0.52 per share in
the third quarter of 2019.
• Our CET1 capital ratio was 11.7% as of both
December 31, 2019 and 2018, and Tier 1
leverage ratio decreased to 6.9% as of
December 31, 2019, compared to 7.2% as of
December 31, 2018. As of December 31, 2019,
advanced approaches capital ratios were
binding for the period. As of December 31,
2018, standardized approaches capital ratios
were binding for the period.
Capital Redemptions
• We redeemed all outstanding Series E non-
cumulative perpetual preferred stock as of
December 15, 2019 at a redemption price of
$750 million ($100,000 per share equivalent to
$25.00 per depositary share) plus accrued and
unpaid dividends. The difference of $22 million
between the redemption value and the net
carrying value resulted in an EPS impact of
approximately ($0.06) per share in 2019.
• On February 12, 2020, we announced that we
will redeem all 5,000 of our outstanding shares
of our non-cumulative perpetual preferred
stock, Series C, for cash at a redemption price
of $100,000 per share (equivalent to $25.00 per
depositary share) plus all declared and unpaid
dividends. The redemption price will be payable
on March 16, 2020, and this redemption will be
reflected in our first quarter 2020 results of
operations.
Debt Issuances and Redemptions
• On November 1, 2019, we issued $1 billion
aggregate principal amount of fixed-to-floating
rate senior notes due 2025 and $500 million
aggregate principal amount of fixed-to-floating
rate senior subordinated notes due 2034 in a
public offering.
• On January 24, 2020, we issued $750 million
aggregate principal amount of 2.400% Senior
Notes due 2030 in a public offering.
Debt Redemptions
•
•
In the fourth quarter of 2019, we completed a
cash tender offer for approximately $297 million
of our $800 million aggregate principal amount
of outstanding floating rate junior subordinated
debentures due 2047, resulting in a gain of
approximately $44 million.
In the fourth quarter of 2019, we redeemed
approximately $50 million of our $150 million
aggregate principal amount of outstanding
floating rate junior subordinated debentures
due 2028.
State Street Corporation | 60
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 2019 compared to 2018 and should be read in
conjunction with the consolidated financial statements and accompanying condensed notes to the consolidated financial
statements in this Form 10-K.
Total Revenue
TABLE 2: TOTAL REVENUE
(Dollars in millions)
2019
2018
2017
Years Ended December 31,
% Change 2019
vs. 2018
% Change 2018
vs. 2017
Fee revenue:
Servicing fees
Management fees(1)
Foreign exchange trading services(2)
Securities finance
Software and processing fees(2)
Total fee revenue(2)
Net interest income:
Interest income
Interest expense
Net interest income
Other income:
Gains (losses) related to investment
securities, net
Other income
Total other income
Total revenue(2)
$
5,074
$
5,421
$
1,771
1,111
471
720
9,147
3,941
1,375
2,566
(1)
44
43
1,851
1,201
543
438
9,454
3,662
991
2,671
9
(3)
6
5,365
1,616
1,071
606
343
9,001
2,908
604
2,304
(39)
—
(39)
$
11,756
$
12,131
$
11,266
(6)%
(4)
(7)
(13)
64
(3)
8
39
(4)
nm
nm
nm
(3)
1%
15
12
(10)
28
5
26
64
16
nm
nm
nm
8
(1) The revenue recognition standard impact was approximately $319 million in total revenue for 2018, including approximately $190 million in management fees, $58
million in foreign exchange trading services and $71 million across all other revenue lines.
(2) CRD contributed approximately $385 million in total revenue in 2019, including approximately $370 million in software and processing fees and $15 million in
brokerage and other trading services within foreign exchange trading services. CRD contributed approximately $119 million in total revenue in 2018, including approximately
$114 million in software and processing fees and $5 million in brokerage and other trading services within foreign exchange trading services.
nm Not meaningful
State Street Corporation | 61
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Fee Revenue
Table 2: Total Revenue, provides the breakout of fee revenue for the years ended December 31, 2019, 2018 and
2017. Servicing and management fees collectively made up approximately 75%, 77% and 78% of the total fee revenue
in 2019, 2018 and 2017, respectively.
Servicing Fee Revenue
Generally, our servicing fee revenues are affected by several factors including changes 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. On average and over time, 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 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 five years ended December 31, 2019, we estimate that worldwide market valuations impacted our
servicing fee revenues by approximately (2)% to 5% annually and approximately 0% and 2% in 2019 and 2018,
respectively. See Table 3: Daily Averages, Month-End Averages 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 the indices presented. In addition, our asset classifications may differ from
those industry classifications presented.
We estimate, using relevant information as of December 31, 2019 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%.
TABLE 3: DAILY AVERAGES, MONTH-END AVERAGES AND YEAR-END EQUITY INDICES(1)
S&P 500®
MSCI EAFE®
MSCI® Emerging Markets
Daily Averages of Indices
Month-End Averages of Indices
Year-End Indices
Years Ended December 31,
Years Ended December 31,
Years Ended December 31,
2019
2018
% Change
2019
2018
% Change
2019
2018
% Change
2,913
1,892
1,036
2,746
1,965
1,093
6%
(4)
(5)
2,938
1,903
1,043
2,738
1,957
1,090
7%
(3)
(4)
3,231
2,037
1,115
2,507
1,720
966
29%
18
15
(1) The index names listed in the table are service marks of their respective owners.
NA Not applicable
TABLE 4: YEAR-END DEBT INDICES(1)
Barclays Capital U.S. Aggregate Bond Index®
Barclays Capital Global Aggregate Bond Index®
(1) The index names listed in the table are service marks of their respective owners.
As of December 31,
2019
2018
% Change
2,225
512
2,047
479
9%
7
State Street Corporation | 62
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Client Activity and Asset Flows
Pricing
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. Our servicing fee revenues are
impacted by a number of factors, including transaction
volumes, asset levels and asset classes in which funds
are invested, as well as industry trends associated with
these client-related activities.
Our clients may change the asset classes in which
their assets are invested, based on their market outlook,
risk acceptance tolerance or other considerations. Over
the five years ended December 31, 2019, we estimate
that client activity and asset flows, together, impacted
our servicing fee revenues by approximately (1)% to
2% annually and approximately (1)% and 1% in 2019
and 2018, respectively. See Table 5: 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 5: INDUSTRY ASSET FLOWS
(In billions)
North America - ICI Market Data(1)(2)(3)
Long-Term Funds(4)
Money Market
Exchange-Traded Fund
Total ICI Flows
Europe - Broadridge Market Data(1)(5)(6)
Long-Term Funds(4)
Money Market
Total Broadridge Flows
Years Ended December 31,
2019
2018
$
$
$
$
(95.6)
$
(349.6)
584.4
328.2
817.0
$
119.8
310.9
81.1
188.8
54.9
243.7
$
$
(52.1)
12.4
(39.7)
(1) Industry data is provided for illustrative purposes only and is not intended to reflect
our 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 year ended December 31, 2019 data includes ICI actuals for January 2019
through November 2019 and ICI estimates for December 2019.
(4) 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 the European, Middle-Eastern,
and African market flows mainly in Equities, Fixed-Income and Multi Asset Classes.
(5) Source: © Copyright 2019, 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.
(6) The year ended December 31, 2019 data is on a rolling twelve month basis for
December 2018 through November 2019 for EMEA (Copyright 2019 Broadridge
Financial Solutions, Inc.).
The industry in which we operate has historically
faced pricing pressure, and our servicing fee revenues
are also affected by such pressures
today.
Consequently, no assumption should be drawn as to
future revenue run rate from announced servicing wins,
as the amount of revenue associated with AUC/A can
vary materially. On average, over the five years ended
December 31, 2019, we estimate that pricing pressure
with respect to existing clients has impacted our
servicing fees by approximately (2)% annually, with the
impact ranging from (1)% to (4)% in any given year, and
approximately (4)% in both 2019 and 2018. 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
through the standardization of the services we provide.
The timing of the impact of additional revenue
generated by anticipated 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, the nature of those services and client
investment practices. These same market pressures
also impact the fees we negotiate when we win business
from new clients.
Net New Business
Over the five years ended December 31, 2019, 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 0% to 3%
annually and approximately 0% and 1% in 2019 and
2018, respectively, inclusive of a client transition.
New business impacting servicing fees can
include: custody; product and participant
level
accounting; daily valuation and administration; record-
keeping; cash management; 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 our
level of AUM, which we report based on month-end
valuations. 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
State Street Corporation | 63
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
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.
Asset-based management fees for passively
managed products, to which our AUM is currently
primarily weighted, are generally charged at a lower fee
of AUM than for actively managed 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, 2019 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
total
in a corresponding change
management fee revenues, on average and
over time, of approximately 5%; and
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
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 Averages, Month-
End Averages 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 Interest Income
See Table 2: Total Revenue, for the breakout of
interest income and interest expense for the years
ended December 31, 2019, 2018 and 2017.
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,
resale
deposits with
interest-bearing
agreements, loans and other liquid assets, are financed
primarily by client deposits, short-term borrowings and
long-term debt.
NIM
relationship between
the
annualized FTE NII and average total interest-earning
represents
banks,
assets for the period. It is calculated by dividing FTE
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 FTE basis using the U.S.
federal and state statutory income tax rates.
loan and
NII on a FTE basis decreased in 2019 compared
to 2018, primarily due to lower long-end U.S. market
rates and lower average non-interest bearing deposit
balances, partially offset by FICC expansion and higher
investment securities balances.
core
Investment securities net premium amortization, which
is included in interest income, was $434 million in 2019
compared to $391 million in 2018 and $364 million in
2017, primarily related to higher MBS premium
amortization.
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 rate of return
considers any non-refundable fees or costs, as well as
in
purchase premiums or discounts,
amortization or accretion, accordingly. The amortization
of premiums and accretion of discounts are adjusted
for prepayments when they occur, such that the level
the
rate of return remains constant
contractual life of the security.
The following table presents the investment securities
amortizable purchase premium net of discount
indicated:
accretion
throughout
resulting
periods
the
for
TABLE 6: INVESTMENT SECURITIES NET PREMIUM
AMORTIZATION
Years Ended December 31,
(Dollars in millions)
2019
2018
2017
Unamortized premiums, net of
discounts at period end
$
1,585
$
1,575
$
2,249
Net premium amortization
Investment securities duration
(years)
434
2.7
391
3.1
364
2.7
State Street Corporation | 64
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
See Table 7: Average Balances and Interest Rates - Fully Taxable-Equivalent Basis, for the breakout of NII on a
FTE basis for the years ended December 31, 2019, 2018 and 2017.
TABLE 7: AVERAGE BALANCES AND INTEREST RATES - FULLY TAXABLE-EQUIVALENT BASIS(1)
Years Ended December 31,
(Dollars in millions; fully
taxable-equivalent basis)
Average
Balance
2019
Interest
Revenue/
Expense
Rate
Average
Balance
2018
Interest
Revenue/
Expense
Rate
Average
Balance
2017
Interest
Revenue/
Expense
Rate
Interest-bearing deposits
with banks
Securities purchased under
resale agreements(2)
Trading account assets
Investment securities
Loans and leases
Other interest-earning
assets
Average total interest-
earning assets
Interest-bearing deposits:
U.S.
Non-U.S.(3)
Total interest-bearing
deposits(3)(4)
Securities sold under
repurchase agreements
Other short-term
borrowings
Long-term debt
Other interest-bearing
liabilities
Average total interest-
bearing liabilities
Interest rate spread
Net interest income, fully
taxable-equivalent basis
Net interest margin, fully
taxable-equivalent basis
Tax-equivalent adjustment
Net interest income, GAAP
basis
$ 48,500
$
416
.86% $ 54,328
$
387
.71% $ 47,514
$
180
.38%
2,506
884
91,768
24,073
14,160
364
14.54
1
2,009
775
395
.11
2.19
3.22
2.79
2,901
1,051
88,070
23,573
15,714
335
—
1,927
698
372
11.55
—
2.19
2.96
2.37
2,131
1,011
95,779
21,916
22,884
264
12.38
(1)
(.12)
1,891
519
222
1.97
2.37
.97
$ 181,891
$
3,960
2.18
$ 185,637
$
3,719
2.00
$ 191,235
$
3,075
1.61
$ 67,547
$
61,301
128,848
1,616
1,524
11,474
4,103
539
124
663
31
21
414
246
.80% $ 54,953
$
.20
.51
1.90
1.37
3.61
6.00
70,623
125,576
2,048
1,327
10,686
4,956
256
107
363
13
17
389
209
.47% $ 30,623
$
.15
.29
.62
1.28
3.64
4.20
91,937
122,560
3,683
1,313
11,595
4,607
96
67
163
2
10
308
121
.31%
.07
.13
.05
.80
2.66
2.63
$ 147,565
$
1,375
.93
$ 144,593
$
991
.68
$ 143,758
$
604
.42
1.25%
1.32%
$
2,585
$
2,728
$
2,471
1.42%
1.47%
(19)
$
2,566
(57)
$
2,671
(167)
$
2,304
1.19%
1.29%
(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 $86.67 billion, $35.74 billion and $31.15 billion for the years
ended December 31, 2019, 2018 and 2017, respectively. Excluding the impact of netting, the average interest rates would be approximately 0.41%, 0.87% and 0.79%
for the years ended December 31, 2019, 2018 and 2017, respectively.
(3) Average rate includes the impact of FX swap costs of approximately $153 million, $106 million and $141 million for the years ended December 31, 2019, 2018 and
2017, respectively. Average rates for total interest-bearing deposits excluding the impact of FX swap costs were 0.40%, 0.20% and 0.02% for the years ended December
31, 2019, 2018 and 2017, respectively.
(4) Total deposits averaged $158.26 billion compared to $161.41 billion and $163.81 billion for 2018 and 2017, respectively.
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.
State Street Corporation | 65
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
total
Average
interest-earning assets were
$181.89 billion in 2019 compared to $185.64 billion in
2018. The decrease is primarily driven by lower average
total client deposits.
Interest-bearing deposits with banks averaged
$48.50 billion in 2019 compared to $54.33 billion in
2018. These deposits primarily reflect our maintenance
of cash balances at the Federal Reserve, the European
Central Bank (ECB) and other non-U.S. central banks.
The lower levels of average cash balances with central
banks reflect lower levels of client deposits and an
increase in the investment portfolio.
Securities purchased under resale agreements
averaged $2.51 billion in 2019 compared to $2.90 billion
in 2018. While the on-balance sheet amount has
remained relatively stable, the impact of balance sheet
netting increased to $86.67 billion on average in 2019,
respectively, compared to $35.74 billion in 2018. We
maintain an agreement with Fixed Income Clearing
Corporation (FICC), a clearing organization
that
enables us to net all securities sold under repurchase
agreements against those purchased under resale
agreements with counterparties that are also members
of the clearing organization. The increase in average
balance sheet netting, in 2019 compared to 2018, is
primarily due to the expansion of our FICC program and
new client activity.
then, we have
We have been a netting and sponsoring member
within FICC since 2005. FICC expanded the service in
2017, and since
increased our
participation. We enter into repurchase and resale
transactions in eligible securities with sponsored clients
and with other FICC members and, pursuant to FICC
Government Securities Division rules, submit, novate
and net the transactions. We may sponsor clients to
clear their eligible repurchase transactions with FICC,
backed by our guarantee to FICC of the prompt and full
payment and performance of our sponsored member
clients’ respective obligations. We obtain a security
interest from our sponsored clients in the high quality
securities collateral that they receive, which is designed
to mitigate our potential exposure to FICC.
Average
to
investment securities
$91.77 billion in 2019 from $88.07 billion in 2018
primarily driven by increased investment in MBS.
increased
Loans averaged $24.07 billion in 2019 compared
to $23.57 billion in 2018. Average core loans, which
exclude overdrafts, averaged $19.95 billion in 2019
compared to $18.65 billion in 2018.
Average other interest-earning assets, largely
associated with our enhanced custody business,
decreased to $14.16 billion in 2019 from $15.71 billion
in 2018, 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 total interest-bearing deposits
increased to $128.85 billion in 2019 from $125.58 billion
interest-bearing deposits
in 2018. Average U.S.
increased as a result of a gradual shift from non-interest
bearing deposits and new deposit initiatives. 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, typically
associated with our tax-exempt investment program,
increased to $1.52 billion in 2019 from $1.33 billion in
2018.
Average long-term debt was $11.47 billion in 2019
compared to $10.69 billion in 2018. These amounts
reflect issuances, redemptions and maturities of senior
debt during the respective periods, including the
issuance of $1.0 billion of senior debt and $500 million
of subordinated debt in November 2019.
Average other interest-bearing liabilities were
$4.10 billion in 2019 compared to $4.96 billion in 2018.
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 federal agency MBS,
sovereign debt securities and U.S. Treasury and
agency securities. 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 | 66
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Provision for Loan Losses
We recorded a provision for loan losses of $10
million in 2019 compared to $15 million in 2018 and $2
million in 2017. Additional information 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 8: Expenses, provides the breakout of
expenses for the years ended December 31, 2019,
2018 and 2017.
TABLE 8: EXPENSES
Years Ended December 31,
2019
2018
2017
%
Change
2019
vs.
2018
%
Change
2018
vs.
2017
$ 4,541
$ 4,780
$ 4,394
(5)%
9%
1,465
1,324
1,167
11
983
470
79
(2)
985
500
31
(7)
838
461
—
(6)
21
155
245
(71)
nm
14
18
9
48
236
226
214
4
321
941
357
819
1,262
1,176
340
589
929
$ 9,034
$ 9,015
$ 8,269
(10)
15
7
—
39,103
40,142
36,643
(3)
6
5
39
27
9
10
(Dollars in
millions)
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
Other(2)
Total other(2)
Total
expenses(1)
Number of
employees at
year-end
(1) CRD contributed approximately $201 million in total expenses in 2019, including
approximately $148 million in compensation and employee benefits and $53 million in other
expense lines. In addition, CRD-related expenses in 2019 include $65 million in amortization
of other intangible assets.
CRD contributed approximately $39 million in total expenses in 2018, including
approximately $28 million in compensation and employee benefits and $11 million in other
expense lines. In addition, CRD-related expenses in 2018 include $18 million in amortization
of other intangible assets.
(2) The revenue recognition standard contributed approximately $319 million in total expenses
for 2018, including approximately $183 million in other expenses, $106 million in transaction
processing and $30 million across other expense line items.
nm Not meaningful
Compensation and employee benefits expenses
decreased 5% in 2019 compared to 2018, primarily
driven by savings from the process re-engineering and
initiatives under our
resource discipline savings
expense savings program and lower repositioning
charges in 2019 compared to 2018, partially offset by
the impact of the CRD acquisition and annual merit
increases.
Total headcount decreased by approximately 3%
as of December 31, 2019 compared to December 31,
2018, primarily driven by productivity savings, including
a reduction in headcount in higher cost locations.
Information
communications
systems and
expenses increased 11% in 2019 compared to 2018.
The increase was primarily related to technology
infrastructure enhancements.
Transaction processing services expenses
remained flat in 2019 compared to 2018.
Occupancy expenses decreased 6% in 2019
compared to 2018, primarily due to lower repositioning
charges
the
advancement of our global footprint strategy.
in 2019 compared
to 2018 and
Amortization of other intangible assets increased
4% in 2019 compared to 2018, primarily due to the CRD
acquisition.
Other expenses increased 7% in 2019 compared
to 2018, primarily driven by higher legal expenses and
State Street Foundation funding, partially offset by
lower professional services, travel, and insurance
costs.
Acquisition Costs
We recorded approximately $79 million of
acquisition costs in 2019 compared to $31 million in
2018, related to our acquisition of CRD, and $21 million
in 2017 related to our acquisition of the GEAM business.
As we integrate CRD into our business, we expect to
incur a total of approximately $200 million of acquisition
costs, including merger and integration costs, through
2021, out of which $110 million has been incurred as of
December 31, 2019, since the acquisition.
Restructuring and Repositioning Charges
Repositioning Charges
In late 2018, we initiated an expense program to
accelerate efforts to become a higher-performing
organization and help navigate challenging market and
industry conditions, with an initial goal to realize $350
million in gross expense savings in 2019, which was
subsequently revised to $400 million gross savings for
2019. In 2019, we achieved approximately $415 million
of gross expense savings under this program, including
approximately $230 million in resource discipline
initiatives and $185 million in process re-engineering
and automation benefits.
Resource discipline initiatives include reducing
senior management headcount, rigorous performance
management, vendor management and optimization of
real estate. Process re-engineering and automation
benefits can include high-cost location workforce
reductions, reducing manual/bespoke and redundant
activities, streamlining operational centers and moving
to common platforms/retiring legacy applications.
Expenses for 2019 included a repositioning
charge of $110 million to further drive process
State Street Corporation | 67
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
automation, information technology optimizations and
organization rationalization in 2020, consisting of $98
million of compensation and employee benefits and $12
million of occupancy expenses. Total repositioning
charges were $300 million in 2018.
The following table presents aggregate activity for
repositioning charges and activity related to previous
Beacon restructuring charges for the periods indicated:
TABLE 9: RESTRUCTURING AND REPOSITIONING CHARGES
(In millions)
Employee
Related
Costs
Real
Estate
Actions
Asset and
Other
Write-offs
Total
Accrual Balance at
December 31, 2016
$
37
$
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
Accruals for Beacon
Accruals for
Repositioning
Charges
Payments and Other
Adjustments
Accrual Balance at
December 31, 2019
186
(57)
166
(7)
259
17
32
$
2
$
27
56
245
(17)
(26)
(100)
32
—
41
3
—
—
201
(7)
300
(115)
(36)
(2)
(153)
303
(2)
98
37
—
12
(209)
(42)
1
—
—
—
341
(2)
110
(251)
$
190
$
7
$
1
$
198
Income Tax Expense
Income tax expense was $470 million in 2019
compared to $508 million and $839 million in 2018 and
2017, respectively. Our effective tax rate was 17.3% in
2019, compared to 16.3% and 27.9% in 2018 and 2017,
respectively. The effective tax rate for 2019 included a
benefit attributable to a foreign legal entity restructuring
which was partially offset by legal accruals, limitations
on foreign tax credit benefits and a decrease in
deductions related to stock based compensation. The
effective tax rate in 2018 included an additional deferred
tax benefit of $32 million related to adjustments from
the Tax Cuts and Jobs Act provisional estimate recorded
in 2017.
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
LINE OF BUSINESS INFORMATION
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.
regulation);
Investment Servicing, through State Street Global
Services, State Street Global Markets, State Street
Global Exchange and CRD, provides services for
institutional clients, including mutual funds, collective
investment funds and other investment pools, corporate
and public retirement plans, insurance companies,
investment managers, foundations and endowments
worldwide. Products include: custody; product and
participant
level accounting; daily pricing and
administration; master trust and master custody;
depotbank services (a fund oversight role created by
cash
non-U.S.
management; foreign exchange, brokerage and other
trading services; securities finance and enhanced
custody products; deposit and short-term investment
investment
lease
facilities;
financing;
investment manager
manager and alternative
operations outsourcing; performance,
risk and
compliance analytics; and financial data management
to support institutional investors. Our CRD business
also falls within our Investment Servicing line of
business and includes products and services, such as:
portfolio modeling and construction;
trade order
management; investment risk and compliance; and
wealth management solutions.
record-keeping;
loans and
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 Global
Fiduciary Solutions
(formerly Outsourced Chief
Investment Officer). 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
to
respective management agreements
performance fees.
related
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.
State Street Corporation | 68
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Investment Servicing
TABLE 10: INVESTMENT SERVICING LINE OF BUSINESS RESULTS
(Dollars in millions, except where otherwise noted)
2019
2018
2017
Years Ended December 31,
% Change
2019 vs.
2018
% Change
2018 vs.
2017
Servicing fees
Foreign exchange trading services(1)
Securities finance
Software and processing fees(1)
Total fee revenue(1)
Net interest income
Total other income
Total revenue(1)
Provision for loan losses
Total expenses(1)
Income before income tax expense
Pre-tax margin
Average assets (in billions)
$
5,074
$
974
462
691
7,201
2,590
43
9,834
10
7,140
2,684
27%
220.3
$
$
$
$
5,429
1,071
543
443
7,486
2,691
6
10,183
15
7,081
3,087
30%
220.2
$
5,365
(7)%
999
606
336
7,306
2,309
(39)
9,576
2
6,717
2,857
30%
214.0
$
$
(9)
(15)
56
(4)
(4)
nm
(3)
(33)
1
(13)
1%
7
(10)
32
2
17
nm
6
650
5
8
(1) CRD contributed approximately $385 million and $201 million in total revenue and total expenses, respectively, in 2019, including approximately $370 million in software and processing fees and
$15 million in brokerage and other trading services within foreign exchange trading services, and expenses contributed approximately $148 million in compensation and employee benefits and $53
million in other expense lines. In addition, CRD-related expenses in 2019 include $65 million in amortization of other intangible assets.
CRD contributed approximately $119 million and $39 million in total revenue and total expenses, respectively, in 2018. Revenue includes approximately $114 million in software and processing
fees and $5 million in brokerage and other trading services within foreign exchange trading services, and expenses include approximately $28 million in compensation and employee benefits and
$11 million in other expense lines. In addition, CRD-related expenses in 2018 include $18 million in amortization of other intangible assets.
nm Not meaningful
Servicing Fees
Servicing fees, as presented in Table 10: Investment Servicing Line of Business Results, decreased 7% in 2019
compared to 2018 primarily due to elevated fee pressure and lower client activity and flows. FX rates negatively
impacted servicing fees by 1% in 2019 and positively impacted servicing fees by 1% in 2018.
Servicing fees generated outside the U.S. were approximately 47% of total servicing fees in both 2019 and 2018
compared to approximately 45% in 2017.
TABLE 11: ASSETS UNDER CUSTODY AND/OR ADMINISTRATION BY PRODUCT
(In billions)
Collective funds
Mutual funds
Insurance and other products
Pension products
Total
$
$
December 31, 2019
December 31, 2018
December 31, 2017
% Change
2019 vs. 2018
% Change
2018 vs. 2017
9,796
$
8,999
$
9,221
8,417
6,924
7,912
8,220
6,489
34,358
$
31,620
$
9,707
7,603
9,105
6,704
33,119
9%
17
2
7
9
(7)%
4
(10)
(3)
(5)
TABLE 12: ASSETS UNDER CUSTODY AND/OR ADMINISTRATION BY ASSET CLASS
(In billions)
Equities
Fixed-income
Short-term and other investments
Total
December 31, 2019
December 31, 2018
December 31, 2017
% Change
2019 vs. 2018
% Change
2018 vs. 2017
$
$
19,301
$
10,766
4,291
34,358
$
18,041
$
9,758
3,821
31,620
$
19,214
10,070
3,835
33,119
7%
10
12
9
(6)%
(3)
—
(5)
TABLE 13: ASSETS UNDER CUSTODY AND/OR ADMINISTRATION BY GEOGRAPHY(1)
(In billions)
Americas
Europe/Middle East/Africa
Asia/Pacific
Total
$
$
December 31, 2019
December 31, 2018
December 31, 2017
% Change
2019 vs. 2018
% Change
2018 vs. 2017
25,018
$
23,203
$
7,325
2,015
6,699
1,718
34,358
$
31,620
$
24,418
7,028
1,673
33,119
8%
9
17
9
(5)%
(5)
3
(5)
(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.
State Street Corporation | 69
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Asset servicing mandates newly announced in
2019 totaled approximately $1.84 trillion, in line with a
high of $1.89 trillion in 2018. Servicing assets remaining
to be installed in future periods totaled approximately
$1.17 trillion as of December 31, 2019, 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 may be subject to
completion of definitive agreements, approval of
applicable boards and shareholders and customary
regulatory approvals. 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, FX, fund administration, hedge fund servicing,
middle office outsourcing, performance and analytics,
private equity administration, real estate administration,
securities
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.
finance,
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.
Foreign Exchange Trading Services
Foreign exchange trading services revenue, as
presented in Table 10: Investment Servicing Line of
Business Results, decreased 9% in 2019 compared to
2018, primarily due to lower market volatility. Foreign
exchange trading services is composed of revenue
generated by FX trading and revenue generated by
brokerage and other trading services, which made up
56% and 44%, respectively, of foreign exchange trading
services revenue in 2019.
We primarily earn FX trading revenue by acting
as a principal market-maker through both "direct sales
and trading” and “indirect FX 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
•
custodian, or
trading: Represents FX
Indirect FX
transactions with clients, for which we are the
funds'
investment
managers, routed to our FX desk through our
asset-servicing operation. We execute indirect
FX trades as a principal at rates disclosed to
our clients.
their
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 FX 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
transition management and brokerage
trading,
revenue."
• Electronic FX services: Our clients may choose
to execute FX transactions through one of our
These
electronic
transactions generate revenue through a “click”
fee.
platforms.
trading
• Other trading, transition management and
brokerage revenue: As our clients look to us to
State Street Corporation | 70
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
enhance and preserve portfolio values, they
may choose to utilize our Transition or Currency
Management capabilities or transact with our
Equity Trade execution group. These
transactions, which are not limited to foreign
exchange, generate revenue via commissions
charged for trades transacted during the
management of these portfolios.
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
Securities Finance
Software and Processing Fees
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.
Securities finance revenue, as presented in Table
10: Investment Servicing Line of Business Results,
decreased 15% in 2019 compared to 2018, reflecting
lower securities on loan, enhanced custody balances
and spreads and
impact of balance sheet
optimization efforts implemented in the second half of
2018.
the
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
Software and processing fees revenue includes
diverse types of fees and revenue, including fees from
software licensing and maintenance, fees from our
structured products business and other revenue
including equity
joint venture
investments, gains and losses on sales of other assets
and amortization of our tax-advantaged investments.
from our
income
Software and processing fees revenue, presented
in Table 10: Investment Servicing Line of Business
Results, increased significantly in 2019 compared to
2018 and reflects approximately $370 million from CRD
in 2019. CRD was acquired on October 1, 2018.
Revenue related to the front office solutions provided
by CRD is primarily driven by the sale of term software
licenses and software as service arrangements,
including professional services such as consulting and
implementation services, software support and
maintenance. 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 license. Revenue for a Software
as a Service (SaaS) related arrangement is recognized
over time as services are provided.
Other Income
In the fourth quarter of 2019, we completed a cash
tender offer for approximately $297 million of our $800
million aggregate principal amount of outstanding
floating rate junior subordinated debentures due 2047,
resulting in a gain of approximately $44 million.
Expenses
initiatives and process
Total expenses for Investment Servicing increased
1% in 2019 compared to 2018. The increases are
primarily due to the impact of the CRD acquisition,
technology infrastructure investments and business
volumes, partially offset by savings from resource
discipline
re-engineering
benefits through our expense savings program. Total
in 2019 were
expenses contributed by CRD
approximately $201 million. In addition, CRD-related
expenses in 2019 include $65 million in amortization of
other intangible assets. Additional information about
in
expenses
"Consolidated Results of Operations" included in this
Management's Discussion and Analysis.
is provided under
"Expenses"
State Street Corporation | 71
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Investment Management
TABLE 14: INVESTMENT MANAGEMENT LINE OF BUSINESS RESULTS
(Dollars in millions, except where otherwise noted)
2019
2018
2017
Years Ended December 31,
% Change
2019 vs.
2018
% Change
2018 vs.
2017
Management fees
Foreign exchange trading services(1)
Securities finance
Software and processing fees(2)
Total fee revenue
Net interest income
Total revenue
Total expenses
Income before income tax expense
Pre-tax margin
Average assets (in billions)
$
1,771
$
1,851
$
1,616
137
9
29
1,946
(24)
1,922
1,535
387
20%
3.0
$
$
130
—
(5)
1,976
(20)
1,956
1,544
412
21%
3.2
$
$
72
—
7
1,695
(5)
1,690
1,286
404
24%
5.4
$
$
(4)%
5
nm
nm
(2)
20
(2)
(1)
(6)
15%
81
nm
(171)
17
nm
16
20
2
(1) Includes revenues from distributing and marketing activities for U.S. mutual funds and ETFs associated with State Street Global Advisors.
(2) Includes other revenue items that are primarily driven by equity market movements.
nm Not meaningful
Management Fees
Management fees decreased 4% in 2019 compared to 2018, primarily reflecting the run rate impact of late 2018
outflows and mix changes away from higher fee products, partially offset by higher equity market levels.
Management fees generated outside the U.S. were approximately 27% of total management fees in both 2019
and 2018 compared to approximately 28% in 2017.
TABLE 15: ASSETS UNDER MANAGEMENT BY ASSET CLASS AND INVESTMENT APPROACH
December 31, 2019
December 31, 2018
December 31, 2017
% Change
2019 vs. 2018
% Change
2018 vs. 2017
(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
$
88
$
80
$
1,903
1,991
1,464
1,544
89
379
468
324
24
133
157
21
155
176
81
341
422
287
19
113
132
21
105
126
95
1,650
1,745
77
337
414
330
18
129
147
23
123
146
10%
30
29
10
11
11
13
26
18
19
—
48
40
24
(16)%
(11)
(12)
5
1
2
(13)
6
(12)
(10)
(9)
(15)
(14)
(10)
Total
$
3,116
$
2,511
$
2,782
(1) Includes both floating- and constant-net-asset-value portfolios held in commingled structures or separate accounts.
(2) Includes real estate investment trusts, currency and commodities, including SPDR® Gold Shares and SPDR® Gold MiniSharesSM Trust. We are not the investment manager for
the SPDR® Gold Shares and SPDR® MiniSharesSM Trust, but act as the marketing agent.
State Street Corporation | 72
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
TABLE 16: EXCHANGE-TRADED FUNDS BY ASSET CLASS(1)
(In billions)
Alternative Investments(2)
Cash
Equity
Fixed-Income
Total Exchange-Traded Funds
December 31, 2019
December 31, 2018
December 31, 2017
% Change
2019 vs. 2018
% Change
2018 vs. 2017
$
$
56
$
43
$
9
618
85
9
482
66
768
$
600
$
48
2
531
63
644
30%
—
28
29
28
(10)%
350
(9)
5
(7)
(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 and SPDR® Gold MiniSharesSM Trust. We are not the investment manager for
the SPDR® Gold Shares and SPDR® MiniSharesSM Trust, but act as the marketing agent.
TABLE 17: GEOGRAPHIC MIX OF ASSETS UNDER MANAGEMENT(1)
(In billions)
North America
Europe/Middle East/Africa
Asia/Pacific
Total
December 31, 2019
December 31, 2018
December 31, 2017
% Change
2019 vs. 2018
% Change
2018 vs. 2017
$
$
2,115
$
1,731
$
493
508
421
359
3,116
$
2,511
$
1,931
521
330
2,782
22%
17
42
24
(10)%
(19)
9
(10)
(1) Geographic mix is based on client location or fund management location.
TABLE 18: ACTIVITY IN ASSETS UNDER MANAGEMENT BY PRODUCT CATEGORY
(In billions)
Balance as of December 31, 2016
Long-term institutional flows, net(3)
Exchange-Traded Fund flows, net
Cash fund flows, net
Total flows, net
Market appreciation
Foreign exchange impact
Total market/foreign exchange impact
Balance as of December 31, 2017
Long-term institutional flows, net(3)
Exchange-traded fund flows, net
Cash fund flows, net
Total flows, net
Market appreciation (depreciation)
Foreign exchange impact
Total market/foreign exchange impact
Balance as of December 31, 2018
Long-term institutional flows, net(3)
Exchange-traded fund flows, net
Cash fund flows, net
Total flows, net
Market appreciation (depreciation)
Foreign exchange impact
Total market/foreign exchange impact
Equity
Fixed-
Income
Cash(1)
Multi-Asset-
Class
Solutions
Alternative
Investments(2)
Total
$
1,474
$
378
$
333
$
126
$
157
$
2,468
(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
$
1,745
$
414
$
330
$
147
$
146
$
2,782
(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)
$
1,544
$
422
$
287
$
132
$
126
$
2,511
26
13
—
39
404
4
408
(7)
15
—
8
38
—
38
—
—
31
31
6
—
6
3
—
—
3
22
—
22
16
6
—
22
28
—
28
38
34
31
103
498
4
502
Balance as of December 31, 2019
$
1,991
$
468
$
324
$
157
$
176
$
3,116
(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, SPDR Long Dollar Gold Trust and SPDR® Gold MiniSharesSM Trust, for which
we are not the investment manager but act as the marketing agent.
(3) Amounts represent long-term portfolios, excluding ETFs.
State Street Corporation | 73
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Expenses
TABLE 19: AVERAGE STATEMENT OF CONDITION(1)
Total expenses for Investment Management
decreased 1% in 2019 compared to 2018, primarily due
to savings from resource discipline initiatives and
process re-engineering benefits through our expense
savings program.
"Expenses"
Additional information about expenses is provided
under
"Consolidated Results of
Operations" included in this Management's Discussion
and Analysis.
in
FINANCIAL CONDITION
Investment Servicing and
The structure of our consolidated statement of
condition is primarily driven by the liabilities generated
Investment
by our
Management lines of business. Our clients' needs and
our operating objectives determine balance sheet
volume, mix and currency denomination. As our clients
their worldwide cash management and
execute
investment activities, they utilize deposits and short-
term investments that constitute the majority of our
liabilities. These liabilities are generally in the form of
interest-bearing transaction account deposits, which
are denominated in a variety of currencies; non-interest-
bearing
repurchase
deposits;
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
Years Ended December 31,
2019
2018
2017
$
48,500
$ 54,328
$
47,514
2,506
884
91,768
24,073
14,160
2,901
1,051
88,070
23,573
15,714
2,131
1,011
95,779
21,916
22,884
181,891
185,637
191,235
Cash and due from banks
3,390
3,178
3,097
Other non-interest-earning
assets
38,053
34,570
25,118
Average total assets
$ 223,334
$ 223,385
$ 219,450
Liabilities and shareholders’
equity:
Interest-bearing deposits:
U.S.
Non-U.S.
$
67,547
$ 54,953
$
30,623
61,301
70,623
91,937
Total interest-bearing
deposits(2)
Securities sold under
repurchase agreements
Other short-term borrowings
128,848
125,576
122,560
1,616
1,524
2,048
1,327
3,683
1,313
Long-term debt
11,474
10,686
11,595
Other interest-bearing
liabilities
Average total interest-
bearing liabilities
Non-interest-bearing
deposits(2)
Other non-interest-bearing
liabilities
4,103
4,956
4,607
147,565
144,593
143,758
29,414
35,832
41,248
21,299
19,804
12,379
Preferred shareholders’ equity
3,653
3,327
3,197
Common shareholders’ equity
21,403
19,829
18,868
Average total liabilities
and shareholders’ equity $ 223,334
$ 223,385
$ 219,450
(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 $158.26 billion in 2019 compared to $161.41 billion
and $163.81 billion in 2018 and 2017, respectively.
State Street Corporation | 74
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Investment Securities
TABLE 20: CARRYING VALUES OF INVESTMENT
SECURITIES
(In millions)
Available-for-sale:
U.S. Treasury and federal
agencies:
As of December 31,
2019
2018
2017
Direct obligations
$
3,487
$
1,039
$
223
Mortgage-backed securities
17,838
15,968
10,872
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
Total non-U.S. debt securities
State and political subdivisions
Collateralized mortgage obligations
Other U.S. debt securities
U.S. equity securities(2)
U.S. money-market mutual funds(2)
21,325
17,007
11,095
531
89
1,820
2,440
1,980
2,179
12,373
8,658
25,190
1,783
104
2,973
—
—
541
583
593
1,717
1,682
1,574
12,793
6,602
22,651
1,918
197
1,658
—
—
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
Total
$ 53,815
$ 45,148
$ 57,121
Held-to-maturity(3):
U.S. Treasury and federal
agencies:
Direct obligations
$ 10,311
$ 14,794
$ 17,028
Mortgage-backed securities
26,297
21,647
16,651
Total U.S. Treasury and federal
agencies
Asset-backed securities:
Student loans(1)
Credit cards
Other
36,608
36,441
33,679
3,783
3,191
3,047
—
—
193
1
798
1
Total asset-backed securities
3,783
3,385
3,846
Non-U.S. debt securities:
Mortgage-backed securities
Asset-backed securities
Government securities
Other
Total non-U.S. debt securities
Collateralized mortgage obligations
366
—
328
—
694
697
638
223
358
46
1,265
823
939
263
474
48
1,724
1,209
Total
$ 41,782
$ 41,914
$ 40,458
(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) Upon adoption of ASU 2016-01, Financial Instruments-Overall (Subtopic
825-10): Recognition and Measurement of Financial Assets and Financial
Liabilities, 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 was 2.7 years and 3.1 years as of December
31, 2019 and December 31, 2018, respectively. The
decrease in securities duration is primarily driven by the
impact of lower long-end U.S. interest rates shortening
the duration of mortgage backed securities.
Approximately 90% of the carrying value of the
portfolio was rated “AAA” or “AA” as of both December
31, 2019 and December 31, 2018.
TABLE 21: INVESTMENT PORTFOLIO BY EXTERNAL CREDIT
RATING
December 31, 2019
December 31, 2018
AAA(1)
AA
A
BBB
Below BBB
77%
13
5
5
—
100%
76%
14
5
5
—
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, 2019 and December 31, 2018,
the investment portfolio was diversified with respect to
asset class composition. The following table presents
the composition of these asset classes.
TABLE 22: INVESTMENT PORTFOLIO BY ASSET CLASS
December 31, 2019
December 31, 2018
U.S. Agency
Mortgage-backed
securities
Foreign sovereign
U.S. Treasuries
Asset-backed
securities
Other credit
41%
40%
19
14
11
15
19
18
11
12
100%
100%
State Street Corporation | 75
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
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 both December 31, 2019 and
December 31, 2018.
TABLE 23: NON-U.S. DEBT SECURITIES
(In millions)
December 31, 2019
December 31, 2018
Available-for-sale:
Canada
Australia
France
European(1)
Germany
United Kingdom
Spain
Netherlands
Austria
Japan
Ireland
Italy
Belgium
Finland
Hong Kong
Asian(1)
Sweden
Luxembourg
Brazil
Norway
Other(2)
Total
Held-to-maturity:
Singapore
United Kingdom
Germany
Australia
Spain
Netherlands
Other(3)
Total
$
$
$
$
2,611
2,409
2,223
2,101
1,944
1,608
1,531
1,524
1,398
1,363
1,235
1,113
977
846
617
581
156
124
93
51
685
25,190
214
126
112
109
85
—
48
694
$
$
$
$
2,185
2,847
1,875
1,087
1,547
2,580
1,504
1,116
1,312
1,352
1,301
1,010
952
789
458
338
186
—
—
94
118
22,651
242
363
115
158
92
187
108
1,265
(1) Consists entirely of supranational bonds.
(2) Included approximately $618 million and $78 million as of December 31, 2019 and
December 31, 2018, respectively, related to supranational and non-U.S. agency
bonds.
(3) Included approximately $46 million and $61 million as of December 31, 2019 and
December 31, 2018, respectively, related to Italy and Portugal, all of which were
related to MBS.
Approximately 74% of the aggregate carrying
value of these non-U.S. debt securities was rated “AAA”
or “AA” as of both December 31, 2019 and December
31, 2018. 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, 2019 and December 31, 2018,
approximately 27% and 31%, respectively, of the
aggregate carrying value of these non-U.S. debt
securities was floating-rate.
As of December 31, 2019, our non-U.S. debt
securities had an average market-to-book ratio of
101.1%, and an aggregate pre-tax net unrealized gain
of $271 million, composed of gross unrealized gains of
$291 million and gross unrealized losses of $20 million.
These unrealized amounts included:
•
•
a pre-tax net unrealized gain of $195 million,
composed of gross unrealized gains of $209
million and gross unrealized losses of $14
million, associated with non-U.S. AFS debt
securities; and
a pre-tax net unrealized gain of $76 million,
composed of gross unrealized gains of $82
million and gross unrealized losses of $6
million, associated with non-U.S. HTM debt
securities.
As of December 31, 2019, the underlying collateral
for non-U.S. MBS and ABS primarily included U.K.,
Australian, Italian and Dutch mortgages. The securities
listed under “Canada” were composed of Canadian
government securities, corporate debt and non-U.S.
agency securities. The securities listed under “France”
were composed of sovereign bonds, corporate debt,
covered bonds, ABS and Non-U.S. agency securities.
The securities listed under “Japan” were substantially
composed of Japanese government securities.
Municipal Obligations
We carried approximately $1.8 billion of municipal
securities classified as state and political subdivisions
in our investment securities portfolio as of December
31, 2019, as shown in Table 20: Carrying Values of
Investment Securities, all of which were classified as
AFS. As of December 31, 2019, we also provided
approximately $9.5 billion of credit and liquidity facilities
to municipal issuers.
TABLE 24: STATE AND MUNICIPAL OBLIGORS(1)
(Dollars in
millions)
December 31, 2019
State of Issuer:
Texas
California
New York
Massachusetts
Total
December 31, 2018
State of Issuer:
Texas
California
New York
Massachusetts
Total
Total
Municipal
Securities
Credit and
Liquidity
Facilities(2)
Total
% of Total
Municipal
Exposure
$
$
$
$
275
111
283
442
1,111
315
108
231
467
1,121
$
$
$
$
2,345
2,114
1,531
809
6,799
2,467
1,693
1,518
978
6,656
$
$
$
$
2,620
2,225
1,814
1,251
7,910
2,782
1,801
1,749
1,445
7,777
23%
20
16
11
25%
16
15
13
(1) Represented 5% or more of our aggregate municipal credit exposure of
approximately $11.32 billion and $11.35 billion across our businesses as of December
31, 2019 and December 31, 2018, respectively.
(2) Includes municipal loans which are also presented within Table 26: U.S. and Non-
U.S. Loans and Leases.
State Street Corporation | 76
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Our aggregate municipal securities exposure presented in Table 24: State and Municipal Obligors, was
concentrated primarily with highly-rated counterparties, with approximately 83% of the obligors rated “AAA” or “AA” as
of December 31, 2019. As of that date, approximately 20% and 79% of our aggregate municipal securities exposure
was associated with general obligation and revenue bonds, respectively. The portfolios are also diversified
geographically, with the states that represent our largest exposures widely dispersed across the U.S.
Additional information with respect to our assessment of OTTI of our municipal securities is provided in Note 3
to the consolidated financial statements in this Form 10-K.
TABLE 25: CONTRACTUAL MATURITIES AND YIELDS
As of December 31, 2019
Under 1 Year
1 to 5 Years
6 to 10 Years
Over 10 Years
Total
(Dollars in millions)
Available-for-sale(1):
U.S. Treasury and federal agencies:
Amount
Yield
Amount
Yield
Amount
Yield
Amount
Yield
Amount
Direct obligations
$
1,058
2.10% $
1,010
1.50% $
1,419
1.64% $
—
—%
3,487
Mortgage-backed securities
118
3.71
970
3.30
2,951
2.54
13,799
3.77
17,838
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
1,176
1,980
72
—
—
72
430
487
4,183
884
5,984
238
—
760
2.72
—
—
0.65
1.01
0.25
2.35
5.97
—
3.00
184
—
745
929
569
981
7,381
6,689
15,620
635
—
2,083
2.42
—
2.60
0.87
0.35
1.61
1.29
5.86
—
2.69
4,370
96
89
958
1,143
196
366
809
1,063
2,434
554
—
130
13,799
21,325
179
—
117
296
785
345
—
22
1,152
356
104
—
2.77
—
2.82
1.85
0.47
—
3.64
5.71
3.55
—
531
89
1,820
2,440
1,980
2,179
12,373
8,658
25,190
1,783
104
2,973
2.10
2.51
2.89
1.12
0.79
4.39
1.51
4.65
—
2.41
Total
$
8,230
$ 21,247
$
8,631
$ 15,707
$ 53,815
Held-to-maturity(1):
U.S. Treasury and federal agencies:
Direct obligations
$
4,116
2.27% $
6,161
2.31% $
5
2.44% $
29
2.1% $ 10,311
Mortgage-backed securities
9
2.88
438
2.65
2,515
2.92
23,335
3.39
26,297
Total U.S. treasury and federal
agencies
Asset-backed securities:
Student loans
Other
Total asset-backed securities
Non-U.S. debt securities:
Mortgage-backed securities
Government securities
Total non-U.S. debt securities
Collateralized mortgage obligations
4,125
6,599
2,520
23,364
36,608
96
—
96
16
328
344
2
2.09
—
2.97
3.8
2.34
—
1.93
—
207
—
207
33
—
33
2.09
283
2.52
408
—
408
4
—
4
13
2.42
—
1.80
—
2.39
3,072
—
3,072
313
—
313
399
2.53
2.79
0.92
—
2.79
3,783
—
3,783
366
328
694
697
Total
$
4,567
$
7,122
$
2,945
$ 27,148
$ 41,782
(1) The maturities of MBS, ABS and CMOs are based on expected principal payments.
(2) Yields were calculated on a FTE basis, using applicable statutory tax rates (21.0% as of December 31, 2019).
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
to assess whether OTTI exists. Our
securities
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 26: U.S. AND NON- U.S. LOANS AND LEASES
The decrease in domestic loans in the commercial
and financial segment as of December 31, 2019
compared to December 31, 2018 was primarily driven
by a decrease in loans to investment funds and senior
secured loans. The increase in foreign loans in the same
period was primarily driven by an increase in loans to
investment funds and senior secured loans.
As of December 31, 2019 and December 31, 2018,
our investment in senior secured loans, otherwise
known as leveraged loans, totaled approximately $4.46
billion and $4.42 billion, respectively. In addition, we had
binding unfunded commitments as of December 31,
2019 and December 31, 2018 of $176 million and $238
million, respectively, to participate in such syndications.
these unfunded
Additional
commitments is provided in Note 12 to the consolidated
financial statements in this Form 10-K.
information about
These senior secured loans, which are primarily
internal risk-rating
rated “speculative” under our
framework (refer to Note 4 to the consolidated financial
statements in this Form 10-K), are externally rated
“BBB,” “BB” or “B,” with approximately 86% and 90%
of the loans rated “BB” or “B” as of December 31, 2019
and December 31, 2018, respectively. Our investment
strategy involves generally limiting our investment to
larger, more liquid credits underwritten by major global
internal credit
financial
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
Additional information about all of our loan
segments, as well as underlying classes, is provided in
Note 4 to the consolidated financial statements in this
Form 10-K.
2019
As of December 31,
2017
2016
2018
2015
No
loans were modified
troubled debt
restructurings as of both December 31, 2019 and
December 31, 2018.
in
$ 18,762
$ 19,479
$ 18,696
$ 16,412
$ 15,899
1,766
—
874
—
98
267
27
338
28
337
20,528
20,353
19,061
16,777
16,264
TABLE 27: CONTRACTUAL MATURITIES FOR LOANS
(In millions)
Domestic:
As of December 31, 2019
Under 1
year
1 to 5
years
Over 5
years
Total
Commercial and financial
$ 10,883
$ 5,464
$ 2,415
$ 18,762
5,781
5,436
3,837
2,476
1,957
Commercial real estate
—
—
396
504
578
5,781
5,436
4,233
2,980
2,535
$ 26,309
$ 25,789
$ 23,294
$ 19,757
$ 18,799
$ 24,073
$ 23,573
$ 21,916
$ 19,013
$ 17,948
Total domestic
Foreign:
Commercial and financial
Total foreign
—
10,883
3,525
3,525
277
5,741
1,569
1,569
1,489
3,904
1,766
20,528
687
687
5,781
5,781
Total loans
$ 14,408
$ 7,310
$ 4,591
$ 26,309
(In millions)
Domestic(1):
Commercial
and financial
Commercial
real estate
Lease
financing(2)
Total
domestic
Foreign(1):
Commercial
and financial
Lease
financing(2)
Total
foreign
Total loans
and leases(3)(4)
Average loans
and leases
(1) Domestic and foreign categorization is based on the borrower’s country of domicile.
(2) We wound down our lease financing business in 2018.
(3) Includes $3,256 million and $5,444 million of overdrafts as of December 31, 2019 and
December 31, 2018, respectively.
(4) As of December 31, 2019, floating rate loans totaled $24,289 million and fixed rate loans
totaled $2,020 million.
State Street Corporation | 78
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
TABLE 28: CLASSIFICATION OF LOAN BALANCES DUE
AFTER ONE YEAR
(In millions)
As of December 31, 2019
Loans with predetermined interest rates
Loans with floating or adjustable interest rates
Total
$
$
1,971
9,930
11,901
TABLE 29: ALLOWANCE FOR LOAN AND LEASE LOSSES
Years Ended December 31,
(In millions)
2019
2018
2017
2016
2015
Allowance for loan
and lease losses:
Beginning balance
$
67
$
54
$
53
$
46
$
38
Provision for loan
and lease losses(1)
Charge-offs(2)
10
(3)
15
(2)
2
(1)
10
(3)
Ending balance
$
74
$
67
$
54
$
53
$
12
(4)
46
(1) The provision for loan and lease losses is primarily related to commercial and
financial loans.
(2) The charge-offs are related to commercial and financial loans.
We recorded a provision for loan losses of $10
million in 2019 compared to $15 million in 2018 and $2
million in 2017.
As of December 31, 2019, approximately $61
million of our allowance for loan and lease losses (ALLL)
was related to senior secured loans included in the
commercial and financial segment compared to $60
million as of December 31, 2018. As this portfolio grows
and matures, our ALLL related to these loans may
increase through additional provisions for credit losses.
The remaining $13 million and $7 million as of
December 31, 2019 and 2018, respectively, was related
to other components of commercial and financial loans.
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
financing,
advances;
investment securities; amounts related to FX and
interest rate contracts; and securities finance. In
addition to credit risk, cross-border outstandings have
the risk that, as a result of political or economic
conditions in a country, borrowers may be unable to
meet
their contractual repayment obligations of
principal and/or interest when due because of the
unavailability of, or restrictions on, FX needed by
borrowers to repay their obligations.
short-duration
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.
Cross-border
The cross-border outstandings presented in Table
30:
represented
approximately 28% of our consolidated total assets as
of both December 31, 2019 and December 31, 2018.
outstandings,
TABLE 30: CROSS-BORDER OUTSTANDINGS(1)
Investment
Securities and
Other Assets
Derivatives
and Securities
on Loan
Total Cross-
Border
Outstandings
(In millions)
December 31, 2019
Germany
$
20,968
$
217
$
United Kingdom
Japan
Luxembourg
Canada
Australia
France
Ireland
Switzerland
December 31, 2018
Germany
Japan
United Kingdom
Australia
Canada
Ireland
France
Luxembourg
December 31, 2017
Germany
Japan
United Kingdom
Australia
Canada
France
13,764
11,121
3,399
2,955
3,100
2,813
1,988
1,724
1,468
555
668
783
597
240
641
589
$
20,157
$
489
$
13,985
12,623
4,217
3,010
2,019
2,495
2,033
1,084
1,176
1,349
1,507
809
294
710
$
18,201
$
295
$
15,250
12,051
5,278
4,215
2,684
549
1,253
390
707
344
21,185
15,232
11,676
4,067
3,738
3,697
3,053
2,629
2,313
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
(1) Cross-border outstandings included countries in which we do business, and
which amounted to at least 1% of our consolidated total assets as of the dates
indicated.
As of December 31, 2019, aggregate cross-border
outstandings in the Netherlands amounted to between
0.75% and 1% of our consolidated assets, at
approximately $1.89 billion. As of both December 31,
2018 and December 31, 2017, there were no countries
whose aggregate cross-border outstandings amounted
to between 0.75% and 1% of our consolidated assets.
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
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
HRC 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.
State Street Corporation | 80
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
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 through multi-disciplinary
involvement, particularly through ERM. The following chart presents this structure.
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
Executive
Information
Security
Committee
Recovery and
Resolution Planning
Executive Review
Board
Model Risk
Committee
(MRC)
Compliance and
Ethics Committee
CCAR Steering
Committee
SSGA Risk
Committee
Legal Entity
Oversight Committee
Country Risk
Committee
Regulatory
Reporting Oversight
Committee
Conduct Standards
Committee
Enterprise Risk Management
The goal of ERM is to ensure that risks are proactively identified, well-understood and prudently managed in
support of our business strategy. ERM provides risk oversight, support and coordination to allow for the consistent
identification, measurement and management of risks across business units separate from the business units' activities,
and is responsible for the formulation and maintenance of corporate-wide risk management policies and guidelines.
In addition, ERM establishes and reviews limits and, in collaboration with business unit management, monitors key
risks. Ultimately, ERM works to validate that risk-taking occurs within the risk appetite statement approved by the Board
and conforms to associated risk policies, limits and guidelines.
State Street Corporation | 81
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The Chief Risk Officer (CRO) is responsible for our
risk management globally, leads ERM and has a dual
reporting line to our CEO and the Board’s RC. ERM
manages its responsibilities globally through a three-
dimensional organization structure:
•
•
“Vertical” business unit-aligned risk groups that
support business managers with risk management,
measurement and monitoring activities;
“Horizontal” risk groups that monitor the risks that
cross all of our business units (for example, credit
and operational risk); and
• Risk oversight for international activities, which
combines intersecting “Verticals” and “Horizontals”
through a hub and spoke model to provide
important regional and legal entity perspectives to
the global risk framework.
this
top of
three-dimensional
Sitting on
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 HRC
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,
technology, business, compliance and reputation risks,
and related policies.
In addition, the RC provides oversight of capital
policies, capital planning and balance sheet
management, resolution planning and monitors capital
adequacy in relation to risk. The RC is also responsible
for discharging the duties and obligations of the Board
regulatory
under applicable Basel and other
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 HRC has direct responsibility for the oversight
of human capital management, 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 HRC oversees the alignment
of our incentive compensation arrangements with our
safety and soundness, including the integration of risk
management objectives, and
related policies,
arrangements and control processes consistent with
applicable related regulatory rules and guidance.
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.
In addition, TOPS reviews matters related to corporate
information security and cyber-security programs,
business continuity and technology resiliency, data and
access management and third-party risk management.
Executive Management Committees
MRAC is the senior management decision-making
body for risk and capital issues, and oversees our
financial risks, our consolidated statement of condition,
and our capital adequacy, liquidity and recovery and
resolution planning. Its responsibilities include:
• The approval of the policies of our global risk,
capital and liquidity management frameworks,
including our risk appetite framework;
• The monitoring and assessment of our capital
adequacy based on internal policies and
regulatory requirements;
• The oversight of our
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 Chief
Financial Officer, 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
State Street Corporation | 82
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
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 Chief Compliance Officer
and our General Counsel.
TORC oversees and assesses the effectiveness
of corporate-wide technology and operational risk
to manage and control
management programs,
technology and operational risk consistently across the
organization. TORC
the Chief
Operating Officer and the Chief Risk Officer.
is co-chaired by
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
for balance sheet
decision-making body
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
the ongoing monitoring of model
and
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
Act, and
the overall
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
risk
decision making
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
assessment, monitoring,
identification,
reporting and mitigation, where necessary, of
country risks.
• The Regulatory Reporting Oversight
for providing
responsible
Committee
oversight of regulatory reporting and related
report
and
accountabilities.
governance
processes
is
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
State Street Corporation | 83
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
of existing products or services, evaluations
including economic justification, material risk,
legal
and
regulatory
compliance,
considerations, and capital and
liquidity
analyses;
• The Compliance and Ethics Committee
provides
review and oversight of our
compliance programs, including our 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
the
including determining
programs,
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; and
to our
change
for
direction
• The Executive Information Security Committee
provides
the Enterprise
Information Security posture and program,
including cyber-security protections, provides
enterprise-wide oversight and assessment of
the effectiveness of all Information Security
Programs
that controls are
measured and managed, and serves as an
escalation point for cyber-security issues.
to promote
Credit Risk Management
Core Policies and Principles
We define credit risk as the risk of financial loss if
a counterparty, borrower or obligor, collectively referred
to as a counterparty, is either unable or unwilling to
loans and contingent commitments,
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,
indebtedness,
government repudiation of
exchange controls and disruptive currency
depreciation or devaluation; and
• Settlement risk - the risk that the settlement or
clearance of transactions will fail, which arises
whenever the exchange of cash, securities
and/or other assets is not simultaneous.
The acceptance of credit risk by 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
risk profile; the markets served; counterparty, industry
and
regulatory
compliance. These policies and procedures also
implement a number of core principles, which include
the following:
concentrations;
country
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;
• 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.
reviewed. Our
State Street Corporation | 84
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
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,
including
internal risk-rating
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 and Global Markets 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
and Global Markets 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 and Global
Markets Risk group or designees within ERM. To
facilitate
portfolio,
counterparties within a given sector are rated using a
risk-rating tool developed for that sector.
comparability
across
the
Our risk-rating methodologies are approved by the
CRPC, after completion of internal model validation
processes, and are subject to an annual review,
including re-validation.
We generally rate our counterparties individually,
although accounts defined by us as low-risk are rated
on a pooled basis. We evaluate and rate the credit risk
of our counterparties on an ongoing basis.
Risk Parameter Estimates
Our internal risk-rating system 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
risk associated with
these counterparties and
exposures over time. This capability enhances our
ability to more accurately calculate both risk exposures
and capital, enabling better strategic decision making
across the organization.
State Street Corporation | 85
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
We use credit risk parameter estimates for the
following purposes:
• The assessment of the creditworthiness of
new counterparties and, in conjunction with
our risk appetite statement, the development
of appropriate credit limits for our products and
services, including loans, foreign exchange,
securities
and
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
for comparable
management escalation
short-duration advances compared to less
risky counterparties with lower rating-class
values;
• The monitoring of credit facility utilization
levels using EAD values and the identification
of
instances where counterparties have
exceeded limits;
• The aggregation and
comparison of
counterparty exposures with risk appetite
levels
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.
Credit Risk Mitigation
We seek to limit our credit exposure and reduce
our potential credit losses through various types of risk
mitigation. In our day-to-day management of credit
risks, we utilize and recognize the following types of risk
mitigation.
Collateral
In many parts of our business, we regularly require
or agree for collateral to be received from or provided
to clients and counterparties in connection with
that
In our
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.
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
State Street Corporation | 86
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
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
financial guarantees,
letters of credit, bankers’
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
reviews of documentation,
that
jurisdictions and credit quality of protection providers.
regular
require
Pursuant to the Basel III 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
in a consistent manner across our
undertaken
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 and Global Markets Risk group, by individuals to
whom credit authority has been delegated, or by the
Credit Committee.
Credit limits are re-evaluated annually, or more
frequently as needed, and are revised periodically on
prevailing and anticipated market conditions, changes
in counterparty or country-specific credit ratings and
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
the
exposures. Monitoring
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.
State Street Corporation | 87
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The Credit Portfolio Management group routinely
assesses the composition of our overall credit risk
portfolio for alignment with our stated risk appetite. This
assessment includes routine analysis and reporting of
the portfolio, monitoring of market-based indicators, the
assessment of industry trends and developments and
regular reviews of concentrated risks. The Credit
Portfolio Management group is also responsible, in
conjunction with the business units, for defining the
appetite for credit risk in the major sectors in which we
have a concentration of business activities. These
sector-level risk appetite statements, which include
counterparty
granular
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 and
Global Markets Risk group and designees with ERM,
allowing for frequent and extensive oversight. This
surveillance process includes, but is not limited to, the
following components:
• Annual Reviews. A
•
formal
review of
counterparties is conducted at least annually
and includes a thorough review of operating
performance, primary risk factors and our
internal credit risk rating. This annual review
also includes a review of current and proposed
credit limits, an assessment of our ongoing
risk appetite and verification that supporting
legal documentation remains effective.
Interim Monitoring. Periodic monitoring of our
largest and
is
undertaken more frequently, utilizing financial
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.
riskiest counterparties
this
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
the early
processes are designed
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.
The Credit and Global Markets Risk group
maintains primary responsibility for our watch list
processes, and generates a monthly report of all watch
list counterparties. The watch list is formally reviewed
at least on a quarterly basis, with participation from
senior ERM staff, and representatives from the
business units and our corporate finance and legal
groups as appropriate. These meetings include a
review of individual watch list counterparties, together
with credit limits and prevailing exposures, and are
focused on actions to contain, reduce or eliminate the
risk of loss to 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:
• Perform separate and objective assessments
of our credit and counterparty exposures to
determine the nature and extent of risk
undertaken by the business units;
• Execute periodic credit process and credit
product reviews to assess the quality of credit
analysis, compliance with policies, guidelines
and relevant regulation, transaction structures
and underwriting standards, and risk-rating
integrity;
•
Identify and monitor developing counterparty,
market and/or industry sector trends to limit
risk of loss and protect capital;
• Deliver regular and
to
stakeholders,
results,
identified issues and the status of requisite
actions to remedy identified deficiencies;
formal reporting
exam
including
• Allocate
resources
for specialized
risk
assessments (on an as-needed basis); and
•
Liaise with assurance partners and regulatory
personnel on matters relating to risk rating,
reporting and measurement.
State Street Corporation | 88
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
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 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
period. Absent
the Parent
Company, the liquid assets available at SSIF continue
to be available to the Parent Company. As of December
31, 2019, the value of our Parent Company's net liquid
assets totaled $428 million, compared with $486 million
as of December 31, 2018, which amount does not
include available liquidity through SSIF. As of December
31, 2019, our Parent Company and State Street Bank
had approximately $1.7 billion of 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 contingency funding plan (CFP), and routine
management reporting to ALCO, MRAC and the
Board's RC.
requirements,
Global Treasury Risk Management, part of ERM,
provides separate oversight over the identification,
communication and management of Global Treasury’s
risks in support of our business strategy. Global
Treasury Risk Management reports to the CRO. Global
Treasury Risk Management’s responsibilities relative to
liquidity risk management include the development and
review of policies and guidelines; the monitoring of limits
related to adherence to the liquidity risk guidelines and
associated reporting.
State Street Corporation | 89
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
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
the
liquidity by monitoring and directing
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,
the percentage of non-government
and
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
repurchase
borrowings,
agreements, FHLB products and certificates of
deposit.
at
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
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.
responsibilities and
roles,
The CFPs define
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, 2019 and December 31, 2018,
daily average LCR for the Parent Company was 110%
and 108%, respectively. The average HQLA for the
Parent Company under the LCR final rule definition was
$100.23 billion and $91.67 billion, post-prescribed
haircuts, for the quarters ended December 31, 2019
and December 31, 2018, respectively. The increase in
average HQLA for the quarter ended December 31,
2019, compared to the quarter ended December 31,
2018, was primarily a result of an increase in HQLA
purchases as part of the repositioning of the investment
portfolio.
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 $41.56 billion at the
Federal Reserve, the ECB and other non-U.S. central
banks as of December 31, 2019, compared to $44.17
billion as of December 31, 2018. The lower levels of
average cash balances with central banks reflect an
increase in the investment portfolio.
Liquid securities carried in our asset liquidity
include securities pledged without corresponding
advances from the Federal Reserve Bank of Boston
(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, 2019, we had no outstanding borrowings
from the FHLB. As of December 31, 2018, we had
approximately $2 billion of 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
to
of contingent
underlying conditions. As of December 31, 2019 and
December 31, 2018, 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 $76.94 billion for the quarter ended
December 31, 2019, compared to $65.94 billion for the
quarter ended December 31, 2018.
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 $29.70 billion
and $28.95 billion and standby letters of credit totaling
$3.32 billion and $2.99 billion as of December 31, 2019
and December 31, 2018, respectively. These amounts
do not reflect the value of any collateral. As of December
31, 2019, approximately 73% of our unfunded
commitments to extend credit and 10% 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
financial
finance and
cash management,
We provide products and services including
custody, accounting, administration, daily pricing, FX
asset
services,
management, securities
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,
2019 and December 31, 2018, 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 $1.10 billion and $1.08 billion as of December 31,
2019 and December 31, 2018, 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 $1.08 billion, as of December 31, 2019,
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 both December 31, 2019 and 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.
On January 24, 2020, we issued $750 million
aggregate principal amount of 2.400% Senior Notes
due 2030 in a public offering.
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.
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.
TABLE 31: CREDIT RATINGS
As of December 31, 2019
Standard &
Poor’s
Moody’s
Investors
Service
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
A
A-
BBB
BBB
Stable
A-1+
AA-
AA-
A
A1
A2
A3
Baa1
Stable
P-1
Aa1
Aa3
Aa3
Fitch
AA-
A+
NR
BBB
Stable
F1+
AA+
AA
A+
High ratings limit borrowing costs and enhance our
Outlook
Stable
Stable
Stable
liquidity by:
•
•
•
•
providing assurance for unsecured funding and
depositors;
increasing the potential market for our debt and
improving our ability to offer products;
serving markets; and
engaging in transactions in which clients value
high credit ratings.
A downgrade or reduction of our credit ratings
could have a material adverse effect on our liquidity by
restricting our ability to access the capital markets,
which could increase the related cost of funds. In turn,
this could cause the sudden and large-scale withdrawal
of unsecured deposits by our clients, which could lead
to draw-downs of unfunded commitments to extend
credit or trigger requirements under securities purchase
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 32: Long-Term Contractual Cash Obligations
were recorded in our consolidated statement of condition as of December 31, 2019, except for the interest portions of
long-term debt and finance leases.
TABLE 32: LONG-TERM CONTRACTUAL CASH OBLIGATIONS
December 31, 2019
(In millions)
Long-term debt(1)(2)
Operating leases
Finance 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
$
$
1,691
$
1,492
$
4,340
$
4,850
$
183
41
—
344
82
—
251
31
23
356
—
24
12,373
1,134
154
47
1,915
$
1,918
$
4,645
$
5,230
$
13,708
(1) Long-term debt excludes finance 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, 2019.
(2) Additional information about contractual cash obligations related to long-term debt and operating and finance 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 32: Long-Term Contractual Cash Obligations do not include:
• Obligations which will be settled in cash, primarily in less than one year, such as client deposits, federal funds
purchased, securities sold under repurchase agreements and other short-term borrowings. Additional
information about deposits, federal funds purchased, securities sold under repurchase agreements and other
short-term borrowings is provided in Note 8 to the consolidated financial statements 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, 2019 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 32: Long-Term Contractual Cash Obligations.
TABLE 33: 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, 2019
Less than
1 year
1-3
years
4-5
years
Over 5
years
Total amounts
committed(1)
$
$
367,901
$
— $
— $
— $
18,737
326
90
6,221
1,920
162
4,312
1,065
19
427
13
20
387,054
$
8,303
$
5,396
$
460
$
367,901
29,697
3,324
291
401,213
(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 33: Other commercial commitments, except for
purchase obligations, is provided in Note 12 to the consolidated financial statements in this Form 10-K.
Operational Risk Management
Overview
Operational risk is the risk of loss resulting from inadequate or failed internal processes, people and systems or
from external events. Operational risk encompasses fiduciary risk and legal risk. Fiduciary risk is defined as the risk
that 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.
State Street Corporation | 93
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
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
its TOPS, which reviews our
does so
through
framework and approves our
risk
operational
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
consistent manner and
reviews and approves
operational risk guidelines intended to maintain a
consistent implementation of our corporate operational
risk policy and framework.
Ownership and Accountability
We have
implemented our operational risk
framework to support the broad mandate established
by our operational risk policy. This
framework
represents an integrated set of processes and tools that
assists us in the management and measurement of
operational risk, including our calculation of required
capital and RWA.
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
requirements. The operational
regulatory
risk
framework is intended to provide a number of important
benefits, including:
• A common understanding of operational risk
management and its supporting processes;
• The clarification of responsibilities for the
management of operational risk across 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
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;
State Street Corporation | 94
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
• ERM’s MVG
independently validates
the
quantitative models used
to measure
operational risk, and ORM performs validation
checks on the output of the model;
• CIS establishes the framework, policies and
related programs to measure, monitor and
report on information security risks, including
the effectiveness of cyber-security program
protections. CIS defines and manages the
enterprise-wide information security program.
CIS coordinates with Information Technology,
control functions and business units to support
the confidentiality, integrity and availability of
corporate information assets. CIS identifies
risk-based methodology
and employs a
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 and control assessment program
seeks to understand the risks associated with
day-to-day activities, and the effectiveness of
controls
to manage potential
exposures arising from these activities. These
risks are typically frequent in nature but
generally not severe in terms of exposure;
intended
• 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
totaled $3.84 billion and $47.96 billion,
RWA
respectively, as of December 31, 2019, compared to
$3.68 billion and $46.06 billion, respectively, as of
December 31, 2018; refer to the "Capital" section in
"Financial Condition," of this Management's Discussion
and Analysis.
The LDA model incorporates the four required
operational risk elements described below:
•
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,
the modeling
analyzed and
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.
to support processes related
included
in
State Street Corporation | 95
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Internal loss event data may be incorporated
into our LDA model in a future quarter following
the realization of the losses, with the timing and
categorization dependent on the processes for
model updates and, if applicable, model
revalidation and regulatory review and related
supervisory processes. An individual loss event
can have a significant effect on the output of
our LDA model and our operational risk RWA
under the advanced approaches depending on
the severity of the loss event, its categorization
among the seven Basel-defined UOMs and the
stability of the distributional approach for a
particular UOM;
• External loss event data provides information
with respect to loss event severity from other
financial institutions to inform our capital
estimation process of events
in similar
business units at other banking organizations.
This information supplements the data pool
available
in our LDA model.
Assessments of the sufficiency of internal data
the relevance of external data are
and
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.
factors
control
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.
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
Documentation and guidelines allow
for
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
State Street Corporation | 96
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
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
identifying, assessing and measuring
well as
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;
• 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
State Street Corporation | 97
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
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
investment portfolios. As an active
international
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, 2019, the notional amount of these
derivative contracts was $2.41 trillion, of which $2.38
trillion was composed of foreign exchange forward,
swap and spot contracts. We seek to match positions
closely with the objective of minimizing related currency
and interest rate risk. All foreign exchange contracts are
valued daily at current market rates.
Governance
Our assumption of market risk in our trading
activities is an integral part of our corporate risk appetite.
Our Board reviews and oversees our management of
market risk, including the approval of key market risk
policies and the receipt and review of regular market
risk reporting, as well as periodic updates on selected
market risk topics.
The previously described TMRC (refer to "Risk
Committees") oversees all market risk-taking activities
across 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
State Street Corporation | 98
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
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
risk policies, guidelines and corporate
market
standards, as well as relevant regulatory requirements.
We are subject to regular monitoring, reviews and
supervisory exams of our market risk function by the
Federal Reserve. In addition, we are regulated by,
among others,
Industry
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
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
State Street Corporation | 99
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
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
in connection with
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
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.
State Street Corporation | 100
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
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
includes
risk
approximately 5,000
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
those
this
“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.
•
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.
State Street Corporation | 101
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
As each of the historical stress events is associated with a different time horizon, we normalize results by scaling
down the longer horizon events to a ten-day horizon and keeping the shorter horizon events (i.e., events that are
shorter than ten days) at their original terms. We also conduct sensitivity analysis daily to calculate the impact of a
large predefined shock in a specific risk factor or a group of risk factors on our current portfolio. These predefined
shocks include parallel and non-parallel yield curve shifts and foreign exchange spot and volatility surface shifts. In a
parallel shift scenario, we apply a constant factor shift across all yield curve tenors. In a non-parallel shift scenario, we
apply different shock levels to different tenors of a yield curve, rather than shifting the entire curve by a constant amount.
Non-parallel shifts include steepening, flattening and butterflies.
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 two back-testing exceptions in 2019 and four back-testing exceptions in 2018. At 99% confidence
interval, the statistical expectation for a VaR model is to witness one exception every hundred trading days (or two to
three exceptions per year). The 2019 back-testing exceptions are therefore within statistical expectation. In 2018
heightened volatility followed a longer period of relatively benign market conditions that saw the Volatility Index 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.
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.
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, 2019 and 2018, 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 34: TEN-DAY VALUE-AT-RISK ASSOCIATED WITH TRADING ACTIVITIES FOR COVERED POSITIONS
Year Ended December 31, 2019
Year Ended December 31, 2018
(In thousands)
Year Ended
Average
Maximum
Minimum
Year Ended
Average
Maximum
Minimum
Global Markets
Global Treasury
Diversification
Total VaR
$
$
9,954
$
10,235
$
26,419
$
5,880
$
10,588
$
7,354
$
19,160
$
2,967
987
(1,082)
733
(864)
2,326
(4,812)
123
(67)
1,354
(1,435)
750
(634)
3,579
(3,348)
91
205
9,859
$
10,104
$
23,933
$
5,936
$
10,507
$
7,470
$
19,391
$
3,263
TABLE 35: TEN-DAY STRESSED VALUE-AT-RISK ASSOCIATED WITH TRADING ACTIVITIES FOR COVERED POSITIONS
Year Ended December 31, 2019
Year Ended December 31, 2018
(In thousands)
Year Ended
Average
Maximum
Minimum
Year Ended
Average
Maximum
Minimum
Global Markets
$
48,089
$
34,574
$
55,751
$
17,492
$
26,512
$
32,744
$
58,221
$
14,811
Global Treasury
Diversification
5,898
(8,289)
3,454
(3,459)
8,376
(5,962)
842
(1,734)
7,683
(7,919)
3,659
(4,101)
10,177
(10,179)
342
(325)
Total Stressed VaR
$
45,698
$
34,569
$
58,165
$
16,600
$
26,276
$
32,302
$
58,219
$
14,828
State Street Corporation | 102
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The average of our stressed VaR-based measure was approximately $35 million for the year ended December
31, 2019, compared to an average of approximately $32 million for the year ended December 31, 2018.
The average stressed VaR-based measure as of December 31, 2019 was relatively unchanged compared to
December 31, 2018. Our stressed VaR-based measure increased as of December 31, 2019 compared to December
31, 2018, primarily due to larger FX net open positions.
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, 2019 and 2018, 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 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 36: 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, 2019(2)
As of December 31, 2018
Foreign Exchange Risk
Interest Rate Risk
Foreign Exchange Risk
Interest Rate Risk
$
$
5,447
24
(23)
5,448
$
$
6,266
966
(995)
6,237
$
$
2,679
53
(39)
2,693
$
$
11,850
1,377
(1,436)
11,791
TABLE 37: 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, 2019(2)
As of December 31, 2018
Foreign Exchange Risk
Interest Rate Risk
Foreign Exchange Risk
Interest Rate Risk
$
$
8,427
59
(61)
8,425
$
$
61,792
6,258
(8,681)
59,369
$
$
10,465
74
(132)
10,407
$
$
23,324
8,202
(7,835)
23,691
(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, 2019, 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 on 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 NII over a twelve-month horizon, based on our internal forecast of interest rates, to a wide range of rate shocks.
Table 38, Key Interest Rates for Baseline Forecasts, presents the spot and 12-month forward rates used in our baseline
forecasts at December 31, 2019 and December 31, 2018. Our December 31, 2019 baseline forecast includes the
expectation of one rate cut by the Federal Reserve over the next 12 months.
State Street Corporation | 103
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
TABLE 38: KEY INTEREST RATES FOR BASELINE FORECASTS
Spot rates
12-month forward rates
1.75%
1.50
1.92%
1.95
2.50%
3.00
2.68%
2.99
December 31, 2019
December 31, 2018
Fed Funds Target
10-Year Treasury
Fed Funds Target
10-Year Treasury
In Table 39: Net Interest Income Sensitivity, we report the expected change in NII over the next twelve months
from instantaneous shocks to various tenors on the yield curve, including the impacts from U.S. and non-U.S. rates.
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 39: NET INTEREST INCOME SENSITIVITY
(In millions)
Rate change:
Parallel shifts:
+100 bps shock
–100 bps shock
Steeper yield curve:
+100 bps shift in long-end rates
-100 bps shift in short-end rates
Flatter yield curve:
+100 bps shift in short-end rates
-100 bps shift in long-end rates
December 31, 2019
December 31, 2018
U.S. Dollar
All Other
Currencies
Total
U.S. Dollar
All Other
Currencies
Total
Benefit (Exposure)
Benefit (Exposure)
$
67
$
(214)
176
(16)
(97)
(184)
175
$
81
6
86
170
(6)
242
$
(133)
136
$
(210)
182
70
73
(190)
108
(68)
31
(135)
235
$
27
19
44
218
(18)
371
(183)
127
(24)
249
(153)
As of December 31, 2019, NII remains positioned to benefit from a parallel rise in interest rates and is exposed
to a parallel decline in interest rates. Compared to December 31, 2018, our NII is less sensitive to parallel rate increases
and decreases, driven by changes to the composition of U.S. deposits and derivative hedging activity intended to
reduce the impact of lower rates in the U.S.
U.S dollar NII sensitivity as of December 31, 2019 similarly remains poised to benefit from a parallel rise in interest
rates and is exposed to a parallel decline in U.S. interest rates. Compared to December 31, 2018, our U.S. dollar NII
benefit to higher rates has declined, largely driven by the composition of U.S. deposits, higher deposit betas and
derivative hedging activity. NII exposure to lower U.S. rates has remained stable since December 31, 2018 as reduced
sensitivities to short-end rates is offset by increased exposure to long-end rates. The reduced NII sensitivity to lower
short-end U.S. rates is driven by changes to the composition of U.S. deposits and cash flow hedging activity, while
increased NII exposure to lower long-end U.S. rates is driven by higher levels of mortgage-backed securities in the
investment portfolio.
We are still positioned to benefit from changes in non-U.S. interest rates, with the majority of our sensitivity derived
from the short-end of the curve given deposit pricing expectations. Compared to December 31, 2018, our non-U.S.
benefit to higher rates has decreased, while the benefit to lower rates has increased. The decreased NII benefit to
higher rates is driven by Euro deposit pricing actions, in addition to the impact of changes to the treatment of excess
reserves by the European Central Bank and Swiss National Bank. The increased benefit to lower rates is largely a
result of the aforementioned change in treatment for excess reserves.
EVE sensitivity is a discounted cash flow model designed to estimate the fair value of assets and liabilities under
a series of interest rate shocks over a long-term horizon. In the following table, we report our EVE sensitivity to 200
bps instantaneous rate shocks, 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 40: ECONOMIC VALUE OF EQUITY SENSITIVITY
(In millions)
Rate change:
+200 bps shock
–200 bps shock
$
As of December 31,
2019
2018
Benefit (Exposure)
(1,966) $
1,292
(1,603)
796
State Street Corporation | 104
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
As of December 31, 2019, EVE sensitivity remains
exposed to upward shifts in interest rates. Compared
to December 31, 2018, the change in the up and down
200 bps instantaneous shocks was primarily driven by
purchases of fixed-rate investment portfolio securities,
partially offset by lower long-end U.S. rates.
Both NII sensitivity and EVE sensitivity are
routinely monitored as market conditions change.
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 MRM
Framework seeks to mitigate our model risk.
significant advancement
in
Our MRM program has
three principal
components:
• A model risk governance program that defines
roles and
the
responsibilities,
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 MRM group. The model validation
results and/or a decision by the Model Risk Committee
must permit model usage or the model may not be used.
ERM’s MRM group is responsible for defining the
corporate-wide model risk governance framework,
maintaining policies that achieve the framework’s
objectives. The team is responsible for overall model
risk governance capabilities, with particular emphasis
in the areas of model validation, model risk reporting,
model performance monitoring, tracking of new model
development status and committee-level review and
challenge.
MRC, which is composed of senior managers
responsible for representing functional areas and
business units with key models across the organization,
reports to MRAC, and provides guidance and oversight
to the MRM function.
Model Development and Usage
testing. Model development
Models are developed under standards governing
data sourcing, methodology selection and model
integrity
includes a
statement of purpose to align development with
intended use. It also includes a comparison of
alternative approaches to promote a sound modeling
approach.
Model developers conduct an assessment of data
quality and relevance. The development teams conduct
a variety of tests of the accuracy, robustness and
stability of each model.
Model owners submit models to the MVG for
validation on a regular basis, as per the existing policy.
Model Validation
MVG is part of MRM within ERM and performs
model validations and reviews. MVG is independent,
as contemplated by applicable bank regulatory
requirements, of both the developers and users of the
models. MVG validates models through an evaluation
process that assesses the appropriateness, accuracy,
and suitability of data
inputs, methodologies,
documentation, assumptions, and processing code.
Model validation also encompasses an assessment of
model performance, sensitivity, and robustness, as well
as a model’s potential limitations given its particular
assumptions or deficiencies. Based on the results of its
review, MVG issues a model use decision and may
require remedial actions and/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.
Although model validation is the primary method
of subjecting models to independent review and
challenge, in practice, a multi-step governance process
provides the opportunity for challenge by multiple
parties. First, MVG conducts a model validation and
issues a model use decision. MVG communicates their
result as one of the following three outcomes:
“Approved”, “Approved with conditions”, or “Not
Approved”. There are two ways in which a model can
be deemed “Not approved for Use” given a validation:
1) the aggregation of the model scoring within MRM’s
Model Risk Rating System (MRRS) model is poor
enough to result in a “high” rating, or 2) the scoring of
one or more MRRS model element(s) is deemed
“critical” resulting
in an automatic “high” rating
irrespective of the other elements as the “critical”
element(s) undermines the model. Second, these
State Street Corporation | 105
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
decisions may be reviewed, challenged, and confirmed
by the MRC. Finally, model use decisions, risk ratings,
and overall levels of model risk may be reported to and
reviewed by MRAC. MRM also reports regularly on
model risk issues to the Board.
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.
Strategic Risk Management
Framework
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
Our objective with respect to management of our
capital is to maintain a strong capital base in order to
provide financial flexibility for our business needs,
including funding corporate growth and supporting
clients’ cash management needs, and to provide
protection against loss to depositors and creditors. We
strive to maintain an appropriate level of capital,
commensurate with our risk profile, on which an
attractive return to shareholders is expected to be
realized over both the short and long-term, while
protecting our obligations to depositors and creditors
and complying with regulatory capital requirements.
Our capital management focuses on our risk
exposures, the regulatory requirements applicable to
us with respect to multiple capital measures, the
evaluations and resulting credit ratings of the major
independent rating agencies, our return on capital at
both the consolidated and line-of-business level and our
capital position relative to our peers.
Assessment of our overall capital adequacy
includes the comparison of capital sources with capital
uses, as well as the consideration of the quality and
quantity of the various components of capital. The
assessment seeks to determine the optimal level of
capital and composition of capital instruments to satisfy
all constituents of capital, with the lowest overall cost
to shareholders. Other factors considered in our
assessment of capital adequacy are strategic and
contingency planning, stress testing and planned
capital actions.
Capital Adequacy Process
Our primary federal banking regulator is the
Federal Reserve. Both we and State Street Bank are
subject to the minimum regulatory capital requirements
established by the Federal Reserve and defined in the
Federal Deposit Insurance Corporation Improvement
Act. 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
objectives 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
State Street Corporation | 106
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
effectively in the global capital markets; and satisfy
regulatory, security holders and shareholder needs.
Capital is one of several elements that affect our credit
ratings and the ratings of our principal subsidiaries.
In conformity with our Capital Policy and
Guidelines, we strive to achieve and maintain specific
internal capital levels, not just at a point in time, but over
time and during periods of stress, to account for
changes in our strategic direction, evolving economic
conditions, and financial and market volatility. We have
developed and implemented a corporate-wide CAP to
assess our overall capital in relation to our risk profile
and
for
to provide a comprehensive strategy
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
appropriateness and relevance in relation to our
financial budget and capital plan.
these measures annually
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 inherent in our business,
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,
reputation and
operational,
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
process,
the Federal Reserve assesses each
organization’s capital adequacy, capital planning
process and plans to distribute capital, such as dividend
payments or stock purchase programs. Management
and Board risk committees review, challenge and
approve CCAR results and assumptions before
submission to the Federal Reserve.
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.
Governance
In order to support integrated decision making, we
have identified three management elements to aid in
the compatibility and coordination of our CAP:
• Risk
Management
identification,
measurement, monitoring and forecasting of
different types of risk and their combined impact
on capital adequacy;
-
• Capital management - determination of optimal
capital levels; and
• Business Management - strategic planning,
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 oversight of global
capital management and optimization.
The 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
State Street Corporation | 107
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Global Systemically Important Bank
We are one among a group of 30 institutions
worldwide that have been identified by the Financial
Stability Board and the Basel Committee on Banking
Supervision 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 surcharge above the minimum capital ratios set
forth in the Basel III rule.
We and our depositary institution subsidiaries are
subject to the current Basel III minimum risk-based
capital and leverage ratio guidelines.
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.
Regulatory Capital
We and State Street Bank, as advanced
approaches banking organizations, are subject to the
U.S. Basel III framework. Provisions of the Basel III 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
The Basel III rule provides for two frameworks for
monitoring capital adequacy:
“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
for certain on- and off-balance sheet
weights
exposures.
the
The advanced approaches consist of
Advanced Internal Ratings-Based Approach used for
the calculation of RWA related to credit risk, and the
Advanced Measurement Approach used
the
calculation of RWA related to operational risk.
for
The market risk capital rule requires us to use
internal models to calculate daily measures of VaR,
which 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
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" included in this Management's
Discussion and Analysis.
information about
the market
As required by the Dodd-Frank Act, we and State
Street Bank, as advanced approaches banking
organizations, are subject to a permanent "capital floor,"
also referred to as the Collins Amendment, in the
assessment of our regulatory capital adequacy,
including
the capital conservation buffer and
countercyclical capital buffer. 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 rule
The requirement for the capital conservation buffer
became effective with full implementation on January
limits a banking
1, 2019. Specifically,
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. To
maintain the status of the Parent Company as a financial
holding company, we and our insured depository
institution subsidiaries are required, among other
requirements, to be "well capitalized" as defined by the
Prompt Corrective Action Framework.
The specific calculation of our and State Street
Bank's risk-based capital ratios changed as the
provisions of the Basel III 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 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.
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 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 | 108
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
TABLE 41: REGULATORY CAPITAL STRUCTURE AND RELATED REGULATORY CAPITAL RATIOS
(Dollars in millions)
Common shareholders' equity:
State Street Corporation
State Street Bank
Basel III
Advanced
Approaches
December 31,
2019(1)
Basel III
Standardized
Approach
December 31,
2019(1)
Basel III
Advanced
Approaches
December 31,
2018(1)
Basel III
Standardized
Approach
December 31,
2018(1)
Basel III
Advanced
Approaches
December 31,
2019(1)
Basel III
Standardized
Approach
December 31,
2019(1)
Basel III
Advanced
Approaches
December 31,
2018(1)
Basel III
Standardized
Approach
December 31,
2018(1)
Common stock and related surplus
$
10,636
$
10,636
$
10,565
$
10,565
$
12,893
$
12,893
$
12,894
$
12,894
Retained earnings
21,918
21,918
20,606
20,606
13,218
13,218
14,261
14,261
Accumulated other comprehensive income
(loss)
Treasury stock, at cost
Total
Regulatory capital adjustments:
Goodwill and other intangible assets, net of
associated deferred tax liabilities
Other adjustments(2)
Common equity tier 1 capital
Preferred stock
Tier 1 capital
Qualifying subordinated long-term debt
Allowance for loan losses
Total capital
Risk-weighted assets:
Credit risk(3)
Operational risk(4)
Market risk
Total risk-weighted assets
Adjusted quarterly average assets
(870)
(10,209)
21,475
(9,112)
(150)
12,213
2,962
15,175
1,095
5
16,275
54,763
47,963
1,638
104,364
219,624
$
$
$
$
(870)
(10,209)
21,475
(9,112)
(150)
12,213
2,962
15,175
1,095
90
16,360
102,367
NA
1,638
104,005
219,624
(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
16,131
97,303
NA
1,517
98,820
211,924
$
$
$
$
$
$
$
$
$
$
$
$
(654)
—
(654)
—
(1,112)
(1,112)
—
—
25,457
25,457
26,043
26,043
(8,839)
(1)
16,617
—
16,617
1,099
3
17,719
51,610
44,138
1,638
97,386
216,397
$
$
$
$
(8,839)
(1)
16,617
—
16,617
1,099
90
17,806
98,979
NA
1,638
100,617
216,397
(9,073)
(29)
16,941
—
(9,073)
(29)
16,941
—
16,941
16,941
776
11
17,728
45,565
44,494
1,517
91,576
209,413
$
$
$
$
776
83
17,800
94,776
NA
1,517
96,293
209,413
$
$
$
$
$
$
$
$
Minimum
Requirement
2019 (including
G-SIB and CCB)
(5)
Minimum
Requirement
2018 (including
G-SIB and CCB)
(6)
8.5%
7.5%
11.7%
11.7%
12.1%
11.7%
17.1%
16.5%
18.5%
17.6%
10.0
12.0
9.0
14.5
11.0
15.6
14.6
15.7
16.0
16.9
15.5
16.3
17.1
18.2
16.5
17.7
18.5
19.4
17.6
18.5
Capital
Ratios:
Common
equity tier 1
capital
Tier 1
capital
Total capital
(1) Under the applicable bank regulatory rules, we are not required to and, accordingly, did not revise previously-filed reported capital metrics and ratios following the change in accounting for low
Income housing tax credits (LIHTC).
(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 (OTC) 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) 2019 Minimum Requirements including Capital Conservation Buffer and G-SIB Surcharge.
(6) 2018 Minimum Requirements including Capital Conservation Buffer and G-SIB Surcharge.
NA Not applicable
State Street Corporation | 109
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Our CET1 capital increased $0.63 billion as of December 31, 2019 compared to December 31, 2018, primarily
driven by net income and accumulated other comprehensive income in the year ended December 31, 2019, partially
offset by common stock repurchases and capital distributions from common and preferred stock dividends.
Our tier 1 capital decreased $0.10 billion as of December 31, 2019 compared to December 31, 2018 under both
the advanced approaches and standardized approach due to the redemption of all outstanding Series E preferred
stock and changes in our CET1 capital. Total capital increased under the advanced approaches and standardized
approach by $0.21 billion and $0.23 billion, respectively, due to the changes in our tier 1 and tier 2 capital.
The table below presents a roll-forward of CET1 capital, tier 1 capital and total capital for the years ended December
31, 2019 and 2018.
TABLE 42: CAPITAL ROLL-FORWARD
(In millions)
Common equity tier 1 capital:
Basel III
Advanced
Approaches
December 31,
2019
Basel III
Standardized
Approach
December, 31,
2019
Basel III
Advanced
Approaches
December 31,
2018(1)
Basel III
Standardized
Approach
December 31,
2018(1)
Common equity tier 1 capital balance, beginning of period
$
11,580
$
11,580
$
12,204
$
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 common equity tier 1 capital
2,242
(1,494)
(939)
238
462
124
633
2,242
(1,494)
(939)
238
462
124
633
2,599
314
(853)
(2,473)
(360)
149
(624)
12,204
2,599
314
(853)
(2,473)
(360)
149
(624)
Common equity tier 1 capital balance, end of period
12,213
12,213
11,580
11,580
Additional tier 1 capital:
Tier 1 capital balance, beginning of period
Change in common equity tier 1 capital
Net issuance of preferred stock
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 Allowance for loan losses and other
Change in other adjustments
Changes in tier 2 capital
Tier 2 capital balance, end of period
Total capital:
15,270
15,270
15,382
15,382
633
(728)
—
(95)
633
(728)
—
(95)
(624)
494
18
(112)
(624)
494
18
(112)
15,175
15,175
15,270
15,270
792
317
(9)
—
308
1,100
861
317
7
—
324
1,185
985
(202)
10
(1)
(193)
792
1,053
(202)
11
(1)
(192)
861
Total capital balance, beginning of period
16,062
16,131
16,367
16,435
Changes in tier 1 capital
Changes in tier 2 capital
(95)
308
(95)
324
(112)
(193)
(112)
(192)
Total capital balance, end of period
$
16,275
$
16,360
$
16,062
$
16,131
(1) Under the applicable bank regulatory rules, we are not required to and, accordingly, did not revise previously-filed reported capital metrics and ratios following the change in
accounting for LIHTC.
State Street Corporation | 110
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 and standardized approach RWA
for the years ended December 31, 2019 and 2018.
TABLE 43: ADVANCED & STANDARDIZED APPROACHES RISK-WEIGHTED ASSETS ROLL-FORWARD
(In millions)
Total risk-weighted assets, beginning of period(1)
Changes in credit risk-weighted assets:
Net increase (decrease) in investment securities-wholesale
Net increase (decrease) in loans
Net increase (decrease) in securitization exposures
Net increase (decrease) in repo-style transaction exposures
Net increase (decrease) in over-the-counter derivatives
exposures
Net increase (decrease) in all other(2)(3)
Net increase (decrease) in credit risk-weighted assets
Net increase (decrease) in market risk-weighted assets
Net increase (decrease) in operational risk-weighted assets
Basel III
Advanced
Approaches
December 31, 2019
Basel III
Advanced
Approaches
December 31, 2018
Basel III
Standardized
Approach
December 31, 2019
Basel III
Standardized
Approach
December 31, 2018
$
95,315
$
99,156
$
98,820
$
102,683
3,470
2,586
(140)
(45)
26
1,128
7,025
121
1,903
(940)
(12)
(3,666)
(19)
(1,170)
1,545
(4,262)
183
238
3,882
809
(140)
365
(1,124)
1,272
5,064
121
N/A
(2,887)
3,104
(3,666)
(3,156)
(46)
2,605
(4,046)
183
N/A
98,820
Total risk-weighted assets, end of period
$
104,364
$
95,315
$
104,005
$
(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 rule.
(2) 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.
(3) 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, 2019, total advanced approaches RWA increased $9.05 billion compared to December 31,
2018, primarily due to increases in both credit RWA and operational risk RWA. The increase in credit RWA was primarily
driven by an increase in investment securities RWA, primarily due to higher exposures to agency MBS and corporates.
Additionally, loans RWA increased primarily due to higher lending activity.
As of December 31, 2019, total standardized approach RWA increased $5.19 billion compared to December 31,
2018, primarily due to higher credit RWA. The main drivers of the credit RWA change were increased investment
securities RWA, other RWA and loans RWA, partially offset by a reduction in derivative exposure RWA.
The regulatory capital ratios as of December 31, 2019, presented in Table 41: Regulatory Capital Structure and
Related Regulatory Capital Ratios, are calculated under the standardized approach and advanced approaches in
conformity with the Basel III rule. The advanced approaches based ratios reflect calculations and determinations with
respect to our capital and related matters as of December 31, 2019, 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 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 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 rule on us and State Street Bank are therefore
subject to further evaluation and also to further regulatory guidance, action or rule-making.
State Street Corporation | 111
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Tier 1 and Supplementary Leverage Ratios
The SLR rule requires that, as of January 1, 2018,
(i) State Street Bank maintains an SLR of at least 6.0%
to be well capitalized under the U.S. banking regulators’
Prompt Corrective Action Framework and (ii) we
maintain an SLR of at least 5.0% to avoid limitations on
capital distributions and discretionary bonus payments.
In addition to the SLR, we are subject to a well
capitalized tier 1 leverage ratio requirement of 5.0%.
TABLE 44: TIER 1 AND SUPPLEMENTARY LEVERAGE
RATIOS
(Dollars 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
December 31,
2019
December 31,
2018
$
15,175
$
15,270
228,886
221,350
(9,262)
(9,426)
219,624
28,238
211,924
29,279
$
247,862
$
241,203
6.9%
6.1
7.2%
6.3
State Street Bank:
Tier 1 capital
Average assets
$
16,617
$
16,941
225,234
218,402
Less: adjustments for deductions
from tier 1 capital
Adjusted average assets
Off-balance sheet exposures
(8,837)
(8,989)
216,397
28,266
209,413
29,368
Total assets for SLR
$
244,663
$
238,781
Tier 1 leverage ratio (1)
Supplementary leverage ratio
7.7%
6.8
8.1%
7.1
(1) Tier 1 leverage ratios were calculated in conformity with the Basel III rule.
Total Loss-Absorbing Capacity (TLAC)
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 TLAC final rule. In granting the
extension request, the Federal Reserve noted that the
Economic Growth, Regulatory Relief and Consumer
Protection Act (EGRRCPA) was signed into law in May
2018. Under this legislation, the Federal Reserve and
federal banking agencies must
the other U.S.
promulgate rules to exclude certain central bank
placements from the calculation of SLR for custodial
banks such as us. The Federal Reserve and the other
U.S. federal banking agencies adopted that final rule in
November 2019; the rule becomes effective on April 1,
2020. Accordingly, we requested and received an
additional three-month extension from January 1, 2020
to April 1, 2020, for compliance with the LTD SLR
requirements of the rule. This regulatory change is
expected to reduce the LTD we are required to hold as
calculated under the current requirements, and we
estimate that, had those reduced LTD requirements
been in effect, we would have been in compliance with
the LTD SLR at December 31, 2019.
The following table presents external LTD and
external TLAC as of December 31, 2019. On January
24, 2020 we issued $750 million aggregate principal
amount of 2.400% Senior Notes due in 2030.
TABLE 45: TOTAL LOSS-ABSORBING CAPACITY
(Dollars in millions)
Actual
Requirement(1)
As of December 31, 2019
Total loss-absorbing
capacity (eligible Tier 1
regulatory capacity and
long term debt):
Risk-weighted assets
$ 25,857
24.8% $ 22,438
21.5%
Supplemental leverage
ratio
Long term debt:
Risk-weighted assets
Supplemental leverage
ratio
25,857
10.4
23,547
9.5
9,936
9,936
9.5
4.0
7,827
11,154
7.5
4.5
(1) We requested and received from the Federal Reserve, an extension from January
1, 2019 to April 1, 2020, for compliance with the LTD SLR requirements of the rule.
Additional information about TLAC is provided
under "Total Loss-Absorbing Capacity" in "Supervision
and Regulation" in Business in this Form 10-K.
Regulatory Developments
In April 2018, the Federal Reserve Board (FRB)
issued a proposed rule which would replace the current
2.0% SLR buffer for G-SIBs, with a buffer equal to 50%
of their G-SIB surcharge. 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 (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. 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 the present time. Consequently,
we have not estimated the impact of the proposed rule.
State Street Corporation | 112
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
In November 2019, the Federal Reserve and the other U.S. federal banking agencies adopted a final rule that
establishes a deduction for central bank deposits from a custodial banking organization’s total leverage exposure equal
to the lesser of (i) the total amount of funds the custodial banking organization and its consolidated subsidiaries have
on deposit at qualifying central banks and (ii) the total amount of client funds on deposit at the custodial banking
organization that are linked to fiduciary or custodial and safekeeping accounts. The rule becomes effective on April 1,
2020. In the quarter ended December 31, 2019, we estimated $48.87 billion of average balances held on deposit at
central banks will be excluded from the SLR denominator under our interpretation of the rule, which would impact the
SLR by approximately 150 bps. The TLAC and LTD that State Street is required to hold as calculated under the current
requirements will also be reduced as a consequence of the rule.
Also in November 2019, the Federal Reserve and other US federal banking agencies issued a final rule for the
Standardized Approach to Counterparty Credit Risk. This change would replace the current exposure method for
calculating EAD for over-the-counter derivatives with a new approach. Our over-the-counter derivatives exposures
would be subject to this new methodology. We have not estimated the impact of the final rule as its expected effective
date is in 2022 and is expected to be accompanied by other revisions to the Basel III regime.
For additional information about regulatory developments, refer to the "Regulatory Capital Adequacy and Liquidity
Standards" section of "Supervision and Regulation" in Business in this Form 10-K.
Capital Actions
Preferred Stock
The following table summarizes selected terms of each of the series of the preferred stock issued and outstanding
as of December 31, 2019:
TABLE 46: PREFERRED STOCK ISSUED AND OUTSTANDING
Preferred
Stock(2):
Issuance
Date
Depositary
Shares
Issued
Amount
outstanding
(in millions)
Ownership
Interest
Per
Depositary
Share
Liquidation
Preference
Per Share
Liquidation
Preference
Per
Depositary
Share
Per Annum
Dividend Rate
Series C
August
2012
20,000,000
$
500
1/4,000th
$
100,000
$
25
5.25%
Series D
February
2014
30,000,000
750
1/4,000th
100,000
25
Series F
May 2015
750,000
750
1/100th
100,000
1,000
Series G
April 2016
20,000,000
500
1/4,000th
100,000
25
Series H
September
2018
500,000
500
1/100th
100,000
1,000
5.90% to but
excluding
March 15,
2024, then a
floating rate
equal to the
three-month
LIBOR plus
3.108%
5.25% to but
excluding
September 15,
2020, then a
floating rate
equal to the
three-month
LIBOR plus
3.597%
5.35% to but
excluding
March 15,
2026, then a
floating rate
equal to the
three-month
LIBOR plus
3.709%
5.625% to but
excluding
December 15,
2023, then a
floating rate
equal to the
three-month
LIBOR plus
2.539%
Carrying
Value as
of
December
31, 2019
(In
millions)
Redemption
Date(1)
$
491
September 15,
2017
742 March 15,
2024
742
September 15,
2020
493 March 15,
2026
494 December 15,
2023
Dividend
Payment
Frequency
Quarterly:
March, June,
September
and
December
Quarterly:
March, June,
September
and
December
Semi-
annually:
March and
September
Quarterly:
March, June,
September
and
December
Semi-
annually:
June and
December
(1) On the redemption date, or any dividend payment 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.
State Street Corporation | 113
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
In the fourth quarter of 2019, we requested and received approval from the Federal Reserve to redeem our
outstanding Series E non-cumulative perpetual preferred stock. We redeemed all outstanding shares as of December
15, 2019 at a redemption price of $750 million ($100,000 per share equivalent to $25.00 per depositary share) plus
accrued and unpaid dividends. The difference between the redemption value and the net carrying value of $22 million
resulted in an EPS impact of approximately ($0.06) per share in 2019.
On February 12, 2020, we announced that we will redeem all 5,000 of our outstanding shares of our non-cumulative
perpetual preferred stock, Series C, for cash at a redemption price of $100,000 per share (equivalent to $25.00 per
depositary share) plus all declared and unpaid dividends. The redemption price will be payable on March 16, 2020,
and this redemption will be reflected in our first quarter 2020 results of operations.
The following tables present the dividends declared for each of the series of preferred stock issued and outstanding
for the periods indicated:
TABLE 47: PREFERRED STOCK DIVIDENDS
(Dollars in millions, except
per share amounts)
Dividends
Declared per
Share
Preferred Stock:
Series C
$
5,250
$
Series D
Series E
Series F
Series G
Series H
Total
Common Stock
5,900
6,000
5,250
5,352
5,625
2019
Dividends
Declared per
Depositary
Share
Years Ended December 31,
Total
Dividends
Declared per
Share
2018
Dividends
Declared per
Depositary
Share
Total
1.32
1.48
1.52
52.50
1.32
56.25
$
$
$
5,250
$
5,900
6,000
5,250
5,352
1,219
26
44
45
40
27
28
210
1.32
1.48
1.52
52.50
1.32
12.18
$
$
26
44
45
40
27
6
188
In June 2019, the Federal Reserve issued a non-objection to our capital plan submitted as part of the 2019 CCAR
submission; and in connection with that capital plan, our Board approved a common stock purchase program authorizing
the purchase of up to $2.0 billion of our common stock from July 1, 2019 through June 30, 2020 (the 2019 Program).
We repurchased $500 million of our common stock in each of the third and fourth quarters of 2019 under the 2019
Program.
In June 2018, the Federal Reserve issued a conditional non-objection to our 2018 capital plan; and in connection
with that 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), under which we repurchased $300 million of
our common stock in each of the first and second quarters of 2019.
The table below presents the activity under our common stock purchase program during the year ended December
31, 2019:
TABLE 48: SHARES REPURCHASED
2018 Program
2019 Program
Total
Year Ended December 31, 2019
Shares Acquired
(In millions)
Average Cost per Share
Total Acquired
(In millions)
8.8
$
16.1
24.9
67.97
$
62.28
64.30
$
600
1,000
1,600
The table below presents the dividends declared on common stock for the periods indicated:
TABLE 49: COMMON STOCK DIVIDENDS
Years Ended December 31,
2019
2018
Dividends Declared
per Share
Total
(In millions)
Dividends Declared
per Share
Total
(In millions)
Common Stock
$
1.98
$
728
$
1.78
$
665
State Street Corporation | 114
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
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 $367.90 billion
and $342.34 billion as of December 31, 2019 and
December 31, 2018, respectively. 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 $385.43 billion and $357.89 billion as
collateral for indemnified securities on loan as of
December 31, 2019 and December 31, 2018,
respectively.
The cash collateral held by us as agent is invested
on behalf of our clients. In certain cases, the cash
collateral
repurchase
in
agreements, for which we indemnify the client against
third-party
invested
is
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
$385.43 billion and $357.89 billion, referenced above,
$45.66 billion and $42.61 billion was invested in
indemnified repurchase agreements as of December
31, 2019 and December 31, 2018, respectively. We or
our agents held $48.89 billion and $45.06 billion as
collateral for indemnified investments in repurchase
agreements as of December 31, 2019 and December
31, 2018, 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,
estimates and assumptions underlying
these
accounting policies is essential in order to understand
our reported consolidated results of operations and
financial condition.
The following is a discussion of the above-
estimates.
accounting
significant
mentioned
State Street Corporation | 115
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
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
three-level valuation hierarchy. The
prescribed
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).
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. We may elect to bypass
the qualitative assessment and complete a quantitative
assessment in any given year.
In 2019, due to the passage of time since the last
quantitative test, we elected to bypass the qualitative
assessment and we assessed goodwill for impairment
using a quantitative approach. We determined there
was no goodwill impairment in 2019.
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
State Street Corporation | 116
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
the estimated
other intangible assets for impairment at the lowest level
for which there are identifiable cash flows that are
largely independent of the cash flows from other groups
of assets using 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 2019.
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.
ITEM 7A. QUANTITATIVE AND QUALITATIVE
DISCLOSURES ABOUT MARKET RISK
The information provided under “Market Risk
in our
Management”
Management's Discussion and Analysis in this Form 10-
K, is incorporated by reference herein.
"Financial Condition"
in
ITEM
FINANCIAL
SUPPLEMENTARY DATA
8.
STATEMENTS AND
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 | 117
Report of Ernst & Young LLP, Independent Registered Public Accounting Firm
To the Shareholders and the 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, 2019 and 2018, 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, 2019, 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,
2019 and 2018, and the results of its operations and its cash flows for each of the three years in the period ended
December 31, 2019, 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, 2019, 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 20, 2020 expressed an unqualified
opinion thereon.
Change in Accounting Principle
As discussed in Note 1 to the consolidated financial statements, the Corporation has elected to change its method of
accounting for investments in low income housing tax credits from the equity method of accounting to the proportional
amortization method of accounting in each of the three years in the period ended December 31, 2019.
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.
State Street Corporation | 118
Critical Audit Matter
The critical audit matter communicated below is a matter arising from the current period audit of the financial statements
that was communicated or required to be communicated to the audit committee and that: (1) relates to accounts or
disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or
complex judgments. The communication of the critical audit matter does not alter in any way our opinion on the
consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below,
providing a separate opinion on the critical audit matter or on the account or disclosures to which it relates.
Description of the
Matter
How We Addressed
the Matter in Our
Audit
Servicing Fee Revenue
Revenue recognized by the Corporation as servicing fees was $5.1 billion for the year ended
December 31, 2019. As disclosed in Notes 24 and 25 of the consolidated financial statements,
servicing fee revenue involves revenue streams from various products which include custody,
product and participant level accounting, transfer agency, daily pricing and administration,
master trust and master custody, depotbank services (a fund oversight role created by non-
US regulation), record-keeping, cash management, and investment manager operations
outsourcing. The Corporation’s servicing fee revenue involves a significant volume of
contracts and transactions and is sourced from multiple systems and processes across
different business teams and geographies.
Auditing servicing fee revenue was complex and involved significant audit effort due to the
non-standard nature of the Corporation’s contracts, the volume of contracts, the impact of
contract renegotiations on accrued servicing fees, and the number of different processes
used to recognize revenue.
We identified and obtained an understanding of the processes used by the Corporation to
recognize revenue transactions. We evaluated the design and tested the operating
effectiveness of controls over the Corporation’s processes for recognizing servicing fee
revenue, including, among others, controls over the review of client contracts, the calculations
of the key drivers of revenue (e.g., assets under custody) and the flow of this information
from the business teams negotiating contract amendments to the department accruing
revenue.
Among other procedures, to test servicing fee revenue, we selected a sample of client
contracts and analyzed the contracts to determine whether terms that may have an impact
on revenue recognition, including performance obligations and specified fees, were identified
and properly considered in the evaluation of the accounting for the contracts and reperformed
the calculation of revenue for a sample of revenue transactions. We also agreed the amounts
recognized to source documents and tested the mathematical accuracy of the recorded
revenue. We inquired of the business teams involved in contract negotiations for a selection
of clients to assess the state of those negotiations and any effect on accrued servicing fees.
We obtained third party confirmation of the client balance due for a sample of servicing fees
receivable.
/s/ Ernst & Young LLP
We have served as the Corporation's auditor since 1972.
Boston, Massachusetts
February 20, 2020
State Street Corporation | 119
STATE STREET CORPORATION
CONSOLIDATED STATEMENT OF INCOME
(Dollars in millions, except per share amounts)
2019
2018
2017
Years Ended December 31,
$
5,074
$
5,421
$
Fee revenue:
Servicing fees
Management fees
Foreign exchange trading services
Securities finance
Software and processing fees
Total fee revenue
Net interest income:
Interest income
Interest expense
Net interest income
Other income:
Gains (losses) from sales of available-for-sale securities, net
Other income
Total other income
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
Income tax expense
Net income
Net income available to common shareholders
Earnings per common share:
Basic
Diluted
Average common shares outstanding (in thousands):
Basic
Diluted
Cash dividends declared per common share
1,771
1,111
471
720
9,147
3,941
1,375
2,566
(1)
44
43
11,756
10
4,541
1,465
983
470
77
236
1,262
9,034
2,712
470
2,242
2,009
5.43
5.38
$
$
$
1,851
1,201
543
438
9,454
3,662
991
2,671
9
(3)
6
12,131
15
4,780
1,324
985
500
24
226
1,176
9,015
3,101
508
2,593
2,404
6.46
6.39
$
$
$
5,365
1,616
1,071
606
343
9,001
2,908
604
2,304
(39)
—
(39)
11,266
2
4,394
1,167
838
461
266
214
929
8,269
2,995
839
2,156
1,972
5.26
5.19
369,911
373,666
371,983
376,476
1.98
$
1.78
$
374,793
380,213
1.60
$
$
$
$
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
Other comprehensive income (loss), net of related taxes:
Foreign currency translation, net of related taxes of $2, ($8) and $21,
respectively
Net unrealized gains (losses) on available-for-sale securities, net of
reclassification adjustment and net of related taxes of $212, ($134)
and $272, respectively
Net unrealized gains (losses) on available-for-sale securities
designated in fair value hedges, net of related taxes of $6, $9 and $16,
respectively
Other-than-temporary impairment on held-to-maturity securities related
to factors other than credit, net of related taxes of $1, $2 and $3,
respectively
Net unrealized gains (losses) on cash flow hedges, net of related
taxes of $9, ($17) and ($181), respectively
Net unrealized gains (losses) on retirement plans, net of related taxes
of ($8), $8 and $8, respectively
Other comprehensive income (loss)
Total comprehensive income
Years Ended December 31,
2019
2018
2017
$
2,242
$
2,593
$
2,156
(9)
545
18
1
25
(16)
564
(67)
(302)
24
4
(33)
27
(347)
$
2,806
$
2,246
$
900
367
22
3
(285)
24
1,031
3,187
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 $42,157 and $41,351)
Loans (less allowance for losses of $74 and $67)
Premises and equipment (net of accumulated depreciation of $4,367 and $4,152)
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 357,389,416 and 379,946,724 shares
outstanding
Surplus
Retained earnings
Accumulated other comprehensive income (loss)
Treasury stock, at cost (146,490,226 and 123,932,918 shares)
Total shareholders’ equity
Total liabilities and shareholders' equity
December 31,
2019
December 31,
2018
$
3,302
$
68,965
1,487
914
53,815
41,782
26,235
2,282
3,231
7,556
2,030
34,011
$
$
245,610
$
34,031
$
77,504
70,337
181,872
1,102
839
24,857
12,509
3,212
73,040
4,679
860
45,148
41,914
25,722
2,214
3,203
7,446
2,369
34,789
244,596
44,804
66,235
69,321
180,360
1,082
3,092
24,232
11,093
221,179
219,859
491
742
—
742
493
494
504
10,132
21,918
(876)
(10,209)
24,431
$
245,610 $
491
742
728
742
493
494
504
10,061
20,553
(1,356)
(8,715)
24,737
244,596
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
Accumulated
Other
Comprehensive
Income (Loss)
Retained
Earnings
Treasury Stock
Shares
Amount
Total
Balance at December 31, 2016
$
3,196
503,880
$
504
$ 9,782
$ 17,433
$
(2,040)
121,941
$ (7,682) $ 21,193
Net income
Other comprehensive income
(loss)
Cash dividends declared:
Common stock - $1.60 per share
Preferred stock
Common stock acquired
Common stock awards exercised
Other
2,156
(596)
(182)
(2)
16
1
1,031
2,156
1,031
(596)
(182)
16,788
(1,450)
(1,450)
(2,503)
4
104
(1)
120
(2)
Balance at December 31, 2017
$
3,196
503,880
$
504
$ 9,799
$ 18,809
$
(1,009)
136,230
$ (9,029) $ 22,270
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 exercised
Other
2,593
(347)
2,593
(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 at December 31, 2018
$
3,690
503,880
$
504
$ 10,061
$ 20,553
$
(1,356)
123,933
$ (8,715) $ 24,737
Reclassification of certain tax
effects(1)
Net income
Other comprehensive income
(loss)
Preferred stock redeemed
(728)
Cash dividends declared:
Common stock - $1.98 per share
Preferred stock
Common stock acquired
Common stock awards exercised
Other
(84)
564
84
2,242
(22)
(728)
(210)
(1)
95
(24)
—
2,242
564
(750)
(728)
(210)
24,884
(1,600)
(1,600)
(2,295)
(32)
103
3
198
(22)
Balance at December 31, 2019
$
2,962
503,880
$
504
$ 10,132
$ 21,918
$
(876)
146,490
$ (10,209) $ 24,431
(1) Represents the reclassification from accumulated other comprehensive income into retained earnings as a result of our adoption of ASU 2018-02 - Reclassification
of Certain Tax Effects from Accumulated Other Comprehensive Income in the first quarter of 2019.
The accompanying notes are an integral part of these consolidated financial statements.
State Street Corporation | 123
STATE STREET CORPORATION
CONSOLIDATED STATEMENT OF CASH FLOWS
(In millions)
Operating Activities:
Net income
Adjustments to reconcile net income to net cash provided by operating activities:
Deferred income tax expense (benefit)
Amortization of other intangible assets
Other non-cash adjustments for depreciation, amortization and accretion, net
Losses (gains) related to investment securities, net
Change in trading account assets, net
Change in accrued interest and fees receivable, net
Change in collateral deposits, net
Change in unrealized losses (gains) 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 decrease (increase) in interest-bearing deposits with banks
Net decrease (increase) 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 (decrease) increase in time deposits
Net increase (decrease) in all other deposits
Net (decrease) increase in other short-term borrowings
Proceeds from issuance of long-term debt, net of issuance costs
Payments for long-term debt and obligations under finance leases
Payments for redemption of preferred stock
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
Years Ended December 31,
2019
2018
2017
$
2,242
$
2,593
$
2,156
(130)
236
1,101
1
(54)
(28)
287
2,034
(713)
294
420
5,690
4,075
3,192
5,642
20,407
(38,164)
10,390
(6,938)
(519)
(54)
(647)
(730)
—
720
(136)
226
977
(6)
233
26
7,326
(1,836)
(22)
394
400
10,175
(5,813)
(1,438)
26,082
14,645
(31,814)
6,296
(6,539)
(2,461)
(2,595)
(326)
(609)
—
76
(2,626)
(4,496)
(11,255)
12,767
(2,233)
1,495
(402)
(750)
—
—
(1,585)
—
(81)
(930)
—
(2,974)
90
3,212
6,673
(11,209)
188
995
(1,461)
—
495
1,150
(350)
—
(124)
(828)
—
(4,471)
1,208
2,004
$
$
3,302
$
3,212
$
1,382
$
510
$
981
549
92
214
871
39
(69)
(455)
1,819
3,267
(1,334)
33
307
6,940
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)
—
—
—
(1,292)
(126)
(768)
9
(6,188)
800
1,204
2,004
593
345
The accompanying notes are an integral part of these consolidated financial statements.
State Street Corporation | 124
STATE STREET CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1. Summary of Significant Accounting
Policies
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.
regulation);
record-keeping;
We have two lines of business:
Investment Servicing provides a suite of related
products and services including: custody; product and
level accounting; daily pricing and
participant
administration; master trust and master custody;
depotbank services (a fund oversight role created by
non-U.S.
cash
management; foreign exchange, brokerage and other
trading services; securities finance and enhanced
custody products; deposit and short-term investment
financing;
facilities;
investment
lease
manager and alternative
investment manager
risk and
operations outsourcing; performance,
compliance analytics; and financial data management
to support institutional investors. Our CRD business
also falls within our Investment Servicing line of
business and includes products and services, such as:
portfolio modeling and construction;
trade order
management; investment risk and compliance; and
wealth management solutions.
loans and
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 Global
(formerly Outsourced Chief
Fiduciary Solutions
Investment Officer). 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
to
performance fees.
related
Consolidation
Our consolidated financial statements include the
accounts of the Parent Company and its majority- and
wholly-owned and otherwise controlled subsidiaries,
including State Street Bank. All material inter-company
transactions and balances have been eliminated.
Certain previously reported amounts have been
reclassified to conform to current-year presentation.
We consolidate subsidiaries in which we exercise
control. Investments in unconsolidated subsidiaries,
recorded in other assets, generally are accounted for
under the equity method of accounting if we have the
ability to exercise significant influence over the
operations of the investee. For investments accounted
for under the equity method, our share of income or loss
is recorded in software and processing fees 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.
State Street Corporation | 125
STATE STREET CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Securities Purchased Under Resale Agreements and Securities Sold Under Repurchase Agreements
Securities purchased under resale agreements and sold under repurchase agreements are treated as
collateralized financing transactions, and are recorded in our consolidated statement of condition at the amounts at
which the securities will be subsequently resold or repurchased, plus accrued interest. Our policy is to take possession
or control of securities underlying resale agreements either directly or through agent banks, allowing borrowers the
right of collateral substitution and/or short-notice termination. We revalue these securities daily to determine if additional
collateral is necessary from the borrower to protect us against credit exposure. We can use these securities as collateral
for repurchase agreements.
For securities sold under repurchase agreements collateralized by our investment securities portfolio, the dollar
value of the securities remains in investment securities in our consolidated statement of condition. Where a master
netting agreement exists or both parties are members of a common clearing organization, resale and repurchase
agreements with the same counterparty or clearing house and maturity date are recorded on a net basis.
Fee and Net Interest Income
The majority of fees from investment servicing, investment management, securities finance, trading services and
certain types of software and processing fees 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
Goodwill and Other Intangible Assets
Derivative Financial Instruments
Offsetting Arrangements
Contingencies
Variable Interest Entities
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
2
3
4
5
10
11
13
14
18
22
23
25
Page
Page
Page
Page
Page
Page
Page
Page
Page
Page
Page
Page
128
135
141
143
147
152
156
158
164
168
169
172
State Street Corporation | 126
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, 2019:
Standard
Description
2016-13, Financial
ASU
Instruments-Credit
Losses
(Topic 326): Measurement of
Credit Losses on Financial
Instruments
The standard, and
its related amendments,
replaces the existing incurred 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.
ASU 2017-04,
Intangibles-
Goodwill and Other (Topic
350): Simplifying the Test for
Goodwill Impairment
ASU 2018-13, Fair Value
(Topic 820):
Measurement
Disclosure
Framework-
Changes to the Disclosure
Requirements for Fair Value
Measurement
the
standard
The
subsequent
simplifies
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
its carrying amount and recognize an
with
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 eliminates, amends and adds
disclosure
value
measurements.
requirements
fair
for
Date of
Adoption
January 1,
2020
January 1,
2020
January 1,
2020
Effects on the financial statements or
other significant matters
We have assessed the impact of the
standard on our consolidated
financial
statements. We established a steering
committee which provided cross-functional
governance over the project plan and key
decisions. Key accounting policies were
enhanced and we refined the credit loss
models, processes and the associated data
requirements needed to meet the standard.
The majority of our exposures utilize a
probability-of-default and loss-given-default
methodology to estimate the credit loss
reserve. Our senior secured loan portfolio
remains a major driver of the allowance for
credit loss, along with off-balance sheet
commitments. There was no material
allowance upon implementation for held-to-
maturity exposures given the nature of our
portfolio. Our credit loss models were
approved for use by our Model Validation
Group in 2019. We executed our new
processes in parallel with the existing
processes during 2019 to ensure that we
have an appropriate control environment
over the allowance for credit losses upon
adoption in 2020. Upon adoption of the new
guidance on January 1, 2020, no material
retained earnings was
adjustment
required.
to
We have adopted the new standard as of
January 1, 2020 prospectively. There are no
material impacts as a result of the adoption.
to early adopt
We have elected
the
provisions of the new standard that eliminate
or amend disclosures as of December 31,
2018 and our disclosures were modified
accordingly. The remaining provisions of the
standard that add disclosures have been
adopted from January 1, 2020 and applied
prospectively.
Intangibles-
ASU 2018-15,
Goodwill and Other-Internal-
(Subtopic
Use Software
Customer’s
350-40):
for
Accounting
Costs
Implementation
Cloud
Incurred
Computing
Arrangement.
That Is a Service Contract (a
consensus of the Financial
Accounting Standards Board
Emerging Issues Task Force)
in
a
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 guidance aligns
treatment for capitalization of implementation costs
with guidance on internal-use software.
January 1,
2020
the new standard
We have adopted
prospectively as of January 1, 2020. There
are no material impacts as a result of the
adoption.
State Street Corporation | 127
STATE STREET CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Relevant standards that were adopted in 2019:
Change in Accounting Method
recognized
We adopted ASU 2016-02, Leases (Topic 842)
and relevant amendments, effective January 1, 2019.
The standard represents a change to lease accounting
and requires all leases, other than short-term leases,
to be reported on the balance sheet through recognition
of a right-of-use asset and a corresponding liability for
future lease obligations. The standard also requires
incremental disclosures for assets, expenses, and cash
flows associated with leases, as well as a maturity
analysis of lease liabilities. We adopted Topic 842 by
applying the transition method whereby comparative
periods have not been restated, and no adjustment to
retained earnings was required. Upon adoption of the
right-of-use assets of
standard, we
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.
There were no material changes to the recognition of
lease expenses in the Consolidated Statement of
Income as a result of the adoption of Topic 842. For
adoption, we elected Topic 842’s package of three
practical expedients, and (1) did not reassess whether
any expired or existing contracts are or contain leases,
(2) did not reassess the lease classification for any
expired or existing leases, and (3) did not reassess
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
elected the practical expedient to not separate lease
and nonlease components of leases.
-
We adopted ASU 2017-08, Receivables
Nonrefundable Fees and Other Costs (Subtopic
310-20): Premium Amortization on Purchased Callable
Debt Securities, effective January 1, 2019. 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. The impact to beginning retained earnings
was not material.
Income
We adopted ASU 2018-02, Income Statement -
(Topic 220):
Reporting Comprehensive
Reclassification of Certain Tax Effects
from
Accumulated Other Comprehensive Income, effective
January 1, 2019. 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 comprehensive income to retained
earnings. Upon adoption of the standard we reclassified
approximately $84 million of stranded tax effects.
During the first quarter of 2019, we voluntarily
changed our accounting method under the FASB ASC
323, Investments - Equity Method and Joint Ventures,
for investments in low income housing tax credit
(LIHTC) from the equity method of accounting to the
proportional amortization method of accounting. While
both methods of accounting are acceptable under U.S.
GAAP, we believe the proportional method is preferable
because it more fairly represents the economics of
LIHTC investments, which are made primarily for the
purpose of receiving tax credits and other tax benefits.
In addition, this method aligns to the method typically
used by the companies within our industry which have
similar investments. In addition to the change in the
timing of
income on LIHTC
investments, amortization of the LIHTC investments is
now recorded fully within the Income tax expense
(benefit) line instead of the software and processing
fees line on the consolidated statements of operations.
As part of our change in accounting, all prior periods
were
the change. Additional
information about the effect of the changes on the
financial statement line items for prior periods is
provided by Exhibit 99.2 to our Current Report on Form
8-K filed with the SEC on May 2, 2019.
the recognition of
revised
reflect
to
Since the change in accounting method was
effective in the first quarter of 2019 and the financial
results under the equity method of accounting as
compared to the proportional amortization method of
future management
accounting would not affect
decisions, we did not undertake the operational effort
and cost to maintain separate systems of record for the
equity method of accounting to enable a calculation of
the impact of the change subsequent to the first quarter
of 2019. However, we estimate that software and
processing fees and income tax expense (benefit)
would have both been lower had we continued to use
the equity method, resulting in an immaterial impact to
net income and earnings per share.
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
State Street Corporation | 128
STATE STREET CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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
compares
assumptions and the level of market participant
information used to support those assumptions. In
significant
addition, management
assumptions used by third parties to available market
information. Such information may include known
trades or, to the extent that trading activity is limited,
comparisons to market research information pertaining
to credit expectations, execution prices and the timing
of cash flows and, where information is available, back-
testing.
Derivative instruments categorized in level 2
predominantly represent foreign exchange contracts
used in our trading activities, for which fair value is
measured using discounted cash-flow techniques, with
inputs consisting of observable spot and forward points,
as well as observable interest rate curves. With respect
to derivative instruments, we evaluate the impact on
valuation of the credit risk of our counterparties. 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, 2019
and 2018.
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,
typically non-binding broker/dealer quotes, or
through the use of internally-developed pricing
its
models. Management has evaluated
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.
State Street Corporation | 129
STATE STREET CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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:
Fair Value Measurements on a Recurring Basis
As of December 31, 2019
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
Available-for-sale 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
Total available-for-sale investment
securities
Other assets:
Derivative instruments:
Foreign exchange contracts
Interest rate contracts
Total derivative instruments
Other
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
$
$
$
$
$
34
146
21
201
3,487
—
3,487
—
—
—
—
—
—
—
—
—
—
—
—
3,487
—
—
—
—
3,688
5
3
6
—
9
14
$
$
$
$
173
540
713
—
17,838
17,838
531
89
—
620
1,980
1,292
12,373
8,613
24,258
1,783
104
2,973
47,576
15,136
8
15,144
504
63,937
$
—
—
—
—
—
—
—
—
—
1,820
1,820
—
887
—
45
932
—
—
—
2,752
4
—
4
—
2,756
$
$ (10,391)
(4)
(10,395)
—
$ (10,395) $
— $
— $
— $
15,144
43
182
15,369
15,369
$
$
3
—
—
3
3
$
$
(8,918)
(4)
—
(8,922)
(8,922) $
34
319
561
914
3,487
17,838
21,325
531
89
1,820
2,440
1,980
2,179
12,373
8,658
25,190
1,783
104
2,973
53,815
4,749
4
4,753
504
59,986
5
6,232
45
182
6,459
6,464
(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 $2.31 billion and $0.84 billion, respectively, for cash collateral received from and provided to derivative
counterparties.
(2) As of December 31, 2019, the fair value of other non-U.S. debt securities included $5.50 billion of supranational and non-U.S. agency bonds, $1.78 billion of corporate
bonds and $0.68 billion of covered bonds.
State Street Corporation | 130
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)
Total Net
Carrying Value
in Consolidated
Statement of
Condition
Impact of
Netting(1)
$
— $
(In millions)
Assets:
Trading account assets:
U.S. government securities
Non-U.S. government securities
Other
Total trading account assets
Available-for-sale 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
Total available-for-sale investment
securities
Other assets:
Derivative instruments:
Foreign exchange contracts
Interest rate contracts
Total derivative instruments
Other
Total assets carried at fair value
Liabilities:
Accrued expenses and other liabilities:
Derivative instruments:
Foreign exchange contracts
Interest rate contracts
Other derivative contracts
Total derivative instruments
Total liabilities carried at fair value
$
$
$
$
34
146
—
180
1,039
—
1,039
—
—
—
—
—
—
—
—
—
—
—
—
1,039
—
13
13
—
1,232
$
— $
—
—
—
— $
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
60,282
16,518
71
214
16,803
16,803
$
$
$
—
—
—
—
—
—
—
—
—
593
593
—
631
—
58
689
—
2
—
1,284
4
—
4
—
1,288
$
$ (11,210)
—
(11,210)
—
$ (11,210) $
4
—
—
4
4
$ (11,564) $
—
—
(11,564)
$ (11,564) $
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
(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 $0.99 billion and $1.34 billion, 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 $3.20 billion of supranational and non-U.S. agency bonds, $1.33 billion of corporate
bonds and $1.30 billion of covered bonds.
State Street Corporation | 131
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,
2019 and 2018, respectively. Transfers into and out of level 3 are reported as of the beginning of the period presented.
During the years ended December 31, 2019 and 2018, transfers into level 3 were primarily related to collateralized
loan obligations, collateralized mortgage obligations and 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, 2019 and 2018, transfers out of level 3 were mainly related to certain ABS, MBS, municipal bonds
and non-U.S. debt securities, for which fair value was measured using prices for which observable market information
became available.
Fair Value Measurements Using Significant Unobservable Inputs
Year Ended December 31, 2019
Total Realized and
Unrealized Gains (Losses)
Fair Value
as of
December 31,
2018
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, 2019(1)
Change in
Unrealized
Gains
(Losses)
Related to
Financial
Instruments
Held as of
December
31, 2019
(In millions)
Assets:
Available-for-sale Investment
securities:
U.S. Treasury and federal
agencies:
Mortgage-backed securities
$
— $
— $
— $
123
$ — $
— $
— $
(123)
$
—
Asset-backed securities:
Collateralized loan
obligations
Total asset-backed securities
Non-U.S. debt securities:
Asset-backed securities
Other
Total non-U.S. debt
securities
State and political
subdivisions
Collateralized mortgage
obligations
Total Available-for-sale
investment securities
Other assets:
Derivative instruments:
Foreign exchange
contracts
Total derivative instruments
Total assets carried at fair
value
593
593
631
58
689
—
2
1,284
1
1
—
—
—
—
—
1
—
—
(9)
(1)
(10)
—
—
1,065
1,065
340
—
340
—
—
(10)
1,528
4
4
(15)
(15)
—
—
16
16
—
—
—
—
—
—
—
—
—
—
(342)
(342)
(36)
—
(36)
—
(2)
503
503
—
—
—
—
—
—
—
(39)
(12)
(51)
—
—
1,820
1,820
887
45
932
—
—
(380)
503
(174)
2,752
(1)
(1)
—
—
—
—
$
4
4
$
1,288
$
(14)
$
(10)
$
1,544
$ — $
(381)
$
503
$
(174)
$
2,756
$
(11)
(11)
(11)
(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 | 132
STATE STREET CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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
(In millions)
Assets:
Available-for-sale Investment
securities:
Asset-backed securities:
Collateralized loan
obligations
$
1,358
$
Total asset-backed securities
1,358
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 Available-for-sale
investment securities
Other assets:
Derivative instruments:
Foreign exchange contracts
Total derivative instruments
Total assets carried at fair
value
119
402
204
725
43
—
2,126
1
1
4
4
—
—
—
—
—
—
4
(3)
(3)
$
(7)
$
351
$ (636)
$
(268)
$
— $
(209)
$
(7)
351
(636)
(268)
—
(209)
—
(14)
(6)
(20)
—
—
—
495
13
508
—
—
—
(310)
(59)
(369)
(37)
—
—
(56)
(30)
(86)
(1)
(6)
—
114
—
114
—
8
(119)
—
(64)
(183)
(5)
—
593
593
—
631
58
689
—
2
(27)
859
(1,042)
(361)
122
(397)
1,284
—
—
6
6
—
—
—
—
—
—
—
—
$
4
4
$
2,127
$
1
$
(27)
$
865
$ (1,042)
$
(361)
$
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.
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)
As of December 31,
2019
As of December 31,
2018
Valuation
Technique
Significant
Unobservable
Input(1)
As of December 31,
2019
As of December 31,
2018
Quantitative Information about Level 3 Fair Value Measurements
Fair Value
Weighted-Average
Significant unobservable inputs readily available to State Street:
Assets:
Derivative Instruments, foreign
exchange contracts
Total
Liabilities:
Derivative instruments, foreign
exchange contracts
Total
$
$
$
$
4
4
3
3
$
$
$
$
4 Option model
Volatility
8.2%
11.4%
4
4 Option model
Volatility
7.0%
11.4%
4
(1) Significant changes in these unobservable inputs may result in significant changes in fair value measurement of the derivative instrument.
State Street Corporation | 133
STATE STREET CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Financial Instruments Not Carried at Fair Value
Estimates of fair value for financial instruments not carried at fair value on a recurring basis in our consolidated
statement of condition are generally subjective in nature, and are determined as of a specific point in time based on
the characteristics of the financial instruments and relevant market information. Disclosure of fair value estimates is
not required by U.S. GAAP for certain items, such as lease financing, equity- method investments, obligations for
pension and other post-retirement plans, premises and equipment, other intangible assets and income-tax assets and
liabilities. Accordingly, aggregate fair-value estimates presented do not purport to represent, and should not be
considered representative of, our underlying “market” or franchise value. In addition, because of potential differences
in methodologies and assumptions used to estimate fair values, our estimates of fair value should not be compared
to those of other financial institutions.
We use the following methods to estimate the fair values of our financial instruments:
• For financial instruments that have quoted market prices, those quoted prices are used to estimate fair
value;
• For financial instruments that have no defined maturity, have a remaining maturity of 180 days or less, or
reprice frequently to a market rate, we assume that the fair value of these instruments approximates their
reported value, after taking into consideration any applicable credit risk; 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, commercial
real estate loans, purchased receivables and municipal loans is estimated using information obtained from independent
third parties or by discounting expected future cash flows using current rates at which similar loans would be made to
borrowers with similar credit ratings for the same remaining maturities. Commitments to lend have no reported value
because their terms are at prevailing market rates.
The following tables present the reported amounts and estimated fair values of the financial assets and liabilities not
carried at fair value, as they would be categorized within the fair value hierarchy, as of the dates indicated:
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)
Fair Value Hierarchy
(In millions)
December 31, 2019
Financial Assets:
Cash and due from banks
$
3,302
$
3,302
$
3,302
$
— $
Interest-bearing deposits with banks
Securities purchased under resale agreements
Investment securities held-to-maturity
Net loans(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)
68,965
1,487
41,782
26,235
7,500
68,965
1,487
42,157
26,292
7,500
—
—
10,299
—
—
68,965
1,487
31,682
24,432
7,500
$
34,031
$
34,031
$
— $
34,031
$
77,504
70,337
1,102
839
12,509
7,500
77,504
70,337
1,102
839
12,770
7,500
—
—
—
—
—
—
77,504
70,337
1,102
839
12,621
7,500
—
—
—
176
1,860
—
—
—
—
—
—
149
—
(1) Includes $9 million of loans classified as held-for-sale that were measured at fair value on a recurring basis as of December 31, 2019.
(2) Represents a portion of underlying client assets related to our enhanced custody business, which clients have allowed us to transfer and re-pledge.
State Street Corporation | 134
STATE STREET CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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)
(In millions)
December 31, 2018
Financial Assets:
Cash and due from banks
$
3,212
$
3,212
$
3,212
$
— $
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)
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 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.
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.
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 | 135
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
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, 2019
Gross
Unrealized
Gains
Losses
Amortized
Cost
Fair
Value
Amortized
Cost
December 31, 2018
Gross
Unrealized
Gains
Losses
Fair
Value
$
3,506
$
9
$
17,599
21,105
264
273
532
90
1,822
2,444
1,978
2,179
12,243
8,595
24,995
1,725
104
2,941
1
—
1
2
3
2
131
73
209
59
—
32
$
53,314
$
575
$
28
25
53
2
1
3
6
1
2
1
10
14
1
—
—
74
$
3,487
$
1,035
$
4
$
— $
1,039
17,838
21,325
16,112
17,147
531
89
1,820
2,440
1,980
2,179
12,373
8,658
25,190
1,783
104
2,973
538
609
594
1,741
1,687
1,580
12,816
6,600
22,683
1,905
200
1,683
37
41
4
—
1
5
—
—
22
18
40
20
—
1
181
181
15,968
17,007
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
$
53,815
$
45,359
$
107
$
318
$
45,148
$
10,311
$
24
$
3
$
10,332
$
14,794
$
— $
26,297
36,608
316
340
3,783
—
—
3,783
366
—
328
—
694
697
10
—
—
10
82
—
—
—
82
38
44
47
41
—
—
41
6
—
—
—
6
1
26,569
36,901
21,647
36,441
3,752
—
—
3,752
442
—
328
—
770
734
3,191
193
1
3,385
638
223
358
46
1,265
823
24
24
35
—
—
35
77
—
1
—
78
38
199
518
717
$
14,595
21,153
35,748
10
—
—
10
9
—
—
—
9
2
3,216
193
1
3,410
706
223
359
46
1,334
859
Total
$
41,782
$
470
$
95
$
42,157
$
41,914
$
175
$
738
$
41,351
(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, 2019 and December 31, 2018, the fair value of other non-U.S. debt securities included $5.50 billion and $3.20 billion, respectively, primarily of supranational and non-U.S.
agency bonds, $1.78 billion and $1.33 billion, respectively, of corporate bonds and $0.68 billion and $1.30 billion, respectively, of covered bonds.
(3) As of December 31, 2019 and December 31, 2018, the fair value of state and political subdivisions includes securities in trusts of $0.94 billion and $1.05 billion respectively. Additional information
about these trusts is provided in Note 14.
State Street Corporation | 136
STATE STREET CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Aggregate investment securities with carrying values of approximately $49.48 billion and $38.87 billion as of
December 31, 2019 and December 31, 2018, respectively, were designated as pledged for public and trust deposits,
short-term borrowings and for other purposes as provided by law.
In 2019, 2018 and 2017, $3.98 billion, $2.13 billion and $496 million, respectively, of agency MBS, previously
classified as AFS, were transferred to HTM. These transfers reflect our intent to hold these securities until their maturity.
These securities were transferred at fair value, which included a net unrealized loss of $49 million, $53 million and
$3 million as of December 31, 2019, 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).
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, Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting
for Hedging Activities.
In 2018, we sold approximately $26 billion of AFS securities, primarily ABS and municipal bonds, resulting in a
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.
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:
(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
Total asset-backed securities
Non-U.S. debt securities:
Mortgage-backed securities
Total non-U.S. debt securities
Collateralized mortgage obligations
Total
As of December 31, 2019
Less than 12 months
12 months or longer
Total
Fair
Value
Gross
Unrealized
Losses
Fair
Value
Gross
Unrealized
Losses
Fair
Value
Gross
Unrealized
Losses
$
$
$
$
1,430
2,499
3,929
271
89
862
1,222
228
672
3,246
2,736
6,882
163
13
219
12,428
604
6,056
6,660
2,003
2,003
—
—
13
8,676
$
$
$
$
$
— $
28
7
35
1
1
2
4
—
1
1
9
11
—
—
—
50
$
— $
31
31
22
22
—
—
—
53
$
1,665
1,665
127
—
278
405
220
109
—
187
516
22
4
14
2,626
2,262
1,606
3,868
778
778
138
138
110
4,894
$
$
$
— $
18
18
1
—
1
2
1
1
—
1
3
1
—
—
24
3
13
16
19
19
6
6
1
42
$
$
$
1,430
4,164
5,594
398
89
1,140
1,627
448
781
3,246
2,923
7,398
185
17
233
15,054
2,866
7,662
10,528
2,781
2,781
138
138
123
13,570
$
$
$
$
28
25
53
2
1
3
6
1
2
1
10
14
1
—
—
74
3
44
47
41
41
6
6
1
95
State Street Corporation | 137
STATE STREET CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In millions)
Available-for-sale:
U.S. Treasury and federal agencies:
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
Total asset-backed securities
Non-U.S. debt securities:
Mortgage-backed securities
Total non-U.S. debt securities
Collateralized mortgage obligations
Total
1
26
2
29
5
6
45
16
72
7
3
26
318
199
518
717
10
10
9
9
2
As of December 31, 2018
Less than 12 months
12 months or longer
Total
Fair
Value
Gross
Unrealized
Losses
Fair
Value
Gross
Unrealized
Losses
Fair
Value
Gross
Unrealized
Losses
$
5,089
$
5,089
160
160
$
10,147
$
10,147
181
181
$
5,058
$
5,058
106
90
548
744
1,407
1,479
5,478
2,167
10,531
365
181
861
21
21
—
—
2
2
4
6
45
12
67
3
3
14
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 | 138
STATE STREET CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following table presents the amortized cost and the fair value of contractual maturities of debt investment
securities as of December 31, 2019. The maturities of certain ABS, MBS and collateralized mortgage obligations are
based on expected principal payments. Actual maturities may differ from these expected maturities since certain
borrowers have the right to prepay obligations with or without prepayment penalties.
(In millions)
Under 1 Year
1 to 5 Years
6 to 10 Years
Over 10 Years
Total
Amortized
Cost
Fair
Value
Amortized
Cost
Fair
Value
Amortized
Cost
Fair
Value
Amortized
Cost
Fair
Value
Amortized
Cost
Fair
Value
As of December 31, 2019
Available-for-sale:
U.S. Treasury and
federal agencies:
Direct obligations
$
1,050
$
1,058
$
1,009
$
1,010
$
1,448
$
1,419
$
— $
— $
3,507
$
3,487
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:
116
118
971
970
2,954
2,951
13,558
13,799
17,599
17,838
1,166
1,176
1,980
1,980
4,402
4,370
13,558
13,799
21,106
21,325
72
—
—
72
430
487
4,183
883
72
—
—
72
430
487
4,183
884
185
—
745
184
—
745
96
90
96
89
959
958
180
—
117
179
—
117
533
90
531
89
1,821
1,820
930
929
1,145
1,143
297
296
2,444
2,440
568
981
7,270
6,634
569
981
7,381
6,689
196
366
791
1,057
196
366
809
1,063
784
345
—
19
785
345
—
22
1,978
1,980
2,179
2,179
12,244
8,593
12,373
8,658
5,983
5,984
15,453
15,620
2,410
2,434
1,148
1,152
24,994
25,190
236
—
759
238
—
760
622
—
635
—
2,056
2,083
526
—
126
554
—
130
341
104
—
356
104
—
1,725
1,783
104
104
2,941
2,973
$
8,216
$
8,230
$
21,041
$ 21,247
$
8,609
$
8,631
$
15,448
$ 15,707
$
53,314
$ 53,815
Direct obligations
$
4,116
$
4,114
$
6,161
$
6,185
$
5
$
5
$
29
$
29
$
10,311
$ 10,333
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
Government
securities
Total non-U.S.
debt securities
Collateralized mortgage
obligations
9
9
438
439
2,515
2,539
23,335
23,581
26,297
26,568
4,125
4,123
6,599
6,624
2,520
2,544
23,364
23,610
36,608
36,901
96
96
16
328
344
2
92
92
16
328
344
3
207
206
408
402
3,072
3,051
3,783
3,751
207
206
408
402
3,072
3,051
3,783
3,751
33
—
33
33
—
33
283
287
4
—
4
13
4
—
4
13
313
—
313
399
390
—
390
431
366
328
694
697
443
328
771
734
Total
$
4,567
$
4,562
$
7,122
$
7,150
$
2,945
$
2,963
$
27,148
$ 27,482
$
41,782
$ 42,157
State Street Corporation | 139
STATE STREET CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following tables present gross realized gains
and losses from sales of AFS investment securities, and
the components of net impairment losses included in
net gains and losses related to investment securities
for the periods indicated:
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
(In millions)
Gross realized gains from sales of AFS
investment securities
Gross realized losses from sales of
AFS investment securities
Years Ended December 31,
2019
2018
2017
$
31
$
205
$
74
(32)
(196)
(113)
Net impairment losses:
Gross losses from OTTI
Net impairment losses
Gains (losses) related to investment
securities, net
Net impairment losses, recognized in
our consolidated statement of income,
were composed of the following:
Impairment associated with adverse
changes in timing of expected future
cash flows
—
—
(1)
(3)
(3)
6
—
(3)
Net impairment losses
$
— $
(3) $
—
—
(39)
—
—
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)
2019
2018
2017
Years Ended December 31,
Balance, beginning of period
Additions(1):
Other-than-temporary-
impairment recognized
Deductions(2):
Realized losses on securities
sold or matured
Balance, end of period
$
78
$
77
$
—
(8)
3
(2)
$
70
$
78
$
79
—
(2)
77
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, adjusted as
prepayments occur, resulting
in amortization or
accretion, accordingly.
For certain debt securities acquired which are
considered to be beneficial interests in securitized
financial assets, the excess of our estimate of
undiscounted future cash flows from these securities
over their initial recorded investment is accreted into
interest income on a level-yield basis over the securities’
estimated remaining terms. Subsequent decreases in
these securities’ expected future cash flows are either
recognized prospectively through an adjustment of the
yields on the securities over their remaining terms, or
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).
Our review of impaired securities generally
includes:
•
•
•
•
•
•
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;
activity in the market with respect to the issuer's
securities, which may indicate adverse credit
conditions; and
State Street Corporation | 140
STATE STREET CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
•
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.
is
the
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. 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.
We recorded less than $1 million, $3 million and
less than $1 million of OTTI, included in other income,
in the years ended December 31, 2019, 2018 and 2017,
respectively, which resulted from adverse changes in
the timing of expected future cash flows from non-U.S.
mortgage- and asset backed securities.
After a review of the investment portfolio, taking
into consideration current economic conditions,
adverse situations that might affect our ability to fully
collect principal and interest, the timing of future
payments, the credit quality and performance of the
collateral underlying 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 $169
million related to 622 securities as of December 31,
2019 to be temporary, and not the result of any material
changes in the credit characteristics of the securities.
Note 4. Loans
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
been
fair value based on
management's expectation with respect to future
principal and interest collection as of the date of
acquisition. Acquired loans are held for investment, and
as such their initial fair value is not adjusted subsequent
to acquisition. Loans that are classified as held-for-sale
are measured at lower of cost or fair value on an
individual basis.
Interest income related to loans is recognized in
our consolidated statement of income using the interest
method, or on a basis approximating a level rate of
return over the term of the loan. Fees received for
providing loan commitments and letters of credit that
we anticipate will result in loans typically are deferred
and amortized to interest income over the term of the
related loan, beginning with the initial borrowing. Fees
on commitments and letters of credit are amortized to
software and processing fees over the commitment
period when funding is not known or expected.
The
following
table presents our recorded
investment in loans, by segment, as of the dates
indicated:
(In millions)
Domestic(1):
Commercial and financial:
December 31,
2019
December 31,
2018
Loans to investment funds
$
14,546
$
Senior secured bank loans
Loans to municipalities
Other
Commercial real estate
Total domestic
Foreign(1):
Commercial and financial:
Loans to investment funds
Senior secured bank loans
Total foreign
Total loans(2)
Allowance for loan losses
3,342
848
26
1,766
20,528
4,662
1,119
5,781
26,309
(74)
15,050
3,490
902
37
874
20,353
4,505
931
5,436
25,789
(67)
Loans, net of allowance
$
26,235
$
25,722
(1) Domestic and foreign categorization is based on the borrower’s country of
domicile.
(2) Includes $3,256 million and $5,444 million of overdrafts as of December 31,
2019 and December 31, 2018, respectively.
We segregate our loans into two segments:
commercial and financial loans and commercial real
estate loans. 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 revolving credit lines providing liquidity
and leverage to mutual fund and private equity fund
clients.
Certain loans are pledged as collateral for access
to the Federal Reserve's discount window. As of
December 31, 2019 and December 31, 2018, the loans
pledged as collateral totaled $6.75 billion and $6.51
billion, respectively.
State Street Corporation | 141
STATE STREET CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The
following
tables present our recorded
investment in each class of loans by credit quality
indicator as of the dates indicated:
The
following
table presents our recorded
investment in loans, disaggregated based on our
impairment methodology, as of the dates indicated:
December 31, 2019
(In millions)
Investment grade(1)
Speculative(2)
Special mention(3)
Substandard(4)
Commercial
and
Financial
Commercial
Real Estate
Total Loans
$
19,501
$
1,766
$
5,008
25
9
—
—
—
21,267
5,008
25
9
Total
$
24,543
$
1,766
$
26,309
December 31, 2018
(In millions)
Investment grade(1)
Speculative(2)
Substandard(4)
Total
Commercial
and
Financial
Commercial
Real Estate
Total Loans
$
$
19,599
$
874
$
5,308
8
—
—
20,473
5,308
8
24,915
$
874
$
25,789
(1) Investment grade loans 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) Special mention loans consist of counterparties with potential weaknesses
that, if uncorrected, may result in deterioration of repayment prospects.
(4) Substandard loans consist of counterparties with well-defined weaknesses
that jeopardize repayment with the possibility we will sustain some loss.
We use an internal risk-rating system to assess
our risk of credit loss for each loan. 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, 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,
level and nature of
the
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, 2019.
We review loans for indicators of impairment.
Loans where 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.
December 31, 2019
(In millions)
Loans:
Commercial
and
Financial
Commercial
Real Estate
Total Loans
Individually evaluated
for impairment(1)
Collectively evaluated
for impairment
Total
$
$
25
$
— $
25
24,518
1,766
26,284
24,543
$
1,766
$
26,309
December 31, 2018
(In millions)
Loans:
Commercial
and
Financial
Commercial
Real Estate
Total Loans
Individually evaluated
for impairment(1)
Collectively evaluated
for impairment
Total
$
$
8
$
— $
8
24,907
874
25,781
24,915
$
874
$
25,789
(1) As of December 31, 2019, we had one loan for $25 million in the commercial and
financial segment that was individually evaluated for impairment and deemed to be
impaired. We recorded a specific reserve of $1 million on that loan. 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. We did
not record any reserve on this loan, which was subsequently paid in full in January
2019.
In certain circumstances, we restructure troubled
loans by granting concessions
to borrowers
experiencing financial difficulty. Once restructured, the
loans are generally considered impaired until their
maturity, regardless of whether the borrowers perform
under the modified terms of the loans. There were no
loans modified in troubled debt restructurings during the
years ended December 31, 2019 and 2018.
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, 2019 and
December 31, 2018, we had no loans on non-accrual
status and no loans 30 days or more contractually past
due.
State Street Corporation | 142
STATE STREET CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Allowance For Loan Losses
The allowance for loan losses, recorded as a
reduction of loans in our consolidated statement of
condition, represents management’s estimate of
incurred credit losses in our loan 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 portfolio include loss
experience, the probability of default reflected in our
counterparty's
internal
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.
rating
risk
the
of
Loans are charged off to the allowance for loan
losses in the reporting period in which either an event
occurs that confirms the existence of a loss on a loan,
including a sale of a loan below its carrying value, or a
portion of a loan is determined to be uncollectible. In
addition, any impaired loan that is determined to be
collateral-dependent is reduced to an amount equal to
the fair value of the collateral less costs to sell. A loan
is identified as collateral-dependent when management
determines that it is probable that the underlying
collateral will be the sole source of repayment.
Recoveries are recorded on a cash basis as
adjustments to the allowance.
The following table presents activity in the
allowance for loan losses for the periods indicated:
(In millions)
Allowance for loan losses:
Beginning balance
Provision for loan losses(1)
Charge-offs(1)
Ending balance
Years Ended December 31,
2019
2018
2017
$
$
67
10
(3)
$
54
15
(2)
$
74
$
67
$
53
2
(1)
54
(1) The provisions and charge-offs for loans were primarily attributable to exposure to
senior secured loans to non-investment grade borrowers, purchased in connection
with our loans.
Loans are reviewed on a regular basis, and any
provisions for loan losses that are recorded reflect
management's estimate of the amount necessary to
maintain the allowance for loan losses at a level
considered appropriate to absorb estimated incurred
losses in the loan 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
losses. Provisions to maintain the reserve at a level
considered by us to be appropriate to absorb estimated
incurred credit losses in outstanding facilities are
recorded in other expenses in our consolidated
statement of income.
Note 5. Goodwill and Other Intangible Assets
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
intangible assets,
represent purchased
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
amortization recorded
in our
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
2019, 2018 and 2017.
State Street Corporation | 143
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:
December 31, 2019
(In millions)
Other intangible
assets:
Gross
Carrying
Amount
Accumulated
Amortization
Net
Carrying
Amount
Client relationships
$
3,104
$
(1,718) $
1,386
Technology
Core deposits
Other
Total
December 31, 2018
(In millions)
Other intangible
assets:
403
673
100
(87)
(381)
(64)
316
292
36
$
4,280
$
(2,250) $
2,030
Gross
Carrying
Amount
Accumulated
Amortization
Net
Carrying
Amount
Client relationships
$
3,262
$
(1,605) $
1,657
Technology
Core deposits
Other
Total
389
676
103
(49)
(350)
(57)
340
326
46
$
4,430
$
(2,061) $
2,369
Amortization expense related to other intangible
assets was $236 million, $226 million and $214 million
in 2019, 2018 and 2017, respectively.
Expected future amortization expense for other
intangible assets recorded as of December 31, 2019 is
as follows:
(In millions)
Future Amortization
Years Ended December 31,
2020
2021
2022
2023
2024
$
240
230
227
226
220
The following table presents changes in the
carrying amount of goodwill during the periods indicated:
(In millions)
Goodwill:
Ending balance
December 31, 2017
Acquisitions(1)
Foreign currency
translation
Ending balance
December 31, 2018
Acquisitions(2)
Foreign currency
translation
Ending balance
December 31, 2019
Investment
Servicing(1)
Investment
Management
Total
$
5,752
$
270
$
1,512
(84)
7,180
122
(13)
—
(4)
266
—
1
6,022
1,512
(88)
7,446
122
(12)
$
7,289
$
267
$
7,556
(1) Investment Servicing includes our acquisition of CRD.
(2) We have completed the purchase price accounting for the CRD acquisition
as of March 31, 2019. Upon completion of valuation procedures related to the
acquired assets and assumed liabilities, primarily the identifiable intangible
assets, we recorded measurement period adjustments in the year ended
December 31, 2019, resulting in an increase in the goodwill of $113 million and
a decrease of $93 million in other intangible assets.
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, 2017
Acquisitions(1)
Amortization
Foreign currency
translation
Ending balance
December 31, 2018
Acquisitions(2)
Amortization
Foreign currency
translation
Ending balance
December 31, 2019
Investment
Servicing(1)
Investment
Management
Total
$
1,432
$
181
$
1,007
(196)
(25)
—
(30)
—
1,613
1,007
(226)
(25)
$
2,218
$
151
$
2,369
(93)
(207)
(10)
—
(29)
—
(93)
(236)
(10)
$
1,908
$
122
$
2,030
(1) Investment Servicing includes our acquisition of CRD.
(2) We have completed the purchase price accounting for the CRD acquisition as
of March 31, 2019. Upon completion of valuation procedures related to the
acquired assets and assumed liabilities, primarily the identifiable intangible
assets, we recorded measurement period adjustments in the year ended
December 31, 2019, resulting in a decrease in the fair value of other intangible
assets of $93 million, with a corresponding increase to goodwill.
State Street Corporation | 144
STATE STREET CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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
Collateral, net
Right-of-use assets(2)
Accounts receivable
Prepaid expenses
Receivable for securities settlement
Income taxes receivable
Deferred tax assets, net of valuation allowance(3)
Deposits with clearing organizations
Other
Total
$
$
December 31, 2019
December 31, 2018
18,524
$
4,753
3,395
2,899
874
858
432
395
336
309
216
58
962
19,575
5,189
3,323
2,882
1,354
—
308
493
531
129
113
58
834
34,011
$
34,789
(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) We adopted ASU 2016-02, Leases (Topic 842) and relevant amendments, effective January 1, 2019. 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.
Note 7. Deposits
As of December 31, 2019, we had $35.15 billion of time deposits outstanding, of which $3.00 billion were wholesale
CDs, $32.01 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 $139 million were non-U.S. and all of which are scheduled to mature in 2020. 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. As of December 31, 2019 and 2018, all U.S. and non-
U.S. time deposits were in amounts of $250,000 or more. Demand deposit overdrafts of $3.26 billion and $5.44 billion
were included as loan balances at December 31, 2019 and 2018, 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 1.64% and 0.88% in 2019 and 2018,
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:
(Dollars in millions)
Securities Sold Under
Repurchase Agreements
Tax-Exempt
Investment Program
2019
2018
2017
2019
2018
2017
2019
Other
2018
2017
Balance as of December 31
$ 1,102
$ 1,082
$ 2,842
$
823
$
931
$ 1,078
$
— $ 2,000
$
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
—
—
1
4,125
3,441
4,302
1,616
2,048
3,683
931
898
1,078
1,158
1,023
1,127
—
3
2,000
nm
.00%
1.38%
.03%
1.75%
1.74%
1.45%
.00%
2.68%
.00%
1.90
.62
.05
1.51
1.46
.79
.01
nm
.00
State Street Corporation | 145
STATE STREET CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Obligations to repurchase securities sold are recorded as a liability in our consolidated statement of condition.
U.S. government securities with a fair value of $4.11 billion underlying the repurchase agreements remained in our
investment securities portfolio as of December 31, 2019.
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, 2019.
U.S. Government
Securities Sold
Amortized
Cost
Fair Value
Repurchase
Agreements(1)
Amortized
Cost
$
3,891
$
4,112
$
1,102
(In millions)
Overnight maturity
(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 $86.67 billion in 2019 compared to $35.74 billion in
2018. The increase in average balance sheet netting, in 2019 compared to 2018, is primarily due to the expansion of
our FICC program and new client activity.
State Street Bank currently maintains a line of credit of CAD 1.40 billion, or approximately $1.08 billion, as of
December 31, 2019, 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, 2019 and 2018, there was no balance
outstanding on this line of credit.
Note 9. Long-Term Debt
(Dollars in millions)
Issuance Date
Maturity Date
Coupon Rate
Seniority
Parent Company And Non-Banking Subsidiary Issuances
Interest Due
Dates
As of December 31,
2019
2018
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)
November 1, 2019
November 1, 2025
May 15, 2017
May 15, 2023
March 7, 2011
May 19, 2016
May 19, 2016
March 7, 2021
May 19, 2021
May 19, 2026
December 3, 2018
December 3, 2029
December 3, 2018
December 3, 2024
3.55%
2.55%
3.7%
3.3%
3.1%
2.354%
2.653%
4.375%
1.95%
2.65%
4.141%
3.776%
Senior notes
Senior notes
Senior notes
Senior notes
Subordinated notes
Fixed-to-floating rate senior
notes
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
April 30, 2007
June 15, 2047
Floating-rate
Junior subordinated debentures
November 1, 2019
November 1, 2034
3.031%
Fixed-to-floating rate senior
subordinated notes
May 15, 2028
Floating-rate
Junior subordinated debentures
June 15, 2026(3)
7.35%
Senior notes
May 15, 1998
June 21, 1996
Parent Company
Long-term finance leases
Total long-term debt
2/18; 8/18(1)
2/18; 8/18
5/20; 11/20(1)
6/16; 12/16(1)
5/15; 11/15(1)
5/1; 11/1
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
3/15; 6/15; 9/15;
12/15
5/1; 11/1(2)
2/15; 5/15; 8/15;
11/15
6/15; 12/15
$
1,331
$
1,191
1,037
1,022
1,006
991
753
748
744
741
546
522
500
499
492
100
150
136
1,268
1,177
1,006
979
972
—
734
731
725
698
513
507
499
794
—
150
150
190
$
12,509
$
11,093
(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 both December 31, 2019 and 2018, the carrying value of long-term debt associated with these fair value hedges was $157 million. Refer to Note 10 for additional information about fair
value hedges.
(2) The subordinated notes qualify for inclusion in tier 2 regulatory capital under current federal regulatory capital guidelines.
(3) We may not redeem notes prior to their maturity.
State Street Corporation | 146
STATE STREET CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
In the fourth quarter of 2019, we completed a cash
tender offer for approximately $297 million of our $800
million aggregate principal amount of outstanding
floating rate junior subordinated debentures due 2047,
resulting in a gain of approximately $44 million.
Additionally, in the fourth quarter of 2019, we completed
a redemption for approximately $50 million of our $150
million aggregate principal amount of outstanding
floating rate junior subordinated debentures due 2028.
Termination of Replacement Capital Covenant
junior
floating
Prior to November 20, 2019, we were subject to a
replacement capital covenant dated April 30, 2007 (the
Original RCC), as amended by the amendment to
replacement capital covenant dated May 13, 2016 (the
RCC Amendment and, together with the Original RCC,
the Replacement Capital Covenant). Pursuant to the
terms of the Replacement Capital Covenant, neither us
nor any of our subsidiaries, including State Street Bank,
was permitted to repay, redeem or purchase any of the
outstanding
subordinated
rate
debentures due 2047 prior to June 1, 2047 unless
certain conditions had been satisfied, except to the
extent that (i) we obtained the prior approval of the
Federal Reserve, if such approval was then required,
and (ii) we had received proceeds, up to specified
percentages of the aggregate principal amount repaid
or the applicable redemption or purchase price, from
the sale or issuance of qualifying securities with
characteristics that are the same as, or more equity-like
than, the applicable characteristics of the floating rate
junior subordinated debentures due 2047 during the
180 days prior to the date of that repayment, redemption
or purchase (which period was to be shortened under
certain specified circumstances). The Replacement
Capital Covenant was a covenant for the benefit of
persons buying, holding or selling specified series of
our unsecured
indebtedness or our
depository institution subsidiaries (the Covered Debt).
The original Covered Debt under the Replacement
Capital Covenant were the outstanding floating rate
junior subordinated debentures due 2028.
long-term
The Replacement Capital Covenant was
terminated automatically without further action on
November 20, 2019, following the settlement of the
partial redemption of approximately $50 million
aggregate principal amount of floating rate junior
subordinated debentures due 2028 and
the
redesignation of our 2.650% Senior Notes due 2026 as
Covered Debt for the purposes of the Replacement
Capital Covenant, and purchases of the floating rate
junior subordinated debentures due 2047 are
permissible without issuing qualifying securities under
the Replacement Capital Covenant. The Original RCC
and the RCC Amendment were included as Exhibit 99.2
and Exhibit 99.3 to our Current Report on Form 8-K,
which was filed on November 21, 2019.
Parent Company
As of December 31, 2019 and 2018, long-term
finance leases included $136 million and $190 million,
respectively, related
to our One Lincoln Street
headquarters building and related underground parking
garage. Refer to Note 20 for additional information.
Note 10. Derivative Financial Instruments
We use derivative financial instruments to support
our clients' needs and to manage our interest rate and
currency risks. These financial instruments consist of
FX 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. Derivative 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 accounting
relationships. Derivatives
in hedge 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
foreign exchange
financial
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
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
State Street Corporation | 147
STATE STREET CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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.
The fair value of these derivatives is referenced to the
value of units in State Street-sponsored investment
funds or funds sponsored by other unrelated entities.
We re-measure these derivatives to fair value quarterly,
and record the change in value in compensation and
employee benefits expenses in our consolidated
statement of income.
Derivatives Designated as Hedging Instruments
In connection with our asset-and-liability
management activities, we use derivative financial
instruments to manage our interest rate risk and foreign
currency risk 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
assessing hedge effectiveness of
the derivative
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.
Fair Value Hedges
Derivatives designated as fair value hedges are
utilized to mitigate the risk of changes in the fair values
of recognized assets and liabilities, including long-term
debt, AFS securities, and foreign currency investment
securities. We use interest rate or FX contracts in this
manner to manage our exposure to changes in the fair
value of hedged items caused by changes in interest
rates or FX 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. If a hedge is terminated, but the hedged
item was not derecognized, all remaining adjustments
to the carrying amount of the hedged item are amortized
over a period that is consistent with the amortization of
other discounts or premiums associated with the
hedged item.
Cash Flow Hedges
in
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 FX contracts to
hedge the change in cash flows attributable to FX
movements
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.
foreign
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, 2019, the maximum maturity date of the underlying
loans is approximately 4.7 years.
Net Investment Hedges
Derivatives categorized as net investment hedges
are entered into to protect the net investment in our
in
foreign operations against adverse changes
exchange rates. We use FX forward contracts to convert
the foreign currency risk to U.S. dollars to mitigate our
exposure to fluctuations in FX rates. The changes in fair
value of the FX forward contracts are recorded, net of
taxes, in the foreign currency translation component of
OCI.
State Street Corporation | 148
STATE STREET CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following table presents the aggregate contractual, or notional, amounts of derivative financial instruments
including those entered into for trading and asset-and-liability management activities as of the dates indicated:
(In millions)
December 31, 2019
December 31, 2018
Derivatives not designated as hedging instruments:
Interest rate contracts:
Futures
Foreign exchange contracts:
Forward, swap and spot
Options purchased
Options written
Futures
Other:
Stable value contracts(1)
Deferred value awards(2)
Derivatives designated as hedging instruments:
Interest rate contracts:
Swap agreements
Foreign exchange contracts:
Forward and swap
$
4,368
$
2,348
2,378,808
2,238,819
1,581
1,110
1,040
26,895
389
15,196
3,176
578
576
49
26,634
434
10,596
3,412
(1) The notional value of the stable value contracts represents our maximum exposure. However, exposure to various stable value contracts is generally contractually
limited to substantially lower amounts than the notional values.
(2) 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.
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)
December 31, 2019
December 31, 2018
December 31, 2019
December 31, 2018
Derivative Assets(1)
Derivative Liabilities(2)
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
$
$
$
$
15,140
$
16,369
$
15,054
$
—
—
182
15,140
$
16,369
$
15,236
$
— $
8
8
$
17
13
30
$
$
$
96
49
145
$
16,434
214
16,648
88
71
159
(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.
State Street Corporation | 149
630
$
723
$
—
(153)
(3)
—
—
—
(41)
(6)
(1)
5
632
(23)
—
8
—
—
(143)
474
STATE STREET CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following tables present the impact of our use of derivative financial instruments on our consolidated statement
of income for the periods indicated:
Years Ended December 31,
2019
2018
2017
Location of Gain (Loss) on
Derivative in Consolidated
Statement of Income
Amount of Gain (Loss) on Derivative Recognized
in Consolidated Statement of Income
(In millions)
Derivatives not designated as hedging
instruments:
Foreign exchange contracts
Foreign exchange contracts
Foreign exchange contracts
Interest rate contracts
Interest rate contracts
Foreign exchange trading services revenue $
Software and processing fees(1)
Interest expense(1)
Foreign exchange trading services revenue
Software and processing fees(1)
Other derivative contracts
Foreign exchange trading services revenue
Other derivative contracts
Compensation and employee benefits
Total
(205)
269
$
(171)
509
$
$
(1) 2018 includes approximately $15 million of swap costs related to the first quarter of 2018 that were reclassified from software and processing fees to NII.
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:
(In millions)
Long-term debt
Available-for-sale securities
Total
(In millions)
Long-term debt
Available-for-sale securities
Total
December 31, 2019
Hedged Items Currently Designated
Hedged Items No Longer Designated(1)
Carrying Amount of
Assets and
Liabilities(2)
Cumulative Hedge
Accounting Basis
Adjustments
Carrying Amount of
Assets and
Liabilities
Cumulative Hedge
Accounting Basis
Adjustments
$
$
9,769
$
940
10,709
$
164
$
49
213
$
1,199
$
—
1,199
$
(8)
—
(8)
December 31, 2018
Hedged Items Currently Designated
Hedged Items No Longer Designated(1)
Carrying Amount of
Assets and
Liabilities(2)
Cumulative Hedge
Accounting Basis
Adjustments
Carrying Amount of
Assets and
Liabilities
Cumulative Hedge
Accounting Basis
Adjustments
$
$
8,270
$
1,496
9,766
$
(137) $
72
(65) $
1,197
$
50
1,247
$
(20)
1
(19)
(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 zero and $458 million for December 31, 2019 and December 31, 2018, respectively.
As of December 31, 2019 and December 31, 2018, the total notional amount of the interest rate swaps of fair
value hedges was $10.20 billion and $9.30 billion, respectively.
State Street Corporation | 150
STATE STREET CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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
Years Ended December 31,
2017
2018
2019
Amount of Gain
(Loss) on Derivative
Recognized in
Consolidated
Statement of Income
Hedged Item
in Fair Value
Hedging
Relationship
Location of Gain
(Loss) on
Hedged Item in
Consolidated
Statement of Income
(In millions)
Derivatives designated as fair value hedges:
Foreign exchange
contracts
Foreign exchange
contracts
Software and
processing fees
Software and
processing fees
Interest rate contracts
Net interest income
Interest rate contracts
Net interest income
Interest rate contracts
Interest rate contracts
Total
Software and
processing fees
Software and
processing fees
$ — $
(74) $
18
—
(328)
626
Investment
securities
Foreign
exchange
deposit
Software and
processing fees
Software and
processing fees
(4)
266
—
—
31
(58)
—
—
Available-for-
sale securities(1) Net interest income
—
— Long-term debt
Net interest income
(255)
Available-for-
sale securities(1)
Software and
processing fees
39
(38)
Long-term debt
Software and
processing fees
—
—
—
2
328
(626)
(32)
49
—
—
—
—
(37)
39
$
262
$ (429) $
645
$ (253) $
419
$ (642)
Years Ended December 31,
2017
2018
2019
Amount of Gain
(Loss) on Hedged
Item Recognized in
Consolidated
Statement of Income
$
— $
74
$
(18)
(1) In 2019, 2018 and 2017, $18 million, $24 million and $22 million, respectively, of net unrealized gains on AFS investment securities designated in fair value hedges
were recognized in OCI.
Years Ended December 31,
2018
2017
2019
(In millions)
Amount of Gain or (Loss) Recognized in
Other Comprehensive Income on Derivative
Derivatives designated as cash flow hedges:
Location of Gain or
(Loss) Reclassified from
Accumulated Other
Comprehensive Income
into Income
Years Ended December 31,
2018
2017
2019
Amount of Gain or (Loss) Reclassified from
Accumulated Other Comprehensive Income
into Income
Interest rate contracts
Foreign exchange contracts
Total derivatives designated as
cash flow hedges
$
$
$
8
43
(12) $
(12)
(14) Net interest income
(104) Net interest income
51
$
(24) $
(118)
Derivatives designated as net investment hedges:
Foreign exchange contracts
Total derivatives designated as
net investment hedges
Total
$
$
30
$
81
$
(160)
Gains (Losses) related to
investment securities, net
30
81
81
$
57
$
(160)
(278)
$
$
$
$
(10) $
27
17
$
(1) $
27
26
$
— $
— $
—
—
17
$
26
$
2
24
26
—
—
26
Derivatives Netting and Credit Contingencies
Netting
Derivatives receivable and payable as well as cash collateral from the same counterparty are netted in the
consolidated statement of condition for 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.
Credit Contingencies
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, 2019 totaled approximately $2.03 billion, against which we provided $0.71
billion of collateral in the normal course of business. If our credit related contingent features underlying these agreements
were triggered as of December 31, 2019, the maximum additional collateral we would be required to post to our
counterparties is approximately $1.32 billion.
State Street Corporation | 151
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 for those transactions that met the netting requirements and were transacted under a legally enforceable
netting arrangement with the counterparty.
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, 2019 and December 31, 2018, the value of securities received as collateral from third parties
where we are permitted to transfer or re-pledge the securities totaled $10.09 billion and $11.69 billion, respectively,
and the fair value of the portion that had been transferred or re-pledged as of the same dates was $5.72 billion and
$5.31 million, respectively.
The following tables present information about the offsetting of assets related to derivative contracts and secured
financing transactions, as of the dates indicated:
Assets:
(In millions)
Derivatives:
Foreign exchange contracts
Interest rate contracts(6)
Cash collateral and securities netting
Total derivatives
Other financial instruments:
Resale agreements and securities
borrowing(7)(8)
Total derivatives and other financial
instruments
December 31, 2019
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)
$
15,140
$
(8,081) $
7,059
$
— $
7,059
8
NA
15,148
(4)
(2,310)
(10,395)
4
(2,310)
4,753
—
(685)
(685)
4
(2,995)
4,068
179,989
(159,978)
20,011
(19,572)
439
$
195,137
$
(170,373) $
24,764
$
(20,257) $
4,507
State Street Corporation | 152
STATE STREET CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Assets:
(In millions)
Derivatives:
Foreign exchange contracts
Interest rate contracts(6)
Cash collateral and securities netting
Total derivatives
Other financial instruments:
Resale agreements and securities
borrowing(7)(8)
Total derivatives and other financial
instruments
December 31, 2018
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
$
— $
13
NA
16,399
—
(987)
(11,210)
13
(987)
5,189
—
(220)
(220)
6,163
13
(1,207)
4,969
116,143
(91,889)
24,254
(22,872)
1,382
$
132,542
$
(103,099) $
29,443
$
(23,092) $
6,351
(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 $20.01 billion as of December 31, 2019 were $1.49 billion of resale agreements and $18.52 billion of collateral provided related to securities borrowing.
Included in the $24.25 billion as of December 31, 2018 were $4.68 billion of resale agreements and $19.58 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.
(8) Offsetting of resale agreements primarily relates to our involvement in FICC, where we settle transactions on a net basis for payment and delivery through the Fedwire
system.
NA Not applicable
The following tables present information about the offsetting of liabilities related to derivative contracts and secured
financing transactions, as of the dates indicated:
Liabilities:
December 31, 2019
(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)(8)
Gross Amounts
of Recognized
Liabilities(1)(2)
Gross Amounts
Offset in Statement
of Condition(3)
Net Amounts of
Liabilities Presented in
Statement of Condition
Cash and
Securities
Received(4)
Net Amount(5)
Gross Amounts Not Offset in
Statement of Condition
$
15,150
$
(8,081) $
7,069
$
— $
7,069
49
182
NA
15,381
(4)
—
(837)
(8,922)
45
182
(837)
6,459
—
—
(557)
(557)
45
182
(1,394)
5,902
171,853
(159,977)
11,876
(10,793)
1,083
Total derivatives and other financial
instruments
$
187,234
$
(168,899) $
18,335
$
(11,350) $
6,985
State Street Corporation | 153
STATE STREET CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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
$
16,522
$
(10,223) $
6,299
$
— $
71
214
NA
16,807
—
—
(1,341)
(11,564)
71
214
(1,341)
5,243
—
—
(215)
(215)
6,299
71
214
(1,556)
5,028
104,494
(91,889)
12,605
(11,543)
1,062
121,301
$
(103,453) $
17,848
$
(11,758) $
6,090
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)(8)
Total derivatives and other financial
instruments
$
(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 $11.88 billion as of December 31, 2019 were $1.10 billion of repurchase agreements and $10.77 billion of collateral received related to securities
lending transactions. Included in the $12.60 billion as of December 31, 2018 were $1.08 billion of repurchase agreements and $11.52 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.
(8) Offsetting of repurchase agreements primarily relates to our involvement in FICC, where we settle transactions on a net basis for payment and delivery through the
Fedwire system.
NA Not applicable
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 us 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:
U.S. Treasury and agency
securities
Total
Securities lending transactions:
US Treasury and agency
securities
Corporate debt securities
Equity securities
Other(1)
Total
Gross amount of recognized
liabilities for repurchase
agreements and securities
lending
As of December 31, 2019
As of December 31, 2018
Overnight and
Continuous
Up to 30
Days
Greater
than 90
Days
Total
Overnight and
Continuous
Up to 30
Days
Greater
than 90
Days
Total
$
156,465
$
— $
— $ 156,465
$
88,904
$
— $
— $ 88,904
156,465
15
354
7,389
7,500
15,258
—
—
—
—
—
—
—
156,465
88,904
—
—
88,904
—
—
130
—
130
15
354
7,519
7,500
15,388
249
278
6,426
8,500
15,453
—
—
137
—
137
—
—
—
—
—
249
278
6,563
8,500
15,590
$
171,723
$
— $
130
$ 171,853
$
104,357
$
137
$
— $ 104,494
(1) 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 | 154
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):
December 31,
2019
December 31,
2018
$
29,697
$
28,951
Indemnified securities financing $
367,901
$
Standby letters of credit
3,324
342,337
2,985
(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, 2019, 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
collateral
repurchase
in
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,
2019
December 31,
2018
$
367,901
$
342,337
385,428
357,893
45,658
42,610
48,887
45,064
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, 2019 and December 31, 2018, we had
approximately $18.52 billion and $19.58 billion,
respectively, of collateral provided and approximately
$10.77 billion and $11.52 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.
State Street Corporation | 155
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
regulatory
to
contingencies
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, 2019, our aggregate accruals
for loss contingencies for legal, regulatory and related
matters totaled approximately $146 million, including
potential fines by government agencies and civil
litigation with respect to the matters specifically
discussed below. To the extent that we have established
accruals in our consolidated statement of condition for
probable loss contingencies, such accruals may not be
sufficient to cover our ultimate financial exposure
associated with any settlements or judgments. Any such
ultimate financial exposure, or proceedings to which we
may become subject in the future, could have a material
adverse effect on our businesses, on our future
consolidated financial statements or on our reputation.
As of December 31, 2019, 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 $50 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
State Street Corporation | 156
STATE STREET CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
identified an additional area of incorrect expense billing
associated with mailing services in our retirement
services business. 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 the Employee Retirement Income
Security Act. 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 and the DOL, which reviews could result in
significant fines or other sanctions, civil and criminal,
against us. In June 2019, we reached an agreement
with the SEC to settle its claims that we violated the
recordkeeping provisions of Section 34(b) of the
Investment Company Act of 1940 and caused violations
of Section 31(a) of the Investment Company Act and
Rules 31a-1(a) and 31a-1(b) thereunder in connection
with our overcharges of customers which are registered
investment companies. In reaching this settlement, we
neither admitted nor denied the claims contained in the
SEC’s order, and agreed to pay a civil monetary penalty
of $40 million. Also in June 2019, we reached an
agreement with the Massachusetts Attorney General’s
office to resolve its claims related to this matter. In
reaching this settlement, we neither admitted nor
denied the claims in the order, and agreed to pay a civil
monetary penalty of $5.5 million. The costs associated
with
these settlements were within our related
previously established accruals for loss contingencies.
The SEC and Massachusetts Attorney General’s office
settlements both recognize that the payment of $48.8
million in disgorgement and interest is satisfied by our
direct reimbursements of our customers.
In late January 2020, the DOJ outlined a
framework for a possible resolution of their review. We
intend to attempt to negotiate a settlement of this matter
with the DOJ. We expect that any settlement with the
DOJ will include both financial and non-financial
provisions. Separately, we have inquired of the DOL as
to the status of their review. There can be no assurance
that any settlement with the DOJ or DOL will be reached
on financial or other terms acceptable to us or at all.
The aggregate amount of penalties that may potentially
be imposed upon us in connection with the resolution
to
legal accrual with respect
of all outstanding investigations into our historical billing
practices is not currently known. We have increased
the pending
our
government investigations and civil litigation with
respect to this matter. However, our ultimate liability with
respect to this matter might be significantly in excess
of our current accrual. Government authorities have
significant discretion in criminal and civil matters as to
the fines and other penalties they may seek to impose.
Any resolution of the DOJ and DOL claims may involve
penalties that could be a significant percentage, or a
multiple of, all or a portion of the overcharge. The
severity of such fines or penalties could take into
account factors such as the amount or duration of our
incorrect invoicing and the government’s or regulators’
assessment of the conduct of our employees, as well
as prior conduct such as that which resulted in our
January 2017 deferred prosecution agreement and
settlement of civil claims regarding our indirect FX
business.
The outcome of any of these proceedings and, in
particular, any criminal sanction could materially
adversely affect our results of operations and could
have significant collateral consequences
for our
business and reputation.
Federal Reserve/Massachusetts Division of Banks
Written Agreement
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, Anti-Money
Laundering regulations and U.S. economic sanctions
regulations promulgated by the Office of Foreign Assets
Control. 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 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
the Ohio public retirement plans matter.
Income Taxes
In determining our provision for income taxes, we
make certain judgments and interpretations with
respect to tax laws in jurisdictions in which we have
business operations. Because of the complex nature of
these laws, in the normal course of our business, we
are subject to challenges from U.S. and non-U.S.
income tax authorities regarding the amount of income
taxes due. These challenges may result in adjustments
to the timing or amount of taxable income or deductions
State Street Corporation | 157
STATE STREET CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 $149 million as of December 31, 2019
increased from $108 million as of December 31, 2018.
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 2017 and 2018. 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, 2019
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, 2019 and December 31, 2018, we
investment securities, composed of
carried AFS
securities related to state and political subdivisions, with
a fair value of $0.94 billion and $1.05 billion,
respectively, and other short-term borrowings of $0.82
in our
billion and $0.93 billion,
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 3.0
years as of December 31, 2019, compared to
approximately 3.6 years as of December 31, 2018.
Under separate legal agreements, we provide
liquidity facilities to these trusts and, with respect to
certain securities, letters of credit. As of December 31,
2019, our commitments to the trusts under these
liquidity facilities and/or letters of credit totaled $823
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.
State Street Corporation | 158
STATE STREET CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
With respect to our interests in funds that meet the definition of a VIE, a primary beneficiary assessment is
performed to determine if we have a controlling financial interest. As part of our assessment, we consider all the facts
and circumstances regarding the terms and characteristics of the variable interest(s), the design and characteristics
of the fund and the other involvements of the enterprise with the fund. Upon consolidation of certain funds, we retain
the specialized investment company accounting rules followed by the underlying funds.
All of the underlying investments held by such consolidated funds are carried at fair value, with corresponding
changes in the investments’ fair values reflected in 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, 2019, the aggregate assets and liabilities of our consolidated sponsored investment funds
totaled $21 million and $5 million, respectively. As of December 31, 2019, our maximum total exposure associated
with the consolidated sponsored investment funds totaled $15 million and represented the value of our economic
ownership interest in the funds. As of December 31, 2018, we did not have any consolidated sponsored investment
funds.
Our conclusion to consolidate a fund may vary from period to period, most commonly as a result of fluctuation in
our ownership interest as a result of changes in the number of fund shares held by either us or by third parties. Given
that the funds follow specialized investment company accounting rules which prescribe fair value, a de-consolidation
generally would not result in gains or losses for us.
The net assets of any consolidated fund are solely available to settle the liabilities of the fund and to settle any
investors’ ownership redemption requests, including any seed capital invested in the fund by 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.
As of December 31, 2019 and December 31, 2018, we managed certain funds, considered VIEs, in which we
held a variable interest but for which we were not deemed to be the primary beneficiary. Our potential maximum loss
exposure related to these unconsolidated funds totaled approximately $41 million and $70 million as of December 31,
2019 and December 31, 2018, respectively, and represented the carrying value of our investments, which are recorded
in either AFS investment securities or other assets in our consolidated statement of condition. The amount of loss we
may recognize during any period is limited to the carrying amount of our investments in the unconsolidated funds.
Note 15. Shareholders' Equity
Preferred Stock
The following table summarizes selected terms of each of the series of the preferred stock issued and
outstanding as of December 31, 2019:
Preferred
Stock(2):
Issuance Date
Depositary
Shares
Issued
Ownership
Interest Per
Depositary
Share
Liquidation
Preference
Per Share
Liquidation
Preference
Per
Depositary
Share
Per Annum Dividend Rate
Dividend
Payment
Frequency
Carrying
Value as of
December
31, 2019
(In millions)
Redemption Date(1)
Series C
August 2012
20,000,000
1/4,000th
$
100,000
$
25
5.25%
Quarterly
$
491
September 15, 2017
Series D
February 2014
30,000,000
1/4,000th
100,000
25
Series F
May 2015
750,000
1/100th
100,000
1,000
Series G
April 2016
20,000,000
1/4,000th
100,000
25
Series H
September 2018
500,000
1/100th
100,000
1,000
5.90% to but excluding March
15, 2024, then a floating rate
equal to the three-month
LIBOR plus 3.108%
5.25% to but excluding
September 15, 2020, then a
floating rate equal to the three-
month LIBOR plus 3.597%
5.35% to but excluding March
15, 2026, then a floating rate
equal to the three-month
LIBOR plus 3.709%
Quarterly
742 March 15, 2024
Semi-
annually
742
September 15, 2020
Quarterly
493 March 15, 2026
5.625% to but excluding
December 15, 2023, then a
floating rate equal to the three-
month LIBOR plus 2.539%
Semi-
annually
494
December 15, 2023
(1) On the redemption date, or any dividend payment 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.
State Street Corporation | 159
STATE STREET CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
We redeemed all outstanding Series E non-cumulative perpetual preferred stock as of December 15, 2019 at a
redemption price of $750 million ($100,000 per share equivalent to $25.00 per depositary share) plus accrued and
unpaid dividends. The difference of $22 million between the redemption value and the net carrying value resulted in
an EPS impact of approximately ($0.06) per share in 2019.
On February 12, 2020, we announced that we will redeem all 5,000 of our outstanding shares of our non-cumulative
perpetual preferred stock, Series C, for cash at a redemption price of $100,000 per share (equivalent to $25.00 per
depositary share) plus all declared and unpaid dividends. The redemption price will be payable on March 16, 2020,
and this redemption will be reflected in our first quarter 2020 results of operations.
The following table presents the dividends declared for each of the series of preferred stock issued and outstanding
for the periods indicated:
(Dollars in millions, except per
share amounts)
Preferred Stock:
Series C
Series D
Series E
Series F
Series G
Series H
Total
Dividends
Declared per
Share
$
5,250
$
5,900
6,000
5,250
5,352
5,625
2019
Dividends
Declared per
Depositary
Share
Years Ended December 31,
Total
Dividends
Declared per
Share
2018
Dividends
Declared per
Depositary
Share
Total
1.32
1.48
1.52
52.50
1.32
56.25
$
$
$
5,250
$
5,900
6,000
5,250
5,352
1,219
26
44
45
40
27
28
210
1.32
1.48
1.52
52.50
1.32
12.18
$
$
26
44
45
40
27
6
188
In February 2020, we declared dividends on our series D, F and G preferred stock of approximately $1,475,
$2,625 and $1,338, respectively, per share, or approximately $0.37, $26.25 and $0.33, respectively, per depositary
share. These dividends total approximately $11 million, $20 million and $7 million on our series D, F and G preferred
stock, respectively, which will be paid in March 2020. We also announced dividends on our series C preferred stock
of approximately $1,313, per share, or approximately $0.33 per depositary share, totaling approximately $6 million,
which will be paid in March 2020.
Common Stock
In June 2019, our Board approved a common stock purchase program authorizing the purchase of up to $2.0
billion of our common stock from July 1, 2019 through June 30, 2020 (the 2019 Program). We repurchased $500 million
of our common stock in each of the third and fourth quarters of 2019 under the 2019 Program.
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). We repurchased $300 million of our common
stock in each of the first and second quarters of 2019 under the 2018 Program.
The table below presents the activity under our common stock purchase program during the year ended December
31, 2019:
2018 Program
2019 Program
Total
Year Ended December 31, 2019
Shares Acquired
(In millions)
Average Cost per Share
Total Acquired
(In millions)
8.8
$
16.1
24.9
67.97
62.28
64.30
$
$
600
1,000
1,600
The table below presents the dividends declared on common stock for the periods indicated:
Years Ended December 31,
2019
2018
Dividends Declared per
Share
Total
(In millions)
Dividends Declared per
Share
Total
(In millions)
Common Stock
$
1.98
$
728
$
1.78
$
665
State Street Corporation | 160
STATE STREET CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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,
2019
2018
2017
Net unrealized (losses) on cash flow hedges
$
(70) $
(89) $
Net unrealized gains (losses) on available-for-sale securities portfolio
Net unrealized gains related to reclassified available-for-sale securities
Net unrealized gains (losses) on available-for-sale securities
Net unrealized (losses) on available-for-sale securities designated in fair value hedges
Net unrealized gains 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
426
19
445
(36)
46
(2)
(187)
(1,072)
(193)
58
(135)
(40)
16
(2)
(143)
(963)
(56)
148
19
167
(64)
(65)
(6)
(170)
(815)
$
(876) $
(1,356) $
(1,009)
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
(56) $
103
$
(65) $
(6) $
(170) $
(815) $
(1,009)
$
$
Balance as of December 31, 2017
Other comprehensive income (loss) before
reclassifications
Amounts reclassified into (out of) earnings
Other comprehensive income (loss)
Balance as of December 31, 2018
Other comprehensive income (loss) before
reclassifications
Reclassification of certain tax effects(1)
Amounts reclassified into (out of) earnings
Other comprehensive income (loss)
Balance as of December 31, 2019
$
(70) $
(52)
19
(33)
(285)
7
(278)
(89) $
(175) $
13
(6)
12
19
563
21
—
584
409
$
81
—
81
16
33
(3)
—
30
46
6
(2)
4
—
27
27
(148)
—
(148)
(398)
51
(347)
$
(2) $
(143) $
(963) $
(1,356)
2
(1)
(1)
—
—
(28)
(16)
(44)
(42)
(67)
—
(109)
$
(2) $
(187) $
(1,072) $
569
(84)
(5)
480
(876)
(1) Represents the reclassification from accumulated other comprehensive income into retained earnings as a result of our adoption of ASU 2018-02 - Reclassification
of Certain Tax Effects from Accumulated Other Comprehensive Income in the first quarter of 2019.
The following table presents after-tax reclassifications into earnings for the periods indicated:
(In millions)
Available-for-sale securities:
Years Ended December 31,
2019
2018
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 zero and ($2), respectively
$
— $
Net gains (losses) from sales of available-
for-sale securities
7
Held-to-maturity securities:
Other-than-temporary impairment on held-to-maturity securities related to
factors other than credit, net of related taxes of zero and $1, respectively
Cash flow hedges:
Gain reclassified from accumulated other comprehensive income into Income,
net of related taxes of $5 and $7
(1)
12
Losses reclassified (from) to other
comprehensive income
(2)
Net interest income reclassified from other
comprehensive income
19
Retirement plans:
Amortization of actuarial losses, net of related taxes of ($8) and $8, respectively
(16)
Total reclassifications (into) out of Accumulated other comprehensive loss
$
(5) $
Compensation and employee benefits
expenses
27
51
State Street Corporation | 161
STATE STREET CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 ratios using both the advanced approaches and the standardized approach. As a result, from January 1,
2015 going forward, our risk-based capital ratios for regulatory assessment purposes are the lower of each ratio
calculated under the standardized approach and the advanced approaches.
The methods for the calculation of our and State Street Bank's risk-based capital ratios have changed as the
provisions of the Basel III 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, 2019, we and State Street Bank exceeded all regulatory capital adequacy requirements
to which we were subject. As of December 31, 2019, State Street Bank was categorized as “well capitalized” under
the applicable regulatory capital adequacy framework, and exceeded all “well capitalized” ratio guidelines to which
it was subject. Management believes that no conditions or events have occurred since December 31, 2019 that
have changed the capital categorization of State Street Bank.
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 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 | 162
STATE STREET CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
State Street Corporation
State Street Bank
Basel III
Advanced
Approaches
December 31,
2019(1)
Basel III
Standardized
Approach
December 31,
2019(1)
Basel III
Advanced
Approaches
December 31,
2018(1)
Basel III
Standardized
Approach
December 31,
2018(1)
Basel III
Advanced
Approaches
December 31,
2019(1)
Basel III
Standardized
Approach
December 31,
2019(1)
Basel III
Advanced
Approaches
December 31,
2018(1)
Basel III
Standardized
Approach
December 31,
2018(1)
(Dollars in millions)
Common shareholders' equity:
Common stock and related surplus
$
10,636
$
10,636
$
10,565
$
10,565
$
12,893
$
12,893
$
12,894
$
12,894
Retained earnings
21,918
21,918
20,606
20,606
13,218
13,218
14,261
14,261
Accumulated other comprehensive income
(loss)
Treasury stock, at cost
Total
Regulatory capital adjustments:
Goodwill and other intangible assets, net of
associated deferred tax liabilities
Other adjustments
Common equity tier 1 capital
Preferred stock
Tier 1 capital
Qualifying subordinated long-term debt
Allowance for loan losses and other
Total capital
Risk-weighted assets:
Credit risk(2)
Operational risk(3)
Market risk
Total risk-weighted assets
Adjusted quarterly average assets
$
$
$
$
(870)
(870)
(10,209)
(10,209)
21,475
21,475
(9,112)
(150)
12,213
2,962
15,175
1,095
5
16,275
54,763
47,963
1,638
104,364
219,624
$
$
$
$
(9,112)
(150)
12,213
2,962
15,175
1,095
90
16,360
102,367
NA
1,638
104,005
219,624
$
$
$
$
(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
16,131
97,303
NA
1,517
98,820
211,924
$
$
$
$
(654)
—
(654)
—
(1,112)
(1,112)
—
—
25,457
25,457
26,043
26,043
(8,839)
(8,839)
(9,073)
(9,073)
(1)
(1)
(29)
(29)
16,617
16,617
16,941
16,941
—
16,617
1,099
3
17,719
51,610
44,138
1,638
97,386
216,397
$
$
$
$
—
16,617
1,099
90
17,806
98,979
NA
1,638
100,617
216,397
—
—
16,941
16,941
776
11
17,728
45,565
44,494
1,517
91,576
209,413
$
$
$
$
776
83
17,800
94,776
NA
1,517
96,293
209,413
$
$
$
$
$
$
$
$
2019 Minimum
Requirements
Including
Capital
Conservation
Buffer and G-
SIB
Surcharge(4)
2018 Minimum
Requirements
Including
Capital
Conservation
Buffer and G-
SIB
Surcharge(5)
8.5%
7.5%
11.7%
11.7%
12.1%
11.7%
17.1%
16.5%
18.5%
17.6%
10.0
12.0
9.0
11.0
14.5
15.6
14.6
15.7
16.0
16.9
15.5
16.3
17.1
18.2
16.5
17.7
18.5
19.4
17.6
18.5
Capital
Ratios:
Common
equity tier 1
capital
Tier 1 capital
Total capital
(1) 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.
(2) Includes a CVA which reflects the risk of potential fair value adjustments for credit risk reflected in our valuation of OTC derivative contracts. We used a simple CVA approach in
conformity with the Basel III advanced approaches.
(3) 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.
(4) Minimum requirements were phased in with full implementation beginning on January 1, 2019; minimum requirements listed are as of December 31, 2019.
(5) Minimum requirements were phased in with full implementation beginning on January 1, 2019; minimum requirements listed are as of December 31, 2018.
NA Not applicable
State Street Corporation | 163
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,
2019
2018
2017
Interest-bearing deposits with banks
$
416
$
387
$
180
Investment securities:
U.S. Treasury and federal agencies
1,443
1,178
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
49
505
364
769
395
143
560
335
687
372
854
226
658
264
504
222
3,941
3,662
2,908
663
31
21
414
246
1,375
363
13
17
389
209
991
163
2
10
308
121
604
$
2,566
$
2,671
$
2,304
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.
Compensation expense related to equity-based
awards with service-only conditions and terms that
provide for a graded vesting schedule is recognized on
a straight-line basis over the required service period for
the entire award. Compensation expense related to
equity-based awards with performance conditions and
terms that provide for a graded vesting schedule is
recognized over the requisite service period for each
separately vesting tranche of the award, and is based
on the probable outcome of the performance conditions
at each reporting date. Compensation expense is
adjusted for assumptions with respect to the estimated
amount of awards that will be forfeited prior to vesting,
and for employees who have met certain retirement
eligibility criteria. Compensation expense for common
stock awards granted to employees meeting early
retirement eligibility criteria is fully expensed on the
grant date.
Dividend equivalents for certain equity-based
awards are paid on stock units on a current basis prior
to vesting and distribution.
The 2017 Stock Incentive Plan, or 2017 Plan, was
approved by shareholders in May 2017 for issuance of
stock and stock based awards. Awards may be made
under the 2017 Plan for (i) up to 8.3 million shares of
common stock plus (ii) up to an additional 28.5 million
shares that were available to be issued under the 2006
Equity Incentive Plan, or 2006 Plan, or may become
available for issuance under the 2006 Plan due to
expiration,
forfeiture or
repurchase of awards granted under the 2006 Plan. As
of December 31, 2019, a total of 19.7 million shares
from the 2006 Plan have been added to and may be
issued from the 2017 Plan.
termination, cancellation,
The following table presents the cumulative total
number of shares that was awarded under the 2017
Plan and the 2006 Plan for the periods indicated:
As of December 31,
(In millions)
2019
2018
2017
Total number of shares awarded
under the 2006 Plan
Total number of shares awarded
under the 2017 Plan
68.9
68.9
68.9
7.6
3.9
0.4
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 option 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, 2019,
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, 2019, a total
of 21.3 million shares were available for future issuance
under the 2017 Plan.
For deferred stock awards granted under the
Plans, no common stock is issued at the time of grant
and the award does not possess dividend and voting
rights. Generally, these grants vest over one to four
years. Performance awards granted are earned over a
performance period based on the achievement of
defined goals, generally over three years. Payment for
performance awards is made in shares of our common
stock equal to its fair market value per share, based on
the performance of certain financial ratios, after the
conclusion of each performance period.
Beginning with 2012, malus-based forfeiture
provisions were included in deferred stock awards
granted to employees identified as “material risk-
takers,” as defined by management. These malus-
based forfeiture provisions provide for the reduction or
cancellation of unvested deferred compensation, such
as deferred stock awards and performance based
awards, if it is determined that a material risk-taker
made risk-based decisions
to
inappropriate
in a material
unexpected loss at the business-unit, line-of-business
or corporate level. In addition, awards granted to certain
of our senior executives, as well as awards granted to
that exposed us
resulted
risks
that
State Street Corporation | 164
STATE STREET CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
individuals in certain jurisdictions, may be subject to
recoupment after vesting (if applicable) and delivery to
the individual in specified circumstances generally
relating to fraud or willful misconduct by the individual
that results in material harm to us or a material financial
restatement.
Compensation expense related to 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
$235 million, $262 million and $243 million for the years
ended December 31, 2019, 2018 and 2017,
respectively. Such expense for 2019, 2018 and 2017
excluded a release of $4 million, an expense of $45
million and $15 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
For the year ended December 31, 2019, no stock
appreciation rights were exercised. The total intrinsic
value of stock appreciation rights exercised during the
years ended December 31, 2018 and 2017 was $0
million and $5 million, respectively. As of December 31,
2019, there was no unrecognized compensation cost
related to stock appreciation rights.
Shares
(In thousands)
Weighted-Average
Grant Date Fair
Value
Deferred Stock Awards:
Outstanding as of
December 31, 2017
Granted
Vested
Forfeited
Outstanding as of
December 31, 2018
Granted
Vested
Forfeited
Outstanding as of
December 31, 2019
6,848
$
2,500
(3,235)
(138)
5,975
3,168
(3,089)
(220)
5,834
65.44
101.25
70.98
80.60
77.07
66.68
71.20
75.85
74.33
The total fair value of deferred stock awards vested
for the years ended December 31, 2019, 2018 and
2017, based on the weighted average grant date fair
value in each respective year, was $220 million, $230
million and $232 million, respectively. As of December
31, 2019, total unrecognized compensation cost related
to deferred stock awards, net of estimated forfeitures,
was $212 million, which is expected to be recognized
over a weighted-average period of 2.4 years.
Performance Awards:
Outstanding as of
December 31, 2017
Granted
Forfeited
Paid out
Outstanding as of
December 31, 2018
Granted
Forfeited
Paid out
Outstanding as of
December 31, 2019
Shares
(In thousands)
Weighted-Average
Grant Date Fair Value
1,548
$
1,067
(1)
(457)
2,157
510
(96)
(432)
2,139
66.09
74.68
101.26
70.58
69.36
66.04
74.82
51.01
71.82
The total fair value of performance awards vested
for the years ended December 31, 2019, 2018 and
2017, based on the weighted average grant date fair
value in each respective year, was $22 million, $32
million and $14 million, respectively. As of December
31, 2019, total unrecognized compensation cost related
to performance awards, net of estimated forfeitures,
was $39 million, which is expected to be recognized
over a weighted-average period of 1.9 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
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
State Street Corporation | 165
STATE STREET CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 $8 million, $11 million and $15 million in 2019,
2018 and 2017, 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 $1.37 billion, $88 million and $10 million,
respectively, as of December 31, 2019 and $1.21 billion,
$110 million and $12 million, respectively, as of
December 31, 2018. 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
overfunded by $10 million and underfunded by $1
million as of December 31, 2019 and 2018, respectively.
The non-qualified supplemental retirement plans were
underfunded by $88 million and $110 million as of
December 31, 2019 and 2018, respectively. The other
post-retirement benefit plans were underfunded by $10
million and $12 million as of December 31, 2019 and
2018, 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 $167 million, $170 million and $146
million in 2019, 2018 and 2017, respectively.
Note 20. Occupancy Expense and Information
Systems and Communications Expense
Upon adoption of Topic 842 on January 1, 2019,
we recognized right-of-use assets of approximately
$0.91 billion and lease liabilities of approximately $1.06
billion.
Occupancy expense and information systems and
include depreciation of
communications expense
computer
buildings,
hardware and software, equipment, furniture and
improvements,
leasehold
fixtures, and amortization of lease right-of-use assets.
Total depreciation and amortization expense in 2019,
2018 and 2017 was $842 million, $599 million and $526
million, respectively.
We use our incremental borrowing rate to
determine the present value of the lease payments for
finance and operating
leases described below.
Additionally, we do not separate nonlease components
such as real estate
taxes and common area
maintenance from base lease payments.
As of December 31, 2019 and 2018, an aggregate
net book value of $78 million and $102 million,
respectively, for the finance lease related to our One
Lincoln Street Boston headquarters was recorded in
premises and equipment, with the related liability of
$136 million and $190 million, respectively, recorded in
long-term debt, in our consolidated statement of
condition.
Finance lease right-of-use asset amortization is
recorded in occupancy expense on a straight-line basis
in our consolidated statement of income over the
respective lease term. As of December 31, 2019,
accumulated amortization of the finance lease right-of-
use asset was $56 million. Lease payments are
recorded as a reduction of the liability, with a portion
recorded as imputed interest expense. In 2019 and
2018, interest expense related to the finance lease
obligation reflected in NII was $11 million and $17
million, respectively.
As of December 31, 2019, an aggregate net book
value of $858 million for the operating lease right-of-
use assets is recorded in other assets, with the related
lease liability of $1,020 million recorded in accrued
expenses and other liabilities in our consolidated
statement of condition.
We have entered into non-cancellable operating
leases for premises and equipment. Nearly all of these
leases include renewal options, and only those
reasonably certain of being exercised are included in
the term of the lease. Costs for operating leases are
recorded on a straight-line basis which includes both
interest expense and right-of-use asset amortization.
Operating lease costs for office space are recorded in
occupancy expense. Costs related to operating leases
for equipment are recorded in information systems and
communications expense.
As of December 31, 2019, we have additional
operating leases, primarily for office space, that have
not yet commenced of approximately $484 million of
undiscounted future minimum lease payments. These
leases will commence between fiscal year 2020 and
fiscal year 2023 with lease terms of 10 to 15 years. The
majority of these future payments relate to the new
Boston headquarters lease executed in the first quarter
of 2019, replacing the One Lincoln Street Boston
property.
State Street Corporation | 166
STATE STREET CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
None of our leases contain residual value
guarantees.
The following table presents lease costs, sublease
rental income, cash flows and new leases arising from
lease transactions for 2019:
Note 21. Expenses
The following table presents the components of other
expenses for the periods indicated:
(In millions)
2019
2018
2017
Years Ended December 31,
(In millions)
Finance lease:
Year End December 31, 2019
Professional services
$
Sales advertising public relations
$
321
114
$
357
115
Amortization of right-of-use assets
$
Interest on lease liabilities
Total finance lease expense
Sublease income
Net finance lease expense
Operating lease:
Operating lease expense
Sublease income
Net operating lease expense
Net lease expense
Cash paid for amounts included in the
measurement of lease liabilities:
Operating cash flows from finance
leases
Operating cash flows from operating
leases
Financing cash flows from finance
leases
Right-of-use assets obtained in
exchange for new lease obligations:
Operating leases
Finance leases
$
$
$
21
11
32
(9)
23
179
(6)
173
196
11
201
54
120
—
The following table presents future minimum lease
leases as of
payments under non-cancellable
December 31, 2019:
(In millions)
Operating
Leases
Finance
Leases
2020
2021
2022
2023
2024
Thereafter
Total future minimum lease
payments
Less imputed interest
$
$
183
180
164
143
108
356
41
41
41
31
—
—
Total
$
224
221
205
174
108
356
1,134
(114)
154
(18)
1,288
(132)
Total
$
1,020
$
136
$
1,156
The following table presents details related to
remaining lease terms and discount rate as of
December 31, 2019:
Weighted-average remaining lease term (in years):
Finance leases
Operating leases
Weighted-average discount rate:
Finance leases
Operating leases
December 31,
2019
3.8
7.6
7%
3%
340
67
10
108
80
17
20
287
929
Securities processing
Regulatory fees and assessments
Bank operations
Donations
Insurance
Other
75
73
43
51
19
52
91
70
12
18
566
461
Total other expenses
$
1,262
$
1,176
$
Acquisition Costs
We recorded $79 million of acquisition costs in
2019, primarily related to our acquisition of CRD. In
2018, we recorded approximately $31 million of
acquisition costs related to our acquisition of CRD and
in 2017 we recorded approximately $21 million of
acquisition costs primarily related to our acquisition of
the GEAM business. As we integrate CRD into our
business, we expect to incur approximately $200 million
of acquisition costs, including merger and integration
costs, through 2021.
Restructuring and Repositioning Charges
Repositioning Charges
In 2019, we recorded $110 million of repositioning
charges, including $98 million of compensation and
employee benefits expenses and $12 million of
occupancy costs, to further drive process automation,
information technology optimizations and organization
rationalization in 2020.
In late 2018, we initiated an expense program to
accelerate efforts to become a higher-performing
organization and help navigate challenging market and
industry conditions. Total repositioning charges were
$300 million
including $259 million of
compensation and employee benefits expenses and $41
million of occupancy costs.
in 2018,
State Street Corporation | 167
STATE STREET CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following table presents aggregate activity for
repositioning charges and activity related to previous
Beacon restructuring charges for the periods indicated:
(In millions)
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
Accruals for Beacon
Accruals for
Repositioning
Charges
Payments and Other
Adjustments
Accrual Balance at
December 31, 2019
Employee
Related
Costs
Real
Estate
Actions
Asset and
Other
Write-offs
Total
$
37
$
186
(57)
166
(7)
259
(115)
303
(2)
98
17
32
(17)
32
—
41
(36)
37
—
12
(209)
(42)
$
2
$
27
(26)
3
—
—
(2)
1
—
—
—
56
245
(100)
201
(7)
300
(153)
341
(2)
110
(251)
$
190
$
7
$
1
$
198
Note 22. Income Taxes
reported
We use an asset-and-liability approach to account
for income taxes. Our objective is to recognize the
amount of taxes payable or refundable for the current
year through charges or credits to the current tax
provision, and to recognize deferred tax assets and
liabilities for future tax consequences of temporary
differences between amounts
in our
consolidated financial statements and their respective
tax bases. The measurement of tax assets and liabilities
is based on enacted tax laws and applicable tax rates.
The effects of a tax position on our consolidated
financial statements are recognized when we believe it
is more likely than not that the position will be sustained.
A valuation allowance is established if it is considered
more likely than not that all or a portion of the deferred
tax assets will not be realized. Deferred tax assets and
liabilities recorded in our consolidated statement of
condition are netted within the same tax jurisdiction.
The following table presents the components of
income tax expense (benefit) for the periods indicated:
(In millions)
2019
2018
2017
Years Ended December 31,
Current:
Federal
State
Non-U.S.
Total current expense
Deferred:
Federal
State
Non-U.S.
Total deferred expense (benefit)
Total income tax expense
(benefit)
$
157
$
86
357
600
(6)
33
(157)
(130)
$
122
148
374
644
(128)
(22)
14
(136)
343
24
380
747
45
66
(19)
92
$
470
$
508
$
839
The following table presents a reconciliation of the
U.S. statutory income tax rate to our effective tax rate
based on income before income tax expense for the
periods indicated:
U.S. federal income tax rate
21.0%
21.0%
35.0%
Years Ended December 31,
2019
2018
2017
Changes from statutory rate:
State taxes, net of federal benefit
Tax-exempt income
Business tax credits(1)
Foreign tax differential
Foreign legal entity restructuring
Foreign tax credit limitations
Transition tax
Deferred tax revaluation
Foreign designated earnings
Litigation expense
Other, net
Effective tax rate
3.4
(1.5)
(5.4)
(0.1)
(4.3)
2.2
—
—
—
1.6
0.4
3.1
(2.0)
(4.1)
(0.6)
—
0.2
—
(1.0)
—
0.3
(0.6)
2.0
(4.3)
(3.7)
(7.2)
—
—
15.2
(6.8)
(0.7)
—
(1.6)
17.3%
16.3%
27.9%
(1) Business tax credits include low-income housing, production and investment
tax credits.
The 2017 income tax expense included a net
provisional estimate of $257 million attributable to the
enactment of TCJA (H.R.1).
As of December 31, 2018, the accounting for
income tax effects of the TCJA was completed and the
2018 income tax expense included an additional
deferred tax benefit of approximately $32 million.
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 0.3% and 0.2% in 2019 and 2018, respectively, which
is reflected in the prior reconciliation table under
"Foreign Tax Credit Limitations".
State Street Corporation | 168
STATE STREET CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Undistributed indefinitely reinvested earnings of
certain foreign subsidiaries amounted to approximately
$4.1 billion at December 31, 2019. 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.
The
following
significant
components of our gross deferred tax assets and gross
deferred tax liabilities as of the dates indicated:
table presents
December 31,
2019
2018
(In millions)
Deferred tax assets:
Other amortizable assets
Tax credit carryforwards
Lease obligations
Deferred compensation
Restructuring charges and other reserves
NOL and other carryforwards
Pension plan
Foreign currency translation
Unrealized losses on investment securities,
net
Total deferred tax assets
Valuation allowance for deferred tax assets
Deferred tax assets, net of valuation
allowance
Deferred tax liabilities:
Fixed and intangible assets
Investment basis differences
Right-of-use Assets
Unrealized gains on investment securities,
net
Other
$
$
$
$
$
$
394
387
254
120
104
73
66
57
—
1,455
(330)
1,125
763
258
223
86
32
49
274
—
134
156
104
55
50
146
968
(138)
830
744
229
—
—
11
984
Total deferred tax liabilities
$
1,362
$
The table below summarizes the deferred tax
assets and related valuation allowances recognized as
of December 31, 2019:
(In millions)
Other amortizable
assets
Tax credits
NOLs - Non-U.S.
Other carryforwards
NOLs - State
Deferred
Tax Asset
Valuation
Allowance
Expiration
$
394
$
(243) __
387
33
27
13
(29) 2029-2039
(18) 2020-2028, None
(27) None
(13) 2020-2039
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, 2019, 2018 and 2017, the gross
unrecognized tax benefits, excluding interest, were
$149 million, $108 million and $94 million, respectively.
Of this, the amounts that would reduce the effective tax
rate, if recognized, are $140 million, $100 million and
$87 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)
Beginning balance
Decrease related to agreements with
tax authorities
Increase related to tax positions
taken during current year
Increase related to tax positions
taken during prior years
Decreases related to a lapse of the
applicable statute of limitations
December 31,
2019
2018
2017
$
108
$
94
$
71
(17)
(40)
(14)
13
49
(4)
12
44
(2)
26
11
—
94
Ending balance
$
149
$
108
$
It is reasonably possible that of the $149 million of
unrecognized tax benefits as of December 31, 2019, up
to $4 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, 2019 for tax exposures and related
interest expense.
Income tax expense included related interest and
penalties of approximately $5 million and $1 million in
2019 and 2018, respectively. Total accrued interest and
penalties were approximately $10 million, $8 million and
$8 million as of December 31, 2019, 2018 and 2017,
respectively.
Note 23. Earnings Per Common Share
Basic EPS is calculated pursuant to the two-class
method, by dividing net income available to common
shareholders by the weighted-average common shares
outstanding during the period. Diluted EPS is calculated
pursuant to the two-class method, by dividing net
income available to common shareholders by the total
weighted-average number of common shares
outstanding for the period plus the shares representing
the dilutive effect of equity-based awards. The effect of
equity-based awards is excluded from the calculation
of diluted EPS in periods in which their effect would be
anti-dilutive.
State Street Corporation | 169
STATE STREET CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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,
2019
2018
2017
$
2,242
$
2,593
$
2,156
Preferred stock dividends
(232)
(188)
(182)
Dividends and undistributed
earnings allocated to
participating securities(1)
Net income available to common
shareholders
Average common shares
outstanding (In thousands):
(1)
(1)
(2)
$
2,009
$
2,404
$
1,972
Basic average common shares
369,911
371,983
374,793
Effect of dilutive securities: equity-
based awards
3,755
4,493
5,420
Diluted average common shares
373,666
376,476
380,213
Anti-dilutive securities(2)
2,052
1,011
188
Earnings per common share:
Basic
Diluted(3)
$
5.43
$
6.46
$
5.38
6.39
5.26
5.19
(1) Represents the portion of net income available to common equity allocated to participating
securities, composed of unvested and fully vested SERP (Supplemental executive retirement
plans) 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.
Note 24. Line of Business Information
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.
Investment Servicing, through State Street Global
Services, State Street Global Markets, State Street
Global Exchange and CRD, provides services for U.S.
mutual funds, collective investment funds and other
investment pools, corporate and public retirement
foundations and
plans,
insurance companies,
regulation);
record-keeping;
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
non-U.S.
cash
management; foreign exchange, brokerage and other
trading services; securities finance and enhanced
custody products; deposit and short-term investment
financing;
facilities;
investment
lease
manager and alternative
investment manager
risk and
operations outsourcing; performance,
compliance analytics; and financial data management
to support institutional investors. Our CRD business
also falls within our Investment Servicing line of
business and includes products and services, such as:
portfolio modeling and construction;
trade order
management; investment risk and compliance; and
wealth management solutions.
loans and
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 Global
Fiduciary Solutions
(formerly Outsourced Chief
Investment Officer). 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
to
performance fees.
related
Our investment servicing strategy is to focus on
total client relationships and the full integration of our
products and services across our client base through
cross-selling opportunities. In general, our clients will
use a combination of services, depending on their
needs, rather than one product or service. For instance,
a custody client may purchase securities finance and
cash management services from different business
units. Products and services that we provide to our
clients are parts of an integrated offering to these
clients. We price our products and services on the basis
of overall client relationships and other factors; as a
result, revenue may not necessarily reflect the stand-
alone market price of these products and services within
the business lines in the same way it would for separate
business entities.
State Street Corporation | 170
STATE STREET CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 70% to 80% of our consolidated total
revenue. The remaining 20% to 30% is composed of
software and processing fees, including CRD, as well
as NII, which is largely generated by our investment of
client deposits, short-term borrowings and long-term
debt in a variety of assets, and net gains (losses) related
to investment securities. These other revenue types are
generally fully allocated to, or reside in, Investment
Servicing and Investment Management.
Revenue and expenses are directly charged or
allocated to our lines of business through management
information systems. Assets and liabilities are allocated
according to policies that support management’s
strategic and tactical goals. Capital is allocated based
on the relative risks and capital requirements inherent
in each business
line, along with management
judgment. Capital allocations may not be representative
of the capital that might be required if these lines of
business were separate business entities.
The following is a summary of our line of business
results for the periods indicated.
The “Other” column for the year ended December
31, 2019 included net costs of $359 million composed
of the following:
• Net acquisition and restructuring costs of $77
million;
• Net repositioning charges of $110 million; and
•
Legal and related expenses of $172 million.
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 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,
to management
changes in methodologies associated with allocations
of revenue and expenses to lines of business in 2019.
related
(Dollars in millions)
2019
2018
2017
2019
2018
2017
2019
Investment
Servicing
Investment
Management
Other
2018
2017
2019
Total
2018
2017
Servicing fees
$ 5,074
$ 5,429
$ 5,365
$ — $ — $ — $ — $
(8)
$ — $ 5,074
$ 5,421
$ 5,365
Years Ended December 31,
Management fees
Foreign exchange
trading services
Securities finance
Software and
processing fees(1)(2)
Total fee revenue(1)
Net interest income
Total other income
Total revenue(1)
Provision for loan
losses
Total expenses(1)
Income before
income tax
expense
Pre-tax margin
Average assets (in
billions)
—
974
462
691
7,201
2,590
43
—
—
1,771
1,851
1,616
1,071
543
443
7,486
2,691
999
606
336
7,306
2,309
6
(39)
137
9
29
130
—
(5)
72
—
7
1,946
1,976
1,695
(24)
—
(20)
—
(5)
—
9,834
10,183
9,576
1,922
1,956
1,690
10
15
2
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
(8)
—
—
(8)
—
—
—
—
—
—
—
—
—
—
1,771
1,851
1,616
1,111
1,201
1,071
471
720
9,147
2,566
43
543
438
9,454
2,671
606
343
9,001
2,304
6
(39)
11,756
12,131
11,266
10
15
2
7,140
7,081
6,717
1,535
1,544
1,286
359
390
266
9,034
9,015
8,269
$ 2,684
$ 3,087
$ 2,857
$ 387
$ 412
$ 404
$ (359)
$ (398)
$ (266)
$ 2,712
$ 3,101
$ 2,995
27%
30%
30%
20%
21%
24%
23%
26%
27%
$ 220.3
$ 220.2
$ 214.0
$ 3.0
$ 3.2
$ 5.4
$ 223.3
$ 223.4
$ 219.4
(1) Investment Servicing includes results from our acquisition of CRD on October 1, 2018.
(2) Investment Management includes other revenue items that are primarily driven by equity market movements.
State Street Corporation | 171
STATE STREET CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 25. Revenue from Contracts with Customers
We account for revenue from contracts with customers in accordance with Topic 606, which we adopted on
January 1, 2018. 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.
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 not include termination penalties. Therefore, for 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.
Investment Servicing
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 and/or administration
and/or actual 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.
Foreign exchange 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.
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 CRD 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 license. Revenue for a SaaS related arrangement
is recognized over time as services are provided.
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
State Street Corporation | 172
STATE STREET CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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
Year Ended December 31, 2019
(Dollars in millions)
Topic 606
revenue
All other
revenue
Total
Topic 606
revenue
All other
revenue
Total
Topic 606
revenue
All other
revenue
Total
2019
Servicing fees
$
5,074
$
— $
5,074
$
— $
— $
— $
— $
— $
— $
5,074
Management fees
Foreign exchange
trading services
Securities finance
Software and
processing fees
—
346
259
456
Total fee revenue
6,135
Net interest income
Total other income
—
—
—
628
203
235
1,066
2,590
43
—
974
462
691
7,201
2,590
43
1,771
137
—
—
1,908
—
—
—
—
9
29
38
(24)
—
1,771
137
9
29
1,946
(24)
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
1,771
1,111
471
720
9,147
2,566
43
Total revenue
$
6,135
$
3,699
$
9,834
$
1,908
$
14
$
1,922
$
— $
— $
— $
11,756
Investment Servicing
Investment Management
Other
Total
Year Ended December 31, 2018
(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
Management fees
Foreign exchange
trading services
Securities finance
Software and
processing fees
—
361
308
209
Total fee revenue
6,307
Net interest income
Total other income
—
—
—
710
235
234
1,179
2,691
6
—
1,851
1,071
543
443
7,486
2,691
6
130
—
—
1,981
—
—
—
—
—
(5)
(5)
(20)
—
1,851
130
—
(5)
1,976
(20)
—
—
—
—
—
(8)
—
—
—
—
—
—
—
—
—
—
—
—
—
(8)
—
—
1,851
1,201
543
438
9,454
2,671
6
Total revenue
$
6,307
$
3,876
$
10,183
$
1,981
$
(25) $
1,956
$
(8) $
— $
(8) $
12,131
Contract balances and contract costs
As of December 31, 2019 and December 31, 2018, net receivables of $2.77 billion and $2.75 billion, respectively,
are included in accrued interest and fees receivable, representing amounts billed or currently billable 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 | 173
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 tax
expense
Years Ended December 31,
Non-U.S.(1)
2019
U.S.
Total
Non-U.S.(1)
2018
U.S.
Total
Non-U.S.(1)
2017
U.S.
Total
$
4,974
$
6,782
$ 11,756
$
5,190
$
6,941
$ 12,131
$
4,734
$
6,532
$ 11,266
1,159
1,553
2,712
1,294
1,807
3,101
1,230
1,765
2,995
(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 $83.28 billion and $81.69 billion as of December 31, 2019 and 2018, 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,
2019
2018
2017
Cash dividends from consolidated banking subsidiary
$
3,300
$
785
$
Cash dividends from consolidated non-banking subsidiaries and unconsolidated
entities
Other, net
Total revenue
Interest expense
Other expenses
Total expenses
Income tax (benefit)
Income 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
285
149
3,734
415
108
523
(91)
3,302
(1,070)
10
41
58
884
381
162
543
(127)
468
1,944
181
2,224
12
127
2,363
297
94
391
(86)
2,058
(1)
99
Net income
$
2,242
$
2,593
$
2,156
State Street Corporation | 174
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
As of December 31,
2019
2018
$
$
$
$
$
428
393
250
25,451
7,240
117
—
3,361
270
37,510
696
12,383
13,079
24,431
37,510
$
$
$
486
357
224
25,966
6,726
106
64
2,337
96
36,362
685
10,940
11,625
24,737
36,362
(In millions)
Net cash provided by operating activities
Investing Activities:
Net decrease (increase) in interest-bearing deposits with consolidated banking
subsidiary
Proceeds from sales and maturities of available-for-sale securities
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
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
Payments for redemption of preferred stock
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
Years Ended December 31,
2019
2018
2017
$
2,684
$
2,250
$
2,047
58
900
(921)
(6,165)
5,345
—
(783)
1,495
(50)
—
—
(750)
(1,585)
(81)
(930)
(1,901)
—
—
— $
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)
—
—
—
$
Note 28. Subsequent Events
On January 24, 2020, we issued $750 million aggregate principal amount of 2.400% Senior Notes due 2030 in
a public offering.
On February 12, 2020, we announced that we will redeem all 5,000 of our outstanding shares of our non-cumulative
perpetual preferred stock, Series C, for cash at a redemption price of $100,000 per share (equivalent to $25.00 per
depositary share) plus all declared and unpaid dividends. The redemption price will be payable on March 16, 2020,
and this redemption will be reflected in our first quarter 2020 results of operations.
State Street Corporation | 175
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:
2019
2018
2017
Years Ended December 31,
(Dollars in millions; fully
taxable-equivalent basis)
Assets:
Average
Balance
Interest
Average
Rate
Average
Balance
Interest
Average
Rate
Average
Balance
Interest
Average
Rate
Interest-bearing deposits with U.S. banks
$
16,815
$
Interest-bearing deposits with non-U.S. banks
31,685
2.14% $
18,081
$
.18
36,247
1.91% $
16,790
$
184
.12
30,724
(4)
1.10%
(.01)
360
56
364
1
1,443
62
504
775
—
395
14.54
.11
2.55
3.31
1.51
3.22
—
2.79
2.18
2,506
884
56,639
1,869
33,260
24,073
—
14,160
345
42
335
—
1,178
189
560
687
11
372
11.55
—
2.43
3.45
1.64
2.97
2.53
2.37
2.00
2,901
1,051
48,449
5,481
34,140
23,147
426
15,714
264
12.38
(1)
(.12)
2,131
1,011
43,273
9,928
42,578
21,149
767
22,884
854
378
659
498
21
222
185,637
3,719
3,178
34,570
$ 223,385
191,235
3,075
3,097
25,118
$ 219,450
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
Other short-term borrowings
Long-term debt
Other interest-bearing liabilities
181,891
3,960
3,390
38,053
$ 223,334
$
20,443
$
47,104
61,301
128,848
1,616
1,524
11,474
4,103
222
317
124
663
31
21
414
246
Total interest-bearing liabilities
147,565
1,375
Non-interest-bearing deposits:
Special time
Demand
Non-U.S.(2)
Other liabilities
Shareholders’ equity
15,338
13,552
524
21,299
25,056
1.08% $
17,081
$
.67
.20
.51
1.90
1.37
3.61
6.00
.93
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
121
135
107
363
13
17
389
209
991
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
1.97
3.80
1.55
2.36
2.67
.97
1.61
.61%
.13
.07
.13
.05
.80
2.66
2.63
.42
Total liabilities and shareholders’ equity
$ 223,334
$ 223,385
$ 219,450
Net interest income, fully taxable-equivalent
basis
Excess of rate earned over rate paid
Net interest margin(3)
$ 2,585
$
2,728
$
2,471
1.25%
1.42
1.32%
1.47
1.19%
1.29
(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 the period ending in 2017, and a tax rate of 21% for periods ending in 2018 and 2019, 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
$19 million, $57 million and $167 million for the years ended December 31, 2019, 2018 and 2017, respectively, and were substantially related to tax-exempt securities
(state and political subdivisions).
(2) Non-U.S. non-interest-bearing deposits were $820 million, $1,165 million and $762 million as of December 31, 2019, 2018 and 2017, respectively.
(3) NIM is calculated by dividing fully taxable-equivalent NII by average total interest-earning assets.
State Street Corporation | 176
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:
Interest-bearing deposits with U.S. banks
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
Other short-term borrowings
Long-term debt
Other interest-bearing liabilities
Total interest-bearing liabilities
Net interest income
$
2019 Compared to 2018
2018 Compared to 2017
Change in
Volume
Change in
Rate
Net (Decrease)
Increase
Change in
Volume
Change in
Rate
Net (Decrease)
Increase
$
(24) $
(5)
(46)
—
199
(125)
(14)
27
(11)
(37)
(36)
24
33
(14)
(3)
3
29
(36)
36
(72) $
$
39
19
75
1
66
(2)
(42)
61
—
60
277
77
149
31
21
1
(4)
73
348
(71) $
$
15
14
29
1
265
(127)
(56)
88
(11)
23
241
101
182
17
18
4
25
37
384
(143) $
$
14
(1)
95
—
102
(169)
(131)
47
(9)
(70)
(122)
30
24
(15)
(1)
—
(24)
9
23
(145) $
147
47
(24)
1
222
(20)
32
142
(1)
220
766
19
87
55
12
7
105
79
364
402
$
$
161
46
71
1
324
(189)
(99)
189
(10)
150
644
49
111
40
11
7
81
88
387
257
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
Total other income
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(2):
Basic
Diluted
Average common shares outstanding:
Basic
Diluted
4Q19
3Q19
2Q19
1Q19
4Q18(1)
3Q18(1)
2Q18(1)
1Q18(1)
$
2,368
$
2,259
$
2,260
$
2,260
$
2,326
$
2,318
$
2,395
$
2,415
906
270
636
44
3,048
3
2,407
638
74
564
492
1.36
1.35
$
$
$
1,001
1,007
1,027
357
644
—
2,903
2
2,180
721
138
583
528
1.44
1.42
$
$
$
394
613
—
2,873
1
2,154
718
131
587
537
1.44
1.42
$
$
$
354
673
(1)
2,932
4
2,293
635
127
508
452
1.20
1.18
$
$
$
982
285
697
—
3,023
8
2,486
529
92
437
396
1.04
1.03
$
$
$
916
244
672
(1)
2,989
5
2,091
893
129
764
708
1.89
1.87
$
$
$
907
248
659
9
3,063
2
2,170
891
158
733
697
1.91
1.88
$
$
$
857
214
643
(2)
3,056
—
2,268
788
129
659
603
1.64
1.62
$
$
$
361,439
365,851
366,732
370,595
373,773
377,577
377,915
381,703
379,741
383,651
374,963
379,383
365,619
370,410
367,439
372,619
Dividends per common share
$
.52
$
.52
$
.47
$
.47
$
.47
$
.47
$
.42
$
.42
(1) The amounts for 2018 were updated from previously reported amounts due to the change in accounting method that we made during the first quarter of 2019. We
voluntarily changed our accounting method under the FASB ASC 323, Investments - Equity Method and Joint Ventures, for investments in low income housing tax
credit (LIHTC) from the equity method of accounting to the proportional amortization method of accounting. Additional information about the effect of the changes on
the financial statement line items for prior periods is provided by Exhibit 99.2 to our Current Report on Form 8-K filed with the SEC on May 2, 2019.
(2) Basic and diluted earnings per common share for full-year 2019 and basic earnings per common share for full-year 2018 do not equal the sum of the four quarters
for the year.
State Street Corporation | 177
ABS
AFS
AML
AOCI
ASU
AUC/A
AUM
BCRC
bps
CAP
CCAR
CRD
CET1(1)
CFTC
CIS
COSO
CRO
CRPC
CVA
DOJ
DOL
ACRONYMS
Asset-backed securities
Available-for-sale
Anti-money laundering
LCR(1)
LIHTC
Liquidity coverage ratio
Low income housing tax credits
LDA model
Loss distribution approach model
Accumulated other comprehensive income (loss)
LIBOR
London Interbank Offered Rate
Accounting Standards Update
Assets under custody and/or administration
Assets under management
Business Conduct Risk Committee
Basis points
Capital adequacy process
Comprehensive Capital Analysis and Review
Charles River Development
Common equity tier 1
Commodity Futures Trading Commission
Corporate Information Security
Committee of Sponsoring Organizations of the
Treadway Commission
Chief Risk Officer
Credit Risk & Policy Committee
Credit valuation adjustment
Department of Justice
Department of Labor
LTD
MBS
MRAC
MRC
MRM
MVG
NII
NIM
NOL
NSFR(1)
ORM
OTC
OTTI
PCA
PCAOB
PD(1)
P&L
RC
Long-term debt
Mortgage-backed securities
Management Risk and Capital Committee
Model Risk Committee
Model Risk Management
Model Validation Group
Net interest income
Net interest margin
Net Operating Loss
Net stable funding ratio
Operational risk management
Over-the-counter
Other-than-temporary-impairment
Prompt corrective action
Public Company Accounting Oversight Board
Probability-of-default
Profit-and-loss
Risk Committee
E&A
Committee
Examining and Audit Committee
ECB
European Central Bank
RWA(1)
Risk-weighted asset
EGRRCPA
Economic Growth, Regulatory Relief, and Consumer
Protection Act
EMEA
Europe, Middle East, and Africa
EPS
ERM
eSLR
ETF
EVE
FDIC
Earnings per share
Enterprise Risk Management
Enhanced supplementary leverage ratio
Exchange-Traded Fund
Economic value of equity
Federal Deposit Insurance Corporation
FFELP
Federal Family Education Loan Program
FHLB
FICC
FTE
FSOC
FX
GAAP
GCR
G-SIB
HQLA(1)
HRC
HTM
Federal Home Loan Bank of Boston
Fixed Income Clearing Corporation
Fully taxable-equivalent
Financial Stability Oversight Council
Foreign exchange
Generally accepted accounting principles
Global credit review
Global systemically important bank
High-quality liquid assets
Human Resources Committee
Held-to-maturity
(1) As defined by the applicable U.S. regulations.
SCB
SEC
SIFI
SLB
SLR(1)
SOX
SPDR
SPOE
Strategy
SSIF
TCJA
TLAC(1)
TMRC
TOPS
TORC
UCITS
UOM
VaR
VIE
WD
Stress Capital Buffer
Securities and Exchange Commission
Systemically important financial institutions
Stress Leverage Buffer
Supplementary leverage ratio
Sarbanes-Oxley Act of 2002
Spider; Standard and Poor's depository receipt
Single Point of Entry Strategy
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
Unit of measure
Value-at-Risk
Variable interest entity
Withdrawn
State Street Corporation | 178
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
(including back and middle office services) 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. Assets under
management include 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.
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. We seek CRE loans with
strong competitive positions in major domestic markets, stable cash
flows, modest leverage and experienced institutional ownership.
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.
Depot bank: A German term, specified by the country's law on
investment companies, which essentially corresponds to 'custodian'.
Doubtful: 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.
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: A rating of loans and leases to counterparties with
strong credit quality and low expected credit risk and probability of
default. It applies to counterparties with a strong capacity to support
the timely repayment of any financial commitment.
Liquidity coverage ratio: The ratio of encumbered high-quality liquid
assets divided by expected total net cash outflows over a 30-day
stress period. 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.
Net asset value: The amount of net assets attributable to each share/
unit of the fund at a specific date or time.
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: A measure of the likelihood that a credit obligor
will enter into default status.
Qualified financial contracts: Securities contracts, commodity
contracts, forward contracts, repurchase agreements, swap
agreements and any other contract determined by the FDIC to be a
qualified financial contract.
Risk-weighted assets: A measurement used to quantify risk inherent
in our on and off-balance sheet assets by adjusting the asset value for
risk. RWA is used in the calculation of our risk-based capital ratios.
Special mention: Loans and leases that consist of counterparties with
potential weaknesses that, if uncorrected, may result in deterioration of
repayment prospects.
Speculative: Loans and leases that consist of counterparties that face
ongoing uncertainties or exposure to business, financial, or economic
downturns. However, these counterparties may have financial
flexibility or access to financial alternatives, which allow for financial
commitments to be met.
Substandard: Loans and leases that consist of counterparties with
well-defined weakness that jeopardizes repayment with the possibility
we will sustain some loss.
Economic value of equity: A measure designed to estimate the fair
value of assets, liabilities and off-balance sheet instruments based on
a discounted cash flow model.
Supplementary leverage ratio: The ratio of our tier 1 capital to our
total leverage exposure, which measures our capital adequacy relative
to our on and off-balance sheet assets.
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 measure 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.
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 | 179
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, 2019, 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, 2019.
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, 2019, 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 | 180
INTERNAL CONTROL OVER FINANCIAL REPORTING
Management’s Report on Internal Control Over Financial Reporting
The management of State Street is responsible for establishing and maintaining adequate internal control over
financial reporting.
State Street’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 accounting principles generally accepted in the United States of America. State Street’s internal control
over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in
reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of State Street; (ii) provide
reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in
accordance with accounting principles generally accepted in the United States of America, and that receipts and
expenditures of State Street are being made only in accordance with authorizations of management and directors of
State Street; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition,
use, or disposition of State Street’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.
Management assessed the effectiveness of State Street’s internal control over financial reporting as of December
31, 2019 based on the framework set forth by the Committee of Sponsoring Organizations of the Treadway Commission
in Internal Control - Integrated Framework (2013).
Based on that assessment, management concluded that, as of December 31, 2019, State Street’s internal control
over financial reporting is effective.
The effectiveness of State Street’s internal control over financial reporting as of December 31, 2019 has been
audited by Ernst & Young LLP, an independent registered public accounting firm, as stated in their accompanying
report, which follows this report.
State Street Corporation | 181
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, 2019, 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, 2019, based
on the COSO criteria.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United
States) (“PCAOB”), the 2019 consolidated financial statements of the Corporation and our report dated February 20,
2020 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 20, 2020
State Street Corporation | 182
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 2020 Annual Meeting of
Shareholders, to be filed pursuant to Regulation 14A on or before April 29, 2020, referred to as the 2020 Proxy Statement,
under the caption "Election of Directors." Information concerning compliance with Section 16(a) of the Exchange Act,
if required, will appear in our 2020 Proxy Statement under the caption "Delinquent Section 16(a) Reports." Information
concerning our Code of Ethics for Senior Financial Officers and our Examining and Audit Committee will appear in our
2020 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 2020 Proxy Statement under the captions "Executive
Compensation" and "Non-Employee Director Compensation." Such information is incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED
STOCKHOLDER MATTERS
Information concerning security ownership of certain beneficial owners and management will appear in our 2020
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, 2019. 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
7,973 (2) $
18 (3)
7,991
—
—
—
21,343
—
21,343
(1) Excludes deferred stock awards and performance awards for which there is no exercise price.
(2) Consists of 5,834 thousand shares subject to deferred stock awards, zero shares subject to stock options, zero stock appreciation rights and 2,139 thousand shares
subject to performance awards (assuming payout at 100% for all awards, including awards for which performance is uncertain).
(3) Consists of shares subject to deferred stock awards.
Individual directors who are not our employees have received stock awards and cash retainers, both of which
may be deferred. Directors may elect to receive shares of our common stock in place of cash. If payment is in the form
of common stock, the number of shares is determined by dividing the approved cash amount by the closing price on
the date of the annual shareholders' meeting or date of grant, if different. All deferred shares, whether stock awards
or common stock received in place of cash retainers, are increased to reflect dividends paid on the common stock
and, for certain directors, may include share amounts in respect of an accrual under a terminated retirement plan.
State Street Corporation | 183
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 241,205 shares of common stock were outstanding as of December 31, 2019; awards made
through June 30, 2003, totaling 18,324 shares outstanding as of December 31, 2019, 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.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
Information concerning certain relationships and related transactions and director independence will appear in
our 2020 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 2020 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, 2019, 2018 and 2017
Consolidated Statement of Comprehensive Income - Years ended December 31, 2019, 2018 and 2017
Consolidated Statement of Condition - As of December 31, 2019 and 2018
Consolidated Statement of Changes in Shareholders' Equity - Years ended December 31, 2019, 2018 and
2017
Consolidated Statement of Cash Flows - Years ended December 31, 2019, 2018 and 2017
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 | 184
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 3.1 to State Street's Current Report on Form 8-K (File No.
001-07511) filed with the SEC on February 20, 2020 and incorporated herein by reference)
Description of Securities Registered under Section 12 of the Exchange Act
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 10.5 to State Street’s Quarterly Report on Form 10-Q (File No. 001-07511) for the
quarter ended March 31, 2019 filed with the SEC on May 1, 2019 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 and Second Amendments thereto, and
form of award agreement thereunder (filed as Exhibit 10.2 to State Street’s Quarterly Report on
Form 10-Q (File No. 001-07511) for the quarter ended March 31, 2019 filed with the SEC on May
1, 2019 and incorporated herein by reference)
* 3.1
* 3.2
* 4.1
* 4.2
* 4.3
* 4.4
* 4.5
* 4.6
* 4.7
* 10.1†
* 10.2†
* 10.3†
State Street Corporation | 185
* 10.4†
* 10.5†
* 10.6†
* 10.7†
* 10.8†
* 10.9†
* 10.10
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 10.3 to State Street’s Quarterly Report on Form 10-Q (File No. 001-07511) for the quarter
ended March 31, 2019 filed with the SEC on May 1, 2019 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, 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, 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, 2019
(filed as Exhibit 10.13 to State Street's Annual Report on Form 10-K (File No. 001-07511) for the
year ended December 31, 2018 filed with the SEC on February 21, 2019 and incorporated herein
by reference)
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)
* 10.11†
Description of compensation arrangements for non-employee directors
* 10.12†
* 10.13A†
* 10.13B†
* 10.13C†
* 10.13D†
* 10.14†
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)
Form of amended and restated employment agreement entered into on December 13, 2018 with
each of Joseph L. Hooley, Eric W. Aboaf, Jeff D. Conway, Karen C. Keenan and Ronald P.
O’Hanley (filed as Exhibit 10.1 to State Street’s Quarterly Report on Form 10-Q (File No.
001-07511) for the quarter ended March 31, 2019 filed with the SEC on May 1, 2019 and
incorporated herein by reference)
State Street Corporation | 186
* 10.15†
* 10.16†
* 10.17†
* 10.18†
* 10.19†
* 10.20†
* 21
* 23
31.1
31.2
32
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) for the quarter ended March 31, 2018 filed with the SEC on May
3, 2018 and incorporated herein by reference)
Employment Letter Agreement entered into with Eric Aboaf dated September 22, 2016 (filed as
Exhibit 10.1 to State Street's Current Report on Form 8-K (File No. 001-07511) dated September
28, 2016 filed with the SEC on September 28, 2016 and incorporated herein by reference)
Transition and Separation Agreement entered into with Jeff D. Conway dated March 20, 2019
(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, 2019 filed with the SEC on May 1, 2019 and incorporated herein by
reference)
State Street Corporation Incentive Compensation Program, Effective January 1, 2019 (filed as
Exhibit 10.24 to State Street's Annual Report on Form 10-K (File No. 001-07511) for the year
ended December 31, 2018 filed with the SEC on February 21, 2019 and incorporated herein by
reference)
State Street Corporation Cash Award Plan, Effective January 1, 2019 (filed as Exhibit 10.25 to
State Street's Annual Report on Form 10-K (File No. 001-07511) for the year ended December
31, 2018 filed with the SEC on February 21, 2019 and incorporated herein by reference)
Subsidiaries of State Street Corporation
Consent of Independent Registered Public Accounting Firm
Rule 13a-14(a)/15d-14(a) Certification of Chairman, President and Chief Executive Officer
Rule 13a-14(a)/15d-14(a) Certification of Chief Financial Officer
Section 1350 Certifications
* 101.INS
The instance document does not appear in the interactive data file because its XBRL tags are
embedded within the inline XBRL document
* 101.SCH
Inline XBRL Taxonomy Extension Schema Document
* 101.CAL
* 101.DEF
Inline XBRL Taxonomy Calculation Linkbase Document
Inline XBRL Taxonomy Extension Definition Linkbase Document
* 101.LAB
Inline XBRL Taxonomy Label Linkbase Document
* 101.PRE
Inline XBRL Taxonomy Presentation Linkbase Document
* 104
Cover Page Interactive Data File (formatted as Inline XBRL and included within the Exhibit 101
attachments)
† 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 iXBRL (Inline Extensible Business Reporting
Language): (i) consolidated statement of income for the years ended December 31, 2019, 2018 and 2017, (ii)
consolidated statement of comprehensive income for the years ended December 31, 2019, 2018 and 2017,
(iii) consolidated statement of condition as of December 31, 2019 and December 31, 2018, (iv) consolidated statement
of changes in shareholders' equity for the years ended December 31, 2019, 2018 and 2017, (v) consolidated statement
of cash flows for the years ended December 31, 2019, 2018 and 2017, and (vi) notes to consolidated financial
statements.
State Street Corporation | 187
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 20, 2020, 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 20, 2020 by the following persons on behalf of the registrant and in the capacities indicated.
OFFICERS:
/s/ RONALD P. O'HANLEY
RONALD P. O'HANLEY,
Chairman, 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/ KENNETT F. BURNES
KENNETT F. BURNES
/s/ MARIE A. CHANDOHA
MARIE A. CHANDOHA
/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 | 188
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 20, 2020
By:
/s/ RONALD P. O'HANLEY
Ronald P. O'Hanley,
Chairman, 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 20, 2020
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, 2019 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 20, 2020
By:
/s/ RONALD P. O'HANLEY
Ronald P. O'Hanley,
Chairman, President and Chief Executive Officer
Date: February 20, 2020
By:
/s/ ERIC W. ABOAF
Eric W. Aboaf,
Executive Vice President and
Chief Financial Officer
(cid:37)(cid:50)(cid:36)(cid:53)(cid:39)(cid:3)(cid:50)(cid:41)(cid:3)(cid:39)(cid:44)(cid:53)(cid:40)(cid:38)(cid:55)(cid:50)(cid:53)(cid:54)
(cid:48)(cid:68)(cid:85)(cid:70)(cid:75)(cid:3)(cid:21)(cid:19)(cid:15)(cid:3)(cid:21)(cid:19)(cid:21)(cid:19)
(cid:53)(cid:82)(cid:81)(cid:68)(cid:79)(cid:71)(cid:3)(cid:51)(cid:17)(cid:3)(cid:50)(cid:182)(cid:43)(cid:68)(cid:81)(cid:79)(cid:72)(cid:92)
(cid:58)(cid:76)(cid:79)(cid:79)(cid:76)(cid:68)(cid:80)(cid:3)(cid:38)(cid:17)(cid:3)(cid:41)(cid:85)(cid:72)(cid:71)(cid:68)
(cid:38)(cid:75)(cid:68)(cid:76)(cid:85)(cid:80)(cid:68)(cid:81)(cid:15) (cid:51)(cid:85)(cid:72)(cid:86)(cid:76)(cid:71)(cid:72)(cid:81)(cid:87)(cid:3)(cid:68)(cid:81)(cid:71)(cid:3)(cid:38)(cid:75)(cid:76)(cid:72)(cid:73)(cid:3)(cid:40)(cid:91)(cid:72)(cid:70)(cid:88)(cid:87)(cid:76)(cid:89)(cid:72)(cid:3)(cid:50)(cid:73)(cid:73)(cid:76)(cid:70)(cid:72)(cid:85)(cid:15)
(cid:54)(cid:87)(cid:68)(cid:87)(cid:72)(cid:3)(cid:54)(cid:87)(cid:85)(cid:72)(cid:72)(cid:87)(cid:3)(cid:38)(cid:82)(cid:85)(cid:83)(cid:82)(cid:85)(cid:68)(cid:87)(cid:76)(cid:82)(cid:81)
(cid:53)(cid:72)(cid:87)(cid:76)(cid:85)(cid:72)(cid:71)(cid:3)(cid:54)(cid:72)(cid:81)(cid:76)(cid:82)(cid:85)(cid:3)(cid:51)(cid:68)(cid:85)(cid:87)(cid:81)(cid:72)(cid:85)(cid:3)(cid:68)(cid:81)(cid:71)(cid:3)(cid:57)(cid:76)(cid:70)(cid:72)(cid:3)(cid:38)(cid:75)(cid:68)(cid:76)(cid:85)(cid:80)(cid:68)(cid:81)(cid:15)(cid:3)(cid:39)(cid:72)(cid:79)(cid:82)(cid:76)(cid:87)(cid:87)(cid:72)(cid:3)(cid:47)(cid:47)(cid:51)(cid:15)(cid:3)(cid:68)(cid:3)(cid:74)(cid:79)(cid:82)(cid:69)(cid:68)(cid:79)(cid:3)
(cid:83)(cid:85)(cid:82)(cid:73)(cid:72)(cid:86)(cid:86)(cid:76)(cid:82)(cid:81)(cid:68)(cid:79)(cid:3)(cid:86)(cid:72)(cid:85)(cid:89)(cid:76)(cid:70)(cid:72)(cid:86)(cid:3)(cid:73)(cid:76)(cid:85)(cid:80)
(cid:46)(cid:72)(cid:81)(cid:81)(cid:72)(cid:87)(cid:87)(cid:3)(cid:41)(cid:17)(cid:3)(cid:37)(cid:88)(cid:85)(cid:81)(cid:72)(cid:86)
(cid:54)(cid:68)(cid:85)(cid:68)(cid:3)(cid:48)(cid:68)(cid:87)(cid:75)(cid:72)(cid:90)
(cid:53)(cid:72)(cid:87)(cid:76)(cid:85)(cid:72)(cid:71)(cid:3)(cid:38)(cid:75)(cid:68)(cid:76)(cid:85)(cid:80)(cid:68)(cid:81)(cid:15)(cid:3)(cid:51)(cid:85)(cid:72)(cid:86)(cid:76)(cid:71)(cid:72)(cid:81)(cid:87)(cid:3)(cid:68)(cid:81)(cid:71)(cid:3)(cid:38)(cid:75)(cid:76)(cid:72)(cid:73)(cid:3)(cid:40)(cid:91)(cid:72)(cid:70)(cid:88)(cid:87)(cid:76)(cid:89)(cid:72)(cid:3)(cid:50)(cid:73)(cid:73)(cid:76)(cid:70)(cid:72)(cid:85)(cid:15)(cid:3)(cid:38)(cid:68)(cid:69)(cid:82)(cid:87)(cid:3)
(cid:38)(cid:82)(cid:85)(cid:83)(cid:82)(cid:85)(cid:68)(cid:87)(cid:76)(cid:82)(cid:81)(cid:15)(cid:3)(cid:80)(cid:68)(cid:81)(cid:88)(cid:73)(cid:68)(cid:70)(cid:87)(cid:88)(cid:85)(cid:72)(cid:85)(cid:3)(cid:82)(cid:73)(cid:3)(cid:86)(cid:83)(cid:72)(cid:70)(cid:76)(cid:68)(cid:79)(cid:87)(cid:92)(cid:3)(cid:70)(cid:75)(cid:72)(cid:80)(cid:76)(cid:70)(cid:68)(cid:79)(cid:86)(cid:3)(cid:68)(cid:81)(cid:71)(cid:3)(cid:83)(cid:72)(cid:85)(cid:73)(cid:82)(cid:85)(cid:80)(cid:68)(cid:81)(cid:70)(cid:72)(cid:3)
(cid:80)(cid:68)(cid:87)(cid:72)(cid:85)(cid:76)(cid:68)(cid:79)(cid:86)
(cid:53)(cid:72)(cid:87)(cid:76)(cid:85)(cid:72)(cid:71)(cid:3)(cid:38)(cid:75)(cid:68)(cid:76)(cid:85)(cid:80)(cid:68)(cid:81)(cid:3)(cid:68)(cid:81)(cid:71)(cid:3)(cid:38)(cid:75)(cid:76)(cid:72)(cid:73)(cid:3)(cid:40)(cid:91)(cid:72)(cid:70)(cid:88)(cid:87)(cid:76)(cid:89)(cid:72)(cid:3)(cid:50)(cid:73)(cid:73)(cid:76)(cid:70)(cid:72)(cid:85)(cid:15)(cid:3)(cid:39)(cid:88)(cid:81)(cid:3)(cid:9)(cid:3)(cid:37)(cid:85)(cid:68)(cid:71)(cid:86)(cid:87)(cid:85)(cid:72)(cid:72)(cid:87)
(cid:38)(cid:82)(cid:85)(cid:83)(cid:82)(cid:85)(cid:68)(cid:87)(cid:76)(cid:82)(cid:81)(cid:15) (cid:76)(cid:81)(cid:87)(cid:72)(cid:85)(cid:81)(cid:68)(cid:87)(cid:76)(cid:82)(cid:81)(cid:68)(cid:79)(cid:3)(cid:70)(cid:82)(cid:80)(cid:80)(cid:72)(cid:85)(cid:70)(cid:76)(cid:68)(cid:79)(cid:3)(cid:71)(cid:68)(cid:87)(cid:68)(cid:3)(cid:68)(cid:81)(cid:71)(cid:3)(cid:68)(cid:81)(cid:68)(cid:79)(cid:92)(cid:87)(cid:76)(cid:70)(cid:86)(cid:3)(cid:73)(cid:76)(cid:85)(cid:80)
(cid:48)(cid:68)(cid:85)(cid:76)(cid:72)(cid:3)(cid:36)(cid:17)(cid:3)(cid:38)(cid:75)(cid:68)(cid:81)(cid:71)(cid:82)(cid:75)(cid:68)
(cid:58)(cid:76)(cid:79)(cid:79)(cid:76)(cid:68)(cid:80)(cid:3)(cid:47)(cid:17)(cid:3)(cid:48)(cid:72)(cid:68)(cid:81)(cid:72)(cid:92)
(cid:53)(cid:72)(cid:87)(cid:76)(cid:85)(cid:72)(cid:71)(cid:3)(cid:51)(cid:85)(cid:72)(cid:86)(cid:76)(cid:71)(cid:72)(cid:81)(cid:87)(cid:3)(cid:68)(cid:81)(cid:71)(cid:3)(cid:38)(cid:75)(cid:76)(cid:72)(cid:73)(cid:3)(cid:40)(cid:91)(cid:72)(cid:70)(cid:88)(cid:87)(cid:76)(cid:89)(cid:72)(cid:3)(cid:50)(cid:73)(cid:73)(cid:76)(cid:70)(cid:72)(cid:85)(cid:15)(cid:3)(cid:38)(cid:75)(cid:68)(cid:85)(cid:79)(cid:72)(cid:86)(cid:3)(cid:54)(cid:70)(cid:75)(cid:90)(cid:68)(cid:69)(cid:3)
(cid:44)(cid:81)(cid:89)(cid:72)(cid:86)(cid:87)(cid:80)(cid:72)(cid:81)(cid:87)(cid:3)(cid:48)(cid:68)(cid:81)(cid:68)(cid:74)(cid:72)(cid:80)(cid:72)(cid:81)(cid:87)(cid:15)(cid:3)(cid:44)(cid:81)(cid:70)(cid:17)(cid:15)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3)(cid:76)(cid:81)(cid:89)(cid:72)(cid:86)(cid:87)(cid:80)(cid:72)(cid:81)(cid:87)(cid:3)(cid:80)(cid:68)(cid:81)(cid:68)(cid:74)(cid:72)(cid:80)(cid:72)(cid:81)(cid:87)(cid:3)(cid:86)(cid:88)(cid:69)(cid:86)(cid:76)(cid:71)(cid:76)(cid:68)(cid:85)(cid:92)(cid:3)
(cid:82)(cid:73)(cid:3)(cid:38)(cid:75)(cid:68)(cid:85)(cid:79)(cid:72)(cid:86)(cid:3)(cid:54)(cid:70)(cid:75)(cid:90)(cid:68)(cid:69)(cid:3)(cid:38)(cid:82)(cid:85)(cid:83)(cid:82)(cid:85)(cid:68)(cid:87)(cid:76)(cid:82)(cid:81)
(cid:51)(cid:85)(cid:72)(cid:86)(cid:76)(cid:71)(cid:72)(cid:81)(cid:87)(cid:15)(cid:3)(cid:38)(cid:75)(cid:76)(cid:72)(cid:73)(cid:3)(cid:40)(cid:91)(cid:72)(cid:70)(cid:88)(cid:87)(cid:76)(cid:89)(cid:72)(cid:3)(cid:50)(cid:73)(cid:73)(cid:76)(cid:70)(cid:72)(cid:85)(cid:3)(cid:68)(cid:81)(cid:71)(cid:3)(cid:39)(cid:76)(cid:85)(cid:72)(cid:70)(cid:87)(cid:82)(cid:85)(cid:15)(cid:3)(cid:44)(cid:85)(cid:82)(cid:81)(cid:3)(cid:48)(cid:82)(cid:88)(cid:81)(cid:87)(cid:68)(cid:76)(cid:81)(cid:3)(cid:44)(cid:81)(cid:70)(cid:17)(cid:15)(cid:3)
(cid:76)(cid:81)(cid:73)(cid:82)(cid:85)(cid:80)(cid:68)(cid:87)(cid:76)(cid:82)(cid:81)(cid:3)(cid:80)(cid:68)(cid:81)(cid:68)(cid:74)(cid:72)(cid:80)(cid:72)(cid:81)(cid:87)(cid:3)(cid:68)(cid:81)(cid:71)(cid:3)(cid:71)(cid:68)(cid:87)(cid:68)(cid:3)(cid:69)(cid:68)(cid:70)(cid:78)(cid:88)(cid:83)(cid:3)(cid:68)(cid:81)(cid:71)(cid:3)(cid:85)(cid:72)(cid:70)(cid:82)(cid:89)(cid:72)(cid:85)(cid:92)(cid:3)(cid:70)(cid:82)(cid:80)(cid:83)(cid:68)(cid:81)(cid:92)
(cid:51)(cid:68)(cid:87)(cid:85)(cid:76)(cid:70)(cid:78)(cid:3)(cid:71)(cid:72)(cid:3)(cid:54)(cid:68)(cid:76)(cid:81)(cid:87)(cid:16)(cid:36)(cid:76)(cid:74)(cid:81)(cid:68)(cid:81)
(cid:54)(cid:72)(cid:68)(cid:81)(cid:3)(cid:50)(cid:182)(cid:54)(cid:88)(cid:79)(cid:79)(cid:76)(cid:89)(cid:68)(cid:81)
(cid:53)(cid:72)(cid:87)(cid:76)(cid:85)(cid:72)(cid:71)(cid:3)(cid:48)(cid:68)(cid:81)(cid:68)(cid:74)(cid:76)(cid:81)(cid:74)(cid:3)(cid:39)(cid:76)(cid:85)(cid:72)(cid:70)(cid:87)(cid:82)(cid:85)(cid:3)(cid:68)(cid:81)(cid:71)(cid:3)(cid:36)(cid:71)(cid:89)(cid:76)(cid:86)(cid:82)(cid:85)(cid:92)(cid:3)(cid:39)(cid:76)(cid:85)(cid:72)(cid:70)(cid:87)(cid:82)(cid:85)(cid:3)(cid:73)(cid:82)(cid:85)(cid:3)(cid:48)(cid:82)(cid:85)(cid:74)(cid:68)(cid:81)(cid:3)(cid:54)(cid:87)(cid:68)(cid:81)(cid:79)(cid:72)(cid:92)(cid:15)(cid:3)
(cid:74)(cid:79)(cid:82)(cid:69)(cid:68)(cid:79)(cid:3)(cid:73)(cid:76)(cid:81)(cid:68)(cid:81)(cid:70)(cid:76)(cid:68)(cid:79)(cid:3)(cid:86)(cid:72)(cid:85)(cid:89)(cid:76)(cid:70)(cid:72)(cid:86)
(cid:53)(cid:72)(cid:87)(cid:76)(cid:85)(cid:72)(cid:71)(cid:3)(cid:42)(cid:85)(cid:82)(cid:88)(cid:83)(cid:3)(cid:48)(cid:68)(cid:81)(cid:68)(cid:74)(cid:76)(cid:81)(cid:74)(cid:3)(cid:39)(cid:76)(cid:85)(cid:72)(cid:70)(cid:87)(cid:82)(cid:85)(cid:3)(cid:68)(cid:81)(cid:71)(cid:3)(cid:42)(cid:85)(cid:82)(cid:88)(cid:83)(cid:3)(cid:38)(cid:75)(cid:76)(cid:72)(cid:73)(cid:3)(cid:50)(cid:83)(cid:72)(cid:85)(cid:68)(cid:87)(cid:76)(cid:81)(cid:74)(cid:3)
(cid:50)(cid:73)(cid:73)(cid:76)(cid:70)(cid:72)(cid:85)(cid:15)(cid:3)(cid:43)(cid:54)(cid:37)(cid:38)(cid:3)(cid:43)(cid:82)(cid:79)(cid:71)(cid:76)(cid:81)(cid:74)(cid:86)(cid:15)(cid:3)(cid:83)(cid:79)(cid:70)(cid:17)(cid:15)(cid:3)(cid:69)(cid:68)(cid:81)(cid:78)(cid:76)(cid:81)(cid:74)(cid:3)(cid:68)(cid:81)(cid:71)(cid:3)(cid:73)(cid:76)(cid:81)(cid:68)(cid:81)(cid:70)(cid:76)(cid:68)(cid:79)(cid:3)(cid:86)(cid:72)(cid:85)(cid:89)(cid:76)(cid:70)(cid:72)(cid:86)(cid:3)
(cid:82)(cid:85)(cid:74)(cid:68)(cid:81)(cid:76)(cid:93)(cid:68)(cid:87)(cid:76)(cid:82)(cid:81)
(cid:47)(cid:92)(cid:81)(cid:81)(cid:3)(cid:36)(cid:17)(cid:3)(cid:39)(cid:88)(cid:74)(cid:79)(cid:72)
(cid:53)(cid:76)(cid:70)(cid:75)(cid:68)(cid:85)(cid:71)(cid:3)(cid:51)(cid:17)(cid:3)(cid:54)(cid:72)(cid:85)(cid:74)(cid:72)(cid:79)
(cid:53)(cid:72)(cid:87)(cid:76)(cid:85)(cid:72)(cid:71)(cid:3)(cid:38)(cid:75)(cid:68)(cid:76)(cid:85)(cid:80)(cid:68)(cid:81)(cid:3)(cid:68)(cid:81)(cid:71)(cid:3)(cid:38)(cid:75)(cid:76)(cid:72)(cid:73)(cid:3)(cid:40)(cid:91)(cid:72)(cid:70)(cid:88)(cid:87)(cid:76)(cid:89)(cid:72)(cid:3)(cid:50)(cid:73)(cid:73)(cid:76)(cid:70)(cid:72)(cid:85)(cid:15) (cid:40)(cid:81)(cid:74)(cid:76)(cid:79)(cid:76)(cid:87)(cid:92) (cid:43)(cid:82)(cid:79)(cid:71)(cid:76)(cid:81)(cid:74)(cid:86)(cid:15)(cid:3)(cid:44)(cid:81)(cid:70)(cid:17)(cid:15)(cid:3)
(cid:68)(cid:81) (cid:72)(cid:81)(cid:74)(cid:76)(cid:81)(cid:72)(cid:72)(cid:85)(cid:76)(cid:81)(cid:74)(cid:3)(cid:68)(cid:81)(cid:71)(cid:3)(cid:87)(cid:72)(cid:70)(cid:75)(cid:81)(cid:82)(cid:79)(cid:82)(cid:74)(cid:92)(cid:3)(cid:70)(cid:82)(cid:81)(cid:86)(cid:88)(cid:79)(cid:87)(cid:76)(cid:81)(cid:74)(cid:3)(cid:70)(cid:82)(cid:80)(cid:83)(cid:68)(cid:81)(cid:92)
(cid:53)(cid:72)(cid:87)(cid:76)(cid:85)(cid:72)(cid:71)(cid:3)(cid:51)(cid:85)(cid:72)(cid:86)(cid:76)(cid:71)(cid:72)(cid:81)(cid:87)(cid:3)(cid:68)(cid:81)(cid:71)(cid:3)(cid:38)(cid:75)(cid:76)(cid:72)(cid:73)(cid:3)(cid:40)(cid:91)(cid:72)(cid:70)(cid:88)(cid:87)(cid:76)(cid:89)(cid:72)(cid:3)(cid:50)(cid:73)(cid:73)(cid:76)(cid:70)(cid:72)(cid:85)(cid:15)
(cid:49)(cid:82)(cid:85)(cid:87)(cid:75)(cid:3)(cid:36)(cid:80)(cid:72)(cid:85)(cid:76)(cid:70)(cid:68)(cid:81)(cid:3)(cid:40)(cid:79)(cid:72)(cid:70)(cid:87)(cid:85)(cid:76)(cid:70)(cid:3)(cid:53)(cid:72)(cid:79)(cid:76)(cid:68)(cid:69)(cid:76)(cid:79)(cid:76)(cid:87)(cid:92)(cid:3)(cid:38)(cid:82)(cid:85)(cid:83)(cid:82)(cid:85)(cid:68)(cid:87)(cid:76)(cid:82)(cid:81)(cid:15)(cid:3)(cid:86)(cid:72)(cid:79)(cid:73)(cid:16)
(cid:85)(cid:72)(cid:74)(cid:88)(cid:79)(cid:68)(cid:87)(cid:82)(cid:85)(cid:92)(cid:3)(cid:68)(cid:88)(cid:87)(cid:75)(cid:82)(cid:85)(cid:76)(cid:87)(cid:92)(cid:3)(cid:73)(cid:82)(cid:85)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3)(cid:69)(cid:88)(cid:79)(cid:78)(cid:3)(cid:72)(cid:79)(cid:72)(cid:70)(cid:87)(cid:85)(cid:76)(cid:70)(cid:76)(cid:87)(cid:92)(cid:3)(cid:86)(cid:92)(cid:86)(cid:87)(cid:72)(cid:80)
(cid:36)(cid:80)(cid:72)(cid:79)(cid:76)(cid:68)(cid:3)(cid:38)(cid:17)(cid:3)(cid:41)(cid:68)(cid:90)(cid:70)(cid:72)(cid:87)(cid:87)
(cid:42)(cid:85)(cid:72)(cid:74)(cid:82)(cid:85)(cid:92)(cid:3)(cid:47)(cid:17)(cid:3)(cid:54)(cid:88)(cid:80)(cid:80)(cid:72)
(cid:47)(cid:72)(cid:68)(cid:71)(cid:3)(cid:39)(cid:76)(cid:85)(cid:72)(cid:70)(cid:87)(cid:82)(cid:85)(cid:15)(cid:3)(cid:54)(cid:87)(cid:68)(cid:87)(cid:72)(cid:3)(cid:54)(cid:87)(cid:85)(cid:72)(cid:72)(cid:87)(cid:3)(cid:38)(cid:82)(cid:85)(cid:83)(cid:82)(cid:85)(cid:68)(cid:87)(cid:76)(cid:82)(cid:81)
(cid:38)(cid:75)(cid:68)(cid:76)(cid:85)(cid:80)(cid:68)(cid:81)(cid:15)(cid:3)(cid:46)(cid:76)(cid:81)(cid:81)(cid:72)(cid:89)(cid:76)(cid:78)(cid:3)(cid:36)(cid:37)(cid:15)(cid:3)(cid:68)(cid:3)(cid:79)(cid:82)(cid:81)(cid:74)(cid:16)(cid:87)(cid:72)(cid:85)(cid:80)(cid:3)(cid:82)(cid:85)(cid:76)(cid:72)(cid:81)(cid:87)(cid:72)(cid:71)(cid:3)(cid:76)(cid:81)(cid:89)(cid:72)(cid:86)(cid:87)(cid:80)(cid:72)(cid:81)(cid:87)(cid:3)(cid:70)(cid:82)(cid:80)(cid:83)(cid:68)(cid:81)(cid:92)(cid:3)
(cid:69)(cid:68)(cid:86)(cid:72)(cid:71)(cid:3)(cid:76)(cid:81)(cid:3)(cid:54)(cid:90)(cid:72)(cid:71)(cid:72)(cid:81)
(cid:48)(cid:68)(cid:81)(cid:68)(cid:74)(cid:76)(cid:81)(cid:74)(cid:3)(cid:51)(cid:68)(cid:85)(cid:87)(cid:81)(cid:72)(cid:85)(cid:3)(cid:68)(cid:81)(cid:71)(cid:3)(cid:41)(cid:82)(cid:88)(cid:81)(cid:71)(cid:72)(cid:85)(cid:15)(cid:3)(cid:42)(cid:79)(cid:72)(cid:81)(cid:3)(cid:38)(cid:68)(cid:83)(cid:76)(cid:87)(cid:68)(cid:79)(cid:3)(cid:51)(cid:68)(cid:85)(cid:87)(cid:81)(cid:72)(cid:85)(cid:86)(cid:15)(cid:3)(cid:47)(cid:47)(cid:38)(cid:15)(cid:3)
(cid:68)(cid:81)(cid:3)(cid:68)(cid:79)(cid:87)(cid:72)(cid:85)(cid:81)(cid:68)(cid:87)(cid:76)(cid:89)(cid:72)(cid:3)(cid:68)(cid:86)(cid:86)(cid:72)(cid:87)(cid:3)(cid:76)(cid:81)(cid:89)(cid:72)(cid:86)(cid:87)(cid:80)(cid:72)(cid:81)(cid:87)(cid:3)(cid:73)(cid:88)(cid:81)(cid:71)(cid:3)
(cid:40)(cid:59)(cid:40)(cid:38)(cid:56)(cid:55)(cid:44)(cid:57)(cid:40)(cid:3)(cid:47)(cid:40)(cid:36)(cid:39)(cid:40)(cid:53)(cid:54)(cid:43)(cid:44)(cid:51)
(cid:48)(cid:68)(cid:85)(cid:70)(cid:75)(cid:3)(cid:21)(cid:19)(cid:15)(cid:3)(cid:21)(cid:19)(cid:21)(cid:19)
(cid:53)(cid:82)(cid:81)(cid:68)(cid:79)(cid:71)(cid:3)(cid:51)(cid:17)(cid:3)(cid:50)(cid:182)(cid:43)(cid:68)(cid:81)(cid:79)(cid:72)(cid:92)
(cid:38)(cid:75)(cid:68)(cid:76)(cid:85)(cid:80)(cid:68)(cid:81)(cid:15)(cid:3)(cid:51)(cid:85)(cid:72)(cid:86)(cid:76)(cid:71)(cid:72)(cid:81)(cid:87) (cid:68)(cid:81)(cid:71)(cid:3)(cid:38)(cid:75)(cid:76)(cid:72)(cid:73)(cid:3)(cid:40)(cid:91)(cid:72)(cid:70)(cid:88)(cid:87)(cid:76)(cid:89)(cid:72)(cid:3)(cid:50)(cid:73)(cid:73)(cid:76)(cid:70)(cid:72)(cid:85)
(cid:43)(cid:68)(cid:81)(cid:81)(cid:68)(cid:75) (cid:48)(cid:17)(cid:3)(cid:42)(cid:85)(cid:82)(cid:89)(cid:72)
(cid:40)(cid:91)(cid:72)(cid:70)(cid:88)(cid:87)(cid:76)(cid:89)(cid:72)(cid:3)(cid:57)(cid:76)(cid:70)(cid:72)(cid:3)(cid:51)(cid:85)(cid:72)(cid:86)(cid:76)(cid:71)(cid:72)(cid:81)(cid:87) (cid:68)(cid:81)(cid:71)(cid:3)(cid:38)(cid:75)(cid:76)(cid:72)(cid:73)(cid:3)(cid:48)(cid:68)(cid:85)(cid:78)(cid:72)(cid:87)(cid:76)(cid:81)(cid:74)(cid:3)(cid:50)(cid:73)(cid:73)(cid:76)(cid:70)(cid:72)(cid:85)
(cid:40)(cid:85)(cid:76)(cid:70)(cid:3)(cid:58)(cid:17)(cid:3)(cid:36)(cid:69)(cid:82)(cid:68)(cid:73)
(cid:40)(cid:91)(cid:72)(cid:70)(cid:88)(cid:87)(cid:76)(cid:89)(cid:72)(cid:3)(cid:57)(cid:76)(cid:70)(cid:72)(cid:3)(cid:51)(cid:85)(cid:72)(cid:86)(cid:76)(cid:71)(cid:72)(cid:81)(cid:87)(cid:3)(cid:68)(cid:81)(cid:71) (cid:38)(cid:75)(cid:76)(cid:72)(cid:73)(cid:3)(cid:41)(cid:76)(cid:81)(cid:68)(cid:81)(cid:70)(cid:76)(cid:68)(cid:79)(cid:3)(cid:50)(cid:73)(cid:73)(cid:76)(cid:70)(cid:72)(cid:85)
(cid:46)(cid:68)(cid:87)(cid:75)(cid:85)(cid:92)(cid:81) (cid:48)(cid:17)(cid:3)(cid:43)(cid:82)(cid:85)(cid:74)(cid:68)(cid:81)
(cid:40)(cid:91)(cid:72)(cid:70)(cid:88)(cid:87)(cid:76)(cid:89)(cid:72)(cid:3)(cid:57)(cid:76)(cid:70)(cid:72)(cid:3)(cid:51)(cid:85)(cid:72)(cid:86)(cid:76)(cid:71)(cid:72)(cid:81)(cid:87) (cid:68)(cid:81)(cid:71)(cid:3)(cid:38)(cid:75)(cid:76)(cid:72)(cid:73)(cid:3)(cid:43)(cid:88)(cid:80)(cid:68)(cid:81)(cid:3)(cid:53)(cid:72)(cid:86)(cid:82)(cid:88)(cid:85)(cid:70)(cid:72)(cid:86)(cid:3)(cid:68)(cid:81)(cid:71)(cid:3)
(cid:38)(cid:76)(cid:87)(cid:76)(cid:93)(cid:72)(cid:81)(cid:86)(cid:75)(cid:76)(cid:83)(cid:3)(cid:50)(cid:73)(cid:73)(cid:76)(cid:70)(cid:72)(cid:85)
(cid:44)(cid:68)(cid:81)(cid:3)(cid:58)(cid:17)(cid:3)(cid:36)(cid:83)(cid:83)(cid:79)(cid:72)(cid:92)(cid:68)(cid:85)(cid:71)
(cid:40)(cid:91)(cid:72)(cid:70)(cid:88)(cid:87)(cid:76)(cid:89)(cid:72)(cid:3)(cid:57)(cid:76)(cid:70)(cid:72)(cid:3)(cid:51)(cid:85)(cid:72)(cid:86)(cid:76)(cid:71)(cid:72)(cid:81)(cid:87)(cid:15)(cid:3)(cid:42)(cid:79)(cid:82)(cid:69)(cid:68)(cid:79)(cid:3)(cid:38)(cid:82)(cid:81)(cid:87)(cid:85)(cid:82)(cid:79)(cid:79)(cid:72)(cid:85)(cid:3)(cid:68)(cid:81)(cid:71)(cid:3)(cid:38)(cid:75)(cid:76)(cid:72)(cid:73)(cid:3)
(cid:36)(cid:70)(cid:70)(cid:82)(cid:88)(cid:81)(cid:87)(cid:76)(cid:81)(cid:74)(cid:3)(cid:50)(cid:73)(cid:73)(cid:76)(cid:70)(cid:72)(cid:85)
(cid:36)(cid:81)(cid:71)(cid:85)(cid:72)(cid:90)(cid:3)(cid:51)(cid:17)(cid:3)(cid:46)(cid:88)(cid:85)(cid:76)(cid:87)(cid:93)(cid:78)(cid:72)(cid:86)
(cid:40)(cid:91)(cid:72)(cid:70)(cid:88)(cid:87)(cid:76)(cid:89)(cid:72)(cid:3)(cid:57)(cid:76)(cid:70)(cid:72)(cid:3)(cid:51)(cid:85)(cid:72)(cid:86)(cid:76)(cid:71)(cid:72)(cid:81)(cid:87)(cid:3)(cid:68)(cid:81)(cid:71) (cid:38)(cid:75)(cid:76)(cid:72)(cid:73)(cid:3)(cid:53)(cid:76)(cid:86)(cid:78)(cid:3)(cid:50)(cid:73)(cid:73)(cid:76)(cid:70)(cid:72)(cid:85)(cid:3)(cid:3)(cid:3)(cid:3)(cid:3)(cid:3)(cid:3)(cid:3)(cid:3)(cid:3)(cid:3)(cid:3)(cid:3)(cid:3)(cid:3)(cid:3)(cid:3)(cid:3)(cid:3)(cid:3)(cid:3)(cid:3)(cid:3)(cid:3)(cid:3)(cid:3)
(cid:45)(cid:82)(cid:85)(cid:74)(cid:3)(cid:36)(cid:80)(cid:69)(cid:85)(cid:82)(cid:86)(cid:76)(cid:88)(cid:86)
(cid:40)(cid:91)(cid:72)(cid:70)(cid:88)(cid:87)(cid:76)(cid:89)(cid:72)(cid:3)(cid:57)(cid:76)(cid:70)(cid:72)(cid:3)(cid:51)(cid:85)(cid:72)(cid:86)(cid:76)(cid:71)(cid:72)(cid:81)(cid:87)(cid:3)(cid:68)(cid:81)(cid:71)(cid:3)(cid:43)(cid:72)(cid:68)(cid:71)(cid:3)(cid:82)(cid:73)(cid:3)(cid:40)(cid:88)(cid:85)(cid:82)(cid:83)(cid:72)(cid:15)(cid:3)(cid:48)(cid:76)(cid:71)(cid:71)(cid:79)(cid:72)(cid:3)(cid:40)(cid:68)(cid:86)(cid:87)(cid:3)
(cid:68)(cid:81)(cid:71)(cid:3)(cid:36)(cid:73)(cid:85)(cid:76)(cid:70)(cid:68)
(cid:45)(cid:82)(cid:75)(cid:81)(cid:3)(cid:47)(cid:72)(cid:75)(cid:81)(cid:72)(cid:85)
(cid:40)(cid:91)(cid:72)(cid:70)(cid:88)(cid:87)(cid:76)(cid:89)(cid:72)(cid:3)(cid:57)(cid:76)(cid:70)(cid:72)(cid:3)(cid:51)(cid:85)(cid:72)(cid:86)(cid:76)(cid:71)(cid:72)(cid:81)(cid:87)(cid:3)(cid:68)(cid:81)(cid:71)(cid:3)(cid:43)(cid:72)(cid:68)(cid:71)(cid:3)(cid:82)(cid:73)(cid:3)(cid:42)(cid:79)(cid:82)(cid:69)(cid:68)(cid:79)(cid:3)(cid:54)(cid:72)(cid:85)(cid:89)(cid:76)(cid:70)(cid:72)(cid:86)(cid:15)(cid:3)(cid:49)(cid:82)(cid:85)(cid:87)(cid:75)(cid:3)
(cid:36)(cid:80)(cid:72)(cid:85)(cid:76)(cid:70)(cid:68)
(cid:41)(cid:85)(cid:68)(cid:81)(cid:70)(cid:76)(cid:86)(cid:70)(cid:82)(cid:3)(cid:36)(cid:85)(cid:76)(cid:86)(cid:87)(cid:72)(cid:74)(cid:88)(cid:76)(cid:72)(cid:87)(cid:68)
(cid:40)(cid:91)(cid:72)(cid:70)(cid:88)(cid:87)(cid:76)(cid:89)(cid:72)(cid:3)(cid:57)(cid:76)(cid:70)(cid:72)(cid:3)(cid:51)(cid:85)(cid:72)(cid:86)(cid:76)(cid:71)(cid:72)(cid:81)(cid:87)(cid:3)(cid:68)(cid:81)(cid:71)(cid:3)(cid:38)(cid:75)(cid:76)(cid:72)(cid:73)(cid:3)(cid:40)(cid:91)(cid:72)(cid:70)(cid:88)(cid:87)(cid:76)(cid:89)(cid:72)(cid:3)(cid:50)(cid:73)(cid:73)(cid:76)(cid:70)(cid:72)(cid:85)(cid:3)(cid:73)(cid:82)(cid:85)(cid:3)
(cid:44)(cid:81)(cid:87)(cid:72)(cid:85)(cid:81)(cid:68)(cid:87)(cid:76)(cid:82)(cid:81)(cid:68)(cid:79)(cid:3)(cid:37)(cid:88)(cid:86)(cid:76)(cid:81)(cid:72)(cid:86)(cid:86)
(cid:47)(cid:82)(cid:88)(cid:76)(cid:86)(cid:3)(cid:39)(cid:17)(cid:3)(cid:48)(cid:68)(cid:76)(cid:88)(cid:85)(cid:76)
(cid:40)(cid:91)(cid:72)(cid:70)(cid:88)(cid:87)(cid:76)(cid:89)(cid:72)(cid:3)(cid:57)(cid:76)(cid:70)(cid:72)(cid:3)(cid:51)(cid:85)(cid:72)(cid:86)(cid:76)(cid:71)(cid:72)(cid:81)(cid:87) (cid:68)(cid:81)(cid:71)(cid:3)(cid:38)(cid:75)(cid:76)(cid:72)(cid:73)(cid:3)(cid:50)(cid:83)(cid:72)(cid:85)(cid:68)(cid:87)(cid:76)(cid:81)(cid:74)(cid:3)(cid:50)(cid:73)(cid:73)(cid:76)(cid:70)(cid:72)(cid:85)
(cid:55)(cid:85)(cid:68)(cid:70)(cid:92)(cid:3)(cid:36)(cid:87)(cid:78)(cid:76)(cid:81)(cid:86)(cid:82)(cid:81)
(cid:40)(cid:91)(cid:72)(cid:70)(cid:88)(cid:87)(cid:76)(cid:89)(cid:72)(cid:3)(cid:57)(cid:76)(cid:70)(cid:72)(cid:3)(cid:51)(cid:85)(cid:72)(cid:86)(cid:76)(cid:71)(cid:72)(cid:81)(cid:87)(cid:3)(cid:68)(cid:81)(cid:71)(cid:3)(cid:36)(cid:70)(cid:87)(cid:76)(cid:81)(cid:74)(cid:3)(cid:38)(cid:75)(cid:76)(cid:72)(cid:73)(cid:3)(cid:36)(cid:71)(cid:80)(cid:76)(cid:81)(cid:76)(cid:86)(cid:87)(cid:85)(cid:68)(cid:87)(cid:76)(cid:89)(cid:72)(cid:3)
(cid:50)(cid:73)(cid:73)(cid:76)(cid:70)(cid:72)(cid:85)
(cid:44)(cid:68)(cid:81)(cid:3)(cid:48)(cid:68)(cid:85)(cid:87)(cid:76)(cid:81)
(cid:40)(cid:91)(cid:72)(cid:70)(cid:88)(cid:87)(cid:76)(cid:89)(cid:72)(cid:3)(cid:57)(cid:76)(cid:70)(cid:72)(cid:3)(cid:51)(cid:85)(cid:72)(cid:86)(cid:76)(cid:71)(cid:72)(cid:81)(cid:87)(cid:3)(cid:68)(cid:81)(cid:71)(cid:3)(cid:43)(cid:72)(cid:68)(cid:71)(cid:3)(cid:82)(cid:73)(cid:3)(cid:36)(cid:86)(cid:76)(cid:68)(cid:3)(cid:51)(cid:68)(cid:70)(cid:76)(cid:73)(cid:76)(cid:70)
(cid:36)(cid:88)(cid:81)(cid:82)(cid:92)(cid:3)(cid:37)(cid:68)(cid:81)(cid:72)(cid:85)(cid:77)(cid:72)(cid:72)
(cid:40)(cid:91)(cid:72)(cid:70)(cid:88)(cid:87)(cid:76)(cid:89)(cid:72)(cid:3)(cid:57)(cid:76)(cid:70)(cid:72)(cid:3)(cid:51)(cid:85)(cid:72)(cid:86)(cid:76)(cid:71)(cid:72)(cid:81)(cid:87)(cid:3)(cid:68)(cid:81)(cid:71)(cid:3)(cid:38)(cid:75)(cid:76)(cid:72)(cid:73)(cid:3)(cid:55)(cid:85)(cid:68)(cid:81)(cid:86)(cid:73)(cid:82)(cid:85)(cid:80)(cid:68)(cid:87)(cid:76)(cid:82)(cid:81)(cid:3)(cid:50)(cid:73)(cid:73)(cid:76)(cid:70)(cid:72)(cid:85)
(cid:39)(cid:82)(cid:81)(cid:81)(cid:68)(cid:3)(cid:48)(cid:17)(cid:3)(cid:48)(cid:76)(cid:79)(cid:85)(cid:82)(cid:71)
(cid:40)(cid:91)(cid:72)(cid:70)(cid:88)(cid:87)(cid:76)(cid:89)(cid:72)(cid:3)(cid:57)(cid:76)(cid:70)(cid:72)(cid:3)(cid:51)(cid:85)(cid:72)(cid:86)(cid:76)(cid:71)(cid:72)(cid:81)(cid:87)(cid:3)(cid:68)(cid:81)(cid:71)(cid:3)(cid:43)(cid:72)(cid:68)(cid:71)(cid:3)(cid:82)(cid:73)(cid:3)(cid:42)(cid:79)(cid:82)(cid:69)(cid:68)(cid:79)(cid:3)(cid:38)(cid:79)(cid:76)(cid:72)(cid:81)(cid:87)(cid:86)(cid:3)(cid:39)(cid:76)(cid:89)(cid:76)(cid:86)(cid:76)(cid:82)(cid:81)
(cid:45)(cid:72)(cid:73)(cid:73)(cid:85)(cid:72)(cid:92)(cid:3)(cid:49)(cid:17)(cid:3)(cid:38)(cid:68)(cid:85)(cid:83)
(cid:40)(cid:91)(cid:72)(cid:70)(cid:88)(cid:87)(cid:76)(cid:89)(cid:72)(cid:3)(cid:57)(cid:76)(cid:70)(cid:72)(cid:3)(cid:51)(cid:85)(cid:72)(cid:86)(cid:76)(cid:71)(cid:72)(cid:81)(cid:87)(cid:15)(cid:3)(cid:38)(cid:75)(cid:76)(cid:72)(cid:73)(cid:3)(cid:47)(cid:72)(cid:74)(cid:68)(cid:79)(cid:3)(cid:50)(cid:73)(cid:73)(cid:76)(cid:70)(cid:72)(cid:85)(cid:3)(cid:68)(cid:81)(cid:71)(cid:3)(cid:54)(cid:72)(cid:70)(cid:85)(cid:72)(cid:87)(cid:68)(cid:85)(cid:92)
(cid:40)(cid:79)(cid:76)(cid:93)(cid:68)(cid:69)(cid:72)(cid:87)(cid:75)(cid:3)(cid:49)(cid:82)(cid:79)(cid:68)(cid:81)
(cid:40)(cid:91)(cid:72)(cid:70)(cid:88)(cid:87)(cid:76)(cid:89)(cid:72)(cid:3)(cid:57)(cid:76)(cid:70)(cid:72)(cid:3)(cid:51)(cid:85)(cid:72)(cid:86)(cid:76)(cid:71)(cid:72)(cid:81)(cid:87)(cid:3)(cid:68)(cid:81)(cid:71)(cid:3)(cid:43)(cid:72)(cid:68)(cid:71)(cid:3)(cid:82)(cid:73)(cid:3)(cid:42)(cid:79)(cid:82)(cid:69)(cid:68)(cid:79)(cid:3)(cid:39)(cid:72)(cid:79)(cid:76)(cid:89)(cid:72)(cid:85)(cid:92)
(cid:49)(cid:68)(cid:71)(cid:76)(cid:81)(cid:72)(cid:3)(cid:38)(cid:75)(cid:68)(cid:78)(cid:68)(cid:85)
(cid:40)(cid:91)(cid:72)(cid:70)(cid:88)(cid:87)(cid:76)(cid:89)(cid:72)(cid:3)(cid:57)(cid:76)(cid:70)(cid:72)(cid:3)(cid:51)(cid:85)(cid:72)(cid:86)(cid:76)(cid:71)(cid:72)(cid:81)(cid:87)(cid:3)(cid:68)(cid:81)(cid:71)(cid:3)(cid:43)(cid:72)(cid:68)(cid:71)(cid:3)(cid:82)(cid:73)(cid:3)(cid:42)(cid:79)(cid:82)(cid:69)(cid:68)(cid:79)(cid:3)(cid:48)(cid:68)(cid:85)(cid:78)(cid:72)(cid:87)(cid:86)
(cid:45)(cid:82)(cid:75)(cid:81)(cid:3)(cid:51)(cid:79)(cid:68)(cid:81)(cid:86)(cid:78)(cid:92)
(cid:40)(cid:91)(cid:72)(cid:70)(cid:88)(cid:87)(cid:76)(cid:89)(cid:72)(cid:3)(cid:57)(cid:76)(cid:70)(cid:72)(cid:3)(cid:51)(cid:85)(cid:72)(cid:86)(cid:76)(cid:71)(cid:72)(cid:81)(cid:87)(cid:15)(cid:3)(cid:43)(cid:72)(cid:68)(cid:71)(cid:3)(cid:82)(cid:73)(cid:3)(cid:42)(cid:79)(cid:82)(cid:69)(cid:68)(cid:79)(cid:3)(cid:40)(cid:91)(cid:70)(cid:75)(cid:68)(cid:81)(cid:74)(cid:72) (cid:68)(cid:81)(cid:71)
(cid:38)(cid:75)(cid:76)(cid:72)(cid:73)(cid:3)(cid:40)(cid:91)(cid:72)(cid:70)(cid:88)(cid:87)(cid:76)(cid:89)(cid:72)(cid:3)(cid:50)(cid:73)(cid:73)(cid:76)(cid:70)(cid:72)(cid:85)(cid:3)(cid:82)(cid:73)(cid:3)(cid:38)(cid:75)(cid:68)(cid:85)(cid:79)(cid:72)(cid:86)(cid:3)(cid:53)(cid:76)(cid:89)(cid:72)(cid:85)(cid:3)(cid:39)(cid:72)(cid:89)(cid:72)(cid:79)(cid:82)(cid:83)(cid:80)(cid:72)(cid:81)(cid:87)
(cid:36)(cid:81)(cid:71)(cid:85)(cid:72)(cid:90)(cid:3)(cid:45)(cid:17)(cid:3)(cid:40)(cid:85)(cid:76)(cid:70)(cid:78)(cid:86)(cid:82)(cid:81)
(cid:40)(cid:91)(cid:72)(cid:70)(cid:88)(cid:87)(cid:76)(cid:89)(cid:72)(cid:3)(cid:57)(cid:76)(cid:70)(cid:72)(cid:3)(cid:51)(cid:85)(cid:72)(cid:86)(cid:76)(cid:71)(cid:72)(cid:81)(cid:87) (cid:68)(cid:81)(cid:71) (cid:43)(cid:72)(cid:68)(cid:71)(cid:3)(cid:82)(cid:73)(cid:3)(cid:42)(cid:79)(cid:82)(cid:69)(cid:68)(cid:79)(cid:3)(cid:54)(cid:72)(cid:85)(cid:89)(cid:76)(cid:70)(cid:72)(cid:86)
(cid:38)(cid:92)(cid:85)(cid:88)(cid:86)(cid:3)(cid:55)(cid:68)(cid:85)(cid:68)(cid:83)(cid:82)(cid:85)(cid:72)(cid:89)(cid:68)(cid:79)(cid:68)
(cid:40)(cid:91)(cid:72)(cid:70)(cid:88)(cid:87)(cid:76)(cid:89)(cid:72)(cid:3)(cid:57)(cid:76)(cid:70)(cid:72)(cid:3)(cid:51)(cid:85)(cid:72)(cid:86)(cid:76)(cid:71)(cid:72)(cid:81)(cid:87)(cid:3)(cid:68)(cid:81)(cid:71)(cid:3)(cid:51)(cid:85)(cid:72)(cid:86)(cid:76)(cid:71)(cid:72)(cid:81)(cid:87)(cid:3)(cid:68)(cid:81)(cid:71)(cid:3)(cid:38)(cid:75)(cid:76)(cid:72)(cid:73)(cid:3)(cid:40)(cid:91)(cid:72)(cid:70)(cid:88)(cid:87)(cid:76)(cid:89)(cid:72)(cid:3)
(cid:50)(cid:73)(cid:73)(cid:76)(cid:70)(cid:72)(cid:85)(cid:3)(cid:82)(cid:73)(cid:3)(cid:54)(cid:87)(cid:68)(cid:87)(cid:72)(cid:3)(cid:54)(cid:87)(cid:85)(cid:72)(cid:72)(cid:87)(cid:3)(cid:42)(cid:79)(cid:82)(cid:69)(cid:68)(cid:79)(cid:3)(cid:36)(cid:71)(cid:89)(cid:76)(cid:86)(cid:82)(cid:85)(cid:86)
(cid:37)(cid:85)(cid:76)(cid:68)(cid:81)(cid:3)(cid:41)(cid:85)(cid:68)(cid:81)(cid:93)
(cid:40)(cid:91)(cid:72)(cid:70)(cid:88)(cid:87)(cid:76)(cid:89)(cid:72)(cid:3)(cid:57)(cid:76)(cid:70)(cid:72)(cid:3)(cid:51)(cid:85)(cid:72)(cid:86)(cid:76)(cid:71)(cid:72)(cid:81)(cid:87)(cid:3)(cid:68)(cid:81)(cid:71)(cid:3)(cid:38)(cid:75)(cid:76)(cid:72)(cid:73)(cid:3)(cid:44)(cid:81)(cid:73)(cid:82)(cid:85)(cid:80)(cid:68)(cid:87)(cid:76)(cid:82)(cid:81)(cid:3)(cid:50)(cid:73)(cid:73)(cid:76)(cid:70)(cid:72)(cid:85)
(cid:3)
STATE STREET WORLDWIDE(cid:3)
(cid:3)
Japan(cid:3)
Fukuoka
Tokyo
Luxembourg(cid:3)
Luxembourg
Malaysia(cid:3)
Kuala Lumpur
Netherlands(cid:3)
Amsterdam
Norway
Trondheim(cid:3)
(cid:3)
People's Republic of China(cid:3)
Beijing
Hangzhou
Hong Kong
Shanghai(cid:3)
Poland(cid:3)
Gdansk
Krakow(cid:3)
Saudi Arabia(cid:3)
Riyadh
Singapore(cid:3)
Singapore
(cid:3)
South Korea(cid:3)
Seoul
(cid:3)
Switzerland(cid:3)
Zurich
(cid:3)
Taiwan(cid:3)
Taipei City
Thailand(cid:3)
Bangkok
United Arab Emirates(cid:3)
Abu Dhabi
Dubai
United Kingdom(cid:3)
England
London
Scotland
Edinburgh
(cid:3)
United States(cid:3)
Arizona
Scottsdale
California
Irvine
Los Angeles
Redwood City
Sacramento
San Francisco
Connecticut
Stamford
Florida
Jacksonville
Georgia
Atlanta
Illinois
Chicago
Hoffman Estates
Indiana
Indianapolis
Massachusetts
Boston
Burlington
Cambridge
Quincy
Missouri
Kansas City
New Jersey
Clifton
Princeton
New York
New York City
North Carolina
Durham
Pennsylvania
Berwyn
Texas
Austin
(cid:3)
Australia(cid:3)
Melbourne
Sydney
Austria(cid:3)
Vienna
Belgium(cid:3)
Brussels
Brazil(cid:3)
Sao Paulo(cid:3)
(cid:3)
Brunei Darussalam(cid:3)
Bandar Seri Begawan
(cid:3)
Canada(cid:3)
Montreal
Toronto
Vancouver
Cayman Islands(cid:3)
Grand Cayman
Channel Islands(cid:3)
Guernsey
Saint Peter Port
Jersey
Saint Helier
France(cid:3)
Paris
Germany(cid:3)
Frankfurt
Leipzig
Munich
India(cid:3)
Bangalore
Chennai
Coimbatore
Hyderabad
Mumbai
Pune
Thane West
Vijayawada
Ireland(cid:3)
Drogheda
Dublin
Kilkenny
Naas
Italy(cid:3)
Milan
Turin
(cid:3)
statestreet.com
S
T
A
T
E
S
T
R
E
E
T
2
0
1
9
A
N
N
U
A
L
R
E
P
O
R
T
Annual Report
to Shareholders
2019
State Street Corporation
State Street Financial Center
One Lincoln Street
Boston, MA 02111
20-33748-0320
©2020 State Street Corporation