BNYB
Mellon
Annual
Report
BNY Mellon
Annual Report
2018
While we are focused on driving change,
we do this with a keen eye towards preserving
much of the great culture of our company.
CHARLIE SCHARF
Chairman and Chief Executive Officer
II BNY Mellon
Companies must constantly
think about how they must
change and evolve or they risk
both short-term performance
and long-term sustainability.
This is especially true for large companies as smaller, more nimble
competitors target their margins and innovate more rapidly. At BNY Mellon,
we are challenging ourselves to evolve so as to both maximize our short– and
medium–term performance and create a path for long–term continued success.
Our rich history of success over more than two centuries is a distinct
advantage. While we are focused on driving change, we do this with a keen
eye towards preserving much of the great culture of our company. Though
we are proud of who we are and how we serve our clients, we also believe
we can deliver more for our clients, shareholders and employees by setting
higher standards of performance and pushing ourselves to create new and
differentiated solutions for our clients.
Our evolution will take time, but we have confidence that we will build
on our success.
2018 Annual Report III
2018 Financial
Performance
Our financial results for 2018 have a number of
complicating factors, but I will do my best to explain
them. On a reported basis, our earnings per share
increased 9%. These results included several notable
items in both 2018 and 2017 that make our results
difficult to compare.
In last year’s letter, I discussed why we break these items out. To
reiterate, our goal is to provide you with the necessary detail to analyze
our performance. We try and explain our results as well as provide
transparency on items that we believe do not fully represent the future
earnings power of the company. As I said last year, we are going through a
period of transition, and I am encouraging our leaders to take actions that
will add cost in the short term but will benefit us in the long term. As such,
I do not believe all items in our GAAP results represent the future earnings
profile of our company, but ultimately, our disclosures will allow you to
make your own judgment.
Excluding notable items in 2017 and 2018, earnings per share increased 18%1.
Approximately seven percentage points of this increase was due to benefits
TOTAL OPERATING REVENUE ($MM)1
+3% 2018 | $16,405
2017 | $15,863
1For a reconciliation of these non–GAAP measures, see page XXIII.
IV BNY Mellon
$4.04
2018
$3.72
2017
+9%
EARNINGS PER SHARE
ON REPORTED BASIS
$4.21
2018
+18%
$3.57
2017
OPERATING EARNINGS
PER SHARE1
EXCLUDES
NOTABLE ITEMS
from changes in U.S. tax laws. Our overall revenue grew 3% as Investment
Services revenue growth of 6% was partially offset by lower Investment
Management growth of 2%. Our expenses grew 2%. We increased what we
spend on technology by approximately $350 million while reducing all other
expenses to partially offset the increase. Importantly, we continued to return
a significant amount of capital to our shareholders.
Our financial performance and franchise growth were relatively consistent
with that of prior years, but we are reorienting our expense base toward
technology. We have an opportunity to leverage our unique global franchise
and great client relationships and ultimately increase the rate of revenue and
profit growth, while also maintaining continued strong returns.
2%
TOTAL OPERATING EXPENSE ($MM)1
2018 | $10,868
2017 | $10,648
34%
2018 OPERATING
PRE-TAX MARGIN1
2018 Annual Report V
ME
X INCO
PRE–TA
+9%
UES
REVEN
+6%
EXPENSES
+5%
I N V E S T M E N T S E RV I C E S P E R F O R M A N C E 2
Our Investment Services revenue increased 6%, expenses were up 5% and
pre–tax income increased 9%. Our pre–tax margin was 36%, up from 35%
in the prior year.
Our Clearance and Collateral Management and Depositary Receipts businesses
both achieved double–digit revenue growth, while Asset Servicing and
Corporate Trust saw mid–single–digit revenue growth. Pershing and Treasury
Services had revenue growth in the low- to mid–single–digit range.
Assets under custody and/or administration decreased by 1% as the negative
impact of market declines and the stronger U.S. dollar were partially offset
by new business.
ME
X INCO
PRE–TA
+10%
I N V E S T M E N T M A NAG E M E N T P E R F O R M A N C E 2
Investment Management’s financial performance reflected a difficult
environment for the industry. Revenues increased 2%, expenses were down
1% and pre–tax income increased 10%. Pre–tax margin was 35% for the year,
up from 33% in 2017. Strength in our liability–driven investment (LDI) business
was offset by weakness in our traditional active and passive strategies.
Our assets under management declined by 9%, impacted by lower equity
markets and outflows, particularly in our active strategies. Changes in
foreign exchange rates and declines in market values drove approximately
60% of the decline and outflows of $84 billion from cash, index and our
active strategies were partially offset by $45 billion of inflows into liability–
driven strategies.
Revenues in our Wealth Management business increased 2% for the year,
driven primarily by the impact of higher equity markets throughout the year.
2Results on an operating basis.
UES
REVEN
+2%
EXPENSES
(1%)
VI BNY Mellon
Our Business
Our business purpose is clear. We help markets function smoothly, we
help investors access a broad range of banking and investment products,
and we are viewed as one of the safest institutions that helps facilitate
investing globally.
Our business model is strong. We provide the expertise and scale others
cannot achieve on their own as we process and manage cash and securities
on our clients’ behalf. In addition, we provide value-added services to
enhance our core capabilities. We are amongst the best in the world at
what we do and we benefit from our clients’ growth and the growth of
the financial markets themselves. We are positioned to benefit from the
increasing opportunity in the wealth management space through our own
direct relationships as well as from being a core technology and solutions
provider to intermediaries through our Pershing platform. We have the
opportunity to leverage this platform to create even stronger results.
F O C U S O N O RG A N I C G ROW T H
While we are fortunate that our business benefits
from rising interest rates and from strong and growing
financial markets, we remain focused on driving growth
based on our actions.
Across our businesses, we are separating out those external factors to identify
how much of our growth is organic, meaning driven by our actions and
decisions. That discipline is forcing a different level of conversation inside
the company about what we are doing to grow the business. As I will discuss,
some businesses are ahead of others in this evolution.
We have seen organic growth in several of our businesses that either have
differentiated capabilities or in which we have been investing for a number
of years. The following graphic outlines this growth.
Businesses
seeing
organic
growth:
In CLE A R A NCE A N D COLL ATER A L M A NAGEMENT, our
unique position as the sole provider of U.S. government clearing
coupled with over $3 trillion of tri–party collateral management
balances allows us to help clients optimize their funding needs in
ways that others cannot.
In our M A R K ETS business, we have been investing in our Foreign
Exchange platform and expanding the scope of our product offering.
While our focus is primarily on serving clients who we do business with
elsewhere in the company, our updated platform and product lineup
has enabled us to capture a greater share of our clients’ business.
DEFINITION: Organic growth is
the expansion of our business
independent of external factors
such as market performance.
Our LDI offering in Asset Management has seen strong growth. We
have differentiated capabilities and a stellar track record in delivering
tailored solutions to meet the specific needs of our pension fund and
insurance clients.
Our C ASH
A N D LIQU IDIT Y
capabilities span the entire
company and represent
more than $900 billion of
client balances.
Other businesses have shown growth, but have been
heavily reliant on external factors, like rising interest
rates and financial markets. We aren’t being complacent
about this and believe we can do more to grow
organically and are taking action.
In A SSET SERV ICING, we face continued pricing pressure for our
traditional custody and administration services. Fortunately, we have
significant scale benefits that we continue to realize and are making
investments to provide data management solutions and expand our
servicing of ETFs and alternative asset classes. These new capabilities
will allow us to both protect our core and grow in new ways.
PER SHING is an incredibly unique platform. We love our position as
the industry leader providing a complete set of technology and processing
solutions for our clients. While our recent performance has been muted due
to two large client losses (which we’ve spoken about at length), we see
a significant opportunity to accelerate organic growth in both the traditional
broker–dealer channel and in the emerging Registered Investment Advisor
(RIA) space. In fact, our pipeline of signed new clients in the process of being
onboarded is the largest in many years.
Our TR E A SU RY SERV ICE S business has benefited from the rising rate
environment but underlying franchise growth has been stagnant. We have
new leadership in place and see significant opportunity for organic growth
by reorienting the business around our differentiated payments capabilities.
In W E A LTH M A NAGEMENT, we also have new leadership in place and
see opportunities to grow our underlying franchise. We are strengthening
our client–facing teams while building out our banking and investment
offerings to provide more holistic solutions to our clients.
2018 Annual Report IX
We have other businesses that don’t necessarily benefit as much from rising
markets or are in periods of transition.
We are a market leader in
COR POR ATE TRUST. While
our business had underperformed
in recent years, the new
management team’s work in
repositioning our sales and service
teams has yielded incremental
growth in growing asset classes
like insurance–linked securities
and collateralized loan obligations
(CLOs). We feel good about our
efforts and are capturing additional
share, which will benefit us when
issuance volumes are robust.
In ASSET M A NAGEMEN T,
our traditional active strategies
have not been immune to the
broader industry headwinds.
We are working on abating recent
outflows by developing distinctive
multi–asset capabilities that
deliver solutions for our clients.
Our ongoing work in further
consolidating our business in
North America into one multi–
asset company, Mellon, is a
good example of how we are
repositioning the business.
As we look forward, our expectations regarding our ability to increase our
growth rates are not outsized.
Given the operating leverage in our business, small
increases in revenue growth rates should drive more
meaningful increases in our EPS growth.
X BNY Mellon
Focusing on
Quality & Efficiency
I have said several times that scale is an important driver of our ability to be
successful. We provide services and solutions for our clients where we can
gain the benefits of scale that they cannot achieve on their own, or where
we can create solutions that either they cannot or where the quality of our
solution is greater than they could create independently.
This is about us bringing our ability to execute day in and
day out, building solutions efficiently, improving them
over time and sharing those benefits with our clients.
Our focus on execution is paramount and is a necessary precursor to
executing a longer–term strategic vision. Quality and efficiency are linked
and critical for our success. Creating a more efficient organization will
improve our quality and our focus on quality will lead us to efficiency.
A simple example is where we use technology to automate something that
was previously done by people. Automation removes the possibility for
human error, and allows us to perform the task on a much timelier basis
and less expensively. The same is true for simplification of our management
processes. Removing unnecessary processes reduces our cost and will
generally lead to better and more timely answers, which allow us to be more
responsive to our clients.
2018 Annual Report XI
There are a number of areas where we have made great progress in
increasing our efficiency:
•
In 2018, we cleared and settled ~88 million transactions with the
Federal Reserve, with 99.8% being fully automated.
•
We settled ~$230 trillion of securities globally with ~97% fully automated.
•
We process, on average, ~$2 trillion of payments each day, with
94% fully automated.
• There are a number of areas where we experienced volume increases
in 2018 and were able to significantly increase productivity.
We need to bring this level of efficiency and automation across all our
other businesses. This focus on execution is paramount and while making
progress, we still have much more opportunity.
T E C H N O L O GY
All we do is enabled by technology. Our platforms allow us to process cash
and securities and manage assets and liabilities for others. We can drive a
more efficient and a more complete product set than we have today and we
will invest in new platforms and capabilities to do so. We have increased our
technology spend to accomplish this and will continue to do so.
In 2018, we increased what we spend on technology from approximately
$2.4 billion to $2.75 billion. We expect this to be approximately $3.0 billion
in 2019. Remember, we expect to continue to drive efficiency elsewhere to
help fund much of this increased investment.
The increase in spend is directed to hardware and software for our existing
infrastructure and to building additional capabilities. While we are spending
more on infrastructure than what I would have hoped, it is not optional. We
provide key services to our clients and we are obligated to have the strongest
platforms. Today’s strength helps us earn the right to ask for more business
as we extend our capabilities.
~$3.0 B
2019
$2.75 B
2018
$2.4 B
2017
TECHNOLOGY
INVESTMENT
XII BNY Mellon
We are investing in a new data center, as well as making significant
investments in new, modern environments in our existing data centers.
These investments are critical to strengthening our core infrastructure and
resiliency, which are central to our value proposition. These investments
will also help us create a more flexible operating platform from which we
can innovate faster in the future.
While creating the best operating platform is technology priority number
one, it is not in lieu of investing in developing capabilities for clients.
We are making a significant number of investments that
are intended to differentiate us in the marketplace and
capitalize on our growth opportunities over time.
Below are some examples:
•
Consolidating our remaining custody platforms.
•
Improving transparency intra–day into performance for clients.
• Upgrading to a best–in–class platform for servicing traditional loan
and CLO products in Corporate Trust.
• Building new capabilities to better support alternative asset managers,
such as credit managers.
• Redesigning our client portal to offer an integrated experience across
all devices to further penetrate the RIA opportunity in Pershing.
• Building a fully integrated Wealth Management platform across
investments and banking that includes self–service capabilities.
• Continuing to extend our capabilities to service wealth managers in
the UK through Pershing.
•
Increasing our investment in ETF servicing infrastructure.
•
Extending LDI capabilities in the U.S.
2018 Annual Report XIII
Talent & Leadership
It takes many strong leaders to manage a company of our
size and complexity. I continue to be impressed with the
subject matter expertise, desire to serve our clients and
the proud culture within our company.
We have made significant changes to the leadership team over the past
couple of years with a goal of ensuring we have the best talent with a healthy
mix of historical context and fresh thinking.
We have promoted many from within and we have also hired great talent
from the outside. Outside hires bring different skills and experiences, and
help accelerate our evolution. This year we added a series of leaders to
our executive team who we think will complement our existing leaders.
These include: Paul Camp (Treasury Services), Catherine Keating (Wealth
Management), Emily Portney (U.S. Asset Servicing), Roman Regelman
(Digital) and Akash Shah (Strategy).
In addition, Lester Owens joined us in February to lead Operations
globally. We have also added numerous leaders in Technology across our
infrastructure, data and development teams. We expect all of these leaders
will add meaningfully to our ability to advance our efforts.
Our focus on talent goes beyond the leadership team. We are doing a series
of things to ensure we have the best talent at BNY Mellon at all levels.
We are creating more differentiation in our performance ratings, salaries and
incentive compensation. In addition, we are striving to provide even more
direct, honest and helpful feedback to our employees.
I understand there is a debate regarding performance reviews and ratings.
Some believe an annual process should be replaced with continual feedback.
I don’t disagree, but that can only be accomplished when an organization
has a level of maturity in their performance management process that we
XIV BNY Mellon
currently lack. Therefore, I firmly believe that performance reviews and
ratings are extremely important tools for us to ensure we provide clear
feedback in a consistent way to everyone at our company.
Historically we have not differentiated nearly enough in how we have
evaluated people. While this makes for an easier conversation with
employees, we are doing both them and the company a disservice. Candid
feedback is critical to helping people improve their performance and ratings
we assign should provide clarity of our conclusion—and then we can work
towards improving performance.
STRONG PER FOR MER S SHOU LD BE R EWA R DED more than
average and underperformers. Salary changes and year–end bonuses should
both be an incentive to an employee but also recognition of performance.
I would be remiss if I didn’t address the actions behind the severance charge
we recorded in the fourth quarter of 2018. Asking people to leave the
company is one of the toughest decisions managers need to make and one
I wish we did not have to act on.
Unfortunately, for us to serve all of our stakeholders over the long term,
we must take these actions.
As I have said many times in this letter, our clients expect us to create scale
and pass on many of the benefits to them. If our costs are not competitive,
we cannot price our products to both win business and benefit BNY Mellon.
The biggest piece of our cost base is employee salary and benefits and we
must ensure that we are employing the right number of people to deliver
our services and build our capabilities for the future.
Much of what we are doing is eliminating
management layers and increasing spans of control
across the company.
2018 Annual Report XV
Through our planned actions, we reduced two layers throughout the entire
organization and increased the average span of control—or the number of
direct reports per manager—by almost 45%. While the associated changes
result in lower costs, they also help advance our culture by improving
decision making and accountability, allowing us to move more quickly and
making sure we have our best people in roles, which allow them to grow
and contribute more significantly to our growth agenda. Giving people more
responsibility is a good thing.
D I V E R S I T Y
We believe in the power of diversity. I was taught many years ago that
most answers are waiting to be found in the facts. That means that work
must be done ahead of decisions, data must be analyzed and the work
must be presented clearly and concisely. But to arrive at the right
decision, you must have the right people around a table reviewing
the information.
The “right” people means a diverse group—in every way.
This means different skills, disciplines and backgrounds.
This includes race, ethnicity, gender and sexual orientation, as well as
different skills, disciplines and backgrounds. Without this diversity, you
will not have the experiences necessary to arrive at the right conclusion.
We are working to ensure we are advancing diversity from entry levels
all of the way to our Board of Directors. We are setting goals for ourselves
regarding representation for diverse groups, we expect our leaders to
personally be engaged with our employee resource groups and be externally
visible in advancing our efforts and we are focused on increasing diverse
representation of our senior leaders.
B OA R D O F D I R E C T O R S
I would like to thank Mark Nordenberg as he retires from our Board after
serving for more than 20 years. Mark has contributed meaningfully in many
ways, especially in his role as Chairman of our Corporate Governance and
Nominating Committee. Importantly, Mark has also represented us in the
Pittsburgh community, where we employ over 7,000 people. We are grateful
for Mark’s contributions over so many years.
XVI BNY Mellon
Capital Allocation
We continue to believe that capital management is one of the most significant
decisions we make, and we remain committed to continuing to use that
resource wisely. Our prioritization has not changed.
Our first priority will always be ensuring that our capital meets or exceeds the
requirements and expectations of our regulators, rating agencies, clients and
counterparties. We then compare the returns of investing organically in the
company, pursuing mergers and acquisitions, further increasing dividends or
buying back our common stock.
Ultimately, we will pursue the path of highest return for
our shareholders.
In recent years, we have been in a position to consistently return the majority
of the capital that we generate to shareholders. During 2018, we increased our
dividend by 17% and repurchased $3.3 billion of common stock. This included
the repurchase of an additional $830 million of common stock that was
approved and executed in the fourth quarter.
+17%
2018 DIVIDENDS
$3.3B
2018 STOCK
REPURCHASE
100%+
SHAREHOLDER
PAYOUT RATIO
Longer Term
While our focus on the short and medium term is necessary for us today,
it is not sufficient.
We have to think more strategically about where our
businesses are going and what we need to do to create
differentiation in a changing world.
We are at the beginning of mapping out this journey and have a series of
initiatives underway.
In our A SSET SERV ICING business, we are building out our capabilities
in higher–growth products, including alternatives and ETFs. We are
enhancing real–time intraday reporting and providing data analytics to help
clients better manage their cash, manage risk and increase distribution.
We are also pursuing ways to simplify and improve the integration of
activities from portfolio management to accounting to custody for clients.
We believe that our clients will want choice and flexibility as they seek the
best solution based on their internal requirements and products. Their
unique needs require that we provide an open solution that integrates
with other platforms. We are actively working with external partners and
advancing our own solutions to increase quality, reduce cost and provide
more information to our clients to help them drive higher returns.
In PER SHING, we continue to help our broker–dealer clients create more
operating leverage by using our scale and platform to lower their costs
and increase the quality of the products they offer. We are allocating more
resources to the RIA marketplace as the wealth management business
shifts towards this model. We are also dedicating more resources to
other geographies such as the UK, where we think there are meaningful
opportunities for growth.
In TR E A SU RY SERV ICE S, we are investing to improve our payments
capabilities and thinking more strategically about how payments are going
to evolve in the future. We are also digitizing our core capabilities as our
clients’ expectations around the way they interact and consume our
products evolve.
We are uniquely positioned in our CLE A R A NCE A N D COLL ATER A L
M A NAGEM ENT business and are investing to add capabilities to extend
the service to our market participants, help clients optimize their funding
needs and provide more options for clients.
The A SSET M A NAGEMEN T industry is going through dramatic change
as returns have not supported existing fee structures. With pressure on
performance and fees, we are working to ensure we have top–tier
performance, investment products and solutions appropriate for today’s
marketplace, as well as broad distribution capabilities and an efficient
operating infrastructure.
We have the industry–leading LI A BILIT Y–DR I V EN SOLU TIONS
business and it’s growing well. We have strong capabilities in European
credit and are expanding our CLO, loan and high–yield capabilities. We
are transforming our U.S. business into Mellon, an integrated, single multi–
asset solutions provider. We are not immune to the market environment
and expect 2019 to be a difficult year, but we remain focused on creating
differentiated capabilities.
Our W E A LTH M A NAGEMENT business is a strong platform for us to
build from. We are becoming more targeted in our client base, strengthening
our banking and investment product set, and creating stronger technology
for both our advisors and clients.
2018 Annual Report XIX
At a recent all employee town hall, I was asked what my vision for success
was for BNY Mellon.
I responded that we should strive for our clients to think
of us as a partner they must do business with because we
are the unquestioned leader in our businesses.
This is represented by the quality of our work, but more importantly in the
value we add to them as a partner. When we achieve that, we also become
the company that the best people in the industry want to work for. We are
well on our way and I want to thank my more than 50,000 partners around
the world who work every day to achieve this goal.
Charlie Scharf
Chairman and Chief Executive Officer
XX BNY Mellon
Financial
Highlights
2018 Annual Report XXI
Financial Highlights
The Bank of New York Mellon Corporation (and its subsidiaries)
(dollar amounts in millions, except per common share amounts and unless otherwise noted)
2018
2017
Financial Results
Net income applicable to shareholders of The Bank of New York Mellon Corporation
$
4,266
$
4,090
Preferred stock dividends
Net income applicable to common shareholders of
The Bank of New York Mellon Corporation
Earnings per common share – diluted
Key Data
Total revenue (a)
Total expense
Fee revenue as a percentage of total revenue
Percentage of non-U.S. total revenue
Assets under custody and/or administration at year end (in trillions) (b)
Assets under management at year end (in billions) (c)
Balance Sheet at December 31
Total assets
Total deposits
Total The Bank of New York Mellon Corporation common shareholders’ equity
Capital Ratios at December 31
Consolidated regulatory capital ratios (d)
Common Equity Tier 1 (“CET1”) ratio
Tier 1 capital ratio
Total (Tier 1 plus Tier 2) capital ratio
Tier 1 leverage ratio
Supplementary leverage ratio (“SLR”) (e)
The Bank of New York Corporation common shareholders’ equity to total assets ratio
(169)
(175)
$
$
4,097
4.04
$
$
3,915
3.72
$
16,392
$ 15,543
11,211
10,957
78%
37%
78%
36%
$
$
33.1
1,722
$
$
33.3
1,893
$ 362,873
$ 371,758
238,778
37,096
244,322
37,709
10.7%
10.3%
12.8
13.6
6.6
6.0
10.2
12.3
13.0
6.4
5.9
10.1
(a) Includes fee and other revenue, net interest revenue and income from consolidated investment management funds.
(b) Includes the assets under custody and/or administration of CIBC Mellon Global Securities Services Company, a joint venture.
(c) Excludes securities lending cash management assets and assets managed in the Investment Services business.
(d) For our CET1, Tier 1 capital and Total capital ratios, our effective capital ratios under the U.S. capital rules are the lower of the ratios as calculated under the Standardized and Advanced
Approaches, which for the periods noted above was the Advanced Approaches. Beginning Jan. 1, 2018, consolidated regulatory ratios are fully phased-in. The consolidated regulatory ratios
for 2017 are presented on an estimated fully phased-in basis. For additional information on our capital ratios, see “Capital” beginning on page 45.
(e) SLR became a binding measure on Jan. 1, 2018. For additional information on our SLR, see “Capital” beginning on page 45.
XXII BNY Mellon
Supplemental Information
Explanation of GAAP and Non-GAAP financial measures
We have included in this Letter to Shareholders certain non-GAAP measures which exclude the notable items
described below. We believe that these measures provide additional useful information to investors as they align
with our strategy, are consistent with how management views the business and are used to measure the annual
performance of our executive officers.
Net Income and EPS Reconciliation
(dollars in millions, except per share amounts)
Results
Diluted
EPS
Results
Diluted
EPS
Results
Diluted
EPS
2018
2017
2018 vs. 2017
Net income applicable to common shareholders of The Bank
of New York Mellon Corporation – GAAP
Exclude the impact of notable items: (a)(b)
Total revenue
Total noninterest expense
Provision for income taxes
Net impact of notable items
Net income applicate to common shareholders of
The Bank of New York Mellon Corporation,
excluding notable items – Non-GAAP
$ 4,097
$ 4.04
$ 3,915 $ 3.72
5%
9%
(13)
343
(188)
(168)
(0.17)
(320)
309
(789)
160
0.15
$ 4,265
$ 4.21
$ 3,755 $ 3.57
14%
18%
(a) 2018 includes adjustments to provisional estimates for U.S. tax legislation and other changes, severance, expenses associated with consolidating real estate and litigation expense, each
recorded in 4Q18. Also includes expenses associated with consolidating real estate recorded in 2Q18 and adjustments to provisional estimates for U.S. tax legislation and other changes and
litigation expense, both recorded in 3Q18.
(b) 2017 includes the estimated net benefit of U.S. tax legislation, severance, an asset impairment and investment securities losses related to the sale of certain securities, each recorded in
4Q17, and litigation expense recorded in 2017.
Total Revenue and Total Noninterest Expense Reconciliation
(dollars in millions)
Total revenue – GAAP
Exclude: Notable items (a)(b)
Total revenue, excluding notable items – Non-GAAP
Total noninterest expense – GAAP
Exclude: Notable items (a)(b)
2018
$ 16,392
(13)
$ 16,405
$ 11,211
343
2017
$ 15,543
(320)
$ 15,863
$ 10,957
309
Total noninterest expense, excluding notable items – Non-GAAP
$ 10,868
$ 10,648
2018 vs.
2017
5%
3%
2%
2%
(a) 2018 includes adjustments to provisional estimates for U.S. tax legislation and other changes, severance, expenses associated with consolidating real estate and litigation expense, each
recorded in 4Q18. Also includes expenses associated with consolidating real estate recorded in 2Q18 and adjustments to provisional estimates for U.S. tax legislation and other changes
and litigation expense, both recorded in 3Q18.
(b) 2017 includes the estimated net benefit of U.S. tax legislation, severance, an asset impairment and investment securities losses related to the sale of certain securities, each recorded in
4Q17, and litigation expense recorded in 2017.
2018 Annual Report XXIII
Pre-tax Operating Margin Reconciliation (dollars in millions)
Income before taxes – GAAP
Exclude the impact of notable items: (a)(b)
Total revenue
Total noninterest expense
Income before taxes, excluding notable items – Non-GAAP
Total revenue – GAAP
Exclude: Notable items (a)(b)
Total revenue, excluding notable items – Non-GAAP
Pre-tax operating margin – GAAP (c)
Pre-tax operating margin, excluding notable items – Non-GAAP (c)
2018
$
5,192
(13)
343
$
5,548
$ 16,392
(13)
$ 16,405
2017
$
4,610
(320)
309
$
5,239
$ 15,543
(320)
$ 15,863
2018 vs.
2017
13%
6%
5%
3%
32%
34%
30%
33%
(a) 2018 includes adjustments to provisional estimates for U.S. tax legislation and other changes, severance, expenses associated with consolidating real estate and litigation expense,
each recorded in 4Q18. Also includes expenses associated with consolidating real estate recorded in 2Q18 and adjustments to provisional estimates for U.S. tax legislation and other
changes and litigation expense, both recorded in 3Q18.
(b) 2017 includes the estimated net benefit of U.S. tax legislation, severance, an asset impairment and investment securities losses related to the sale of certain securities, each recorded in
4Q17, and litigation expense recorded in 2017.
(c) Income before taxes divided by total revenue.
Investment Services Business Reconciliation
(dollars in millions)
Total revenue – GAAP
Total noninterest expense – GAAP
Exclude: Notable items (a)(b)
Total noninterest expense, excluding notable items – Non-GAAP
Provision for credit losses
Income before income taxes – GAAP
Income before income taxes, excluding notable items – Non-GAAP
Pre-tax operating margin – GAAP (c)
Pre-tax operating margin, excluding notable items – Non-GAAP (c)
2018
$ 12,298
$
$
$
8,058
170
7,888
1
4,239
4,409
34%
36%
(a) 2018 includes severance and litigation expense recorded in 4Q18. Also, includes litigation expense recorded in 3Q18.
(b) 2017 includes severance, and an asset impairment recorded in 4Q17 and litigation expense recorded in 2017.
(c) Income before taxes divided by total revenue.
Investment Management Business Reconciliation
(dollars in millions)
Total revenue – GAAP
Less: Distribution and servicing expense
Total revenue, net of distribution and servicing expense
Total noninterest expense – GAAP
Exclude: Notable items (a)(b)
Total noninterest expense, excluding notable items – Non-GAAP
Provision for credit losses
Income before income taxes – GAAP
Income before income taxes, excluding notable items – Non-GAAP
Pre-tax operating margin - GAAP (c)
Pre-tax operating margin, excluding notable items – Non-GAAP (c)
(a) 2018 includes severance and litigation expense recorded in 4Q18.
(b) 2017 includes severance recorded in 4Q17 and litigation expense recorded in 2017.
(c) Income before taxes divided by total revenue.
XXIV BNY Mellon
$
$
$
$
$
$
2018
4,084
407
3,677
2,818
28
2,790
3
1,263
1,291
31%
35%
2018 vs.
2017
6%
4
5%
10%
9%
2018 vs.
2017
2%
3%
(1)%
(1)%
11%
10%
2017
$ 11,585
7,747
214
$
7,534
(7)
$
$
3,845
4,059
33%
35%
2017
$
3,997
$
$
422
3,575
2,854
35
$
2,819
2
1,141
1,176
$
$
29%
33%
THE BANK OF NEW YORK MELLON CORPORATION
2018 Annual Report
Table of Contents
Financial Summary
Page
2
Financial Statements:
Page
Management’s Discussion and Analysis of Financial
Condition and Results of Operations:
Results of Operations:
General
Overview
Key 2018 events
Summary of financial highlights
Fee and other revenue
Net interest revenue
Noninterest expense
Income taxes
Review of businesses
International operations
Critical accounting estimates
Consolidated balance sheet review
Liquidity and dividends
Commitments and obligations
Off-balance sheet arrangements
Capital
Trading activities and risk management
Asset/liability management
Risk Management
Supervision and Regulation
Risk Factors
Recent Accounting Developments
Business Continuity
Supplemental Information (unaudited):
Explanation of GAAP and Non-GAAP financial
measures (unaudited)
Rate/volume analysis (unaudited)
Selected Quarterly Data (unaudited)
Forward-looking Statements
Acronyms
Glossary
Report of Management on Internal Control Over
Financial Reporting
Report of Independent Registered Public
Accounting Firm
4
4
4
5
7
9
12
12
13
21
23
28
39
44
44
45
50
52
54
60
78
103
104
105
107
108
109
111
112
116
117
Consolidated Income Statement
Consolidated Comprehensive Income Statement
Consolidated Balance Sheet
Consolidated Statement of Cash Flows
Consolidated Statement of Changes in Equity
Notes to Consolidated Financial Statements:
Note 1 - Summary of significant accounting and
reporting policies
Note 2 - Accounting changes and new accounting
guidance
Note 3 - Acquisitions and dispositions
Note 4 - Securities
Note 5 - Loans and asset quality
Note 6 - Goodwill and intangible assets
Note 7 - Other assets
Note 8 - Deposits
Note 9 - Contract revenue
Note 10 - Net interest revenue
Note 11 - Income taxes
Note 12 - Long-term debt
Note 13 - Variable interest entities and securitization
Note 14 - Shareholders’ equity
Note 15 - Other comprehensive income (loss)
Note 16 - Stock-based compensation
Note 17 - Employee benefit plans
Note 18 - Company financial information (Parent
Corporation)
Note 19 - Fair value measurement
Note 20 - Fair value option
Note 21 - Commitments and contingent liabilities
Note 22 - Derivative instruments
Note 23 - Lines of business
Note 24 - International operations
Note 25 - Supplemental information to the
Consolidated Statement of Cash Flows
Report of Independent Registered Public
Accounting Firm
Directors, Executive Committee and Other
Executive Officers
119
121
122
123
124
126
136
139
140
145
151
152
153
153
155
155
157
157
158
162
163
164
171
174
183
184
188
195
198
198
199
200
Performance Graph
Corporate Information
201
Inside back cover
The Bank of New York Mellon Corporation (and its subsidiaries)
Financial Summary
(dollar amounts in millions, except per common share
amounts and unless otherwise noted)
Selected income statement information:
Fee and other revenue
(Loss) income from consolidated investment management funds
Net interest revenue
Total revenue
Provision for credit losses
Noninterest expense
Income before income taxes
Provision for income taxes
Net income
Net loss (income) attributable to noncontrolling interests (a)
Net income applicable to shareholders of The Bank of New York Mellon
Corporation
Preferred stock dividends
Net income applicable to common shareholders of The Bank of New York Mellon
Corporation
Earnings per share applicable to common shareholders of The Bank of New York
Mellon Corporation:
Basic
Diluted
Average common shares and equivalents outstanding of The Bank of New York
Mellon Corporation (in thousands):
Basic
Diluted
Selected balance sheet information (at period-end):
Interest-earning assets
Total assets
Deposits
Long-term debt
Preferred stock
Total The Bank of New York Mellon Corporation common shareholders’ equity
At Dec. 31
Assets under custody and/or administration (in trillions) (b)
Assets under management (in billions) (c)
Market value of securities on loan (in billions) (d)
Selected ratios:
Return on common equity
Return on tangible common equity – Non-GAAP (e)
Return on average assets
Pre-tax operating margin
Fee revenue as a percentage of total revenue
Percentage of non-U.S. total revenue
Net interest margin
2018
2017
2016
2015
2014
$
$
12,794
(13)
3,611
16,392
(11)
11,211
5,192
938
4,254
12
4,266
(169)
$
$
12,165
70
3,308
15,543
(24)
10,957
4,610
496
4,114
(24)
4,090
(175)
12,073
26
3,138
15,237
(11)
10,523
4,725
1,177
3,548
(1)
3,547
(122)
$
12,082
86
3,026
15,194
160
10,799
4,235
1,013
3,222
(64)
3,158
(105)
12,649
163
2,880
15,692
(48)
12,177
3,563
912
2,651
(84)
2,567
(73)
$
4,097
$
3,915
$
3,425
$
3,053
$
2,494
$
$
4.06
4.04
$
$
3.74
3.72
$
$
3.16
3.15
$
$
2.73
2.71
$
$
2.17
2.15
1,002,922
1,007,141
1,034,281
1,040,290
1,066,286
1,072,013
1,104,719
1,112,511
1,129,897
1,137,480
$ 308,749
362,873
238,778
29,163
3,542
37,096
$ 316,261
371,758
244,322
27,979
3,542
37,709
$ 280,332
333,469
221,490
24,463
3,542
35,269
$ 338,955
393,780
279,610
21,547
2,552
35,485
$ 317,646
385,303
265,869
20,264
1,562
35,879
$
$
33.1
1,722
373
$
33.3
1,893
408
$
29.9
1,648
296
$
28.9
1,625
277
28.5
1,686
289
10.8%
22.5
1.19
32
78
37
1.25
10.8%
23.9
1.14
30
78
36
1.14
9.6%
21.2
0.96
31
79
34
1.03
8.6%
19.7
0.82
28
79
36
0.96
6.8%
16.0
0.67
23
80
38
0.95
(a) Primarily attributable to noncontrolling interests related to consolidated investment management funds.
(b)
Includes the assets under custody and/or administration of CIBC Mellon Global Securities Services Company (“CIBC Mellon”), a joint venture with the
Canadian Imperial Bank of Commerce, of $1.2 trillion at Dec. 31, 2018, $1.3 trillion at Dec. 31, 2017, $1.2 trillion at Dec. 31, 2016, $1.0 trillion at Dec.
31, 2015 and $1.1 trillion at Dec. 31, 2014.
(c) Excludes securities lending cash management assets and assets managed in the Investment Services business.
(d) Represents the total amount of securities on loan in our agency securities lending program managed by the Investment Services business. Excludes
securities for which BNY Mellon acts as an agent on behalf of CIBC Mellon clients, which totaled $58 billion at Dec. 31, 2018, $71 billion at Dec. 31,
2017, $63 billion at Dec. 31, 2016, $55 billion at Dec. 31, 2015 and $65 billion at Dec. 31, 2014.
(e) Return on tangible common equity, a Non-GAAP measure, excludes goodwill and intangible assets, net of deferred tax liabilities. See “Supplemental
information - Explanation of GAAP and Non-GAAP financial measures” beginning on page 105 for the reconciliation of the Non-GAAP measure.
2 BNY Mellon
The Bank of New York Mellon Corporation (and its subsidiaries)
Financial Summary (continued)
(dollar amounts in millions, except per common share
amounts and unless otherwise noted)
Cash dividends per common share
Common dividend payout ratio
Common dividend yield
Closing stock price per common share
Market capitalization (in billions)
Book value per common share
Tangible book value per common share – Non-GAAP (a)
Full-time employees
Year-end common shares outstanding (in thousands)
Average total equity to average total assets
Capital ratios (at period-end):
Consolidated regulatory capital ratios - fully phased-in basis: (b)(c)
Advanced:
CET1 ratio
Tier 1 capital ratio
Total (Tier 1 plus Tier 2) capital ratio
Standardized:
CET1 ratio
Tier 1 capital ratio
Total (Tier 1 plus Tier 2) capital ratio
Tier 1 leverage ratio
Supplementary leverage ratio (“SLR”)
Consolidated regulatory capital ratios - transitional basis: (b)(d)
Advanced:
CET1 ratio
Tier 1 capital ratio
Total (Tier 1 plus Tier 2) capital ratio
Tier 1 leverage ratio
SLR
BNY Mellon shareholders’ equity to total assets ratio
BNY Mellon common shareholders’ equity to total assets ratio
$
$
$
$
$
2018
2017
2016
2015
1.04
$
0.86
$
0.72
$
0.68
$
26%
2.2%
23 %
1.6 %
23%
1.5%
25%
1.6%
2014
0.66
31%
1.6%
47.07
45.2
38.63
19.04
51,300
960,426
$
$
$
$
53.86
54.6
37.21
18.24
52,500
1,013,442
$
$
$
$
47.38
49.6
33.67
16.19
52,000
1,047,488
$
$
$
$
41.22
44.7
32.69
15.27
51,200
1,085,343
$
$
$
$
40.57
45.4
32.09
14.70
50,300
1,118,228
12.1%
11.7 %
10.7%
10.2%
10.2%
10.7%
12.8
13.6
10.3 %
12.3
13.0
11.7
14.1
15.1
6.6
6.0
N/A
N/A
N/A
N/A
N/A
11.2%
10.2
11.5
13.7
14.7
6.4
5.9
10.7 %
12.7
13.4
6.6
6.1
11.1 %
10.1
9.7%
9.5%
9.8%
11.8
12.1
11.3
13.6
14.2
N/A
5.6
10.6%
12.6
13.0
6.6
6.0
11.6%
10.6
11.0
11.1
10.2
11.8
12.0
N/A
4.9
10.8%
12.3
12.5
6.0
5.4
9.7%
9.0
10.8
11.0
10.6
11.6
12.0
N/A
4.4
11.2%
12.2
12.5
5.6
N/A
9.7%
9.3
(a) Tangible book value per common share – Non-GAAP excludes goodwill and intangible assets, net of deferred tax liabilities. See “Supplemental
information – Explanation of GAAP and Non-GAAP financial measures” beginning on page 105 for the reconciliation of the Non-GAAP measure.
(b) Risk-based capital ratios at Dec. 31, 2014 do not reflect the adoption of accounting guidance related to Consolidations in Accounting Standards Update
(“ASU”) 2015-02.
(c) For our Common Equity Tier 1 (“CET1”), Tier 1 and Total capital ratios, our effective capital ratios under U.S. capital rules are the lower of the ratios
as calculated under the Standardized and Advanced Approaches. Beginning Jan. 1, 2018, consolidated regulatory ratios are fully phased-in. The
consolidated regulatory ratios for all prior periods are presented on an estimated fully phased-in basis. For additional information on our regulatory
capital ratios, see “Capital” beginning on page 45.
(d) Reflects transitional adjustments to CET1, Tier 1 capital and Tier 2 capital required in period periods under U.S. capital rules.
BNY Mellon 3
Management’s Discussion and Analysis of Financial Condition and Results of Operations
Results of Operations
General
In this Annual Report, references to “our,” “we,”
“us,” “BNY Mellon,” the “Company” and similar
terms refer to The Bank of New York Mellon
Corporation and its consolidated subsidiaries. The
term “Parent” refers to The Bank of New York
Mellon Corporation but not its subsidiaries.
BNY Mellon’s actual results of future operations may
differ from those estimated or anticipated in certain
forward-looking statements contained herein for
reasons which are discussed below and under the
heading “Forward-looking Statements.” When used
in this Annual Report, words such as “estimate,”
“forecast,” “project,” “anticipate,” “likely,” “target,”
“expect,” “intend,” “continue,” “seek,” “believe,”
“plan,” “goal,” “could,” “should,” “would,” “may,”
“might,” “will,” “strategy,” “synergies,”
“opportunities,” “trends,” “future” and words of
similar meaning, may signify forward-looking
statements.
Certain business terms and commonly used acronyms
used in this Annual Report are defined in the
Glossary and Acronyms sections.
The following should be read in conjunction with the
Consolidated Financial Statements included in this
report. Investors should also read the section titled
“Forward-looking Statements.”
Overview
Established in 1784 by Alexander Hamilton, we were
the first company listed on the New York Stock
Exchange (NYSE: BK). With a more than 230-year
history, BNY Mellon is a global company that
manages and services assets for financial institutions,
corporations and individual investors in 35 countries.
BNY Mellon has two business segments, Investment
Services and Investment Management, which offer a
comprehensive set of capabilities and deep expertise
across the investment lifecycle, enabling the
Company to provide solutions to buy-side and sell-
side market participants, as well as leading
institutional and wealth management clients globally.
4 BNY Mellon
The diagram below presents our two business
segments and lines of business, with the remaining
operations in the Other segment.
The Bank of New
York Mellon
Corporation
Investment
Services
Investment
Management
Asset
Management
Wealth
Management
Asset Servicing
Pershing
Issuer Services
Treasury
Services
Clearance and
Collateral
Management
Key 2018 events
(cid:3)
Share repurchase program and increase in cash
dividend on common stock
In June 2018, our Board of Directors approved the
repurchase of up to $2.4 billion of common stock
starting in the third quarter of 2018 and continuing
through the second quarter of 2019.
In July 2018, our Board of Directors approved a 17%
increase in the quarterly cash dividend per common
share, from $0.24 to $0.28 per share. The first
payment of the increased quarterly cash dividend was
made on Aug. 10, 2018.
In December 2018, our Board of Directors approved
the repurchase of $830 million of additional common
stock, all of which was repurchased in the fourth
quarter of 2018. These repurchases were in addition
to the repurchase of $2.4 billion of common stock
previously approved by the Board.
Results of Operations (continued)
Corporate headquarters
In July 2018, BNY Mellon relocated its corporate
headquarters to 240 Greenwich Street in lower
Manhattan.
•
Summary of financial highlights
We reported net income applicable to common
shareholders of BNY Mellon of $4.1 billion, or $4.04
per diluted common share, in 2018, including a net
charge of $168 million, or $(0.17) per diluted
common share, related to severance, expenses
associated with consolidating real estate and litigation
expense, partially offset by adjustments to provisional
estimates for U.S. tax legislation. In 2017, net
income applicable to common shareholders of BNY
Mellon was $3.9 billion, or $3.72 per diluted
common share, including a net benefit of $160
million, or $0.15 per diluted common share, related to
the estimated net benefit related to U.S. tax
legislation, partially offset by severance, litigation
expense and other charges.
Highlights of 2018 results
• Assets under custody and/or administration
(“AUC/A”) totaled $33.1 trillion at Dec. 31, 2018
compared with $33.3 trillion at Dec. 31, 2017.
The 1% decrease primarily reflects lower market
values and the unfavorable impact of a stronger
U.S. dollar on a spot basis, partially offset by net
new business. (See “Investment Services
business” beginning on page 14.)
• Assets under management (“AUM”) totaled $1.7
trillion at Dec. 31, 2018 compared with $1.9
trillion at Dec. 31, 2017. The 9% decrease
primarily reflects the unfavorable impact of a
stronger U.S. dollar (principally versus the
British pound) on a spot basis, lower market
values, net outflows, the divestiture of
CenterSquare Investment Management
(“CenterSquare”) and other changes. AUM
excludes securities lending cash management
assets and assets managed in the Investment
Services business. (See “Investment
Management business” beginning on page 17.)
•
Investment services fees totaled $7.8 billion in
2018, an increase of 5% compared with $7.5
billion in 2017, primarily reflecting higher equity
market values, net new business, including
growth in collateral management and higher
Depositary Receipts revenue, partially offset by
the previously disclosed lost business in Pershing.
(See “Investment Services business” beginning
on page 14.)
Investment management and performance fees
totaled $3.7 billion in 2018 compared with $3.6
billion in 2017, an increase of 3%, primarily
reflecting higher market values, performance fees
and the favorable impact of a weaker U.S. dollar
(principally versus the British pound), partially
offset by the impact of net outflows. On a
constant currency basis (Non-GAAP), investment
management and performance fees increased 2%
compared with 2017. (See “Investment
Management business” beginning on page 17.)
• Foreign exchange and other trading revenue
totaled $732 million in 2018 compared with $668
million in 2017. Foreign exchange revenue
totaled $663 million in 2018, an increase of 4%
compared with $638 million in 2017. The
increase in foreign exchange revenue primarily
reflects higher volumes, partially offset by
foreign currency hedging. (See “Fee and other
revenue” beginning on page 7.)
• Net interest revenue totaled $3.6 billion in 2018
compared with $3.3 billion in 2017, an increase
of 9%. The increase primarily reflects higher
interest rates. Net interest margin was 1.25% in
2018 compared with 1.14% in 2017. (See “Net
interest revenue” beginning on page 9.)
• The provision for credit losses was a credit of $11
million in 2018 and a credit of $24 million in
2017. (See “Asset quality and allowance for
credit losses” beginning on page 35.)
• Noninterest expense totaled $11.2 billion in 2018
compared with $11.0 billion in 2017. The 2%
increase primarily reflects investments in
technology, expenses associated with
consolidating our real estate and the unfavorable
impact of a weaker U.S. dollar, partially offset by
lower bank assessment charges. (See
“Noninterest expense” beginning on page 12.)
• The provision for income taxes was $938 million
(18.1% effective tax rate) in 2018, including the
impact of the adjustments to provisional
estimates for U.S. tax legislation and the tax
impact of severance, expenses associated with
consolidating real estate and litigation expense.
(See “Income taxes” on page 12.)
• The net unrealized pre-tax loss on our total
securities portfolio was $907 million at Dec. 31,
BNY Mellon 5
Results of Operations (continued)
2018, compared with a pre-tax loss of $85 million
at Dec. 31, 2017, including the impact of related
hedges. The increase in net unrealized pre-tax
loss was primarily driven by an increase in
interest rates. (See “Securities” beginning on
page 29.)
• Our CET1 ratio calculated under the Advanced
Approach was 10.7% at Dec. 31, 2018 and
10.7%, on a transitional basis, at Dec. 31, 2017.
The ratio was unchanged compared to Dec. 31,
2017, reflecting capital deployed through
common stock repurchases and dividend
payments, and the final phase-in requirements
under U.S. capital rules, offset by capital
generated through earnings and lower risk-
weighted assets (“RWAs”). (See “Capital”
beginning on page 45.)
• Our SLR was 6.0% at Dec. 31, 2018 and 6.1%,
on a transitional basis, at Dec. 31, 2017. (See
“Capital” beginning on page 45.)
Results for 2017
In 2017, we reported net income applicable to
common shareholders of BNY Mellon of $3.9 billion,
or $3.72 per diluted common share. These results
were primarily driven by:
•
•
Investment services fees totaled $7.5 billion in
2017, an increase of 3% compared with $7.2
billion in 2016, primarily reflecting higher money
market fees, higher equity market values and net
new business, including growth in collateral
management, partially offset by the previously
disclosed lost business in Pershing and lower
volumes in certain Depositary Receipts programs.
Investment management and performance fees
totaled $3.6 billion in 2017 compared with $3.4
billion in 2016, an increase of 7%, primarily
reflecting higher market values, money market
fees and performance fees, partially offset by the
unfavorable impact of a stronger U.S. dollar
(principally versus the British pound).
• Foreign exchange and other trading revenue
totaled $668 million in 2017 compared with $701
million in 2016. Foreign exchange revenue
totaled $638 million in 2017, a decrease of 7%,
compared with $687 million in 2016. The
decrease in foreign exchange revenue primarily
reflects lower volatility, partially offset by higher
volumes.
6 BNY Mellon
• The provision for credit losses was a credit of $24
million in 2017.
• Noninterest expense totaled $11.0 billion in 2017
compared with $10.5 billion in 2016. The 4%
increase primarily reflects higher staff, software,
and professional, legal and other purchased
services expenses.
• The provision for income taxes was $496 million
(10.8% effective tax rate), including the estimated
tax benefit related to U.S. tax legislation.
Results for 2016
In 2016, we reported net income applicable to
common shareholders of BNY Mellon of $3.4 billion,
or $3.15 per diluted common share. These results
were primarily driven by:
•
•
Investment services fees totaled $7.2 billion,
primarily reflecting higher money market fees
and securities lending revenue, partially offset by
the unfavorable impact of lost business on
clearing services fees, the unfavorable impact of
a stronger U.S. dollar and the downsizing of the
UK transfer agency business.
Investment management and performance fees
totaled $3.4 billion, primarily reflecting the
unfavorable impact of a stronger U.S. dollar
(principally versus the British pound), net
outflows of AUM and lower performance fees,
partially offset by higher market values and
money market fees.
• Foreign exchange and other trading revenue
totaled $701 million, of which $687 million
represented foreign exchange revenue. The
decrease in foreign exchange revenue primarily
reflects the impact of clients migrating to lower
margin products and lower volumes.
• The provision for credit losses was a credit of $11
million.
• Noninterest expense totaled $10.5 billion
primarily reflecting lower expenses in nearly all
categories, driven by the favorable impact of a
stronger U.S. dollar, lower staff, other, litigation
and legal expenses and the benefit of the business
improvement process. The decrease was partially
offset by higher bank assessment charges,
distribution and servicing and software expenses.
• The provision for income taxes was $1.2 billion
(24.9% effective tax rate) in 2016.
Results of Operations (continued)
Fee and other revenue
Fee and other revenue
(dollars in millions, unless otherwise noted)
Investment services fees:
Asset servicing (a)
Clearing services
Issuer services
Treasury services
Total investment services fees
Investment management and performance fees
Foreign exchange and other trading revenue
Financing-related fees
Distribution and servicing
Investment and other income
Total fee revenue
Net securities (losses) gains
Total fee and other revenue
2018
2017
2016
$ 4,608
1,578
1,099
554
7,839
3,685
732
207
139
240
12,842
(48)
$ 12,794
$
4,383
1,553
977
557
7,470
3,584
668
216
160
64
12,162
3
$ 12,165
$
4,244
1,404
1,026
547
7,221
3,350
701
219
166
341
11,998
75
$ 12,073
2018
vs.
2017
5 %
2
12
(1)
5
3
10
(4)
(13)
N/M
6
N/M
5 %
2017
vs.
2016
3%
11
(5)
2
3
7
(5)
(1)
(4)
N/M
1
N/M
1%
Fee revenue as a percentage of total revenue
78%
78%
79%
(1)%
AUC/A at period end (in trillions) (b)
(9)%
AUM at period end (in billions) (c)
(a) Asset servicing fees include securities lending revenue of $220 million in 2018, $195 million in 2017 and $207 million in 2016.
(b) Includes the AUC/A of CIBC Mellon of $1.2 trillion at Dec. 31, 2018, $1.3 trillion at Dec. 31, 2017 and $1.2 trillion at Dec. 31, 2016.
(c) Excludes securities lending cash management assets and assets managed in the Investment Services business.
$
33.1
$ 1,722
29.9
1,648
33.3
1,893
$
$
$
$
11%
15%
Fee and other revenue increased 5% compared with
2017. The increase primarily reflects higher asset
servicing fees, investment and other income, issuer
servicing fees and investment management and
performance fees, partially offset by net securities
losses.
provided to clients, which reduce fee revenue and
increase net interest revenue, partially offset by
higher volumes.
See the “Investment Services business” in “Review of
businesses” for additional details.
Investment services fees
Investment management and performance fees
Investment services fees increased 5% compared with
2017 reflecting the following:
• Asset servicing fees increased 5%, primarily
reflecting growth in collateral management,
higher equity market values and securities
lending volumes.
• Clearing services fees increased 2%, primarily
driven by higher equity market values and
average long-term mutual funds balances,
partially offset by the previously disclosed lost
business.
•
Issuer services fees increased 12%, primarily
reflecting higher Depositary Receipts revenue
and higher volumes in Corporate Trust.
• Treasury services fees decreased 1%, primarily
reflecting higher compensating balance credits
Investment management and performance fees
increased 3% compared with 2017, primarily
reflecting higher market values, performance fees and
the favorable impact of a weaker U.S. dollar
(principally versus the British pound), partially offset
by the impact of net outflows. On a constant
currency basis (Non-GAAP), investment
management and performance fees increased 2%
compared with 2017. Performance fees were $144
million in 2018, $94 million in 2017 and $60 million
in 2016.
AUM was $1.7 trillion at Dec. 31, 2018, a decrease of
9% compared with $1.9 trillion at Dec. 31, 2017. The
decrease primarily reflects the unfavorable impact of
a stronger U.S. dollar (principally versus the British
pound) on a spot basis, lower market values, net
BNY Mellon 7
Results of Operations (continued)
outflows, the divestiture of CenterSquare and other
changes.
Distribution and servicing fees
See the “Investment Management business” in
“Review of businesses” for additional details
regarding the drivers of investment management and
performance fees, AUM and AUM flows.
Foreign exchange and other trading revenue
Foreign exchange and other trading revenue
(in millions)
Foreign exchange
Other trading revenue
663 $
69
2018
$
2017
638 $
30
2016
687
14
Total foreign exchange and
other trading revenue
$
732 $
668 $
701
Foreign exchange and other trading revenue increased
10% compared with 2017.
Foreign exchange revenue is primarily driven by the
volume of client transactions and the spread realized
on these transactions, both of which are impacted by
market volatility, and the impact of foreign currency
hedging activities. In 2018, foreign exchange
revenue totaled $663 million, an increase of 4%
compared with 2017, primarily reflecting higher
volumes, partially offset by foreign currency hedging.
Foreign exchange revenue is primarily reported in the
Investment Services business and, to a lesser extent,
the Investment Management business and the Other
segment.
Total other trading revenue was $69 million in 2018,
compared with $30 million in 2017. The increase
primarily reflects gains on Investment Management
hedging activities. Other trading revenue is reported
in all three business segments.
Financing-related fees
Financing-related fees, which are primarily reported
in the Investment Services business and the Other
segment, include capital markets fees, loan
commitment fees and credit-related fees. Financing-
related fees totaled $207 million in 2018 compared
with $216 million in 2017, primarily reflecting lower
fees on standby letters of credit and underwriting.
8 BNY Mellon
Distribution and servicing fees earned from mutual
funds are primarily based on average assets in the
funds and the sales of funds that we manage or
administer and are primarily reported in the
Investment Management business. These fees, which
include 12b-1 fees, fluctuate with the overall level of
net sales, the relative mix of sales between share
classes, the funds’ market values and money market
fee waivers.
Distribution and servicing fees were $139 million in
2018 compared with $160 million in 2017. The
decrease primarily reflects the impact of lower fees
from mutual funds.
Investment and other income
The following table provides the components of
investment and other income.
Investment and other income
(in millions)
Corporate/bank-owned life insurance $
Expense reimbursements from joint
venture
2018
2017
145 $
153 $
2016
149
64
67
Asset-related gains (losses)
Equity investment income (loss)
Seed capital gains (a)
Lease-related gains
Other (loss) income
10
(10)
44
38
43
341
(a) Excludes seed capital gains related to consolidated investment
management funds, which are reflected in operations of
consolidated investment management funds.
Total investment and other income
(1)
37
32
56
(277)
64 $
$
71
70
4
3
1
(54)
240 $
Investment and other income includes corporate and
bank-owned life insurance contracts, expense
reimbursements from our CIBC Mellon joint venture,
gains or losses from asset-related activity, equity
investments, seed capital, lease-related activity and
other (loss) income. Expense reimbursements from
our CIBC Mellon joint venture relate to expenses
incurred by BNY Mellon on behalf of the CIBC
Mellon joint venture. Asset-related gains (losses)
include real estate, loan and other asset dispositions.
Other (loss) income primarily includes foreign
currency remeasurement gain (loss), other
investments, including renewable energy, and various
miscellaneous revenues. Investments in renewable
energy generate losses in other income that are more
than offset by benefits and credits recorded to the
provision for income taxes.
Results of Operations (continued)
Investment and other income was $240 million in
2018 compared with $64 million in 2017. The
increase primarily reflects the impact of U.S. tax
legislation on our renewable energy investments
recorded in 2017.
Net securities losses
Net securities losses were $48 million in 2018,
primarily reflecting the sale of debt securities.
2017 compared with 2016
Fee and other revenue totaled $12.2 billion in 2017
compared with $12.1 billion in 2016. The increase
primarily reflects higher investment services fees and
investment management and performance fees,
partially offset by lower investment and other income
and net securities gains.
Net interest revenue
Net interest revenue
(dollars in millions)
Net interest revenue
Add: Tax equivalent adjustment
Net interest revenue on a fully taxable equivalent
basis (“FTE”) – Non-GAAP (a)
The increase in investment services fees primarily
reflects higher money market fees, higher equity
market values and net new business, including growth
in collateral management, partially offset by
previously disclosed lost business in Pershing and
lower volumes in certain Depositary Receipts
programs.
The increase in investment management and
performance fees primarily reflects higher market
values, money market fees and performance fees,
partially offset by the unfavorable impact of a
stronger U.S. dollar on an average basis (principally
versus the British pound).
The decrease in investment and other income
primarily reflects the impact of U.S. tax legislation on
our renewable energy investments.
2018
2017
2016
$
3,611
20
$
3,631
$
$
3,308
47
3,355
$
$
3,138
51
3,189
2018
vs.
2017
9%
N/M
2017
vs.
2016
5%
N/M
8%
5%
Average interest-earning assets
$289,916
$ 290,522
$ 303,379
—%
(4)%
Net interest margin
Net interest margin (FTE) – Non-GAAP (a)
(a) Net interest revenue (FTE) – Non-GAAP and net interest margin (FTE) – Non-GAAP include the tax equivalent adjustments on tax-
exempt income which allows for comparisons of amounts arising from both taxable and tax-exempt sources and is consistent with
industry practice. The adjustment to an FTE basis has no impact on net income.
1.03%
1.05%
1.14%
1.15%
11 bps
10 bps
1.25%
1.25%
11 bps
10 bps
Net interest revenue increased 9% compared with
2017, primarily reflecting higher interest rates.
Net interest margin increased 11 basis points
compared with 2017, primarily reflecting higher
yields on interest-earning assets, partially offset by
higher interest rates paid on interest-bearing
liabilities.
Average interest-earning assets were $290 billion in
2018 compared with $291 billion in 2017. The
decrease primarily reflects lower loans and interest-
bearing deposits with the Federal Reserve and other
central banks, partially offset by higher trading
securities.
Average non-U.S. dollar deposits comprised
approximately 30% of our average total deposits in
2018 and 2017. Approximately 45% of the average
non-U.S. dollar deposits in 2018 and 2017 were euro-
denominated.
2017 compared with 2016
Net interest revenue increased 5% compared with
2016, primarily driven by higher interest rates,
partially offset by lower interest-earning assets driven
by lower average deposits. The 11 basis points
increase in the net interest margin primarily reflects
higher yields on interest-earning assets, partially
offset by higher interest rates paid on interest-bearing
liabilities.
BNY Mellon 9
Results of Operations (continued)
Average balances and interest rates
(dollar amounts in millions, presented on an FTE basis)
Assets
Interest-earning assets:
Interest-bearing deposits with banks (primarily foreign banks)
Interest-bearing deposits with the Federal Reserve and other central banks
Federal funds sold and securities purchased under resale agreements (a)
Margin loans
Non-margin loans:
Domestic offices:
Consumer
Commercial
Foreign offices
Total non-margin loans
Securities:
U.S. government obligations
U.S. government agency obligations
State and political subdivisions
Other securities:
Domestic offices
Foreign offices
Total other securities
Trading securities (primarily domestic)
Total securities
Total interest-earning assets
Noninterest-earning assets
Total assets
Liabilities
Interest-bearing liabilities:
Interest-bearing deposits:
Domestic offices
Foreign offices
Total interest-bearing deposits
Federal funds purchased and securities sold under repurchase agreements (a)
Trading liabilities
Other borrowed funds:
Domestic offices
Foreign offices
Total other borrowed funds
Commercial paper
Payables to customers and broker-dealers
Long-term debt
Total interest-bearing liabilities
Total noninterest-bearing deposits
Other noninterest-bearing liabilities
Total liabilities
Temporary equity
Redeemable noncontrolling interests
Permanent equity
Total The Bank of New York Mellon Corporation shareholders’ equity
Noncontrolling interests
Total permanent equity
Total liabilities, temporary equity and permanent equity
Net interest revenue (FTE) – Non-GAAP
Net interest margin (FTE) – Non-GAAP
Less: Tax equivalent adjustment (c)
Net interest revenue - GAAP
Net interest margin- GAAP
Average
balance
2018
Interest
Average
rates
$
$
$
$
$
$
14,740
68,408
27,883
14,397
9,789
19,853
11,771
41,413
23,908
63,902
2,565
8,186
19,848
28,034
4,666
123,075
289,916
53,858
343,774
59,226
95,475
154,701
15,546
1,310
2,122
423
2,545
2,607
16,353
28,257
221,319
63,814
16,952
302,085
187
41,360
142
41,502
343,774
(b)
$
$
$
$
$
$
219
531
1,116
510
319
701
336
1,356
486
1,518
69
341
179
520
127
2,720
6,452
537
340
877
758
29
55
3
58
51
191
857
2,821
3,631
20
3,611
1.48%
0.78
4.00
3.54
3.26
3.53
2.85
3.27
2.03
2.37
2.69
4.17
0.90
1.85
2.74
2.21
2.23%
0.91%
0.36
0.57
4.88
2.21
2.57
0.73
2.26
1.97
1.17
3.03
1.27%
1.25%
1.25%
Percentage of assets attributable to foreign offices (d)
Percentage of liabilities attributable to foreign offices (d)
Note: Interest and average rates were calculated on a taxable equivalent basis using dollar amounts in thousands and actual number of days in the year.
(a)
(b)
Includes the average impact of offsetting under enforceable netting agreements of approximately $25 billion in 2018.
Includes fees of $7 million in 2018. Non-accrual loans are included in average loans; the associated income, which was recognized on a cash basis, is
included in interest income.
31%
34
(c) The tax equivalent adjustment relates to tax-exempt securities, primarily state and political subdivisions, and is based on the U.S. federal statutory tax
rate of 21%, adjusted for applicable state income taxes, net of the related federal tax benefit.
Includes the Cayman Islands branch office.
(d)
10 BNY Mellon
Results of Operations (continued)
Average balances and interest rates (continued)
(dollar amounts in millions, presented on an FTE basis)
Average
balance
2017
Interest
Average
rates
Average
balance
2016
Interest
Average
rates
Assets
Interest-earning assets:
Interest-bearing deposits with banks (primarily foreign banks)
Interest-bearing deposits with the Federal Reserve and other
central banks
Federal funds sold and securities purchased under resale agreements (a)
Margin loans
Non-margin loans:
Domestic offices:
Consumer
Commercial
Foreign offices
Total non-margin loans
Securities:
U.S. government obligations
U.S. government agency obligations
State and political subdivisions
Other securities:
Domestic offices
Foreign offices
Total other securities
Trading securities (primarily domestic)
Total securities
Total interest-earning assets
Noninterest-earning assets
Total assets
Liabilities
Interest-bearing liabilities:
Interest-bearing deposits:
Domestic offices:
Foreign offices
Total interest-bearing deposits
Federal funds purchased and securities sold under repurchase
agreements (a)
Trading liabilities
Other borrowed funds:
Domestic offices
Foreign offices
Total other borrowed funds
Commercial paper
Payables to customers and broker-dealers
Long-term debt
Total interest-bearing liabilities
Total noninterest-bearing deposits
Other noninterest-bearing liabilities
Total liabilities
Temporary equity
Redeemable noncontrolling interests
Permanent equity
Total The Bank of New York Mellon Corporation shareholders’ equity
Noncontrolling interests
Total permanent equity
Total liabilities, temporary equity and permanent equity
Net interest revenue (FTE) – Non-GAAP
Net interest margin (FTE) – Non-GAAP
Less: Tax equivalent adjustment (c)
Net interest revenue - GAAP
Net interest margin - GAAP
$ 14,879
$
120
0.80% $ 14,704
$
104
0.70%
198
233
265
259
417
197
873 (b)
378
986
110
210
206
416
63
1,953
$ 3,626
$
$
41
(25)
16
36
6
4
4
8
5
12
354
437
0.25
0.91
1.46
3.05
1.91
1.50
2.01
1.51
1.75
2.96
1.71
1.00
1.26
2.56
1.62
1.20%
0.08%
(0.02)
0.01
0.25
0.89
4.15
0.51
0.91
0.37
0.07
1.52
0.20%
70,213
27,192
14,500
9,548
20,976
12,915
43,439
25,674
60,268
3,226
9,141
19,541
28,682
2,449
120,299
$ 290,522
53,326
$ 343,848
$ 46,908
96,215
143,123
19,653
1,243
1,113
803
1,916
2,630
18,984
27,424
$ 214,973
71,664
16,932
303,569
180
39,687
412
40,099
$ 343,848
319
423
343
298
521
258
1,077 (b)
425
1,195
100
215
150
365
62
2,147
$ 4,429
$
107
55
162
225
7
21
5
26
29
64
561
$ 1,074
0.45
1.55
2.36
3.12
2.49
2.00
2.48
1.66
1.98
3.09
80,593
25,767
18,201
8,483
21,820
13,177
43,480
25,074
56,384
3,703
12,326
2.35
20,664
0.77
32,990
1.27
2,483
2.54
1.79
120,634
1.52% $ 303,379
55,098
$ 358,477
0.23% $ 54,547
102,399
0.06
156,946
0.11
1.14
0.57
14,489
711
93
1.86
753
0.67
846
1.36
1,337
1.08
16,925
0.34
2.05
23,334
0.50% $ 214,588
82,712
21,928
319,228
182
38,489
578
39,067
$ 358,477
$ 3,355
47
$ 3,308
1.15%
1.14%
$ 3,189
51
$ 3,138
1.05%
1.03%
Percentage of assets attributable to foreign offices (d)
Percentage of liabilities attributable to foreign offices (d)
Note: Interest and average rates were calculated on a taxable equivalent basis using dollar amounts in thousands and actual number of days in the year.
(a)
(b)
Includes the average impact of offsetting under enforceable netting agreements of approximately $6 billion in 2017 and less than $350 million in 2016.
Includes fees of $9 million in 2017 and $10 million in 2016. Non-accrual loans are included in the average loans; the associated income, which was
recognized on a cash basis, is included in interest income.
29%
36
30%
35
(c) The tax equivalent adjustment relates to tax-exempt securities, primarily state and political subdivisions, and is based on the U.S. federal statutory tax
rate of 35%, adjusted for applicable state income taxes, net of the related federal tax benefit.
Includes the Cayman Islands branch office.
(d)
BNY Mellon 11
Results of Operations (continued)
Noninterest expense
Noninterest expense
(dollars in millions)
Staff (a)
Professional, legal and other purchased services
Software
Net occupancy
Sub-custodian and clearing (b)
Distribution and servicing
Furniture and equipment
Business development
Bank assessment charges
Amortization of intangible assets
Other (a)(b)(c)
Total noninterest expense
2018
6,145 $
1,334
772
630
450
406
290
228
170
180
606
11,211 $
2017
6,033 $
1,276
744
570
414
419
241
229
220
209
602
10,957 $
2016
5,809
1,186
647
592
400
405
247
245
219
237
536
10,523
$
$
2018
vs.
2017
2 %
5
4
11
9
(3)
20
—
(23)
(14)
1
2 %
2017
vs.
2016
4%
8
15
(4)
4
3
(2)
(7)
—
(12)
12
4%
1%
Full-time employees at period end
(a) In 2018, we adopted new accounting guidance included in ASU 2017-07, Compensation-Retirement Benefits: Improving the Presentation
of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost, which required the reclassification of the components of
pension and other postretirement costs, other than the service cost component. As a result, staff expense increased and other expense
decreased. Prior periods have been reclassified. See Note 2 of the Notes to Consolidated Financial Statements for additional
information.
52,500
51,300
52,000
(2)%
(b) Beginning in 2018, clearing expense, which was previously included in other expense, was included with sub-custodian expense. Prior
periods have been reclassified.
(c) Beginning in 2018, merger and integration (“M&I”), litigation and restructuring charges are no longer separately disclosed. Expenses
previously reported in this line have been reclassified to existing expense categories, primarily other expense.
Total noninterest expense increased 2% compared
with 2017. The increase primarily reflects
investments in technology, expenses associated with
consolidating our real estate and the unfavorable
impact of a weaker U.S. dollar, partially offset by
lower bank assessment charges. The investments in
technology are included in staff, professional, legal
and other purchased services, software and furniture
and equipment expenses.
Our investments in technology infrastructure and
platforms increased throughout 2018 and are
expected to continue at recent levels. As a result, we
expect to incur higher technology-related expenses in
2019 than in 2018. This increase is expected to be
mostly offset by decreases in other expenses as we
continue to manage overall expenses.
2017 compared with 2016
Total noninterest expense increased 4% compared
with 2016. The increase primarily reflects higher
staff, software and professional, legal and other
purchased services expenses. The increase in staff
expense primarily reflects higher incentive expense,
driven by stronger performance, the annual employee
merit increase and higher severance expense, partially
offset by the favorable impact of a stronger U.S.
dollar. The increase in software expense primarily
reflects asset impairments and increased amortization.
The increase in professional, legal and other
purchased services expense primarily reflects higher
consulting and purchased services expenses.
Income taxes
BNY Mellon recorded an income tax provision of
$938 million (18.1% effective tax rate) in 2018,
including the impact of adjusting provisional
estimates related to U.S. tax legislation and the tax
impact of severance, expenses associated with
consolidating real estate and litigation expense. The
income tax provision was $496 million (10.8%
effective tax rate) in 2017, including the estimated tax
benefit related to U.S. tax legislation. The income tax
provision was $1.2 billion (24.9% effective tax rate)
in 2016. For additional information, see Note 11 of
the Notes to Consolidated Financial Statements.
12 BNY Mellon
Results of Operations (continued)
Review of businesses
We have an internal information system that produces
performance data along product and service lines for
our two principal businesses, Investment Services and
Investment Management, and the Other segment.
Business accounting principles
Our business data has been determined on an internal
management basis of accounting, rather than the
generally accepted accounting principles used for
consolidated financial reporting. These measurement
principles are designed so that reported results of the
businesses will track their economic performance.
For information on the accounting principles of our
businesses, the primary products and services in each
line of business, the primary types of revenue by
business and how our businesses are presented and
analyzed, see Note 23 of the Notes to Consolidated
Financial Statements.
Business results are subject to reclassification when
organizational changes are made. There were no
significant organizational changes in 2018. The
results are also subject to refinements in revenue and
expense allocation methodologies, which are
typically reflected on a prospective basis.
The results of our businesses may be influenced by
client and other activities that vary by quarter. In the
first quarter, incentive expense typically increases
reflecting the vesting of long-term stock awards for
retirement-eligible employees. In the third quarter,
Depositary Receipts revenue is typically higher due
to an increased level of client dividend payments.
Also in the third quarter, volume-related fees may
decline due to reduced client activity. In the third
quarter, staff expense typically increases reflecting
the annual employee merit increase. In the fourth
quarter, we typically incur higher business
development and marketing expenses. In our
Investment Management business, performance fees
are typically higher in the fourth quarter, as the fourth
quarter represents the end of the measurement period
for many of the performance fee-eligible
relationships.
The results of our businesses may also be impacted
by the translation of financial results denominated in
foreign currencies to the U.S. dollar. We are
primarily impacted by activities denominated in the
British pound and the euro. On a consolidated basis
and in our Investment Services business, we typically
have more foreign currency-denominated expenses
than revenues. However, our Investment
Management business typically has more foreign
currency-denominated revenues than expenses.
Overall, currency fluctuations impact the year-over-
year growth rate in the Investment Management
business more than the Investment Services business.
However, currency fluctuations, in isolation, are not
expected to significantly impact net income on a
consolidated basis.
Fee revenue in Investment Management, and to a
lesser extent in Investment Services, is impacted by
the value of market indices. At Dec. 31, 2018, we
estimate that a 5% change in global equity markets,
spread evenly throughout the year, would impact fee
revenue by less than 1% and diluted earnings per
common share by $0.03 to $0.05.
See Note 23 of the Notes to Consolidated Financial
Statements for the consolidating schedules which
show the contribution of our businesses to our overall
profitability.
BNY Mellon 13
Results of Operations (continued)
Investment Services business
(dollars in millions unless otherwise noted)
2018
2017
2016
Revenue:
Investment services fees:
Asset servicing
Clearing services
Issuer services
Treasury services
Total investment services fees
Foreign exchange and other trading revenue
Other (a)
Total fee and other revenue
Net interest revenue
Total revenue
Provision for credit losses
Noninterest expense (excluding amortization of intangible assets)
Amortization of intangible assets
Total noninterest expense
Income before taxes
Pre-tax operating margin
Securities lending revenue
Total revenue by line of business:
Asset Servicing
Pershing
Issuer Services
Treasury Services
Clearance and Collateral Management
Total revenue by line of business
Metrics:
Average loans
Average deposits
AUC/A at period end (in trillions) (b)
Market value of securities on loan at period end (in billions) (c)
Pershing:
Average active clearing accounts (U.S. platform) (in thousands)
Average long-term mutual fund assets (U.S. platform)
Average investor margin loans (U.S. platform)
Clearance and Collateral Management:
Average tri-party collateral management balances (in billions)
$
$
$
$
$
2018
vs.
2017
2017
vs.
2016
5 %
2
13
—
5
7
(6)
5
10
6
N/M
4
(13)
4
10 %
4 %
11
(5)
3
4
(6)
2
3
9
4
N/M
6
(4)
6
3 %
4,520
1,577
1,099
553
7,749
665
512
8,926
3,372
12,298
1
7,929
129
8,058
4,239
$
$
4,286
1,549
975
555
7,365
620
542
8,527
3,058
11,585
(7)
7,598
149
7,747
3,845
$
$
4,141
1,399
1,024
541
7,105
663
531
8,299
2,797
11,096
8
7,187
155
7,342
3,746
34%
33%
34%
198
$
168
$
170
18 %
(1)%
5,932
2,255
1,743
1,302
1,066
12,298
$
$
5,603
2,180
1,588
1,251
963
11,585
$
$
5,504
1,979
1,585
1,136
892
11,096
$
36,931
$ 203,279
$
40,142
$ 200,235
$
44,740
$ 217,882
$
$
33.1
373
$
$
33.3
408
$
$
29.9
296
6,097
$ 511,004
10,829
$
6,137
$ 487,845
9,810
$
5,949
$ 431,937
10,772
$
6 %
3
10
4
11
6 %
(8)%
2 %
(1)%
(9)%
(1)%
5 %
10 %
2 %
10
—
10
8
4 %
(10)%
(8)%
11 %
38 %
3 %
13 %
(9)%
$
2,918
$
2,502
$
2,183
17 %
15 %
(a) Other revenue includes investment management fees, financing-related fees, distribution and servicing revenue and investment and other income.
(b)
Includes the AUC/A of CIBC Mellon of $1.2 trillion at Dec. 31, 2018, $1.3 trillion at Dec. 31, 2017 and $1.2 trillion at Dec. 31, 2016.
(c) Represents the total amount of securities on loan in our agency securities lending program managed by the Investment Services business.
Excludes securities for which BNY Mellon acts as agent on behalf of CIBC Mellon clients, which totaled $58 billion at Dec. 31, 2018, $71 billion
at Dec. 31, 2017 and $63 billion at Dec. 31, 2016.
14 BNY Mellon
Results of Operations (continued)
Business description
BNY Mellon Investment Services provides business
services and technology solutions to entities including
financial institutions, corporations, foundations and
endowments, public funds and government agencies.
Our lines of business include: Asset Servicing,
Pershing, Issuer Services, Treasury Services and
Clearance and Collateral Management.
We are one of the leading global investment services
providers with $33.1 trillion of AUC/A at Dec. 31,
2018.
• We are the primary provider of U.S. government
securities clearance and a provider of non-U.S.
government securities clearance.
• We are a leading provider of tri-party collateral
management services with an average of $2.9
trillion serviced globally including approximately
$2.0 trillion of the U.S. tri-party repo market.
• Our agency securities lending program is one of
the largest lenders of U.S. and non-U.S.
securities, servicing a lendable asset pool of
approximately $3.4 trillion in 34 separate
markets.
The Asset Servicing business provides a
comprehensive suite of solutions. As one of the
largest global custody and fund accounting providers
and a trusted partner, we offer services for the
safekeeping of assets in capital markets globally as
well as alternative investment and structured product
strategies. We provide custody and foreign exchange
services, support exchange-traded funds and unit
investment trusts and provide our clients outsourcing
capabilities. We deliver securities lending and
financing solutions on both an agency and principal
basis. Our market leading liquidity services portal
enables cash investments for institutional clients and
includes fund research and analytics.
Pershing provides clearing, custody, business and
technology solutions, delivering dependable
operational support to financial organizations
globally.
The Issuer Services business includes Corporate
Trust and Depositary Receipts. Our Corporate
Trust business delivers a full range of issuer and
related investor services, including trustee, paying
agency, fiduciary, escrow and other financial
services. We are a leading provider to the debt
capital markets, providing customized and market-
driven solutions to investors, bondholders and
lenders. Our Depositary Receipts business drives
global investing by providing servicing and value-
added solutions that enable, facilitate and enhance
cross-border trading, clearing, settlement and
ownership. We are one of the largest providers of
depositary receipts services in the world, partnering
with leading companies from more than 50
countries.
Our Treasury Services business includes global
payments, liquidity management, payables/
receivables and trade finance services for financial
institutions, corporations and the public sector.
Our Clearance and Collateral Management
business clears and settles equity and fixed-income
transactions globally and serves as custodian for
tri-party repo collateral worldwide. Our collateral
services include collateral management,
administration and segregation. We offer
innovative solutions and industry expertise which
help financial institutions and institutional
investors with their liquidity, financing, risk and
balance sheet challenges.
Review of financial results
AUC/A decreased 1% compared with Dec. 31, 2017
to $33.1 trillion, primarily reflecting lower market
values and the unfavorable impact of a stronger U.S.
dollar on a spot basis, partially offset by net new
business. AUC/A consisted of 33% equity securities
and 67% fixed-income securities at Dec. 31, 2018 and
37% equity securities and 63% fixed-income
securities at Dec. 31, 2017.
Total revenue of $12.3 billion increased 6%
compared with 2017. Net interest revenue increased
compared with 2017 in all businesses, primarily
driven by higher interest rates. The drivers of fee
revenue by line of business are indicated below.
Asset Servicing revenue of $5.9 billion increased 6%
compared with 2017. The increase primarily reflects
higher net interest revenue, higher foreign exchange
and securities lending volumes, higher equity market
values and the favorable impact of a weaker U.S.
dollar.
BNY Mellon 15
Results of Operations (continued)
Pershing revenue of $2.3 billion increased 3%
compared with 2017. The increase primarily reflects
higher net interest revenue and higher fees due to
growth in average long-term mutual fund balances
and higher clearance volumes, partially offset by the
previously disclosed lost business.
Issuer Services revenue of $1.7 billion increased 10%
compared with 2017. The increase primarily reflects
higher Depositary Receipts revenue driven by
corporate actions and higher volumes, higher net
interest revenue and increased volumes in Corporate
Trust.
Treasury Services revenue of $1.3 billion increased
4% compared with 2017. The increase primarily
reflects higher net interest revenue and higher
payment volumes.
Clearance and Collateral Management revenue of
$1.1 billion increased 11% compared with 2017. The
increase primarily reflects growth in collateral
management, clearance volumes and net interest
revenue.
Market and regulatory trends are driving investable
assets toward lower fee asset management products at
reduced margins for our clients. These dynamics are
also negatively impacting our investment services
fees. However, at the same time, these trends are
providing additional outsourcing opportunities as
clients and other market participants seek to comply
with new regulations and reduce their operating costs.
Noninterest expense of $8.1 billion increased 4%
compared with 2017. The increase was primarily
driven by investments in technology, higher volume-
related expenses and the unfavorable impact of a
weaker U.S. dollar.
2017 compared with 2016
Total revenue of $11.6 billion increased 4% compared
with 2016. Net interest revenue increased in most
lines of business, primarily driven by higher interest
rates. Asset Servicing revenue increased primarily
reflecting higher net interest revenue, equity market
values and money market fees, partially offset by the
downsizing of the UK transfer agency business.
Pershing revenue increased primarily reflecting
higher net interest revenue, higher money market fees
and growth in long-term mutual fund assets. Issuer
Services revenue increased slightly primarily
reflecting higher net interest revenue partially offset
by lost business and lower volumes from weaker
cross-border settlement activity in Depositary
Receipts. Treasury Services revenue increased
primarily reflecting higher net interest revenue and
higher payment volumes. Clearance and Collateral
Management revenue increased primarily reflecting
growth in collateral management and higher
clearance volumes, partially offset by lower net
interest revenue.
Noninterest expense of $7.7 billion increased 6%
compared with 2016 primarily reflecting higher staff
expense, including severance, higher litigation
expense, additional technology-related costs and asset
impairments.
16 BNY Mellon
Results of Operations (continued)
Investment Management business
(dollars in millions)
Revenue:
Investment management fees (a)
Performance fees
Investment management and performance fees (b)
Distribution and servicing
Other (a)
Total fee and other revenue (a)
Net interest revenue
Total revenue
Provision for credit losses
Noninterest expense (excluding amortization of intangible assets)
Amortization of intangible assets
Total noninterest expense
Income before taxes
Pre-tax operating margin
Adjusted pre-tax operating margin – Non-GAAP (c)
Total revenue by line of business:
Asset Management
Wealth Management
Total revenue by line of business
2018
vs.
2017
2%
53
3
(8)
N/M
3
(8)
2
N/M
(1)
(15)
(1)
11%
2017
vs.
2016
6 %
57
7
8
N/M
7
1
7
N/M
4
(27)
3
18 %
2018
2017
2016
3,232
60
3,292
192
(60)
3,424
327
3,751
6
2,696
82
2,778
967
26%
29%
$
$
$
$
3,488
144
3,632
190
(41)
3,781
303
4,084
3
2,767
51
2,818
1,263
31%
34%
2,836
1,248
4,084
$
$
$
$
3,428
94
3,522
207
(61)
3,668
329
3,997
2
2,794
60
2,854
1,141
29%
32%
2,775
1,222
3,997
$
$
$
$
2,615
1,136
3,751
2%
2
2%
6 %
8
7 %
Average balances:
Average loans
Average deposits
10 %
(13)%
(a) Total fee and other revenue includes the impact of the consolidated investment management funds, net of noncontrolling interests. Additionally,
$ 16,565
$ 13,615
$ 15,015
$ 15,650
$ 16,774
$ 14,291
1%
5%
other revenue includes asset servicing, foreign exchange and other trading revenue, treasury services and investment and other income.
(b) On a constant currency basis, investment management and performance fees increased 2% (Non-GAAP) compared with 2017. See
“Supplemental information – Explanation of GAAP and Non-GAAP financial measures” beginning on page 105 for the reconciliation of this
Non-GAAP measure.
(c) Net of distribution and servicing expense. See “Supplemental information – Explanation of GAAP and Non-GAAP financial measures”
beginning on page 105 for the reconciliation of this Non-GAAP measure. In 2018, the adjusted pre-tax margin – Non-GAAP for prior periods
was restated to include amortization of intangible assets and the provision for credit losses.
BNY Mellon 17
Results of Operations (continued)
AUM trends
(dollars in billions)
AUM at period end, by
product type: (a)
Equity
Fixed income
Index
Liability-driven
investments
Multi-asset and alternative
investments
Cash
Total AUM by product
type
2018
2017
2016
$
135
200
301
659
167
260
$
$
161
206
350
667
214
295
153
186
312
554
181
262
$ 1,722
$ 1,893
$ 1,648
Changes in AUM: (a)
Beginning balance of AUM $ 1,893
Net (outflows) inflows:
Long-term strategies:
$ 1,648
$ 1,625
Equity
Fixed income
Liability-driven
investments
Multi-asset and
alternative
investments
Total long-term active
strategies inflows
Index
Total long-term
strategies (outflows)
inflows
Short-term strategies:
Cash
Total net (outflows)
inflows
Net market impact
Net currency impact
Acquisition/divestiture/
other
Ending balance of
AUM
Wealth Management
client assets (c)
(13)
4
45
(6)
30
(34)
(4)
(35)
(39)
(48)
(53)
(31)
(b)
(14)
6
50
8
50
(17)
33
30
63
106
76
—
(15)
(5)
26
12
18
(32)
(14)
(9)
(23)
181
(137)
2
$ 1,722
$ 1,893
$ 1,648
$
239
$
262
$
240
(a) Excludes securities lending cash management assets and
assets managed in the Investment Services business.
(b) Primarily reflects a change in methodology beginning in
2018 to exclude AUM related to equity method investments
as well as the CenterSquare divestiture.
(c) Includes AUM and AUC/A in the Wealth Management
business. Prior period amounts were revised to include
additional AUC/A.
Business description
Our Investment Management business consists of two
lines of business, Asset Management and Wealth
Management. With AUM of $1.7 trillion, our
Investment Management business is the seventh
largest global asset manager and includes our
investment specialists and Wealth Management
business.
18 BNY Mellon
Our investment specialists deliver a highly diversified
portfolio of investment strategies independently, and
through our global distribution network, to
institutional and retail clients globally. The
investment specialists offer a broad range of actively
managed equity, fixed income, alternative and
liability-driven investments, along with passive
products and cash management. Each investment
specialist follows its own investment approach to
innovate and develop investment solutions designed
to deliver performance returns and outcomes that
meet the investing goals of an increasingly
sophisticated client base. Our multi-boutique model
of investment specialists is designed to provide the
best elements of investment focus and infrastructure
at scale for the benefit of clients.
In the third quarter of 2018, BNY Mellon announced
the wind-down of EACM Advisors and, effective Jan.
2, 2019, Mellon Investments Corporation (“Mellon”)
as the new name of our specialized multi-asset
investment manager formed from the consolidation of
Mellon Capital Management, Standish Mellon Asset
Management, and The Boston Company Asset
Management.
In addition to the investment specialists, Investment
Management has multiple global distribution entities
which are responsible for distributing investment
products developed and managed by the investment
specialists, as well as responsibility for management
and distribution of our U.S. mutual funds and certain
offshore money market funds.
BNY Mellon Wealth Management provides
investment management, custody, wealth and estate
planning and private banking services, and conducts
business globally. BNY Mellon Wealth Management
has $239 billion in Wealth Management client assets
as of Dec. 31, 2018, and an extensive network of
offices in the U.S. and internationally.
The results of the Investment Management business
are driven by the period end, average and mix of
AUM, as well as the level of activity in client
accounts. The overall level of AUM for a given
period is determined by:
•
•
the beginning level of AUM;
the net flows of new assets during the period
resulting from new business wins and existing
client enrichments, reduced by the loss of clients
and withdrawals; and
Results of Operations (continued)
•
the impact of market price appreciation or
depreciation, acquisitions or divestitures and
foreign exchange rates.
The mix of AUM is determined principally by client
asset allocation decisions among equity, fixed
income, passive products, cash, liability-driven
investments and multi-asset and alternative
investments.
Managed equity assets typically generate higher
percentage fees than liability-driven investments and
fixed-income assets. Also, actively managed assets
typically generate higher management fees than
indexed or passively managed assets of the same
type.
Investment management fees are dependent on the
overall level and mix of AUM and the management
fees expressed in basis points (one-hundredth of one
percent) charged for managing those assets.
Management fees are typically subject to fee
schedules based on the overall level of assets
managed for a single client or by individual asset
class and style. This is most common for institutional
clients where we typically manage substantial assets
for individual accounts.
Performance fees are generally calculated as a
percentage of a portfolio’s performance in excess of a
benchmark index or a peer group’s performance.
A key driver of organic growth in investment
management and performance fees is the amount of
net new AUM flows. Overall market conditions are
also key drivers, with a significant long-term
economic driver being growth of global financial
assets.
Net interest revenue is determined by loan and
deposit volumes and the interest rate spread between
customer rates and internal funds transfer rates on
loans and deposits. Expenses in the Investment
Management business are mainly driven by staffing
costs, incentives and distribution and servicing
expense.
Review of financial results
AUM decreased 9% compared with Dec. 31, 2017
primarily reflecting the unfavorable impact of a
stronger U.S. dollar (principally versus the British
pound) on a spot basis, lower market values, net
outflows and the divestiture of CenterSquare and
other changes. Net long-term outflows of $4 billion
in 2018 were a result of $34 billion of outflows from
index funds and $30 billion of inflows from actively
managed strategies, primarily liability-driven
investments.
Total revenue of $4.1 billion increased 2% compared
with 2017.
Asset Management revenue of $2.8 billion increased
2% compared with the 2017, primarily reflecting
higher market values, performance fees and the
favorable impact of a weaker U.S. dollar (principally
versus the British pound), partially offset by the
impact of net outflows. Market and regulatory trends
have resulted in increased demand for lower fee asset
management products, and for performance-based
fees.
Wealth Management revenue of $1.2 billion increased
2% compared with 2017, primarily reflecting higher
equity market values and net new business, partially
offset by lower net interest revenue.
Revenue generated in the Investment Management
business included 42% from non-U.S. sources in
2018, compared with 41% in 2017.
Noninterest expense of $2.8 billion decreased 1%
compared with 2017, primarily reflecting the
divestiture of CenterSquare.
2017 compared with 2016
Total revenue of $4.0 billion increased 7% compared
with 2016. Asset Management revenue increased
primarily reflecting higher equity market values,
money market fees and performance fees, partially
offset by the unfavorable impact of a stronger U.S.
dollar (principally versus the British pound). Wealth
management revenue increased primarily reflecting
higher equity market values and net interest revenue.
Noninterest expense of $2.9 billion increased 3%
primarily reflecting higher incentive, distribution and
servicing and severance expenses, partially offset by
the favorable impact of a stronger U.S. dollar.
BNY Mellon 19
Results of Operations (continued)
Other segment
(in millions)
Fee revenue
Net securities (losses) gains
Total fee and other revenue
Net interest (expense) revenue
Total revenue (loss)
Provision for credit losses
Noninterest expense
(Loss) income before taxes
Average loans and leases
Description of segment
The Other segment primarily includes:
•
•
•
•
•
•
the leasing portfolio;
corporate treasury activities, including our
securities portfolio;
derivatives and other trading activity;
corporate and bank-owned life insurance;
renewable energy investments; and
business exits.
Revenue primarily reflects:
•
•
•
•
net interest revenue and lease-related gains
(losses) from leasing operations;
net interest revenue from corporate treasury
activity;
fee and other revenue from corporate and bank-
owned life insurance and business exits; and
gains (losses) associated with investment
securities and other assets, including renewable
energy.
Expenses include:
•
•
direct expenses supporting leasing, investing, and
funding activities; and
expenses not directly attributable to Investment
Services and Investment Management operations.
Review of financial results
Loss before taxes was $298 million in 2018 compared
with $400 million in 2017.
20 BNY Mellon
2018
133 $
(48)
85
(64)
21
(15)
334
(298) $
2017
4 $
3
7
(79)
(72)
(19)
347
(400) $
2016
291
75
366
14
380
(25)
394
11
2,105 $
1,232 $
1,926
$
$
$
Fee revenue increased $129 million compared with
2017, primarily reflecting the impact of U.S. tax
legislation on our renewable energy investments
recorded in 2017.
Net securities losses of $48 million in 2018 primarily
related to the sale of debt securities.
Net interest expense decreased $15 million compared
with 2017, primarily resulting from lease-related
adjustments recorded in 2017.
Noninterest expense decreased $13 million compared
with 2017, primarily reflecting lower pension
expense and a methodological change in 2017 for
allocating employee benefits expense to the business
segments with no impact to consolidated results,
partially offset by expenses associated with relocating
our corporate headquarters.
2017 compared with 2016
Loss before taxes was $400 million in 2017 compared
with income before taxes of $11 million in 2016.
Total fee and other revenue decreased primarily
reflecting the impact of U.S. tax legislation on our
investments in renewable energy investments and
lower net securities gains. Net interest expense
increased primarily reflecting the impact of interest
rate hedging activities and lease-related adjustments,
partially offset by higher interest rates. Noninterest
expense decreased primarily reflecting lower staff
and other expense.
Results of Operations (continued)
International operations
Our primary international activities consist of asset
servicing and global payment services in our
Investment Services business and asset management
in our Investment Management business.
Our clients include central banks and sovereigns,
financial institutions, asset managers, insurance
companies, corporations, local authorities and high
net worth individuals and family offices. Through
our global network of offices, we have developed a
deep understanding of local requirements and cultural
needs, and we pride ourselves on providing dedicated
service through our multilingual sales, marketing and
client service teams.
At Dec. 31, 2018, we had approximately 9,100
employees in Europe, the Middle East and Africa
(“EMEA”), approximately 14,500 employees in the
Asia-Pacific region (“APAC”) and approximately 700
employees in other global locations, primarily Brazil.
We are the seventh largest global asset manager. At
Dec. 31, 2018, our international operations managed
55% of BNY Mellon’s AUM, compared with 51% at
Dec. 31, 2017. The proportionate increase in
international AUM primarily resulted from the
reduction in domestic AUM and net inflows, partially
offset by the unfavorable impact of a stronger U.S.
dollar (principally versus the British pound).
In Europe, we maintain a presence in Undertakings
for Collective Investment in Transferable Securities
Directives (“UCITS”). In Ireland, BNY Mellon
provides fund administration services across
domiciled and non-domiciled funds. We offer a full
range of tailored solutions for investment companies,
financial institutions and institutional investors in
Germany.
We are a provider of non-U.S. government securities,
fixed income and equities clearance, settling
securities transactions directly in 8 different markets
in Europe while for other markets using a high
quality and established network of local agents.
We have extensive experience providing trade and
cash services to financial institutions and central
banks outside of the U.S. In addition, we offer a
broad range of servicing and fiduciary products to
financial institutions, corporations and central banks
depending on the state of market development. In
emerging markets, we lead with global payments and
issuer services, introducing other products as the
markets mature. For more established markets, our
focus is on global investment services.
We are also a full-service global provider of foreign
exchange services, actively trading in over 100 of the
world’s currencies. We serve clients from trading
desks located in Europe, Asia and North America.
Our financial results, as well as our levels of AUC/A
and AUM, are impacted by translation from foreign
currencies to the U.S. dollar. We are primarily
impacted by activities denominated in the British
pound and the euro. If the U.S. dollar depreciates
against these currencies, the translation impact is a
higher level of fee revenue, net interest revenue,
noninterest expense and AUC/A and AUM.
Conversely, if the U.S. dollar appreciates, the
translated levels of fee revenue, net interest revenue,
noninterest expense and AUC/A and AUM will be
lower.
Foreign exchange rates
vs. U.S. dollar
Spot rate (at Dec. 31):
British pound
Euro
Yearly average rate:
British pound
Euro
2018
2017
2016
$ 1.2801 $ 1.3532 $ 1.2323
1.0538
1.2009
1.1455
$ 1.3349 $ 1.2885 $ 1.3548
1.1065
1.1390
1.1808
International clients accounted for 37% of revenues
in 2018, compared with 36% in 2017 and 34% in
2016. Net income from international operations was
$2.2 billion in 2018, compared with $1.8 billion in
2017 and $1.6 billion in 2016.
In 2018, revenues from EMEA were $4.3 billion,
compared with $4.0 billion in 2017 and $3.7 billion
2016. Revenues from EMEA increased 7% in 2018
compared with 2017, primarily reflecting higher
revenue in the Investment Services business, driven
by higher net interest revenue, the favorable impact
of a weaker U.S. dollar, growth in collateral
management and higher clearance volumes.
Revenues from EMEA also reflect higher revenue in
the Investment Management business, driven by the
favorable impact of a weaker U.S. dollar and higher
performance fees, partially offset by net outflows.
Our Investment Services and Investment
Management businesses generated 68% and 32% of
EMEA revenues, respectively. Net income from
EMEA was $1.3 billion in 2018, compared with $1.2
billion in 2017 and $1.0 billion in 2016.
BNY Mellon 21
Results of Operations (continued)
Revenues from APAC were $1.1 billion in 2018,
compared with $997 million in 2017 and $922
million in 2016. Revenues from APAC increased
11% in 2018 compared with 2017, primarily
reflecting higher net interest revenue, securities
lending volumes and growth in collateral
management, as well as higher revenue in the
Investment Management business, driven by new
business and higher equity market values. Our
Investment Services and Investment Management
businesses generated 80% and 20% of APAC
revenues, respectively. Net income from APAC was
$448 million in 2018, compared with $426 million in
2017 and $389 million in 2016.
For additional information regarding our international
operations, including certain key subjective
assumptions used in determining the results, see Note
24 of the Notes to Consolidated Financial Statements.
Country risk exposure
The following table presents BNY Mellon’s top 10
exposures by country (excluding the U.S.) as of Dec.
31, 2018, as well as certain countries with higher risk
profiles, and is presented on an internal risk
management basis. We monitor our exposure to these
and other countries as part of our internal country risk
management process.
The country risk exposure below reflects the
Company’s risk to an immediate default of the
counterparty or obligor based on the country of
residence of the entity which incurs the liability. If
there is credit risk mitigation, the country of
residence of the entity providing the risk mitigation is
the country of risk. The country of risk for
investment securities is generally based on the
domicile of the issuer of the security.
Country risk exposure
(in billions)
Top 10 country exposure:
UK
Germany
Japan
Canada
Luxembourg
China
Belgium
France
Ireland
Netherlands
Total Top 10 country exposure
Select country exposure:
Spain
Brazil
Italy
Turkey
Total other country exposure
Interest-bearing deposits
Central banks
Banks
Lending (a)
Investment
securities (b)
Other (c)
Total
exposure
$
$
$
$
15.9 $
18.1
8.8
—
2.9
—
2.4
—
—
—
48.1 $
— $
—
—
—
— $
0.6
0.5
1.2
1.8
0.2
2.3
0.3
0.2
0.1
—
7.2
0.3
—
0.2
—
0.5
$
$
$
$
1.9
0.9
0.1
0.3
0.2
0.8
0.1
—
0.5
0.3
5.1
$
$
— $
1.3
—
0.2
1.5
$
2.9
2.4
—
2.2
—
—
0.3
2.3
0.6
1.7
12.4
1.4
0.1
0.9
—
2.4
$
$
$
$
2.1
0.3
0.2
0.9
1.8
0.3
—
0.6
1.1
0.1
7.4
$
$
23.4
22.2
10.3
5.2
5.1
3.4
3.1
3.1
2.3
2.1
80.2 (d)
— $
—
—
—
— $
1.7
1.4
1.1
0.2
4.4
(a) Lending includes loans, acceptances, issued letters of credit, net of participations, and lending-related commitments.
(b) Investment securities include both the available-for-sale and held-to-maturity portfolios.
(c) Other exposures include securities financing and over-the-counter (“OTC”) derivative transactions, net of collateral.
(d) The top 10 country exposures comprise approximately 80% of our total non-U.S. exposure.
Our largest country risk exposure, based on our
internal country risk management process at Dec. 31,
2018, was to the UK, which is planning to withdraw
from the EU. For additional information, see “United
Kingdom’s Withdrawal from the European Union
(“Brexit”)” in Supervision and Regulation and “The
United Kingdom’s referendum decision to leave the
EU has had and may continue to have negative effects
on global economic conditions, global financial
markets, and our business and results of operations”
in Risk Factors.
Select country exposure
Events in recent years have resulted in increased
focus on Spain, Brazil, Italy and Turkey. The country
risk exposure to Spain and Italy primarily consisted
of investment grade sovereign debt. The country risk
22 BNY Mellon
Results of Operations (continued)
exposure to Brazil is primarily short-term trade
finance loans extended to large financial institutions.
We also have operations in Brazil providing
investment services and investment management
services. The country risk exposure to Turkey
consists primarily of syndicated credit facilities. We
mainly provide treasury and issuer services as well as
foreign exchange products primarily to the top 10
largest financial institutions in Turkey.
Cross-border outstandings
Cross-border outstandings are based on the Federal
Financial Institutions Examination Council’s
(“FFIEC”) regulatory guidelines for reporting cross-
border risk and provides information on the
distribution, by country and sector, of claims on
foreign residents held by U.S. banks. Under the
FFIEC guidelines, cross-border outstandings are
reported based on the domicile of the counterparty,
issuer of collateral or guarantor. Cross-border
outstandings in the table below include claims of U.S.
domiciled offices on foreign counterparties as well as
claims of foreign offices on counterparties located
outside those foreign jurisdictions. The guidelines to
determine the cross-border outstandings in the table
below are different than how we determine and
manage our country risk exposure. For example,
unfunded loan commitments as well as central bank
deposits made by our foreign bank subsidiaries in
their local jurisdiction are not considered cross-border
outstandings. As a result, the cross-border
outstandings in the table below are not comparable to
the country risk exposure in the previous section.
Foreign assets are subject to the general risks
attendant on the conduct of business in each foreign
country, including economic uncertainties and each
foreign government’s regulations. In addition, our
foreign assets may be affected by changes in demand
or pricing resulting from fluctuations in currency
exchange rates or other factors.
The table below shows our cross-border outstandings
at Dec. 31 of each of the last three years where cross-
border exposure exceeds 1.00% of total assets
(denoted with “*”) or exceeds 0.75% but less than or
equal to 1.00% of total assets (denoted with “**”).
Cross-border outstandings
(in millions)
2018:
Canada*
Germany**
China**
2017:
Germany**
Canada**
France**
2016:
France*
Germany*
Canada*
United Kingdom**
Banks and
other financial
institutions (a)
$
$
$
1,888
1,655
3,030
1,530
2,256
295
1,662
2,398
2,199
1,325
$
$
$
Public
sector
381
736
—
1,344
1
2,519
2,559
1,408
1
1,584
Commercial,
industrial
and other
Total
cross-border
outstandings (b)
$
$
$
2,263
1,079
5
600
1,170
130
109
357
1,211
405
$
$
$
4,532
3,470
3,035
3,474
3,427
2,944
4,330
4,163
3,411
3,314
(a) Primarily short-term interest-bearing deposits with banks. Also includes global trade finance loans.
(b) Excludes assets of consolidated investment management funds.
Emerging markets exposure
Critical accounting estimates
We determine our emerging markets exposures using
the MSCI Emerging Markets (EM) IMI Index. Our
emerging markets exposures totaled $11 billion at
both Dec. 31, 2018 and Dec. 31, 2017, as higher
interest-bearing deposits with banks in Mexico and
China were offset by lower loans to banks in India
and Turkey.
Our significant accounting policies are described in
Note 1 of the Notes to Consolidated Financial
Statements under “Summary of significant
accounting and reporting policies.” Our critical
accounting estimates are those related to the
allowance for loan losses and allowance for lending-
related commitments, fair value of financial
instruments and derivatives, goodwill and other
intangibles, and litigation and regulatory
BNY Mellon 23
Results of Operations (continued)
contingencies. Further information on policies
related to the allowance for loan losses and allowance
for lending-related commitments can be found under
“Summary of significant accounting and reporting
policies” in Note 1 of the Notes to Consolidated
Financial Statements. Additionally, further
information can be found in the Notes to
Consolidated Financial Statements related to the
following: the valuation of derivatives and securities
can be found under “Fair value measurement” in Note
19; and policies related to goodwill and intangible
assets can be found in “Goodwill and intangible
assets” in Note 6.
Allowance for loan losses and allowance for
lending-related commitments
The allowance for loan losses and allowance for
lending-related commitments represent
management’s estimate of losses inherent in our
credit portfolio. This evaluation process is subject to
numerous estimates and judgments.
We utilize a quantitative methodology and qualitative
framework for determining the allowance for loan
losses and the allowance for lending-related
commitments. Within this qualitative framework,
management applies judgment when assessing
internal risk factors and environmental factors to
compute an additional allowance for each component
of the loan portfolio.
The components of the allowance for loan losses and
the allowance for lending-related commitments are
inclusive of the qualitative allowance framework and
consist of the following three elements:
•
an allowance for impaired credits of $1 million or
greater;
an allowance for higher risk-rated credits and
pass-rated credits; and
an allowance for residential mortgage loans.
•
•
Our lending is primarily to institutional customers.
As a result, our loans are generally larger than $1
million. Therefore, the first element, impaired
credits, is based on individual analysis of all impaired
loans of $1 million or greater. The allowance is
measured by the difference between the recorded
value of impaired loans and their impaired value.
Impaired value is either the present value of the
expected future cash flows from the borrower, the
market value of the loan, or the fair value of the
collateral, if the loan is collateral dependent.
24 BNY Mellon
The second element, higher risk-rated credits and
pass-rated credits, is based on our incurred loss
model. Individual credit analyses are performed on
such loans before being assigned a credit rating. All
borrowers are collectively evaluated based on their
credit rating. The loss inherent in each loan
incorporates the borrower’s credit rating, facility
rating and maturity. The loss given default, derived
from the facility rating, incorporates a recovery
expectation and an estimate of the use of the facility
at default (usage given default). The borrower’s
probability of default is derived from the associated
credit rating. Borrower ratings are reviewed at least
annually and are periodically mapped to third-party
databases, including rating agency and default and
recovery databases, for ongoing consistency and
validity. Higher risk-rated credits are reviewed
quarterly.
The third element, the allowance for residential
mortgage loans, is determined by segregating six
mortgage pools into delinquency periods, ranging
from current through foreclosure. Each of these
delinquency periods is assigned a probability of
default. A specific loss given default is assigned for
each mortgage pool. BNY Mellon assigns all
residential mortgage pools, except home equity lines
of credit, a probability of default and loss given
default based on default and loss data derived from
internal historical data related to our residential
mortgage portfolio. The resulting incurred loss factor
(the probability of default multiplied by the loss given
default) is applied against the loan balance to
determine the allowance held for each pool. For
home equity lines of credit, probability of default and
loss given default are based on external data from
third-party databases due to the small size of the
portfolio and insufficient internal data.
The qualitative framework is used to determine an
additional allowance for each portfolio based on the
factors below:
Internal risk factors:
• Ratio of nonperforming loans to total non-margin
loans;
• Ratio of criticized assets to total loans and
lending-related commitments;
• Borrower concentration; and
• Significant concentrations in high-risk industries
and countries.
Results of Operations (continued)
Environmental risk factors:
• U.S. non-investment grade default rate;
• Unemployment rate; and
• Change in real gross domestic product.
The objective of the qualitative framework is to
capture incurred losses that may not have been fully
captured in the quantitative reserve, which is based
primarily on historical data. Management determines
the qualitative allowance each period based on
judgment informed by consideration of internal and
external risk factors and other considerations that
may be deemed relevant during the period. Once
determined in the aggregate, our qualitative
allowance is then allocated to each of our loan classes
based on the respective classes’ quantitative
allowance balances with the allocations adjusted,
when necessary, for class specific risk factors.
For each risk factor, we calculate the minimum and
maximum values, and percentiles in-between, to
evaluate the distribution of our historical experience.
The distribution of historical experience is compared
to the risk factor’s current quarter observed
experience to assess the current risk inherent in the
portfolio and overall direction/trend of a risk factor
relative to our historical experience.
Based on this analysis, we assign a risk level–no
impact, low, moderate, high and elevated–to each risk
factor for the current quarter. Management assesses
the impact of each risk factor to determine an
aggregate risk level. We do not quantify the impact
of any particular risk factor. Management’s
assessment of the risk factors, as well as the trend in
the quantitative allowance, supports management’s
judgment for the overall required qualitative
allowance. A smaller qualitative allowance may be
required when our quantitative allowance has
reflected incurred losses associated with the
aggregate risk level. A greater qualitative allowance
may be required if our quantitative allowance does
not yet reflect the incurred losses associated with the
aggregate risk level.
To the extent actual results differ from forecasts or
management’s judgment, the allowance for credit
losses may be greater or less than future charge-offs.
The credit rating assigned to each credit is a
significant variable in determining the allowance. If
each credit were rated one grade better, the allowance
would have decreased by $62 million, while if each
credit were rated one grade worse, the allowance
would have increased by $99 million. Similarly, if
the loss given default were one rating worse, the
allowance would have increased by $40 million,
while if the loss given default were one rating better,
the allowance would have decreased by $31 million.
For impaired credits, if the net carrying value of the
loans was 10% higher or lower, the allowance would
have decreased or increased by less than $1 million,
respectively.
Fair value of financial instruments and
derivatives
The guidance included in Accounting Standards
Codification (“ASC”) 820, Fair Value Measurement,
defines fair value, establishes a framework for
measuring fair value, and expands disclosures about
assets and liabilities measured at fair value. The
standard also established a three-level hierarchy for
fair value measurements based upon the transparency
of inputs to the valuation of an asset or liability as of
the measurement date.
Fair value - Securities
Level 1 - Securities: Securities where valuations are
based on recent quoted prices for identical securities
in actively traded markets.
Level 2 - Securities: For securities where quotes from
recent transactions are not available for identical
securities, we determine fair value primarily based on
pricing sources with reasonable levels of price
transparency. The pricing sources employ financial
models or obtain comparisons to similar instruments
to arrive at “consensus” prices.
Specifically, the pricing sources obtain recent
transactions for similar types of securities (e.g.,
vintage or position in the securitization structure) and
ascertain variables such as discount rate and speed of
prepayment for the type of transaction and apply such
variables to similar types of bonds. We view these as
observable transactions in the current market place
and classify such securities as Level 2.
In addition, we have significant investments in more
actively traded agency residential mortgage-backed
securities (“RMBS”) and other types of securities
such as sovereign debt. The pricing sources derive
the prices for these securities largely from quotes they
obtain from three major inter-dealer brokers. The
BNY Mellon 25
Results of Operations (continued)
pricing sources receive their daily observed trade
price and other information feeds from the inter-
dealer brokers.
See Note 19 of the Notes to Consolidated Financial
Statements for details of our securities by ASC 820,
Fair Value Measurement, hierarchy level.
We obtain prices for our Level 1 and Level 2
securities from multiple pricing sources. We have
designed controls to develop an understanding of the
pricing sources’ securities pricing methodology and
have implemented specific internal controls over the
valuation of securities.
As appropriate, we review the quality control
procedures and pricing methodologies used by the
pricing sources, including the process for obtaining
prices provided by the pricing sources, their valuation
methodology and controls for each class of security.
Prices received from pricing sources are subject to
validation checks that help determine the
completeness and accuracy of the prices. These
validation checks are reviewed by management and,
based on the results, may be subject to additional
review and investigation. We also review securities
with no price changes (stale prices) and securities
with zero values.
We have a surveillance process in place to monitor
the reasonableness of prices provided by the pricing
sources. We utilize a hierarchy that compares
security prices obtained from multiple pricing sources
against established thresholds. Discrepancies that fall
outside of these thresholds are challenged with the
pricing services and adjusted if necessary.
If further research is required, we review and validate
these prices with the pricing sources. We also
validate prices from pricing sources by comparing
prices received to actual observed prices from actions
such as purchases and sales, when possible.
At Dec. 31, 2018, approximately 99% of our
securities were valued by pricing sources with
reasonable levels of price transparency.
Level 3 - Securities: Where we have used our own
cash flow models, which included a significant input
into the model that was deemed unobservable, to
estimate the value of securities, we classify them as
Level 3. At both Dec. 31, 2018 and Dec. 31, 2017,
we have no securities included in Level 3 of the fair
value hierarchy.
26 BNY Mellon
Fair value - Derivative financial instruments
Level 1 - Derivative financial instruments: Includes
derivative financial instruments that are actively
traded on exchanges, principally listed equity options.
Level 2 - Derivative financial instruments: Includes
OTC derivative financial instruments. Derivatives
classified as Level 2 are valued utilizing discounted
cash flow analysis and financial models for which the
valuation inputs are observable or can be
corroborated, directly or indirectly, for substantially
the full term of the instrument. Valuation inputs
include interest rate yield curves, foreign exchange
rates, equity prices, credit curves, option volatilities
and other factors.
Where appropriate, valuation adjustments are made to
account for various factors such as creditworthiness
of the counterparty, creditworthiness of the Company
and model and liquidity risks.
Level 3 - Derivative financial instruments: Level 3
derivatives include derivatives for which valuations
are based on inputs that are unobservable and
significant to the overall fair value measurement, and
may include certain long-dated or highly structured
contracts. At both Dec. 31, 2018 and Dec. 31, 2017,
we have no derivatives included in Level 3 of the fair
value hierarchy.
For details of our derivative financial instruments by
level of the valuation hierarchy, see Note 19 of the
Notes to Consolidated Financial Statements.
Fair value option
ASC 825, Financial Instruments, provides the option
to elect fair value as an alternative measurement basis
for selected financial assets and financial liabilities
which are not subject to fair value under other
accounting standards. The changes in fair value are
recognized in income. See Note 20 of the Notes to
Consolidated Financial Statements for additional
disclosure regarding the fair value option.
Results of Operations (continued)
Fair value - Judgments
In times of illiquid markets and financial stress,
actual prices and valuations may significantly diverge
from results predicted by models. In addition, other
factors can affect our estimate of fair value, including
market dislocations and unexpected correlations. The
use of different methodologies or different
assumptions to value certain financial instruments
could result in a different estimate of fair value. See
Note 1 of the Notes to Consolidated Financial
Statements.
Goodwill and other intangibles
We initially record all assets and liabilities acquired
in purchase acquisitions, including goodwill,
indefinite-lived intangibles and other intangibles, in
accordance with ASC 805, Business Combinations.
Goodwill, indefinite-lived intangibles and other
intangibles are subsequently accounted for in
accordance with ASC 350, Intangibles - Goodwill
and Other. The initial measurement of goodwill and
intangibles requires judgment concerning estimates of
the fair value of the acquired assets and liabilities.
Goodwill ($17.4 billion at Dec. 31, 2018) and
indefinite-lived intangible assets ($2.6 billion at Dec.
31, 2018) are not amortized but are subject to tests for
impairment annually or more often if events or
circumstances indicate it is more likely than not they
may be impaired. Other intangible assets are
amortized over their estimated useful lives and are
subject to impairment if events or circumstances
indicate a possible inability to realize the carrying
value.
BNY Mellon’s three business segments include seven
reporting units for which annual goodwill impairment
testing is performed in accordance with ASC 350,
Intangibles - Goodwill and Other. The Investment
Management segment is comprised of two reporting
units; the Investment Services segment is comprised
of four reporting units and one reporting unit is
included in the Other segment.
The goodwill impairment test compares the estimated
fair value of the reporting unit with its carrying
amount, including goodwill. If the estimated fair
value of the reporting unit exceeds its carrying
amount, goodwill of the reporting unit is considered
not impaired. However, if the carrying amount of the
reporting unit were to exceed its estimated fair value,
an impairment loss would be recorded. A substantial
goodwill impairment charge would not have a
significant impact on our financial condition or our
regulatory capital ratios, but could have an adverse
impact on our results of operations. In addition, due
to regulatory restrictions, the Company’s subsidiary
banks could be restricted from distributing available
cash to the Parent, resulting in the Parent needing to
issue additional long-term debt.
In the second quarter of 2018, we performed our
annual goodwill test on all seven reporting units using
an income approach to estimate the fair values of
each reporting unit. Estimated cash flows used in the
income approach were based on management’s
projections as of March 31, 2018. The discount rate
applied to these cash flows ranged from 10.0% to
10.25% and incorporated a 6.0% market equity risk
premium. Estimated cash flows extend many years
into the future, and, by their nature, are difficult to
estimate over such an extended time frame.
As a result of the annual goodwill impairment test of
the seven reporting units, no goodwill impairment
was recognized. The fair value of the Asset
Management reporting unit, which is one of the two
reporting units in the Investment Management
segment, exceeded its carrying value by 34%. The
Asset Management reporting unit had $7.4 billion of
allocated goodwill. For the Asset Management
reporting unit, in the future, changes in the
assumptions, such as changes in the level of AUM
and operating margin, could produce a non-cash
goodwill impairment.
Key judgments in accounting for intangibles include
useful life and classification between goodwill and
indefinite-lived intangibles or other intangibles
requiring amortization.
Indefinite-lived intangible assets are evaluated for
impairment at least annually by comparing their fair
values, estimated using discounted cash flow
analyses, to their carrying values. Other amortizing
intangible assets ($600 million at Dec. 31, 2018) are
evaluated for impairment if events and circumstances
indicate a possible impairment. Such evaluation of
other intangible assets would be initially based on
undiscounted cash flow projections.
See Notes 1 and 6 of the Notes to Consolidated
Financial Statements for additional information
regarding goodwill, intangible assets and the annual
and interim impairment testing.
BNY Mellon 27
Results of Operations (continued)
Litigation and regulatory contingencies
Significant estimates and judgments are required in
establishing an accrued liability for litigation and
regulatory contingencies. For additional information
on our policy, see “Legal proceedings” in Note 21 of
the Notes to Consolidated Financial Statements.
Consolidated balance sheet review
One of our key risk management objectives is to
maintain a balance sheet that remains strong
throughout market cycles to meet the expectations of
our major stakeholders, including our shareholders,
clients, creditors and regulators.
We also seek to verify that the overall liquidity risk,
including intraday liquidity risk, that we undertake
stays within our risk appetite. The objective of our
balance sheet management strategy is to maintain a
balance sheet that is characterized by strong liquidity
and asset quality, ready access to external funding
sources at competitive rates and a strong capital
structure that supports our risk-taking activities and is
adequate to absorb potential losses. In managing the
balance sheet, appropriate consideration is given to
balancing the competing needs of maintaining
sufficient levels of liquidity and complying with
applicable regulations and supervisory expectations
while optimizing profitability.
In 2018, we continued to maintain sufficient liquidity
and comply with applicable regulations. Our overall
liquidity position remained strong and is managed in
accordance with the nature of our balance sheet and
business model. Our liquidity coverage ratio
(“LCR”) averaged 118% in the fourth quarter and the
SLR was 6.0% at Dec. 31, 2018.
At Dec. 31, 2018, total assets were $363 billion,
compared with $372 billion at Dec. 31, 2017. The
decrease in total assets was primarily driven by lower
interest-bearing deposits with the Federal Reserve
and other central banks and loans, partially offset by
higher federal funds sold and securities purchased
under resale agreements. Deposits totaled $239
billion at Dec. 31, 2018, compared with $244 billion
at Dec. 31, 2017. The decrease primarily reflects
lower interest-bearing deposits in non-U.S. offices
and noninterest-bearing deposits principally in U.S.
offices, partially offset by higher interest-bearing
28 BNY Mellon
deposits in U.S. offices. At Dec. 31, 2018, total
interest-bearing deposits were 54% of total interest-
earning assets, compared with 51% at Dec. 31, 2017.
At Dec. 31, 2018, we had $61 billion of liquid funds
(which include interest-bearing deposits with banks
and federal funds sold and securities purchased under
resale agreements) and $74 billion of cash (including
$68 billion of overnight deposits with the Federal
Reserve and other central banks) for a total of $135
billion of available funds. This compares with
available funds of $137 billion at Dec. 31, 2017.
Total available funds as a percentage of total assets
were 37% at both Dec. 31, 2018 and Dec. 31, 2017.
For additional information on our liquid funds and
available funds, see “Liquidity and dividends.”
Securities were $119.8 billion, or 33% of total assets,
at Dec. 31, 2018, compared with $120.4 billion, or
32% of total assets, at Dec. 31, 2017. The decrease
primarily reflects lower investment in sovereign debt/
sovereign guaranteed securities and additional
unrealized losses on the portfolio, partially offset by
additional investments in agency commercial
mortgage-backed securities (“MBS”), supranational
securities and agency RMBS. For additional
information on our securities portfolio, see
“Securities” and Note 4 of the Notes to Consolidated
Financial Statements.
Loans were $57 billion, or 16% of total assets, at
Dec. 31, 2018, compared with $62 billion, or 17% of
total assets, at Dec. 31, 2017. The decrease was
primarily driven by lower margin loans and loans to
financial institutions. For additional information on
our loan portfolio, see “Loans” and Note 5 of the
Notes to Consolidated Financial Statements.
Long-term debt totaled $29 billion at Dec. 31, 2018
and $28 billion at Dec. 31, 2017. The balance reflects
issuances of $5.2 billion, offset by maturities of $3.7
billion and a decrease in the fair value of hedged
long-term debt. For additional information on long-
term debt, see “Liquidity and dividends.”
The Bank of New York Mellon Corporation total
shareholders’ equity decreased to $40.6 billion from
$41.3 billion at Dec. 31, 2017. For additional
information on our capital, see “Capital” and Note 14
of the Notes to Consolidated Financial Statements.
Results of Operations (continued)
Securities
In the discussion of our securities portfolio, we have
included certain credit ratings information because
the information can indicate the degree of credit risk
to which we are exposed. Significant changes in
ratings classifications for our securities portfolio
could indicate increased credit risk for us and could
be accompanied by a reduction in the fair value of our
securities portfolio.
The following table shows the distribution of our total securities portfolio.
Securities portfolio
(dollars in millions)
Agency RMBS
U.S. Treasury
Sovereign debt/sovereign
guaranteed (c)
Agency commercial MBS
CLOs
U.S. government agencies
Supranational
Foreign covered bonds (d)
State and political
subdivisions
Other asset-backed
securities (“ABS”)
Non-agency commercial
MBS
Non-agency RMBS (e)
Corporate bonds
Other (f)
Dec. 31,
2017
Fair
value
$ 49,746
24,848
14,128
10,083
2,909
2,603
2,108
2,615
2,973
1,043
1,368
1,854
1,255
2,375
2018
change in
unrealized
gain (loss)
$
(423) $
(22)
Dec. 31, 2018
Amortized
cost
Fair
value
51,101 $ 50,214
24,792
24,917
Fair value
as a % of
amortized
cost (a)
Ratings (b)
Unrealized
gain (loss)
AAA/
AA-
A+/
A-
BBB+/
BBB-
BB+
and
lower
Not
rated
98 % $
99
(887)
(125)
100 % — % — % — % — %
—
100 —
— —
(49)
(50)
(57)
(49)
—
(22)
(11)
11,496
11,031
3,410
3,173
3,011
2,970
11,577
10,947
3,364
3,157
3,006
2,959
2,268
2,264
(6)
1,776
1,773
(23)
(83)
(26)
(1)
1,491
1,195
1,074
1,236
1,470
1,427
1,054
1,238
101
99
99
99
100
100
100
100
99
119
98
100
81
(84)
(46)
(16)
(5)
(11)
(4)
(3)
(21)
232
(20)
2
74
5
100 —
98 —
100 —
100 —
100 —
78
21
99 —
96
4
12
12
68
14
94 —
95% 2%
20
—
—
—
—
—
—
1
—
1 —
— —
1
1
— —
— —
— —
—
1
— —
— —
47
24
— —
6
—
5
18
—
2% 1% —%
Total securities
$ 119,908 (g) $
(822) $ 120,149 $ 119,242 (g)
99% $
(907) (g)(h)
(a) Amortized cost reflects historical impairments.
(b) Represents ratings by Standard & Poor's (“S&P”) or the equivalent.
(c) Primarily consists of exposure to UK, France, Germany, Spain, Italy and the Netherlands.
(d) Primarily consists of exposure to Canada, UK, Australia and Sweden.
(e)
(f)
Includes RMBS that were included in the former Grantor Trust of $1,091 million at Dec. 31, 2017 and $832 million at Dec. 31, 2018.
Includes commercial paper with a fair value of $700 million and money market funds with a fair value of $963 million at Dec. 31, 2017. There was no
commercial paper or money market funds at Dec. 31, 2018. In the first quarter of 2018, we adopted the new accounting guidance included in ASU
2016-01, Financial Instruments-Overall: Recognition and Measurement of Financial Assets and Financial Liabilities. As a result, the money market fund
investments were reclassified to trading assets, primarily from available-for-sale securities.
Includes net unrealized losses on derivatives hedging securities available-for-sale of $147 million at Dec. 31, 2017 and net unrealized gains of $131
million at Dec. 31, 2018.
(g)
(h) Unrealized losses of $227 million at Dec. 31, 2018 related to available-for-sale securities, net of hedges.
The fair value of our securities portfolio, including
related hedges, was $119.2 billion at Dec. 31, 2018,
compared with $119.9 billion at Dec. 31, 2017. The
decrease primarily reflects lower investment in
sovereign debt/sovereign guaranteed securities and
additional unrealized losses on the portfolio, partially
offset by additional investments in agency
commercial MBS, supranational securities and
agency RMBS.
including the impact of related hedges. The increase
in the net unrealized pre-tax loss was primarily driven
by higher market interest rates.
The unrealized loss, net of tax, on our available-for-
sale securities portfolio included in accumulated other
comprehensive income (“OCI”) was $167 million at
Dec. 31, 2018, compared with an unrealized gain of
$184 million at Dec. 31, 2017.
At Dec. 31, 2018, the total securities portfolio had a
net unrealized loss of $907 million, compared with a
net unrealized loss of $85 million at Dec. 31, 2017,
At Dec. 31, 2018, 95% of the securities in our
portfolio were rated AAA/AA-, compared with 93%
at Dec. 31, 2017.
BNY Mellon 29
Results of Operations (continued)
The following table presents the amortizable purchase premium (net of discount) related to the securities portfolio
and accretable discount related to the 2009 restructuring of the securities portfolio.
Net premium amortization and discount accretion of securities (a)
(dollars in millions)
Amortizable purchase premium (net of discount) relating to securities:
Balance at period end
Estimated average life remaining at period end (in years)
Amortization
Accretable discount related to the prior restructuring of the securities portfolio:
2018
2017
2016
$
$
1,429 $
5.0
437 $
1,987 $
5.0
547 $
2,188
4.9
641
Balance at period end
Estimated average life remaining at period end (in years)
Accretion
315
6.2
102
(a) Amortization of purchase premium decreases net interest revenue while accretion of discount increases net interest revenue. Both were
274 $
6.3
100 $
207 $
6.3
86 $
$
$
Renewable energy investments
We invest in renewable energy projects to receive an
expected after-tax return, which consists of allocated
renewable energy tax credits, tax deductions and cash
distributions based on the operations of the project.
The pre-tax losses on these investments are recorded
in investment and other income on the consolidated
income statement. The corresponding tax benefits
and credits are recorded to the provision for income
taxes on the consolidated income statement.
For additional information on the fair value of certain
seed capital investments and our private equity
investments, see Note 7 of the Notes to Consolidated
Financial Statements.
recorded on a level yield basis.
See Note 4 of the Notes to Consolidated Financial
Statements for the pre-tax net securities gains (losses)
by security type. See Note 19 of the Notes to
Consolidated Financial Statements for details of
securities by level in the fair value hierarchy.
Equity investments
We have several equity investments recorded in other
assets. These include equity method investments,
including renewable energy, and investments in
qualified affordable housing projects, Federal
Reserve Bank stock, seed capital, private equity and
other investments. The following table presents the
carrying values at Dec. 31, 2018 and 2017.
Equity investments
(in millions)
Renewable energy investments
Equity in a joint venture and other
investments:
CIBC Mellon
Siguler Guff
Other equity investments
Dec. 31,
2018
2017
$ 1,264 $ 1,368
548
244
272
580
246
257
Total equity in a joint venture and other
investments
$ 1,064 $ 1,083
Qualified affordable housing project
investments
Federal Reserve Bank stock
Seed capital
Federal Home Loan Bank stock
Private equity investments (a)
Total equity investments
999
484
224
111
74
1,014
477
288
82
55
$ 4,220 $ 4,367
(a) Represents investments in small business investment
companies (“SBICs”), which are compliant with the Volcker
Rule.
30 BNY Mellon
Results of Operations (continued)
Loans
Total exposure – consolidated
(in billions)
Non-margin loans:
Financial institutions
Commercial
Subtotal institutional
Wealth management loans and mortgages
Commercial real estate
Lease financings
Other residential mortgages
Overdrafts
Other
Subtotal non-margin loans
Margin loans
Total
Dec. 31, 2018
Unfunded
commitments
Loans
Total
exposure
Dec. 31, 2017
Unfunded
commitments
Loans
Total
exposure
$
$
11.6 $
2.1
13.7
16.0
4.8
1.3
0.6
5.5
1.2
43.1
13.5
56.6 $
34.0 $
15.2
49.2
0.8
3.5
—
—
—
—
53.5
0.1
53.6 $
45.6
17.3
62.9
16.8
8.3
1.3
0.6
5.5
1.2
96.6
13.6
110.2
$
$
13.1 $
2.9
16.0
16.5
4.9
1.3
0.7
5.1
1.2
45.7
15.8
61.5 $
32.5 $
18.0
50.5
1.1
3.5
—
—
—
—
55.1
—
55.1 $
45.6
20.9
66.5
17.6
8.4
1.3
0.7
5.1
1.2
100.8
15.8
116.6
At Dec. 31, 2018, total exposures of $110.2 billion
decreased 5% compared with Dec. 31, 2017,
primarily reflecting lower exposure in the commercial
and margin loan portfolios.
Our financial institutions and commercial portfolios
comprise our largest concentrated risk. These
portfolios comprised 57% of our total exposure at
both Dec. 31, 2018 and Dec. 31, 2017. Additionally,
most of our overdrafts relate to financial institutions.
Financial institutions
The financial institutions portfolio is shown below.
Financial institutions
portfolio exposure
(dollars in billions)
Securities industry
Banks
Asset managers
Insurance
Government
Other
Total
Loans
Unfunded
commitments
% due
<1 yr.
Loans
Dec. 31, 2017
Unfunded
commitments
Dec. 31, 2018
Total
exposure
25.6
7.9
7.4
2.6
0.6
1.5
45.6
22.5 $
1.6
6.1
2.5
0.5
0.8
34.0 $
% Inv.
grade
99%
77
98
100
100
96
95%
99% $
94
85
8
38
48
88% $ 13.1 $
3.6 $
7.0
1.4
0.1
0.1
0.9
Total
exposure
22.8
8.2
7.8
3.6
1.0
2.2
45.6
19.2 $
1.2
6.4
3.5
0.9
1.3
32.5 $
$
$
3.1 $
6.3
1.3
0.1
0.1
0.7
11.6 $
The financial institutions portfolio exposure was
$45.6 billion at Dec. 31, 2018, unchanged from Dec.
31, 2017, primarily reflecting an increase in securities
industry exposure, offset by lower exposure in all
other portfolios.
Financial institution exposures are high-quality, with
95% of the exposures meeting the investment grade
equivalent criteria of our internal credit rating
classification at Dec. 31, 2018. Each customer is
assigned an internal credit rating, which is mapped to
an equivalent external rating agency grade based
upon a number of dimensions, which are continually
evaluated and may change over time. The exposure
to financial institutions is generally short-term. Of
these exposures, 88% expire within one year and 20%
expire within 90 days. In addition, 81% of the
financial institutions exposure is secured. For
example, securities industry clients and asset
managers often borrow against marketable securities
held in custody.
For ratings of non-U.S. counterparties, our internal
credit rating is generally capped at a rating equivalent
to the sovereign rating of the country where the
counterparty resides, regardless of the internal credit
rating assigned to the counterparty or the underlying
collateral.
BNY Mellon 31
Results of Operations (continued)
At Dec. 31, 2018, the secured intraday credit
provided to dealers in connection with their tri-party
repo activity totaled $20.6 billion and was primarily
included in the securities industry portfolio. Dealers
secure the outstanding intraday credit with high-
quality liquid collateral having a market value in
excess of the amount of the outstanding credit.
Our bank exposure primarily relates to our global
trade finance. These exposures are short-term in
nature, with 94% due in less than one year. The
investment grade percentage of our bank exposure
Commercial
The commercial portfolio is presented below.
was 77% at Dec. 31, 2018, compared with 68% at
Dec. 31, 2017. Our non-investment grade exposures
are primarily in Brazil. These loans are primarily
trade finance loans.
The asset manager portfolio exposure was high-
quality, with 98% of the exposures meeting our
investment grade equivalent ratings criteria as of Dec.
31, 2018. These exposures are generally short-term
liquidity facilities, with the majority to regulated
mutual funds.
Commercial portfolio exposure
(dollars in billions)
Manufacturing
Services and other
Energy and utilities
Media and telecom
Total
Loans
Unfunded
commitments
$
$
0.8 $
0.7
0.5
0.1
2.1 $
Dec. 31, 2018
Total
exposure
5.9
5.5
4.6
1.3
17.3
5.1 $
4.8
4.1
1.2
15.2 $
% Inv.
grade
95%
96
95
94
95%
% due
<1 yr.
Loans
Dec. 31, 2017
Unfunded
commitments
8% $
25
12
12
15% $
1.3 $
0.9
0.7
—
2.9 $
Total
exposure
7.4
6.9
5.1
1.5
20.9
6.1 $
6.0
4.4
1.5
18.0 $
The commercial portfolio exposure was $17.3 billion
at Dec. 31, 2018, a 17% decrease compared with
$20.9 billion at Dec. 31, 2017, primarily reflecting
lower exposure in the manufacturing and services and
other portfolios.
Utilities-related exposure represents approximately
76% of the energy and utilities portfolio at Dec. 31,
2018. Included in this portfolio is unsecured funded
exposure of approximately $160 million to a
California utility company that filed for bankruptcy in
the first quarter of 2019. As of Feb. 27, 2019, we
expect our exposure to this California utility company
to decrease by approximately $60 million as a result
of current sales. Our nonperforming assets are
expected to increase in the first quarter 2019 as a
result of the bankruptcy. Based on current market
conditions and facts and circumstances which may
change, we also expect to record an additional
provision for credit losses relating to this exposure of
$20 million - $30 million in the first quarter of 2019.
The remaining exposure in the energy and utilities
portfolio, which includes exposure to refining,
exploration and production companies, integrated
companies and pipelines, was 88% investment grade
at Dec. 31, 2018, and 77% at Dec. 31, 2017.
32 BNY Mellon
Our credit strategy is to focus on investment grade
clients that are active users of our non-credit services.
The following table summarizes the percentage of the
financial institutions and commercial portfolio
exposures that are investment grade.
Percentage of the portfolios
that are investment grade
Financial institutions
Commercial
2018
95%
95%
Dec. 31,
2017
93%
95%
2016
92%
94%
Wealth management loans and mortgages
Our wealth management exposure was $16.8 billion
at Dec. 31, 2018, compared with $17.6 billion at Dec.
31, 2017. Wealth management loans and mortgages
primarily consist of loans to high-net-worth
individuals, which are secured by marketable
securities and/or residential property. Wealth
management mortgages are primarily interest-only,
adjustable-rate mortgages with a weighted-average
loan-to-value ratio of 62% at origination. Less than
1% of the mortgages were past due at Dec. 31, 2018.
Results of Operations (continued)
At Dec. 31, 2018, the wealth management mortgage
portfolio consisted of the following geographic
concentrations: California - 24%; New York - 18%;
Massachusetts - 10%; Florida - 8%; and other - 40%.
Commercial real estate
Our commercial real estate exposure totaled $8.3
billion at Dec. 31, 2018, compared with $8.4 billion
at Dec. 31, 2017. Our income-producing commercial
real estate facilities are focused on experienced
owners and are structured with moderate leverage
based on existing cash flows. Our commercial real
estate lending activities also include construction and
renovation facilities. Our client base consists of
experienced developers and long-term holders of real
estate assets. Loans are approved on the basis of
existing or projected cash flows and supported by
appraisals and knowledge of local market conditions.
Development loans are structured with moderate
leverage, and in many instances, involve some level
of recourse to the developer.
At Dec. 31, 2018, 61% of our commercial real estate
portfolio was secured. The secured portfolio is
diverse by project type, with 43% secured by
residential buildings, 36% secured by office
buildings, 11% secured by retail properties and 10%
secured by other categories. Approximately 97% of
the unsecured portfolio consists of real estate
investment trusts (“REITs”) and real estate operating
companies, which are both predominantly investment
grade.
At Dec. 31, 2018, our commercial real estate
portfolio consisted of the following concentrations:
REITs and real estate operating companies - 38%;
New York metro - 42%; and other - 20%.
Lease financings
The leasing portfolio exposure totaled $1.3 billion at
both Dec. 31, 2018 and Dec. 31, 2017. At Dec. 31,
2018, the lease financings portfolio consisted of
exposures backed by well-diversified assets,
including large-ticket transportation equipment, the
largest consisting of both passenger and freight train
cars. Assets are both domestic and foreign-based,
with primary concentrations in the United States and
Germany. Approximately 48% of the portfolio is
additionally secured by highly rated securities and/or
secured by letters of credit from investment grade
issuers. Counterparty rating equivalents at Dec. 31,
2018 were as follows:
•
•
•
55% of the counterparties were A or better;
42% were BBB; and
3% were non-investment grade.
Other residential mortgages
The other residential mortgages portfolio primarily
consists of 1-4 family residential mortgage loans and
totaled $594 million at Dec. 31, 2018 and $708
million at Dec. 31, 2017. Included in this portfolio at
Dec. 31, 2018 were $128 million of mortgage loans
purchased in 2005, 2006 and the first quarter of 2007,
of which 11% of the serviced loan balance was at
least 60 days delinquent.
Overdrafts
Overdrafts primarily relate to custody and securities
clearance clients. Overdrafts occur on a daily basis
primarily in the custody and securities clearance
business and are generally repaid within two business
days.
Other loans
Other loans primarily include loans to consumers that
are fully collateralized with equities, mutual funds
and fixed-income securities.
Margin loans
Margin loans are collateralized with marketable
securities, and borrowers are required to maintain a
daily collateral margin in excess of 100% of the value
of the loan. Margin loans included $2.6 billion at
Dec. 31, 2018 and $4.2 billion at Dec. 31, 2017
related to a term loan program that offers fully
collateralized loans to broker-dealers.
BNY Mellon 33
Results of Operations (continued)
Loans by category
The following table shows loans outstanding at year-end over the last five years.
Loans by category
(in millions)
Domestic:
Commercial
Commercial real estate
Financial institutions
Lease financings
Wealth management loans and mortgages
Other residential mortgages
Overdrafts
Other
Margin loans
Total domestic
Foreign:
2018
2017
2016
2015
2014
Dec. 31,
$
1,949 $
4,787
5,091
706
15,843
594
1,550
1,181
13,343
45,044
2,744 $
4,900
5,568
772
16,420
708
963
1,131
15,689
48,895
2,286 $
4,639
6,342
989
15,555
854
1,055
1,202
17,503
50,425
2,115 $
3,899
6,640
1,007
13,247
1,055
911
1,137
19,340
49,351
1,390
2,524
5,603
1,282
11,095
1,222
1,348
1,113
20,034
45,611
Commercial
Commercial real estate
Financial institutions
Lease financings
Wealth management loans and mortgages
Other (primarily overdrafts)
Margin loans
252
6
7,716
889
89
4,569
—
13,521
59,132
(a) Net of unearned income of $358 million at Dec. 31, 2018, $394 million at Dec. 31, 2017, $527 million at Dec. 31, 2016, $674 million at
227
46
9,259
850
100
3,637
233
14,352
63,703 $
331
15
8,347
736
99
4,418
87
14,033
64,458 $
167
—
7,483
527
108
4,264
96
12,645
61,540 $
183
—
6,492
551
122
4,031
141
11,520
56,564 $
Total foreign
Total loans (a)
$
Dec. 31, 2015 and $866 million at Dec. 31, 2014, primarily on domestic and foreign lease financings.
Foreign loans
Maturity of loan portfolio
We have credit relationships in foreign markets,
particularly in areas associated with our securities
servicing and trade finance activities. Excluding
lease financings, these activities resulted in
outstanding foreign loans of $11.0 billion at Dec. 31,
2018 and $12.1 billion at Dec. 31, 2017. The
decrease primarily resulted from lower loans to
financial institutions and lower overdrafts.
The following table shows the maturity structure of
our loan portfolio at Dec. 31, 2018.
Maturity of loan portfolio at Dec. 31, 2018 (a)
Within
1 year
Between
1 and 5
years
After
5 years
Total
$
463 $ 1,371
$
115
$ 1,949
702
2,384
1,701
4,787
940
—
—
500
5,195
524
4,119
1,550
1,181
12,843
20,858
10,283
5,091
1,550
1,181
13,343
27,901
10,847
$ 31,141 $ 5,719 (b) $ 1,888 (b) $38,748
(a) Excludes loans collateralized by residential properties, lease
financings and wealth management loans and mortgages.
(b) Variable rate loans due after one year totaled $7.6 billion
32
—
—
—
1,848
40
Foreign
Total
(in millions)
Domestic:
Commercial
Commercial
real estate
Financial
institutions
Overdrafts
Other
Margin loans
Subtotal
and fixed rate loans totaled $35 million.
34 BNY Mellon
Results of Operations (continued)
Asset quality and allowance for credit losses
Our credit strategy is to focus on investment grade
clients who are active users of our non-credit
services. Our primary exposure to the credit risk of a
customer consists of funded loans, unfunded
contractual commitments to lend, standby letters of
credit (“SBLC”) and overdrafts associated with our
custody and securities clearance businesses.
The following table details changes in our allowance for credit losses.
Allowance for credit losses activity
(dollar amounts in millions)
Non-margin loans
Margin loans
Total loans
Average loans outstanding
Balance, Jan. 1
Domestic
Foreign
Total allowance at Jan. 1
Charge-offs:
Commercial
Commercial real estate
Financial institutions
Wealth management loans and mortgages
Other residential mortgages
Foreign
Total charge-offs
Recoveries:
Commercial
Financial institutions
Other residential mortgages
Foreign
Total recoveries
Net recoveries (charge-offs)
Provision for credit losses
Balance, Dec. 31,
Domestic
Foreign
Total allowance, Dec. 31,
Allowance for loan losses
Allowance for lending-related commitments
Net (recoveries) charge-offs to average loans outstanding
Net (recoveries) charge-offs to total allowance for credit losses
Allowance for loan losses as a percentage of total loans
Allowance for loan losses as a percentage of non-margin loans
Total allowance for credit losses as a percentage of total loans
Total allowance for credit losses as a percentage of non-margin loans
The allowance for credit losses decreased $9 million
compared with Dec. 31, 2017, driven by the credit to
provision for credit losses, partially offset by the
impact of an update to the usage given default
parameter in 2018. The usage given default
parameter associated with the estimate of the
probability of drawdown at default was updated in
2018, resulting in an $11 million increase to the
allowance for lending-related commitments.
2018
2017
2016
$ 43,080
13,484
$ 56,564
55,810
$ 45,755
15,785
$ 61,540
57,939
$ 46,868
17,590
$ 64,458
61,681
2015
$ 43,708
19,573
$ 63,281
60,672
2014
$ 39,077
20,034
$ 59,111
54,210
$
$
$
226
35
261
—
—
—
—
(1)
—
(1)
—
—
2
1
3
2
(11)
$
$
245
36
281
$
240
35
275
$
236
44
280
—
—
—
—
(1)
—
(1)
—
—
5
—
5
4
(24)
—
—
—
—
(2)
—
(2)
—
13
5
1
19
17
(11)
—
—
(170)
—
(2)
—
(172)
—
1
6
—
7
(165)
160
220
32
252
146
106
— %
$
$
(0.79)
0.26
0.34
0.45
0.58
$
$
226
35
261
159
102
(0.01)%
(1.53)
0.26
0.35
0.42
0.57
$
$
245
36
281
169
112
(0.03)%
(6.05)
0.26
0.36
0.44
0.60
240
35
275
157
118
0.27%
$
$
60.00
0.25
0.36
0.43
0.63
288
56
344
(12)
(2)
—
(1)
(2)
(3)
(20)
1
1
2
—
4
(16)
(48)
236
44
280
191
89
0.03%
5.71
0.32
0.49
0.47
0.72
The provision for credit losses was a credit of $11
million in 2018, a credit of $24 million in 2017 and a
credit of $11 million in 2016.
We had $13.5 billion of secured margin loans on our
balance sheet at Dec. 31, 2018 compared with $15.8
billion at Dec. 31, 2017 and $17.6 billion at Dec. 31,
2016. We have rarely suffered a loss on these types
of loans and do not allocate any of our allowance for
credit losses to them. As a result, we believe that the
ratio of total allowance for credit losses as a
BNY Mellon 35
Results of Operations (continued)
percentage of non-margin loans is a more appropriate
metric to measure the adequacy of the reserve.
The allowance for loan losses and allowance for
lending-related commitments represent
management’s estimate of losses inherent in our
credit portfolio. This evaluation process is subject to
numerous estimates and judgments. To the extent
actual results differ from forecasts or management’s
judgment, the allowance for credit losses may be
greater or less than future charge-offs.
Based on an evaluation of the allowance for credit
losses as discussed in “Critical accounting estimates”
and Note 1 of the Notes to Consolidated Financial
Statements, we have allocated our allowance for
credit losses as follows.
Nonperforming assets
Nonperforming assets
(dollars in millions)
Nonperforming loans:
Other residential mortgages
Wealth management loans and mortgages
Commercial real estate
Lease financings
Financial institutions
Total nonperforming loans
Other assets owned
Total nonperforming assets (a)
Allocation of allowance
Commercial
Commercial real estate
Foreign
Financial institutions
Wealth management (a)
Other residential mortgages
Lease financing
Dec. 31,
2016
29%
26
13
9
8
10
5
100% 100% 100% 100% 100%
2018
2017
32% 30%
30
13
9
8
6
2
2015
30%
22
13
11
7
12
5
2014
21%
18
16
11
8
14
12
29
13
9
8
8
3
Total
Includes the allowance for wealth management mortgages.
(a)
The allocation of the allowance for credit losses is
inherently judgmental, and the entire allowance for
credit losses is available to absorb credit losses
regardless of the nature of the losses.
2018
2017
2016
2015
2014
Dec. 31,
$
$
$
$
67
9
—
—
—
76
3
79
0.14%
0.18
192.1
184.8
331.6
319.0
$
$
78
7
1
—
—
86
4
90
0.15%
0.20
184.9
176.7
303.5
290.0
$
$
91
8
—
4
—
103
4
107
0.17%
0.23
164.1
157.9
272.8
262.6
102
11
2
—
171
286
6
292
0.46%
0.67
54.9
53.8
96.2
94.2
$
$
112
12
1
—
—
125
3
128
0.22%
0.33
152.8
149.2
224.0
218.8
Nonperforming assets ratio
Nonperforming assets ratio, excluding margin loans
Allowance for loan losses/nonperforming loans
Allowance for loan losses/nonperforming assets
Total allowance for credit losses/nonperforming loans
Total allowance for credit losses/nonperforming assets
(a) Loans of consolidated investment management funds are not part of BNY Mellon’s loan portfolio and are excluded from the
nonperforming assets table above. Included in the loans of consolidated investment management funds are nonperforming loans of $53
million at Dec. 31, 2014 which are recorded at fair value and therefore do not impact the provision for credit losses and allowance for
loan losses. In the second quarter of 2015, BNY Mellon adopted the accounting guidance included in ASU 2015-02, Consolidations. As
a result, we deconsolidated substantially all of the loans of consolidated investment management funds retrospectively to Jan. 1, 2015.
Nonperforming assets activity
(in millions)
Balance at beginning of year
Additions
Return to accrual status
Charge-offs
Paydowns/sales
Balance at end of year
2018
90 $
10
(2)
(1)
(18)
79 $
2017
107
12
(5)
(1)
(23)
90
$
$
Nonperforming assets decreased $11 million
compared with Dec. 31, 2017, primarily reflecting
lower other residential mortgage loans driven by
paydowns and sales.
As noted earlier, our nonperforming assets are
expected to increase in the first quarter of 2019 as a
result of the bankruptcy of a Californian utility
company.
36 BNY Mellon
Results of Operations (continued)
The following table presents loans that are past due
90 days or more and still accruing interest.
The following table shows the maturity breakdown of
domestic time deposits of $100,000 or more at Dec.
31, 2018.
(in millions)
Domestic:
Consumer
Commercial
Total domestic
Foreign
$
Total past due loans $
2018
2017
2016
2015
2014
12 $
—
12
—
12 $
5 $
—
5
—
5 $
7 $
5 $
—
7
—
—
5
—
7 $
5 $
6
—
6
—
6
Loans past due 90 days or more at Dec. 31, 2018
primarily consisted of other residential mortgage
loans and wealth management loans and mortgages.
See Note 5 of the Notes to Consolidated Financial
Statements for additional information on our past due
loans. See “Nonperforming assets” in Note 1 of the
Notes to Consolidated Financial Statements for our
policy for placing loans on nonaccrual status.
Deposits
We receive client deposits through a variety of
Investment Services and Investment Management
businesses and we rely on those deposits as a low-
cost and stable source of funding.
Total deposits were $238.8 billion at Dec. 31, 2018, a
decrease of 2% compared with $244.3 billion at Dec.
31, 2017. The decrease primarily reflects lower
interest-bearing deposits in non-U.S. offices and
noninterest-bearing deposits principally in U.S.
offices, partially offset by higher interest-bearing
deposits in U.S. offices.
Noninterest-bearing deposits were $70.8 billion at
Dec. 31, 2018 compared with $82.7 billion at Dec.
31, 2017. Interest-bearing deposits were $168.0
billion at Dec. 31, 2018 compared with $161.6 billion
at Dec. 31, 2017.
The aggregate amount of deposits by foreign
customers in domestic offices was $36.4 billion and
$39.9 billion at Dec. 31, 2018 and Dec. 31, 2017,
respectively.
Deposits in foreign offices totaled $99.2 billion at
Dec. 31, 2018 and $114.8 billion at Dec. 31, 2017.
The majority of these deposits were in amounts in
excess of $100,000 and were primarily overnight
foreign deposits.
Certificates
of deposit
Other time
deposits
(in millions)
3 months or less
Between 3 and 6 months
Between 6 and 12 months
Over 12 months
Total
$
$
77 $
36
88
2
203 $
Total
32,247 $ 32,324
36
88
2
32,247 $ 32,450
—
—
—
Short-term borrowings
We fund ourselves primarily through deposits and, to
a lesser extent, other short-term borrowings and long-
term debt. Short-term borrowings consist of federal
funds purchased and securities sold under repurchase
agreements, payables to customers and broker-
dealers, commercial paper and other borrowed funds.
Certain other borrowings, for example, securities sold
under repurchase agreements, require the delivery of
securities as collateral.
See “Liquidity and dividends” for a discussion of
long-term debt and liquidity metrics that we monitor.
Information related to federal funds purchased and
securities sold under repurchase agreements is
presented below.
2017
2018
Federal funds purchased and securities sold under
repurchase agreements
(dollars in millions)
Maximum month-end
$ 21,600
balance during the year
Average daily balance (a) $ 15,546
Weighted-average rate
during the year (a)
Ending balance (b)
Weighted-average rate at
Dec. 31 (b)
$ 21,850
$ 19,653
$ 15,163
$ 14,243
12.99%
4.88%
2.33%
1.14%
$
2016
$ 25,995
$ 14,489
0.25%
9,989
0.38%
(a) Includes the impact of offsetting under enforceable netting
agreements of $25,203 million for 2018, $5,657 million for
2017 and less than $350 million for 2016.
(b) Includes the impact of offsetting under enforceable netting
agreements of $76,040 million at Dec. 31, 2018, $25,848
million at Dec. 31, 2017 and $481 million at Dec. 31, 2016.
BNY Mellon 37
Results of Operations (continued)
Federal funds purchased and securities sold under
repurchase agreements
Quarter ended
Sept. 30,
2018
Dec. 31,
2018
Dec. 31,
2017
(dollars in millions)
Maximum month-end
balance during the quarter $ 14,243
$ 10,980
Average daily balance (a)
Weighted-average rate
during the quarter (a)
10.95%
$ 13,020
$ 14,199
$ 20,098
$ 20,211
5.33%
1.83%
Ending balance (b)
Weighted-average rate at
period end (b)
$ 14,243
$ 10,158
$ 15,163
12.99%
7.33%
2.33%
(a) Includes the impact of offsetting under enforceable netting
agreements of $42,721 million for the fourth quarter of
2018, $25,922 million for the third quarter of 2018 and
$14,128 million for the fourth quarter of 2017.
(b) Includes the impact of offsetting under enforceable netting
agreements of $76,040 million at Dec. 31, 2018, $58,540
million at Sept. 30, 2018 and $25,848 million at Dec. 31,
2017.
Fluctuations of federal funds purchased and securities
sold under repurchase agreements between periods
reflect changes in overnight borrowing opportunities.
The increase in the weighted-average rates, compared
with both Sept. 30, 2018 and Dec. 31, 2017, primarily
reflects the increase in repurchase agreement activity
with the Fixed Income Clearing Corporation
(“FICC”), where we record interest expense gross,
but the average balances are reduced as a result of the
impact of offsetting under enforceable netting
agreements. The increased activity primarily relates
to government securities collateralized resale and
repurchase agreements executed with clients that are
novated to and settle with the FICC.
Information related to payables to customers and
broker-dealers is presented below.
2018
Payables to customers and broker-dealers
(dollars in millions)
Maximum month-end
$ 20,905
balance during the year
Average daily balance (a) $ 19,450
Weighted-average rate
during the year (a)
Ending balance at Dec. 31 $ 19,731
Weighted-average
rate at Dec. 31
1.62%
1.17%
2017
2016
$ 21,621
$ 21,142
$ 22,327
$ 21,149
0.34%
0.07%
$ 20,184
$ 20,987
0.56%
0.09%
(a) The weighted-average rate is calculated based on, and is
applied to, the average interest-bearing payables to
customers and broker-dealers, which were $16,353 million
in 2018, $18,984 million in 2017 and $16,925 million in
2016.
38 BNY Mellon
Payables to customers and broker-dealers
Quarter ended
Sept. 30,
2018
Dec. 31,
2018
Dec. 31,
2017
(dollars in millions)
Maximum month-end
balance during the quarter $ 19,731
$ 18,955
Average daily balance (a)
Weighted-average rate
during the quarter (a)
Ending balance
Weighted-average rate at
period end
$ 19,731
1.61%
1.62%
$ 19,232
$ 19,073
$ 21,380
$ 21,130
1.23%
0.49%
$ 18,683
$ 20,184
1.30%
0.56%
(a) The weighted-average rate is calculated based on, and is
applied to, the average interest-bearing payables to
customers and broker-dealers, which were $15,727 million
in the fourth quarter of 2018, $16,252 million in the third
quarter of 2018 and $17,868 million in the fourth quarter of
2017.
Payables to customers and broker-dealers represent
funds awaiting re-investment and short sale proceeds
payable on demand. Payables to customers and
broker-dealers are driven by customer trading activity
levels and market volatility.
Information related to commercial paper is presented
below.
2018
Commercial paper
(dollars in millions)
Maximum month-end
balance during the year
Average daily balance
Weighted-average rate
during the year
Ending balance at Dec. 31 $ 1,939
Weighted-average rate at
Dec. 31
$ 4,470
$ 2,607
2.34%
1.97%
2017
2016
$
$
$
4,714
2,630
1.08%
3,075
$
$
$
4,950
1,337
0.37%
—
1.27%
—%
Commercial paper
Quarter ended
(dollars in millions)
Maximum month-end
balance during the quarter $
$
Average daily balance
Weighted-average rate
during the quarter
Ending balance
Weighted-average rate at
period end
$
Dec. 31,
2018
Sept. 30,
2018
Dec. 31,
2017
1,939
353
$ 4,422
$ 3,102
$ 4,714
$ 3,391
2.41%
1,939
$
2.10%
735
1.23%
$ 3,075
2.34%
2.06%
1.27%
The Bank of New York Mellon, our largest bank
subsidiary, issues commercial paper that matures
within 397 days from date of issue and is not
redeemable prior to maturity or subject to voluntary
prepayment. The fluctuations in the commercial
paper balances, compared with prior periods,
Results of Operations (continued)
primarily reflects management of overall liquidity.
The increase in weighted-average rates, compared
with prior periods, primarily reflects increases in the
Fed Funds effective rate and the issuance of higher-
yielding term commercial paper.
Information related to other borrowed funds is
presented below.
Other borrowed funds
(dollars in millions)
Maximum month-end
balance during the year
Average daily balance
Weighted-average rate
$ 3,269
$ 2,545
during the year
Ending balance at Dec. 31 $ 3,227
Weighted-average rate at
2.26%
2.64%
Dec. 31
2018
2017
2016
$
$
$
3,955
1,916
1.36%
3,028
$
$
$
1,280
846
0.91%
754
1.48%
0.89%
Other borrowed funds
(dollars in millions)
Maximum month-end
balance during the quarter $
$
Average daily balance
Weighted-average rate
during the quarter
Ending balance
Weighted-average rate at
period end
$
Quarter ended
Sept. 30,
2018
Dec. 31,
2018
Dec. 31,
2017
3,227
2,903
$ 3,269
$ 2,747
$ 3,955
$ 3,421
2.44%
3,227
2.33%
1.46%
$ 2,934
$ 3,028
2.64%
2.48%
1.48%
Other borrowed funds primarily include borrowings
from the Federal Home Loan Bank (“FHLB”),
overdrafts of sub-custodian account balances in our
Investment Services businesses, capital lease
obligations and borrowings under lines of credit by
our Pershing subsidiaries. Overdrafts typically relate
to timing differences for settlements. The increase in
other borrowed funds, compared with prior periods
primarily reflects an increase in borrowings from the
FHLB partially offset by a decline in overdrafts and
lower capital lease obligations due to the purchase of
the leased asset.
Liquidity and dividends
BNY Mellon defines liquidity as the ability of the
Parent and its subsidiaries to access funding or
convert assets to cash quickly and efficiently, or to
roll over or issue new debt, especially during periods
of market stress, at a reasonable cost and in order to
meet its short-term (up to one year) obligations.
Funding liquidity risk is the risk that BNY Mellon
cannot meet its cash and collateral obligations at a
reasonable cost for both expected and unexpected
cash flow and collateral needs without adversely
affecting daily operations or our financial condition.
Funding liquidity risk can arise from funding
mismatches, market constraints from the inability to
convert assets to cash, the inability to hold or raise
cash, low overnight deposits, deposit run-off or
contingent liquidity events.
We also manage liquidity risks on an intraday basis.
Intraday liquidity risk is the risk that BNY Mellon
cannot access funds during the business day to make
payments or settle immediate obligations, usually in
real time. Intraday liquidity risk can arise from
timing mismatches, market constraints from the
inability to convert assets to cash, the inability to
raise cash intraday, low overnight deposits and/or
adverse stress events.
Changes in economic conditions or exposure to
credit, market, operational, legal and reputational
risks also can affect BNY Mellon’s liquidity risk
profile and are considered in our liquidity risk
framework.
For additional information on our liquidity policy, see
“Risk Management - Liquidity risk.”
We monitor and control liquidity exposures and
funding needs within and across significant legal
entities, branches, currencies and business lines,
taking into account, among other factors, any
applicable restrictions on the transfer of liquidity
among entities.
BNY Mellon also manages potential intraday
liquidity risks. We monitor and manage intraday
liquidity against existing and expected intraday liquid
resources (such as cash balances, remaining intraday
credit capacity, intraday contingency funding and
available collateral) to enable BNY Mellon to meet its
intraday obligations under normal and reasonably
severe stressed conditions.
The Parent’s policy is to have access to sufficient
unencumbered cash and cash equivalents at each
quarter-end to cover forecasted debt redemptions, net
interest payments and net tax payments for the
following 18-month period, and to provide sufficient
collateral to satisfy transactions subject to Section
23A of the Federal Reserve Act. As of Dec. 31, 2018,
the Parent was in compliance with this policy.
BNY Mellon 39
Results of Operations (continued)
We define available funds for internal liquidity
management purposes as liquid funds (which include
interest-bearing deposits with banks and federal funds
sold and securities purchased under resale
agreements), cash and due from banks and interest-
bearing deposits with the Federal Reserve and other
central banks. The following table presents our total
available funds, including liquid funds, at period end
and on an average basis.
Available and liquid funds
(in millions)
Available funds:
Liquid funds:
Dec. 31,
2018
Dec. 31,
2017
Average
2018
2017
2016
Interest-bearing deposits with banks
Federal funds sold and securities purchased under resale agreements
Total liquid funds
Cash and due from banks
Interest-bearing deposits with the Federal Reserve and other central banks
Total available funds
Total available funds as a percentage of total assets
$ 14,148
46,795
60,943
5,864
67,988
$ 134,795
$ 11,979
28,135
40,114
5,382
91,510
$ 137,006
$ 14,740
27,883
42,623
5,014
68,408
$ 116,045
$ 14,879
27,192
42,071
5,039
70,213
$ 117,323
$ 14,704
25,767
40,471
4,308
80,593
$ 125,372
37%
37%
34%
34%
35%
We had $60.9 billion of liquid funds at Dec. 31, 2018
and $40.1 billion at Dec. 31, 2017. Of the $60.9
billion in liquid funds held at Dec. 31, 2018, $14.1
billion was placed in interest-bearing deposits with
large, highly-rated global financial institutions with a
weighted-average life to maturity of approximately
13 days. Of the $14.1 billion, $1.1 billion was placed
with banks in the Eurozone.
Total available funds were $134.8 billion at Dec. 31,
2018, compared with $137.0 billion at Dec. 31, 2017.
The decrease was primarily due to lower interest-
bearing deposits with the Federal Reserve and other
central banks, partially offset by higher federal funds
sold and securities purchased under resale
agreements.
Average non-core sources of funds, such as federal
funds purchased and securities sold under repurchase
agreements, trading liabilities, commercial paper and
other borrowed funds, were $22.0 billion for 2018
and $25.4 billion for 2017. The decrease primarily
reflects a decrease in federal funds purchased and
securities sold under repurchase agreements.
Average foreign deposits, primarily from our
European-based Investment Services business, were
$95.5 billion for 2018, compared with $96.2 billion
for 2017. Average interest-bearing domestic deposits
were $59.2 billion for 2018 and $46.9 billion for
2017. The increase primarily reflects an increase in
demand deposits.
Average payables to customers and broker-dealers
were $16.4 billion for 2018 and $19.0 billion for
2017. Payables to customers and broker-dealers are
driven by customer trading activity and market
volatility.
Average long-term debt was $28.3 billion for 2018
and $27.4 billion for 2017. The increase reflects
issuances, partially offset by the maturities of long-
term debt.
Average noninterest-bearing deposits decreased to
$63.8 billion for 2018 from $71.7 billion for 2017,
reflecting lower client deposits.
A significant reduction in our Investment Services
business would reduce our access to deposits. See
“Asset/liability management” for additional factors
that could impact our deposit balances.
40 BNY Mellon
Results of Operations (continued)
Sources of liquidity
The Parent’s three major sources of liquidity are
access to the debt and equity markets, dividends from
its subsidiaries, and cash on hand and cash otherwise
made available in business-as-usual circumstances to
the Parent through a committed credit facility with
our intermediate holding company (“IHC”).
Our ability to access the capital markets on favorable
terms, or at all, is partially dependent on our credit
ratings, which are as follows:
Credit ratings at Dec. 31, 2018
Parent:
Long-term senior debt
Subordinated debt
Preferred stock
Outlook - Parent:
The Bank of New York Mellon:
Long-term senior debt
Subordinated debt
Long-term deposits
Short-term deposits
Commercial paper
BNY Mellon, N.A.:
Long-term senior debt
Long-term deposits
Short-term deposits
Outlook - Banks:
(a) Represents senior debt issuer default rating.
NR - Not rated.
Moody’s
A1
A2
Baa1
Stable
Aa2
NR
Aa1
P1
P1
Aa2 (a)
Aa1
P1
Stable
S&P
A
A-
BBB
Stable
AA-
A
AA-
A-1+
A-1+
AA-
AA-
A-1+
Stable
Fitch
AA-
A+
BBB
Stable
AA
NR
AA+
F1+
F1+
AA (a)
AA+
F1+
Stable
DBRS
AA (low)
A (high)
A (low)
Stable
AA
NR
AA
R-1 (high)
R-1 (high)
AA
AA
R-1 (high)
Stable
Long-term debt totaled $29.2 billion at Dec. 31, 2018
and $28.0 billion at Dec. 31, 2017. The balance
reflects issuances of $5.2 billion, offset by maturities
of $3.7 billion and a decrease in the fair value of
hedged long-term debt. The Parent has $4.3 billion of
long-term debt that will mature in 2019.
The following table presents the long-term debt
issued in 2018.
Debt issuances
(in millions)
Senior notes:
3-month LIBOR + 30bps senior notes due 2020
2.95% senior notes due 2023
3.50% senior notes due 2023
3.45% senior notes due 2023
3.40% senior notes due 2028
3.85% senior notes due 2028
Total debt issuances
2018
$ 1,000
1,000
750
750
750
900
$ 5,150
In the second quarter of 2018, BNY Mellon
established programs for the issuance of notes and
certificates of deposit (“CDs”) issued by The Bank of
New York Mellon, our largest bank subsidiary. These
programs are designed to improve the diversity of our
funding sources and provide additional flexibility in
our liquidity planning. In December 2018, we issued
$1 billion of senior bank notes maturing in 2020 at an
annual interest rate of LIBOR plus 30 basis points.
At Dec. 31, 2018, $2.8 billion of CDs were
outstanding.
The Bank of New York Mellon, our largest bank
subsidiary, issues commercial paper that matures
within 397 days from date of issue and is not
redeemable prior to maturity or subject to voluntary
prepayment. The average commercial paper
borrowings were $2.6 billion for both 2018 and 2017.
Commercial paper outstanding was $1.9 billion at
Dec. 31, 2018 and $3.1 billion at Dec. 31, 2017.
BNY Mellon 41
Results of Operations (continued)
Subsequent to Dec. 31, 2018, our U.S. bank
subsidiaries could declare dividends to the Parent of
approximately $3.7 billion, without the need for a
regulatory waiver. In addition, at Dec. 31, 2018, non-
bank subsidiaries of the Parent had liquid assets of
approximately $1.7 billion. Restrictions on our
ability to obtain funds from our subsidiaries are
discussed in more detail in “Supervision and
Regulation - Capital Planning and Stress Testing -
Payment of Dividends, Stock Repurchases and Other
Capital Distributions” and in Note 18 of the Notes to
Consolidated Financial Statements.
Pershing LLC has uncommitted lines of credit in
place for liquidity purposes which are guaranteed by
the Parent. Pershing LLC has three separate
uncommitted lines of credit amounting to $750
million in aggregate. There were no borrowings
under these lines in 2018. Pershing Limited, an
indirect UK-based subsidiary of BNY Mellon, has
two separate uncommitted lines of credit amounting
to $250 million in aggregate. Average borrowings
under these lines were $1 million, in aggregate, in
2018.
The double leverage ratio is the ratio of our equity
investment in subsidiaries divided by our
consolidated parent company equity, which includes
our noncumulative perpetual preferred stock. In
short, the double leverage ratio measures the extent to
which equity in subsidiaries is financed by Parent
company debt. As the double leverage ratio
increases, this can reflect greater demands on a
company’s cash flows in order to service interest
payments and debt maturities. BNY Mellon’s double
leverage ratio is managed in a range considering the
high level of unencumbered available liquid assets
held in its principal subsidiaries (such as central bank
deposit placements and government securities), the
Company’s cash generating fee-based business
model, with fee revenue representing 78% of total
revenue in 2018, and the dividend capacity of our
banking subsidiaries. Our double leverage ratio was
117.7% at Dec. 31, 2018 and 122.5% at Dec. 31,
2017, and within the range targeted by management.
42 BNY Mellon
Uses of funds
The Parent’s major uses of funds are payment of
dividends, repurchases of common stock, principal
and interest payments on its borrowings, acquisitions
and additional investments in its subsidiaries.
In 2018, we paid $1.2 billion in dividends on our
common and preferred stock. Our common stock
dividend payout ratio was 26% for 2018.
In 2018, we repurchased 63.7 million common shares
at an average price of $51.29 per common share for a
total cost of $3.3 billion.
Liquidity coverage ratio
U.S. regulators have established an LCR that requires
certain banking organizations, including BNY
Mellon, to maintain a minimum amount of
unencumbered high-quality liquid assets (“HQLA”)
sufficient to withstand the net cash outflow under a
hypothetical standardized acute liquidity stress
scenario for a 30-day time horizon.
The following table presents the consolidated HQLA
at Dec. 31, 2018, and the average HQLA and average
LCR for the fourth quarter of 2018.
Consolidated HQLA and LCR
(dollars in billions)
Securities (a)
Cash (b)
Total consolidated HQLA (c)
Dec. 31,
2018
121
61
182
$
$
Total consolidated HQLA - average (c)
Average LCR
164
118%
(a) Primarily includes securities of U.S. government-sponsored
enterprises, U.S. Treasury, sovereign securities, U.S. agency
and investment-grade corporate debt.
$
(b) Primarily includes cash on deposit with central banks.
(c) Consolidated HQLA presented before adjustments. After
haircuts and the impact of trapped liquidity, consolidated
HQLA totaled $133 billion at Dec. 31, 2018 and averaged
$121 billion for the fourth quarter of 2018.
The U.S. LCR rule requires BNY Mellon and each of
our affected domestic bank subsidiaries to meet an
LCR of at least 100%. BNY Mellon and each of our
affected domestic bank subsidiaries were compliant
with the U.S. LCR requirements throughout 2018.
Results of Operations (continued)
Statement of cash flows
The following summarizes the activity reflected on
the consolidated statement of cash flows. While this
information may be helpful to highlight certain macro
trends and business strategies, the cash flow analysis
may not be as relevant when analyzing changes in our
net earnings and net assets. We believe that in
addition to the traditional cash flow analysis, the
discussion related to liquidity and dividends and
asset/liability management herein may provide more
useful context in evaluating our liquidity position and
related activity.
Net cash provided by operating activities was $6.0
billion in 2018, compared with $4.7 billion in 2017
and $6.3 billion in 2016. In 2018, 2017 and 2016,
cash flows provided by operations were principally
the result of earnings. In 2018, cash flows provided
by operations was also the result of changes in
accruals and other balances, partially offset by
changes in trading assets and liabilities. In 2017,
cash flows provided by operations were partially
offset by changes in trading assets and liabilities. In
2016, cash flows provided by operations also reflect
changes in trading assets and liabilities, partially
offset by changes in accruals and other balances.
Net cash provided by investing activities was $3.3
billion in 2018, compared with net cash used for
investing activities of $32.7 billion in 2017 and net
cash provided by investing activities of $50.3 billion
in 2016. In 2018, 2017 and 2016, net cash provided
by or used for investing activities primarily reflects
changes in interest-bearing deposits with the Federal
Reserve and other central banks and the net impact of
securities activity. In 2018, net cash provided by
investing activities was partially offset by changes in
federal funds sold and securities purchased under
resale agreements.
Net cash used for financing activities was $8.1 billion
in 2018, compared with net cash provided by
financing activities of $26.8 billion in 2017 and net
cash used for financing activities of $59.1 billion in
2016. In 2018, net cash used for financing activities
primarily reflects repayments of long-term debt,
common stock repurchases and changes in deposits,
partially offset by proceeds from the issuance of long-
term debt. In 2017 and 2016, net cash provided by, or
used for, financing activities primarily reflects
changes in deposits and changes in federal funds
purchased and securities sold under repurchase
agreements. In 2017, net cash provided by financing
activities also reflects net proceeds from the issuance
of long-term debt, changes in commercial paper and
other borrowed funds, partially offset by common
stock repurchases. In 2016, net cash used for
financing activities also reflects repayment of long-
term debt and common stock repurchases, partially
offset by the net proceeds from the issuance of long-
term debt.
BNY Mellon 43
Results of Operations (continued)
Commitments and obligations
We have contractual obligations to make fixed and
determinable payments to third parties as indicated in
the table below. The table excludes certain
obligations such as trade payables and trading
liabilities, where the obligation is short-term or
subject to valuation based on market factors. In
addition to the amounts shown in the table below, at
Dec. 31, 2018, $103 million of unrecognized tax
benefits have been recorded as liabilities in
accordance with ASC 740, Income Taxes. Related to
these unrecognized tax benefits, we have also
recorded a liability for potential interest of $22
million. At this point, it is not possible to determine
when these amounts will be settled or resolved.
Contractual obligations at Dec. 31, 2018
Payments due by period
(in millions)
Deposits without a stated maturity
Term deposits
Federal funds purchased and securities sold under repurchase agreements
Payables to customers and broker-dealers
Other borrowed funds (a)
Long-term debt (b)
Unfunded pension and post-retirement benefits
Investment commitments (c)
Total
Less than
1 year
$ 128,032 $ 128,032 $
40,592
14,243
19,731
3,227
33,614
256
479
40,543
14,243
19,731
3,227
5,080
27
201
Total contractual obligations
$ 240,174 $ 211,084 $
1-3 years
3-5 years
— $
48
—
—
—
10,883
58
230
11,219 $
— $
—
—
—
—
7,650
53
30
7,733 $
Over
5 years
—
1
—
—
—
10,001
118
18
10,138
(a) Includes capital leases.
(b) Includes interest.
(c) Includes Community Reinvestment Act commitments.
We have entered into fixed and determinable commitments as indicated in the table below:
Other commitments at Dec. 31, 2018
(in millions)
Securities lending indemnifications (a)
Lending commitments
Standby letters of credit
Operating leases
Purchase obligations (b)
Commercial letters of credit
Private equity commitments (c)
Total commitments
Amount of commitment expiration per period
Less than
1 year
1-3 years
3-5 years
Total
$ 401,504 $ 401,504 $
50,631
2,817
1,459
1,374
165
41
29,766
1,972
264
722
165
17
$ 457,991 $ 434,410 $
— $
6,985
496
455
465
—
13
8,414 $
— $
13,310
349
308
148
—
11
14,126 $
Over
5 years
—
570
—
432
39
—
—
1,041
(a) Excludes the indemnifications for securities booked at BNY Mellon resulting from the CIBC Mellon joint venture, which totaled $56
billion at Dec. 31, 2018.
(b) Purchase obligations are defined as agreements to purchase goods or services that are enforceable and legally binding and specify all
significant terms.
(c) Relates to SBIC investments, which are compliant with the Volcker Rule.
See “Liquidity and dividends” and Note 21 of the
Notes to Consolidated Financial Statements for a
further discussion of the source of funds for our
commitments and obligations.
Off-balance sheet arrangements
Off-balance sheet arrangements discussed in this
section are limited to guarantees, retained or
contingent interests and obligations arising out of
44 BNY Mellon
unconsolidated variable interest entities (“VIEs”).
For BNY Mellon, these items include certain
guarantees. Guarantees include SBLCs issued as part
of our corporate banking business and securities
lending indemnifications issued as part of our
Investment Services business. See Note 21 of the
Notes to Consolidated Financial Statements for a
further discussion of our off-balance sheet
arrangements.
Results of Operations (continued)
Capital
Capital data
(dollars in millions except per share amounts; common shares in thousands)
At period end:
BNY Mellon shareholders’ equity to total assets ratio
BNY Mellon common shareholders’ equity to total assets ratio
Total BNY Mellon shareholders’ equity
Total BNY Mellon common shareholders’ equity (a)
BNY Mellon tangible common shareholders’ equity – Non-GAAP (a)
Book value per common share (a)
Tangible book value per common share – Non-GAAP (a)
Closing stock price per common share
Market capitalization
Common shares outstanding
2018
2017
11.2%
10.2%
11.1%
10.1%
$ 40,638
$ 37,096
$ 18,290
38.63
$
19.04
$
$
47.07
$ 45,207
960,426
41,251
$
37,709
$
18,486
$
37.21
$
18.24
$
53.86
$
$
54,584
1,013,442
Full-year:
Average common equity to average assets
Cash dividends per common share
23%
Common dividend payout ratio
Common dividend yield
1.6%
(a) See “Supplemental information – Explanation of GAAP and Non-GAAP financial measures” beginning on page 105 for a reconciliation
11.0%
1.04
10.5%
0.86
26%
2.2%
$
$
of GAAP to Non-GAAP.
The Bank of New York Mellon Corporation total
shareholders’ equity decreased to $40.6 billion at
Dec. 31, 2018 from $41.3 billion at Dec. 31, 2017.
The decrease primarily reflects common stock
repurchases, dividend payments and unrealized losses
on securities available-for-sale, partially offset by
earnings and the impact of stock awards and option
exercises.
We repurchased 63.7 million common shares at an
average price of $51.29 per common share for a total
of $3.3 billion in 2018 including the additional share
repurchases approved in December 2018. We expect
to continue to repurchase shares in the first half of
2019 under the 2018 capital plan.
The unrealized loss, net of tax, on our available-for-
sale securities portfolio included in accumulated OCI
was $167 million at Dec. 31, 2018, compared with a
net unrealized gain of $184 million at Dec. 31, 2017.
The decrease in the unrealized gain, net of tax, was
primarily driven by higher interest rates.
Capital adequacy
Regulators establish certain levels of capital for bank
holding companies (“BHCs”) and banks, including
BNY Mellon and our bank subsidiaries, in accordance
with established quantitative measurements. For the
Parent to maintain its status as a financial holding
company, our U.S. bank subsidiaries and BNY
Mellon must, among other things, qualify as “well
capitalized.” As of Dec. 31, 2018 and Dec. 31, 2017,
BNY Mellon and our U.S. bank subsidiaries were
“well capitalized.”
Failure to satisfy regulatory standards, including
“well capitalized” status or capital adequacy rules
more generally, could result in limitations on our
activities and adversely affect our financial condition.
See the discussion of these matters in “Supervision
and Regulation - Regulated Entities of BNY Mellon
and Ancillary Regulatory Requirements” and “Risk
Factors - Operational Risk - Failure to satisfy
regulatory standards, including “well capitalized” and
“well managed” status or capital adequacy and
liquidity rules more generally, could result in
limitations on our activities and adversely affect our
business and financial condition.”
The U.S. banking agencies’ capital rules are based on
the framework adopted by the Basel Committee on
Banking Supervision (“BCBS”), as amended from
time to time. For additional information on these
capital requirements, see “Supervision and
Regulation.” BNY Mellon is subject to the U.S.
capital rules, which were gradually phased-in over a
multi-year period through Jan. 1, 2019. The phase-in
requirements for consolidated capital were completed
on Jan. 1, 2018.
Our risk-based capital adequacy is determined using
the higher of RWAs determined using the Advanced
Approach and Standardized Approach.
BNY Mellon 45
Results of Operations (continued)
The table below presents our consolidated and largest bank subsidiary regulatory capital ratios.
Consolidated and largest bank subsidiary regulatory
capital ratios
Consolidated regulatory capital ratios: (c)(d)
Well
capitalized
Dec. 31, 2018
Minimum
required (a)
Capital
ratios
Dec. 31, 2017
Fully
phased-in Transitional
(b)
Advanced Approach:
CET1 ratio
Tier 1 capital ratio
Total capital ratio
Standardized Approach:
CET1 ratio
Tier 1 capital ratio
Total capital ratio
Tier 1 leverage ratio
SLR (f)
The Bank of New York Mellon regulatory
capital ratios: (c)
Advanced Approach:
CET1 ratio
Tier 1 capital ratio
Total capital ratio
Tier 1 leverage ratio
SLR (f)
N/A (e)
6%
10%
N/A (e)
6%
10%
N/A (e)
N/A (e)
7.5%
9
11
7.5%
9
11
4
5
6.5%
8
10
5
6
6.375%
7.875
9.875
4
3
10.7%
12.8
13.6
11.7%
14.1
15.1
6.6
6.0
14.0%
14.3
14.7
7.6
6.8
10.3%
12.3
13.0
11.5%
13.7
14.7
6.4
5.9
N/A
N/A
N/A
N/A
6.7
10.7%
12.7
13.4
11.9%
14.2
15.1
6.6
6.1
14.1%
14.4
14.7
7.6
6.9
(a) Minimum requirements for Dec. 31, 2018 include minimum thresholds plus currently applicable buffers.
(b) Reflects transitional adjustments to CET1, Tier 1 capital and Tier 2 capital required in 2017 under the U.S. capital rules.
(c) For our CET1, Tier 1 capital and Total capital ratios, our effective capital ratios under U.S. capital rules are the lower of the ratios as
calculated under the Standardized and Advanced Approaches. The Tier 1 leverage ratio is based on Tier 1 capital and quarterly average
total assets.
(d) See page 48 for the capital ratio requirements with the phase-in of the capital conservation buffer and the U.S. Global Systemically
Important Bank (“G-SIB”) surcharge, as well as the introduction of the SLR buffer.
(e) The Federal Reserve’s regulations do not establish well capitalized thresholds for these measures for BHCs.
(f) SLR became a binding measure on Jan. 1, 2018. The SLR is based on Tier 1 capital and total leverage exposure, which includes certain
off-balance sheet exposures.
Our CET1 ratio determined under the Advanced
Approach was 10.7% at Dec. 31, 2018 and 10.7%, on
a transitional basis, at Dec. 31, 2017. The ratio was
unchanged compared to Dec. 31, 2017, reflecting
capital deployed through common stock repurchases
and dividend payments, and the final phase-in
requirements under U.S. capital rules, offset by
capital generated through earnings and lower RWAs.
Our SLR was 6.0% at Dec. 31, 2018 and 6.1%, on a
transitional basis, at Dec. 31, 2017.
The Advanced Approach capital ratios are
significantly impacted by RWAs for operational risk.
Our operational loss risk model is informed by
external losses, including fines and penalties levied
against institutions in the financial services industry,
particularly those that relate to businesses in which
we operate, and as a result external losses have
impacted and could in the future impact the amount
of capital that we are required to hold.
Our capital ratios are necessarily subject to, among
other things, anticipated compliance with all
necessary enhancements to model calibration,
approval by regulators of certain models used as part
of RWA calculations, other refinements, further
implementation guidance from regulators, market
practices and standards and any changes BNY Mellon
may make to its businesses. As a consequence of
these factors, our capital ratios may materially
change, and may be volatile over time and from
period to period.
46 BNY Mellon
Results of Operations (continued)
The following table presents our capital components and RWAs.
Capital components and risk-weighted assets
(in millions)
CET1:
Common shareholders’ equity
Adjustments for:
Goodwill and intangible assets (b)
Net pension fund assets
Equity method investments
Deferred tax assets
Other
Total CET1
Other Tier 1 capital:
Preferred stock
Deferred tax assets
Net pension fund assets
Other
Total Tier 1 capital
Tier 2 capital:
Subordinated debt
Allowance for credit losses
Other
Total Tier 2 capital – Standardized Approach
Excess of expected credit losses
Less: Allowance for credit losses
Total Tier 2 capital – Advanced Approach
Total capital:
Standardized Approach
Advanced Approach
Risk-weighted assets:
Standardized Approach
Advanced Approach:
Credit Risk
Market Risk
Operational Risk
Total Advanced Approach
Average assets for Tier 1 leverage ratio
330,894 $
Total leverage exposure for SLR
360,543 $
(a) Reflects transitional adjustments to CET1, Tier 1 capital and Tier 2 capital required in 2017 under the U.S. capital rules.
(b) Reduced by deferred tax liabilities associated with intangible assets and tax deductible goodwill.
319,007 $
347,943 $
$
$
Dec. 31,
2018
Dec. 31, 2017
Fully
phased-in
Transitional
Approach (a)
$
37,096 $
37,709 $
37,859
(18,806)
(320)
(361)
(42)
—
17,567
(19,223)
(211)
(387)
(41)
(9)
17,838
3,542
—
—
(65)
21,044 $
3,542
—
—
(41)
21,339 $
1,250 $
252
(10)
1,492
65
252
1,305 $
1,250 $
261
(12)
1,499
31
261
1,269 $
(18,684)
(169)
(372)
(33)
(8)
18,593
3,542
(8)
(42)
(41)
22,044
1,250
261
(12)
1,499
31
261
1,269
22,536 $
22,349 $
22,838 $
22,608 $
23,543
23,313
149,618 $
155,324 $
155,621
92,917 $
3,454
68,300
164,671 $
101,366 $
3,657
68,688
173,711 $
$
$
$
$
$
$
$
$
101,681
3,657
68,688
174,026
331,600
361,249
BNY Mellon 47
Results of Operations (continued)
The table below presents the factors that impacted the
CET1 capital.
Minimum capital ratios and capital buffers
CET1 generation
(in millions)
CET1 – Beginning of period
Net income applicable to common shareholders of
The Bank of New York Mellon Corporation
Goodwill and intangible assets, net of related
deferred tax liabilities
Gross CET1 generated
Capital deployed:
Common stock dividends
Common stock repurchased
Total capital deployed
Other comprehensive income:
Foreign currency translation
Unrealized loss on assets available-for-sale
Defined benefit plans
Unrealized gain on cash flow hedges
Other
Total other comprehensive income
Additional paid-in capital (a)
Other (deductions) additions:
Net pension fund assets
Deferred tax assets
Embedded goodwill
Other
Total other deductions
Net CET1 deployed
CET1 – End of period
The U.S. capital rules include a series of buffers and
surcharges over required minimums that apply to
BHCs, including BNY Mellon, which are being
phased-in over time. Banking organizations with a
risk-based ratio or SLR above the minimum required
level, but with a risk-based ratio or SLR below the
minimum level with buffers, will face constraints on
dividends, equity repurchases and discretionary
executive compensation based on the amount of the
shortfall. Different regulatory capital buffers apply to
our banking subsidiaries.
The following table presents the principal minimum
capital ratio requirements with buffers and
surcharges, as phased-in, applicable to the Parent and
our U.S. insured depository institutions. This table
does not include the imposition of a countercyclical
capital buffer. Buffers and surcharges are not
applicable to the Tier 1 leverage ratio. The SLR
buffer was fully implemented on Jan. 1, 2018 and the
other buffers and surcharge were fully implemented
on Jan. 1, 2019.
Dec. 31,
2018
$ 17,838
4,097
417
4,514
(1,052)
(3,269)
(4,321)
(302)
(380)
(120)
(10)
(2)
(814)
453
(109)
(1)
26
(19)
(103)
(271)
$ 17,567
(a) Primarily related to stock awards, the exercise of stock
options and stock issued for employee benefit plans.
Capital ratio requirements
Capital conservation buffer (CET1)
U.S. G-SIB surcharge (CET1) (b)(c)
Consolidated:
CET1 ratio
Tier 1 capital ratio
Total capital ratio
Enhanced SLR buffer (Tier 1 capital)
SLR
U.S. insured depository institutions: (c)
CET1 ratio
Tier 1 capital ratio
Total capital ratio
SLR
Well
capitalized
Minimum
ratios
Minimum ratios with buffers,
as phased-in (a)
2018
1.875%
1.125%
2019
2.5%
1.5%
N/A
6.0%
10.0%
N/A
N/A
6.5%
8.0%
10.0%
6.0%
4.5%
6.0%
8.0%
3.0%
4.5%
6.0%
8.0%
3.0%
7.5%
9.0%
11.0%
2.0%
5.0%
6.375%
7.875%
9.875%
8.5%
10.0%
12.0%
2.0%
5.0%
7.0%
8.5%
10.5%
6.0% (d)
6.0% (d)
(a) Countercyclical capital buffer currently set to 0%.
(b) The fully phased-in U.S. G-SIB surcharge of 1.5% applicable to BNY Mellon is subject to change.
(c) The U.S. G-SIB surcharge is not applicable to the regulatory capital ratios of the bank subsidiaries.
(d) Well capitalized threshold.
48 BNY Mellon
Capital ratios vary depending on the size of the
balance sheet at year-end and the levels and types of
investments in assets. The balance sheet size
fluctuates from year to year based on levels of
customer and market activity. In general, when
servicing clients are more actively trading securities,
deposit balances and the balance sheet as a whole are
higher. In addition, when markets experience
significant volatility or stress, our balance sheet size
may increase considerably as client deposit levels
increase.
Results of Operations (continued)
The following table shows the impact on the
consolidated capital ratios at Dec. 31, 2018 of a $100
million increase or decrease in common equity, or a
$1 billion increase or decrease in RWAs, quarterly
average assets or total leverage exposure.
Sensitivity of consolidated capital ratios at Dec. 31, 2018
Increase or decrease of
$100 million
in common
equity
$1 billion in
RWA, quarterly
average assets
or total leverage
exposure
(in basis points)
CET1:
Standardized Approach
Advanced Approach
7 bps
6
8 bps
7
Tier 1 capital:
Standardized Approach
Advanced Approach
Total capital:
Standardized Approach
Advanced Approach
Tier 1 leverage
SLR
7
6
7
6
3
3
9
8
10
8
2
2
Issuer purchases of equity securities
Share repurchases - fourth quarter of 2018
Maximum approximate dollar
value of shares that may yet
be purchased under the
publicly announced plans or
programs at Dec. 31, 2018
1,432
$
1,356
1,257
1,257 (b)
(a) Includes 14 thousand shares repurchased at a purchase price of $1 million from employees, primarily in connection with the employees’
(dollars in millions, except per share
information; common shares in thousands)
October 2018
November 2018
December 2018
Total shares
repurchased as
part of a publicly
announced plan
or program
7,763
1,479
19,702
28,944
Average price
per share
47.30
51.14
47.15
47.40
Total shares
repurchased
7,763
1,479
19,702
28,944
Fourth quarter of 2018 (a)
$
$
$
payment of taxes upon the vesting of restricted stock. The average price per share of open market purchases was $47.39.
(b) Represents the maximum value of the shares authorized to be repurchased through the second quarter of 2019, including employee
benefit plan repurchases.
In June 2018, in connection with the Federal
Reserve’s non-objection to our 2018 capital plan,
BNY Mellon announced a share repurchase plan
providing for the repurchase of up to $2.4 billion of
common stock starting in the third quarter of 2018
and continuing through the second quarter of 2019.
This new share repurchase plan replaces all
previously authorized share repurchase plans.
In December 2018, the Federal Reserve approved the
repurchase of up to $830 million of additional
common stock under our repurchase program. Our
Board of Directors approved the additional share
repurchases, all of which were repurchased in the
fourth quarter of 2018. These repurchases were in
addition to the Company’s repurchase of $2.4 billion
of common stock previously approved by the Board
and announced in June 2018.
Share repurchases may be executed through open
market repurchases, in privately negotiated
transactions or by other means, including through
repurchase plans designed to comply with Rule
10b5-1 and other derivative, accelerated share
BNY Mellon 49
Results of Operations (continued)
repurchase and other structured transactions. The
timing and exact amount of any common stock
repurchases will depend on various factors, including
market conditions and the common stock trading
price; the Company’s capital position, liquidity and
financial performance; alternative uses of capital; and
legal and regulatory considerations.
VaR (a)
(in millions)
Interest rate
Foreign exchange
Equity
Credit
Diversification
Overall portfolio
2018
Average Minimum Maximum
$
4.1 $
4.3
0.7
0.9
(4.2)
5.8
3.0 $
2.9
—
0.6
N/M
3.6
5.5 $
8.3
1.2
2.6
N/M
10.4
Dec. 31,
2018
4.3
4.1
0.8
0.6
(3.2)
6.6
Trading activities and risk management
Our trading activities are focused on acting as a
market-maker for our customers, facilitating customer
trades and risk mitigating hedging in compliance with
the Volcker Rule. The risk from market-making
activities for customers is managed by our traders and
limited in total exposure through a system of position
limits, value-at-risk (“VaR”) methodology and other
market sensitivity measures. VaR is the potential loss
in value due to adverse market movements over a
defined time horizon with a specified confidence
level. The calculation of our VaR used by
management and presented below assumes a one-day
holding period, utilizes a 99% confidence level, and
incorporates non-linear product characteristics. VaR
facilitates comparisons across portfolios of different
risk characteristics. VaR also captures the
diversification of aggregated risk at the firm-wide
level.
VaR represents a key risk management measure and it
is important to note the inherent limitations to VaR,
which include:
• VaR does not estimate potential losses over longer
time horizons where moves may be extreme;
• VaR does not take account of potential variability
of market liquidity; and
• Previous moves in market risk factors may not
produce accurate predictions of all future market
moves.
See Note 22 of the Notes to Consolidated Financial
Statements for additional information on the VaR
methodology.
The following tables indicate the calculated VaR
amounts for the trading portfolio for the designated
periods using the historical simulation VaR model.
50 BNY Mellon
2017
Average Minimum Maximum
$
VaR (a)
(in millions)
Interest rate
Foreign exchange
Equity
Credit
Diversification
Overall portfolio
(a) VaR exposure does not include the impact of the Company’s
consolidated investment management funds and seed capital
investments.
4.9 $
8.6
1.1
1.7
N/M
9.9
2.4 $
2.6
0.1
0.5
N/M
3.2
3.6 $
4.1
0.5
1.1
(5.0)
4.3
Dec. 31,
2017
4.4
8.6
0.8
1.3
(5.2)
9.9
N/M - Because the minimum and maximum may occur on different
days for different risk components, it is not meaningful to
compute a minimum and maximum portfolio diversification
effect.
The interest rate component of VaR represents
instruments whose values predominantly vary with
the level or volatility of interest rates. These
instruments include, but are not limited to: sovereign
debt, swaps, swaptions, forward rate agreements,
exchange-traded futures and options, and other
interest rate derivative products.
The foreign exchange component of VaR represents
instruments whose values predominantly vary with
the level or volatility of currency exchange rates or
interest rates. These instruments include, but are not
limited to: currency balances, spot and forward
transactions, currency options, exchange-traded
futures and options, and other currency derivative
products.
The equity component of VaR consists of instruments
that represent an ownership interest in the form of
domestic and foreign common stock or other equity-
linked instruments. These instruments include, but
are not limited to: common stock, exchange-traded
funds, preferred stock, listed equity options (puts and
calls), OTC equity options, equity total return swaps,
equity index futures and other equity derivative
products.
The credit component of VaR represents instruments
whose values predominantly vary with the credit
worthiness of counterparties. These instruments
Results of Operations (continued)
include, but are not limited to, credit derivatives
(credit default swaps and exchange-traded credit
index instruments) and exposures from corporate
credit spreads, and mortgage prepayments. Credit
derivatives are used to hedge various credit
exposures.
The diversification component of VaR is the risk
reduction benefit that occurs when combining
portfolios and offsetting positions, and from the
correlated behavior of risk factor movements.
Distribution of trading revenue (loss) (a)
(dollars in millions)
Revenue range:
Less than $(2.5)
$(2.5) – $0
$0 – $2.5
$2.5 – $5.0
More than $5.0
During 2018, interest rate risk generated 41% of
average gross VaR, foreign exchange risk generated
43% of average gross VaR, equity risk accounted for
7% of average gross VaR and credit risk generated
9% of average gross VaR. During 2018, our daily
trading loss exceeded our calculated VaR amount of
the overall portfolio on one occasion.
The following table of total daily trading revenue or
loss illustrates the number of trading days in which
our trading revenue or loss fell within particular
ranges during the past five quarters.
Quarter ended
Dec. 31,
2018
Sept. 30,
2018
June 30,
2018
March 31,
2018
Dec. 31,
2017
1
7
17
24
13
Number of days
—
6
30
20
7
1
3
21
30
9
—
2
18
32
10
2
4
23
22
11
(a) Trading revenue (loss) includes realized and unrealized gains and losses primarily related to spot and forward foreign exchange
transactions, derivatives and securities trades for our customers and excludes any associated commissions, underwriting fees and net
interest revenue.
Trading assets include debt and equity instruments
and derivative assets, primarily interest rate and
foreign exchange contracts, not designated as hedging
instruments. Trading assets were $7.0 billion at Dec.
31, 2018 and $6.0 billion at Dec. 31, 2017. The
increase was impacted by the reclassification of
money market fund investments of approximately $1
billion primarily from available-for-sale securities.
Trading liabilities include debt and equity instruments
and derivative liabilities, primarily interest rate and
foreign exchange contracts, not designated as hedging
instruments. Trading liabilities were $3.5 billion at
Dec. 31, 2018 and $4.0 billion at Dec. 31, 2017.
Under our fair value methodology for derivative
contracts, an initial “risk-neutral” valuation is
performed on each position assuming time-
discounting based on a AA credit curve. In addition,
we consider credit risk in arriving at the fair value of
our derivatives.
We reflect external credit ratings as well as
observable credit default swap spreads for both
ourselves and our counterparties when measuring the
fair value of our derivative positions. Accordingly,
the valuation of our derivative positions is sensitive to
the current changes in our own credit spreads, as well
as those of our counterparties.
At Dec. 31, 2018, our OTC derivative assets,
including those in hedging relationships, of $2.8
billion included a credit valuation adjustment
(“CVA”) deduction of $22 million. Our OTC
derivative liabilities, including those in hedging
relationships, of $2.4 billion included a debit
valuation adjustment (“DVA”) of $1 million related to
our own credit spread. Net of hedges, the CVA
decreased by $4 million and the DVA increased by
less than $1 million in 2018. The net impact of these
adjustments increased foreign exchange and other
trading revenue by $5 million in 2018. During 2018,
no realized loss was charged off against CVA
reserves.
At Dec. 31, 2017, our OTC derivative assets,
including those in hedging relationships, of $3.1
billion included a CVA deduction of $27 million. Our
OTC derivative liabilities, including those in hedging
relationships, of $3.6 billion included a DVA of $1
million related to our own credit spread. Net of
hedges, the CVA decreased by $9 million and the
DVA decreased by $1 million in 2017. The net
impact of these adjustments increased foreign
BNY Mellon 51
Results of Operations (continued)
exchange and other trading revenue by $8 million in
2017. During 2017, no realized loss was charged off
against CVA reserves.
The table below summarizes the risk ratings for our
foreign exchange and interest rate derivative
counterparty credit exposure during the past five
quarters. This information indicates the degree of
risk to which we are exposed. Significant changes in
ratings classifications for our foreign exchange and
other trading activity could result in increased risk for
us.
Foreign exchange and other trading counterparty risk rating profile (a)
Quarter ended
Rating:
AAA to AA-
A+ to A-
BBB+ to BBB-
Non-investment grade (BB+ and lower)
Total
(a) Represents credit rating agency equivalent of internal credit ratings.
Dec. 31,
2018
Sept. 30,
2018
June 30,
2018
March 31,
2018
Dec. 31,
2017
50%
28
18
4
100%
48%
30
19
3
100%
37%
41
18
4
100%
48%
27
20
5
100%
44%
31
20
5
100%
Asset/liability management
Our diversified business activities include processing
securities, accepting deposits, investing in securities,
lending, raising money as needed to fund assets and
other transactions. The market risks from these
activities include interest rate risk and foreign
exchange risk. Our primary market risk is exposure
to movements in U.S. dollar interest rates and certain
foreign currency interest rates. We actively manage
interest rate sensitivity and use earnings simulation
and discounted cash flow models to identify interest
rate exposures.
An earnings simulation model is the primary tool
used to assess changes in pre-tax net interest revenue.
The model incorporates management’s assumptions
regarding interest rates, market spreads, changes in
the prepayment behavior of loans and securities and
the impact of derivative financial instruments used
for interest rate risk management purposes. These
assumptions have been developed through a
combination of historical analysis and future expected
pricing behavior and are inherently uncertain. Actual
results may differ materially from projected results
due to timing, magnitude and frequency of interest
rate changes, and changes in market conditions and
management’s strategies, among other factors.
In the table below, we use the earnings simulation
model to run various interest rate ramp scenarios
from a baseline scenario. The interest rate ramp
scenarios examine the impact of large interest rate
movements. In each scenario, all currencies’ interest
rates are shifted higher or lower. The baseline
scenario is based on our quarter-end balance sheet
and the spot yield curve. The 100 basis point ramp
scenario assumes rates change 25 basis points above
or below the yield curve in each of the next four
quarters and the 200 basis point ramp scenario
assumes a 50 basis point per quarter change. Interest
rate sensitivity is quantified by calculating the change
in pre-tax net interest revenue between the scenarios
over a 12-month measurement period.
The following table shows net interest revenue sensitivity for BNY Mellon.
Estimated changes in net interest revenue
(in millions)
Up 200 bps parallel rate ramp vs. baseline (a)
Up 100 bps parallel rate ramp vs. baseline (a)
Down 100 bps parallel rate ramp vs. baseline (a)
Long-term up 50 bps, short-term unchanged (b)
Long-term down 50 bps, short-term unchanged (b)
(a) In the parallel rate ramp, both short-term and long-term rates move in four equal quarterly increments.
(b) Long-term is equal to or greater than one year.
$
Dec. 31,
2018
411 $
198
(163)
82
(98)
Sept. 30,
2018
362 $
180
(140)
83
(96)
Dec. 31,
2017
280
148
(225)
105
(122)
52 BNY Mellon
Results of Operations (continued)
Sensitivities in the 200 bps and 100 bps parallel rate
ramp scenarios increased in the fourth quarter of 2018
from the third quarter of 2018 primarily driven by a
favorable asset and liability mix change. In the first
quarter of 2018, we changed the net interest revenue
sensitivity methodology to assume static deposit
levels. Previously, our sensitivities included
assumptions about deposit runoff which were difficult
to predict. Prior period results have been restated to
conform to the current methodology.
To illustrate the net interest revenue sensitivity to
deposit runoff, we note that a $5 billion reduction of
U.S. dollar denominated non-interest bearing deposits
would reduce the net interest revenue sensitivity
results in the ramp up 100 basis point and 200 basis
point scenarios in the table above by approximately
$150 million and approximately $185 million,
respectively. The impact would be smaller if the
runoff was assumed to be a mixture of interest-
bearing and noninterest-bearing deposits.
For a discussion of factors impacting the growth or
contraction of deposits, see “Risk Factors - Our
business, financial condition and results of operations
could be adversely affected if we do not effectively
manage our liquidity.”
We also project future cash flows from our assets and
liabilities over a long-term horizon and then discount
these cash flows using instantaneous parallel shocks
to prevailing interest rates. This measure reflects the
structural balance sheet interest rate sensitivity by
discounting all future cash flows. The aggregation of
these discounted cash flows is the economic value of
equity (“EVE”). The following table shows how the
EVE would change in response to changes in interest
rates.
Estimated changes in EVE
Rate change:
Up 200 bps vs. baseline
Up 100 bps vs. baseline
Dec. 31,
2018
0.8%
0.8%
The asymmetrical accounting treatment of the impact
of a change in interest rates on our balance sheet may
create a situation in which an increase in interest rates
can adversely affect reported equity and regulatory
capital, even though economically there may be no
impact on our economic capital position. For
example, an increase in rates will result in a decline
in the value of our available-for-sale securities
portfolio. In this example, there is no corresponding
change on our fixed liabilities, even though
economically these liabilities are more valuable as
rates rise.
These results do not reflect strategies that
management could employ to limit the impact as
interest rate expectations change.
To manage foreign exchange risk, we fund foreign
currency-denominated assets with liability
instruments denominated in the same currency. We
utilize various foreign exchange contracts if a liability
denominated in the same currency is not available or
desired, and to minimize the earnings impact of
translation gains or losses created by investments in
foreign markets. We use forward foreign exchange
contracts to protect the value of our net investment in
foreign operations. At Dec. 31, 2018, net investments
in foreign operations totaled $13 billion and were
spread across 15 foreign currencies.
BNY Mellon 53
corporate risk appetite. The SRCC also reviews any
material breaches to our risk appetite and approves
action plans required to remediate the issue. SRCC
provides oversight for the risk management,
compliance and ethics framework. The Chief
Executive Officer, Chief Risk Officer and Chief
Financial Officer are among SRCC’s members.
Primary risk types
The understanding, identification and management of
risk are essential elements for the successful
management of BNY Mellon. Our primary risk
categories are:
Credit
Market
Type of risk Description
Operational The risk of loss resulting from inadequate or
failed internal processes, human factors and
systems, breaches of technology and
information systems, or from external events.
Also includes fiduciary risk, reputational risk,
and litigation risk.
The risk of loss due to adverse changes in the
financial markets. Our market risks are
primarily interest rate, foreign exchange, and
equity risk. Market risk particularly impacts
our exposures that are fair valued such as the
securities portfolio, trading book, and equity
investments.
The risk of loss if any of our borrowers or
other counterparties were to default on their
obligations to us. Credit risk is resident in the
majority of our assets, but primarily
concentrated in the loan and securities books,
as well as off-balance sheet exposures such as
lending commitments, letters of credit, and
securities lending indemnifications.
The risk that BNY Mellon cannot meet its cash
and collateral obligations at a reasonable cost
for both expected and unexpected cash flows,
without adversely affecting daily operations or
financial conditions. Liquidity risk can arise
from cash flow mismatches, market constraints
from the inability to convert assets to cash, the
inability to raise cash in the markets, deposit
run-off, or contingent liquidity events.
The risk that BNY Mellon doesn’t effectively
manage and protect the firm’s market
positioning and stability. This includes risks
associated with the inability to maintain a
strong understanding of clients’ needs, provide
suitable product offerings that are financially
viable and fit within the firm’s operating model
and adapt to transformational change in the
industry.
Liquidity
Strategic
Risk Management
Risk management overview
Governance
BNY Mellon’s management is responsible for
execution of the Company’s risk appetite and the risk
management and compliance framework and the
governance structure that supports it, with oversight
provided by BNY Mellon’s Board of Directors and
two key Board committees: the Risk Committee and
the Audit Committee.
The Risk Committee is comprised entirely of
independent directors and meets on a regular basis to
review and assess the control processes with respect
to the Company’s inherent risks. It also reviews and
assesses the risk management activities of the
Company and the Company’s risk policies and
activities. Policy formulation and day-to-day
oversight of the Company’s risk management
framework is delegated to the Chief Risk Officer,
who, together with the Chief Auditor and Chief
Compliance Officer, helps ensure an effective risk
management governance structure. The roles and
responsibilities of the Risk Committee are described
in more detail in its charter, a copy of which is
available on our website, www.bnymellon.com.
The Audit Committee is also comprised entirely of
independent directors. The Audit Committee meets
on a regular basis to perform an oversight review of
the integrity of the financial statements and financial
reporting process, compliance with legal and
regulatory requirements, our independent registered
public accountant’s qualifications and independence,
and the performance of our registered public
accountant and internal audit function. The Audit
Committee also reviews management’s assessment of
the adequacy of internal controls. The functions of
the Audit Committee are described in more detail in
its charter, a copy of which is available on our
website, www.bnymellon.com.
The Senior Risk and Control Committee (“SRCC”) is
the most senior management body responsible for
ensuring that emerging risks are weighed against the
54 BNY Mellon
Risk Management (continued)
The following table presents the primary types of risk
typically embedded in our balance sheet and our off-
balance sheet instruments.
On- and off-balance sheet risks
Assets:
Interest-bearing deposits with banks
Federal funds sold and securities
purchased under resale agreements
Securities
Trading assets
Loans
Goodwill
Intangible assets
credit
market, credit
market, credit, liquidity
market, credit, liquidity
credit, liquidity
operational, market
operational, market
Liabilities:
Deposits
Federal funds purchased and securities
sold under repurchase agreements
Trading liabilities
Payables to customers and broker-
dealers
liquidity
market, liquidity
market, liquidity
liquidity
Off-balance sheet instruments:
Lending commitments
Standby letters of credit
Commercial letters of credit
Securities lending indemnifications
credit, liquidity
credit, liquidity
credit, liquidity
market, credit
Operational risk
In providing a comprehensive array of products and
services, we may be exposed to operational risk.
Operational risk may result from, but is not limited
to, errors related to transaction processing, breaches
of internal control systems and compliance
requirements, fraud by employees or persons outside
BNY Mellon or business interruption due to system
failures or other events. Operational risk may also
include breaches of our technology and information
systems resulting from unauthorized access to
confidential information or from internal or external
threats, such as cyberattacks. Operational risk also
includes potential legal or regulatory actions that
could arise as a result of noncompliance with
applicable laws and/or regulatory requirements. In
the case of an operational event, we could suffer
financial losses as well as reputational damage.
To address these risks, we maintain comprehensive
policies and procedures and an internal control
framework designed to provide a sound operational
environment. These controls have been designed to
manage operational risk at appropriate levels given
our financial strength, the business environment and
markets in which we operate, and the nature of our
businesses, and considering factors such as
competition and regulation. Our internal auditors and
internal control group monitor and test the overall
effectiveness of our internal controls and financial
reporting systems on an ongoing basis.
We have also established procedures that are designed
to ensure compliance with generally accepted
conduct, ethics and business practices which are
defined in our corporate policies. These include
training programs, such as for our “Code of Conduct”
and “Know Your Customer” programs, and
compliance training programs, such as those
regarding information protection and suspicious
activity reporting.
We have established operational risk management as
an independent risk discipline. The organizational
framework for operational risk is based upon a strong
risk culture that incorporates both governance and
risk management activities comprising:
• Board Oversight and Governance – The Risk
Committee of the Board oversees our operational
risk management strategy in addition to
overseeing our strategic management of credit
and market risk. The Risk Committee meets
regularly to review operational risk management
initiatives, discuss key risk issues and review the
effectiveness of the risk management systems.
• Accountability of Businesses – Business
managers are responsible for maintaining an
effective system of internal controls
commensurate with their risk profiles and in
accordance with BNY Mellon policies and
procedures.
• Corporate Operational Risk Management is
responsible for developing risk management
policies and tools for assessing, measuring,
monitoring and managing operational risk for
BNY Mellon. The primary objectives of
Corporate Operational Risk Management are to
promote effective risk management, identify
emerging risks, create incentives for generating
continuous improvement in controls and to
optimize capital.
• Technology Risk is a subset of operational risk.
Technology Risk Management is under the
leadership of the Global Chief Technology Risk
Officer (“CTRO”) and drives the development of
global technology policies, controls and methods
for assessing, measuring and monitoring
information and technology risk for BNY Mellon.
BNY Mellon 55
Risk Management (continued)
Technology Risk Management partners with the
businesses to drive better understanding and a
more accurate assessment of operational risks
that can occur from technology operations.
Market risk
Our business activity tends to minimize outright or
direct exposure to market risk, with such risk
primarily limited to market volatility from trading
activity in support of clients. More significant direct
market risk is assumed in the form of interest rate and
credit spread risk within the investment portfolio both
as a means for forward asset/liability management
and net interest revenue generation.
The Company has indirect market risk exposure
associated with the change in the value of financial
collateral underlying securities financing and
derivatives positions. The Collateral Margin Review
Committee reviews and approves the standards for
collateral received or paid in respect of collateralized
derivative agreements and securities financing
transactions.
In addition to the Risk Committee, oversight of
market risk is performed by the SRCC and Balance
Sheet Risk Committee (“BSRC”) and through
executive review meetings. Detailed reviews of
stress tests results are conducted during the Markets
Weekly Risk Review. Senior managers from Risk
Management, Finance and Sales and Trading attend
the review. Regarding the Corporate Treasury
function, oversight is provided by the Treasury Risk
Committee, biweekly Portfolio Management Group
risk meetings, Business Risk Committee and
numerous portfolio reviews.
The Business Risk Committee for the Markets
business also provides a forum for market risk
oversight. The goal of the Business Risk Committee
meeting, which is held monthly, is to review key risk
and control issues and related initiatives facing all
Markets lines of business. Also addressed during the
Business Risk Committee meetings are trading VaR
and trading stressed VaR exposures against limits.
Finally, the Risk Quantification Review Group
reviews back-testing results for the Company’s VaR
model.
56 BNY Mellon
Credit risk
The extension of credit is not considered a discrete
product and is not, typically, attributable to a specific
business, but instead is used as a means of supporting
our clients and our business activity more holistically.
Specifically, we extend direct credit in order to foster
client relationships and as a method by which to
generate interest income from the deposits that result
from business activity. We extend and incur intraday
credit exposure in order to facilitate our various
processing activities.
To balance the value of our activities with the credit
risk incurred in pursuing them, we set and monitor
internal credit limits for activities that entail credit
risk, most often on the size of the exposure and the
quality of the counterparty. For credit exposures
driven by changing market rates and prices, exposure
measures include an add-on for such potential
changes.
We manage credit risk at both the individual exposure
level as well as the portfolio level. Credit risk at the
individual exposure level is managed through our
credit approval system and involves four approval
levels up to and including the Chief Risk Officer of
the Company. The requisite approvals are based upon
the size and relative risk of the aggregate exposure
under consideration. The Credit Risk Group is
responsible for approving the size, terms and maturity
of all credit exposures as well as the ongoing
monitoring of the creditworthiness of the
counterparty. In addition, they are responsible for
assigning and maintaining the internal risk ratings on
each exposure.
Credit risk management at the portfolio level is
supported by the Enterprise Capital Adequacy Group,
within Risk Management and Compliance. The
Enterprise Capital Adequacy Group is responsible for
calculating two fundamental credit measures. First,
we project a statistically probable credit loss, used to
help determine the appropriate loan loss reserve and
to measure customer profitability. Credit loss
considers three basic components: the estimated size
of the exposure whenever default might occur, the
probability of default before maturity and the severity
of the loss we would incur, commonly called “loss
given default.” For institutional lending, where most
of our credit risk is created, unfunded commitments
are assigned a usage given default percentage.
Borrowers/counterparties are assigned ratings by
Risk Management (continued)
Credit Portfolio Managers on an 18-grade scale,
which translate to a scaled probability of default.
Additionally, transactions are assigned loss-given-
default ratings (on a 7-grade scale) that reflect the
transactions’ structures including the effects of
guarantees, collateral and relative seniority of
position.
The second fundamental measurement of credit risk
calculated by the Enterprise Capital Adequacy Group
is called economic capital. Our economic capital
model estimates the capital required to support the
overall credit risk portfolio. Using a Monte Carlo
simulation engine and measures of correlation among
borrower defaults, the economic capital model
examines extreme and highly unlikely scenarios of
portfolio credit loss in order to estimate credit-related
capital, and then allocates that capital to individual
borrowers and exposures.
The Enterprise Capital Adequacy Group is
responsible for the calculation methodologies and the
estimates of the inputs used in those methodologies
for the determination of expected loss and economic
capital. These methodologies and input estimates are
regularly evaluated to ensure their appropriateness
and accuracy. As new techniques and data become
available, the Enterprise Capital Adequacy Group
attempts to incorporate, where appropriate, those
techniques or data.
BNY Mellon seeks to limit both on- and off-balance
sheet credit risk through prudent underwriting and the
use of capital only where risk-adjusted returns
warrant. We seek to manage risk and improve our
portfolio diversification through syndications, asset
sales, credit enhancements and active collateralization
and netting agreements. In addition, we have a
separate Credit Risk Review Group, which is part of
Internal Audit, made up of experienced loan review
officers who perform timely reviews of the loan files
and credit ratings assigned to the loans.
Liquidity risk
Access to global capital markets and financial market
utilities are fundamental to both our operating model
and overall strategy. Without such access, it would be
difficult, if not impossible, to process payments as
well as settle and clear transactions on behalf of
clients. Deterioration in our liquidity position,
whether actual or perceived, can impact our market
access by affecting participants’ willingness to
transact with us. Changes to our liquidity can be
caused by various factors, such as funding
mismatches, market constraints limiting the ability to
liquidate assets, inability to issue debt, run-off of core
deposits and contingent liquidity events, such as
additional collateral posting. Changes in economic
conditions or exposure to credit, market, operational,
legal and reputational risks can also affect our
liquidity. Our liquidity risk management practices are
designed to maintain a strong liquidity profile, by
actively managing both the quality of the investment
portfolio and intraday liquidity positions, and by
having sufficient deposits and other funding to meet
timely payment and settlement obligations under both
normal and stressed conditions.
Our overall approach to liquidity management is to
have sources of liquidity that are sufficient in amount
and diversity such that changes in funding
requirements at the Parent and at our bank and
broker-dealer subsidiaries can be accommodated
routinely without material adverse impact on
earnings, capital, daily operations or our financial
condition.
The Board of Directors has the responsibility for
oversight of liquidity risk management for the
Company and approves the liquidity risk tolerances.
The Asset Liability Committee (“ALCO”) is the
senior management committee responsible for the
oversight of liquidity management. ALCO is
responsible for appropriately executing Board-
approved strategies, policies and procedures for
managing liquidity. Senior management is
responsible for regularly reporting the liquidity
position of the Company to the Board of Directors.
The BSRC provides governance over independent
Risk oversight of liquidity risks associated with assets
and liabilities, liquidity risk limits calibration, and the
adequacy of related control procedures. The Treasury
Risk Committee, which is chaired by independent
risk management, is responsible for reviewing
liquidity stress tests and various liquidity metrics,
including contractual cash flow gaps for liquidity,
liquidity stress metrics and ratios, LCR, net stable
funding ratio (“NSFR”) and client deposit
concentration. The Treasury Risk Committee
validates and approves stress test methodologies and
assumptions, and an independent liquidity Risk
function provides ongoing review and oversight of
liquidity risk management.
BNY Mellon 57
Risk Management (continued)
BNY Mellon seeks to maintain an adequate liquidity
cushion in both normal and stressed environments
and seeks to diversify funding sources by line of
business, customer and market segment.
Additionally, we seek to maintain liquidity ratios
within approved limits and liquidity risk tolerance,
maintain a liquid asset buffer that can be liquidated,
financed and/or pledged as necessary, and control the
levels and sources of wholesale funds.
Potential uses of liquidity include withdrawals of
customer deposits and client drawdowns on unfunded
credit or liquidity facilities. We actively monitor
unfunded lending-related commitments, thereby
reducing unanticipated funding requirements.
When monitoring liquidity, we evaluate multiple
metrics in order to have sufficient liquidity for
expected and unexpected events. Metrics include
cash flow mismatches, asset maturities, debt spreads,
peer ratios, liquid assets, unencumbered collateral,
funding sources and balance sheet liquidity ratios.
We monitor the LCR, as well as various internal
liquidity limits as part of our standard analysis to
monitor depositor and market funding concentration,
liability maturity profile and potential liquidity draws
due to off-balance sheet exposure.
We also perform liquidity stress tests (“LSTs”) to
evaluate whether the Company and certain domestic
bank subsidiaries maintain sufficient liquidity
resources under multiple stress scenarios. LSTs are
based on scenarios that measure liquidity risks under
unlikely but plausible conditions. We perform these
tests under various time horizons ranging from one
day to one year in a base case, as well as
supplemental tests to determine whether the
Company and certain domestic subsidiaries’ liquidity
is sufficient for severe market events and firm-
specific events. The Parent’s LST framework
includes the Resolution Liquidity Adequacy and
Positioning (“RLAP”) test. The RLAP test is
designed to ensure that the liquidity needs of certain
key subsidiaries in a stress environment can be met
by available resources held directly within the entity
itself or at the Parent or IHC, as applicable. Our
results indicate that we have sufficient RLAP
liquidity.
58 BNY Mellon
Strategic Risk
Our strategy includes expanding our client base,
increasing product offerings and better aligning
certain business activities with market demand.
Successful realization of our strategy requires that we
provide expertise and insight through market-leading
solutions that drive economies of scale while
developing highly talented people and protecting our
financial strength and stability. We understand and
meet market and client expectations with suitable
products and offerings that are financially viable and
leverageable and that integrate into our business
model.
Markets, and the manner in which our clients interact
and transact within markets, can evolve quickly, such
as when new or disruptive technologies are
introduced. Failure to either anticipate or participate
in transformational change within a given market
could result in poor strategic positioning and potential
negative financial impact.
Stress Testing
It is the policy of the Company to perform Enterprise-
wide Stress Testing at regular intervals as part of its
Internal Capital Adequacy Assessment Process
(“ICAAP”). Additionally, the Company performs an
analysis of capital adequacy in a stressed
environment in its Enterprise-Wide Stress Test
Framework, as required by the enhanced prudential
standards issued pursuant to the Dodd-Frank Act.
Enterprise-Wide Stress Testing performs analyses
across the Company’s lines of business, products,
geographic areas, and risk types incorporating the
results from the different underlying models and
projections given alternative stress test scenarios. It
is an important component of assessing the adequacy
of capital as well as identifying any high risk touch
points in business activities. Furthermore, by
integrating enterprise-wide stress testing into the
Company’s capital planning process, the results
provide a forward-looking evaluation of the ability to
complete planned capital actions in a more-adverse-
than-anticipated economic environment.
Risk Management (continued)
Global compliance
Internal audit
Our global compliance function provides leadership,
guidance and oversight to help our businesses
identify applicable laws and regulations and
implement effective measures to meet the specific
requirements. Compliance takes a proactive
approach by anticipating evolving regulatory
standards and remaining aware of industry best
practices, legislative initiatives, competitive issues,
and public expectations and perceptions. The
function uses its global reach to disseminate
information about compliance-related matters
throughout BNY Mellon. The Chief Compliance and
Ethics Officer reports to the Chief Risk Officer, is a
member of key committees of BNY Mellon and
provides regular updates to the Risk Committee of the
Board of Directors.
Internal Audit is an independent, objective assurance
function that reports directly to the Audit Committee
of the Company’s Board of Directors. It assists the
Company in accomplishing its objectives by bringing
a systematic, disciplined, risk-based approach to
evaluate and improve the effectiveness of the
Company’s risk management, control and governance
processes. The scope of Internal Audit’s work
includes the review and evaluation of the adequacy,
effectiveness and sustainability of risk management
procedures, internal control systems, information
systems and governance processes.
BNY Mellon 59
Supervision and Regulation
Evolving Regulatory Environment
BNY Mellon engages in banking, investment
advisory and other financial activities in the U.S. and
34 other countries, and is subject to extensive
regulation in the jurisdictions in which it operates.
Global supervisory authorities generally are charged
with ensuring the safety and soundness of financial
institutions, protecting the interests of customers,
including depositors in banking entities and investors
in mutual funds and other pooled vehicles,
safeguarding the integrity of securities and other
financial markets and promoting systemic resiliency
and financial stability in the relevant country. They
are not, however, generally charged with protecting
the interests of our shareholders or non-deposit
creditors. This discussion outlines the material
elements of selected laws and regulations applicable
to us. The impact of certain other laws and
regulations, such as tax law, is discussed elsewhere in
the Annual Report. Changes in these standards, or in
their application, cannot be predicted, but may have a
material effect on our businesses and results of
operations.
The financial services industry has been the subject of
enhanced regulatory oversight in the past decade
globally, and this trend may continue in the future.
Our businesses have been subject to a significant
number of global reform measures. In particular, the
Dodd-Frank Act and its implementing regulations
have significantly restructured the financial
regulatory regime in the U.S. and enhanced
supervision and prudential standards for large and
internationally active BHCs like BNY Mellon. The
implications of the Dodd-Frank Act for our
businesses depend to a large extent on the manner in
which implementing regulations continue to be
established and interpreted by the primary U.S.
financial regulatory agencies - the Federal Reserve,
the Federal Deposit Insurance Corporation (“FDIC”),
the Office of the Comptroller of the Currency
(“OCC”), the Securities and Exchange Commission
(“SEC”) and the Commodity Futures Trading
Commission (“CFTC”). The implications are also
dependent on continuing changes in market practices
and structures in response to the requirements of the
Dodd-Frank Act and financial reforms in other
jurisdictions. Certain aspects of the Dodd-Frank Act
remain subject to further rulemaking, take effect over
various transition periods, or contain other elements
that make it difficult to precisely anticipate their full
impact. In addition, other national and global non-
60 BNY Mellon
U.S. reform measures adopted or under consideration
by various policy makers that are being considered
may materially adversely impact us.
Political developments may result in legislative and
regulatory changes to key aspects of the Dodd-Frank
Act, its implementing regulations, and related laws,
including the recently enacted Economic Growth,
Regulatory Relief, and Consumer Protection Act (the
“Reform Act”), discussed later in this section. In
addition, the UK referendum vote to withdraw from
the European Union, discussed below, and the
implementation of that decision have resulted in
uncertainty as to the implementation, scope and
timing of regulatory reforms affecting our UK and
EU operations and contingency planning for our EU
operating model.
United Kingdom’s Withdrawal from the European
Union (“Brexit”)
The United Kingdom is scheduled to withdraw from
the European Union on March 29, 2019. In
anticipation of this event, BNY Mellon has assessed
the impact of this withdrawal on our businesses. Our
program currently assumes that the UK will leave the
EU without an agreement in place, meaning that,
among other things, UK firms will lose the benefit of
transacting within the EU by relying on their existing
“passport” on March 29, 2019.
BNY Mellon maintains a presence in the UK through
the London branch of The Bank of New York Mellon,
The Bank of New York Mellon (International)
Limited and a number of its investment management
subsidiaries, and in the remaining EU member states,
through The Bank of New York Mellon SA/NV
(“BNY Mellon SA/NV”) and through certain of its
investment management subsidiaries. We have
undertaken, and continue to undertake, adjustments to
the operations of BNY Mellon SA/NV so that it may
provide a wider range of services to clients domiciled
in the EU.
Enhanced Prudential Standards
The Federal Reserve has adopted rules (“Final SIFI
Rules”) to implement liquidity requirements, stress
testing of capital and overall risk management
requirements affecting U.S. SIFIs. BNY Mellon must
comply with enhanced liquidity and overall risk
management standards, which include maintenance of
a buffer of highly liquid assets based on projected
Supervision and Regulation (continued)
funding needs for 30 days. The liquidity buffer is in
addition to the U.S. banking agencies’ rules regarding
the LCR, discussed below, and is described by the
Federal Reserve as being “complementary” to those
liquidity standards.
Financial Services Regulatory Reform Legislation
The Reform Act became law in May 2018.
Provisions of the Reform Act that may impact BNY
Mellon include the elimination of the Dodd-Frank
company-run stress test requirements for BHCs,
banks, and other financial companies with less than
$250 billion in assets, including BNY Mellon, N.A.;
the elimination of the “adverse scenario” as a
required stress scenario, reducing the minimum
number of supervisory scenarios from three (baseline,
adverse, and severely adverse) to two (baseline and
severely adverse); and its direction to U.S. banking
agencies to exclude certain central bank deposit
placements from the total leverage exposure (the SLR
denominator) of custody banks, including BNY
Mellon and The Bank of New York Mellon, to the
extent of the value of client deposits at the custody
bank that are linked to fiduciary, custody or
safekeeping accounts. See “Regulatory Stress-Testing
Requirements” and “Leverage Ratios” below.
Single Counterparty Credit Limits
On June 14, 2018, the Federal Reserve approved a
final rule imposing single-counterparty credit limits
(“SCCLs”) on, among other organizations, domestic
BHCs, including BNY Mellon, that are G-SIBs or
that have $250 billion or more in total consolidated
assets. The SCCLs apply to the credit exposure of a
covered firm and all of its subsidiaries to a single
counterparty and all of its affiliates and connected
entities. The final rule introduces new definitions of
“subsidiary” and “affiliate” under a financial
consolidation standard that is consistent with
accounting standards. The final rule will apply to
BNY Mellon beginning Jan. 1, 2020.
The final rule establishes two primary credit exposure
limits: (1) a covered domestic BHC may not have
aggregate net credit exposure to any unaffiliated
counterparty in excess of 25% of its tier 1 capital, and
(2) a U.S. G-SIB is further prohibited from having
aggregate net credit exposure in excess of 15% of its
tier 1 capital to any “major counterparty” (defined as
a G-SIB or a nonbank SIFI). The final rule adopts a
risk-sensitive exposure measurement methodology
for securities financing transactions (“SFTs”) that
permits the use of any method authorized under the
Federal Reserve’s capital rules, including internal
models.
BNY Mellon is still evaluating the impact that the
final rule will have, which will depend on various
factors including, for example, the Federal Reserve’s
interpretation of the final rule, whether interpretive
guidance is published and the impact of the final rule
on other covered firms.
Capital Planning and Stress Testing
Payment of Dividends, Stock Repurchases and Other
Capital Distributions
The Parent is a legal entity separate and distinct from
its banks and other subsidiaries. Therefore, the
Parent primarily relies on dividends, interest,
distributions, and other payments from its
subsidiaries, including extensions of credit from the
IHC, to meet its obligations, including its obligations
with respect to its securities, and to provide funds for
share repurchases and payment of common and
preferred dividends to its stockholders, to the extent
declared by the Board of Directors. Various federal
and state laws and regulations limit the amount of
dividends that may be paid to the Parent by our bank
subsidiaries without regulatory consent. If, in the
opinion of the applicable federal regulatory agency, a
depository institution under its jurisdiction is engaged
in or is about to engage in an unsafe or unsound
practice (which, depending on the financial condition
of the bank, could include the payment of dividends),
the regulator may require, after notice and hearing,
that the bank cease and desist from such practice.
The OCC, the Federal Reserve and the FDIC have
indicated that the payment of dividends would
constitute an unsafe and unsound practice if the
payment would reduce a depository institution’s
capital to an inadequate level. Moreover, under the
Federal Deposit Insurance Act, as amended (the “FDI
Act”), an insured depository institution (“IDI”) may
not pay any dividends if the institution is
undercapitalized or if the payment of the dividend
would cause the institution to become
undercapitalized. In addition, the federal bank
regulatory agencies have issued policy statements
which provide that FDIC-insured depository
institutions and their holding companies should
generally pay dividends only out of their current
operating earnings.
BNY Mellon 61
Supervision and Regulation (continued)
In general, the amount of dividends that may be paid
by our U.S. banking subsidiaries, including to the
Parent, is limited to the lesser of the amounts
calculated under a “recent earnings” test and an
“undivided profits” test. Under the recent earnings
test, a dividend may not be paid if the total of all
dividends declared and paid by the entity in any
calendar year exceeds the current year’s net income
combined with the retained net income of the two
preceding years, unless the entity obtains prior
regulatory approval. Under the undivided profits test,
a dividend may not be paid in excess of the entity’s
“undivided profits” (generally, accumulated net
profits that have not been paid out as dividends or
transferred to surplus). The ability of our bank
subsidiaries to pay dividends to the Parent may also
be affected by the capital adequacy standards
applicable to those subsidiaries, which include
minimum requirements and buffers.
There are also limitations specific to the IHC’s ability
to make distributions or extend credit to the Parent.
The IHC is not permitted to pay dividends to the
Parent if certain key capital, liquidity and operational
risk indicators are breached. Additionally, if our
projected financial resources deteriorate so severely
that resolution of the Parent becomes imminent, the
committed lines of credit provided by the IHC to the
Parent will automatically terminate, with all
outstanding amounts becoming due.
BNY Mellon’s capital distributions are subject to
Federal Reserve oversight. The major component of
that oversight is the Federal Reserve’s
Comprehensive Capital Analysis and Review
(“CCAR”), implementing its capital plan rule. That
rule requires BNY Mellon to submit an annual capital
plan to the Federal Reserve. We are also required to
collect and report certain related data on a quarterly
basis to allow the Federal Reserve to monitor
progress against the annual capital plans. Generally,
BNY Mellon and other affected BHCs may pay
dividends, repurchase stock and make other capital
distributions only in accordance with a capital plan
that has been reviewed by the Federal Reserve and as
to which the Federal Reserve has not objected. The
Federal Reserve may object to our capital plan for
quantitative or qualitative reasons, including if the
plan does not show that the covered BHC will meet,
for each quarter throughout the nine-quarter planning
horizon covered by the capital plan, all minimum
regulatory capital ratios under applicable capital rules
as in effect for that quarter on a pro forma basis under
62 BNY Mellon
the base case and stressed scenarios (including a
severely adverse scenario provided by the Federal
Reserve). The capital plan rule also stipulates that we
may not make a capital distribution unless after
giving effect to the distribution it will meet all
minimum regulatory capital ratios.
The purpose of CCAR is to ensure that these BHCs
have robust, forward-looking capital planning
processes that account for their unique risks and that
permit continued operations during times of
economic and financial stress. The 2018 CCAR
instructions, consistent with prior Federal Reserve
guidance, provide that capital plans contemplating
dividend payout ratios exceeding 30% of projected
after-tax net income will receive particularly close
scrutiny. BNY Mellon’s common stock dividend
payout ratio was 26% for 2018. See “Capital” for
information about our 2018 capital plan.
Regulatory Stress-Testing Requirements
In addition to the CCAR stress testing requirements,
Federal Reserve regulations also include
complementary Dodd-Frank Act Stress Tests
(“DFAST”). The CCAR and DFAST requirements
substantially overlap, and the Federal Reserve
implements them at the BHC level on a coordinated
basis. Under these DFAST regulations, we are
required to undergo regulatory stress tests conducted
by the Federal Reserve annually, and to conduct our
own internal stress tests pursuant to regulatory
requirements twice annually. In addition, The Bank
of New York Mellon is required to conduct its own
annual internal stress test (although the bank is
permitted to combine certain reporting and disclosure
of its stress test results with the results of BNY
Mellon). The Reform Act revised the Dodd-Frank
company-run stress test requirements for BHCs
subject to enhanced prudential standards, such as
BNY Mellon, to require periodic, rather than semi-
annual, company-run stress tests. Proposed Federal
Reserve regulations would require BNY Mellon and
other affected BHCs to conduct an annual, but not a
mid-cycle, company-run stress test effective
beginning with the 2020 cycle. The Reform Act also
eliminated the Dodd-Frank company-run stress test
requirements for BHCs, banks, and other financial
companies with less than $250 billion in assets,
including BNY Mellon, N.A. Results from our
annual company-run stress tests are reported to the
appropriate regulators and published. The Federal
Reserve published the results of its most recent
Supervision and Regulation (continued)
annual 2018 DFAST stress-test on June 21, 2018. We
published the results of our most recent company-run
annual stress test on June 21, 2018, and the results of
our company-run mid-year stress test on Oct. 12,
2018.
Capital Requirements - Generally
As a BHC, we are subject to U.S. capital rules,
administered by the Federal Reserve. Our bank
subsidiaries are subject to similar capital
requirements administered by the Federal Reserve in
the case of The Bank of New York Mellon and by the
OCC in the case of our national bank subsidiaries,
BNY Mellon, N.A. and The Bank of New York
Mellon Trust Company, National Association. These
requirements are intended to ensure that banking
organizations have adequate capital given the risk
levels of their assets and off-balance sheet exposures.
Notwithstanding the detailed U.S. capital rules, the
federal banking agencies retain significant discretion
to set higher capital requirements for categories of
BHCs or banks or for an individual BHC or bank as
situations warrant.
U.S. Capital Rules - Minimum Risk-Based Capital
Ratios and Capital Buffers
Consistent with the terms of the Basel III framework
and the Dodd-Frank Act, as amended by the Reform
Act, the U.S. capital rules require Advanced
Approaches banking organizations, such as BNY
Mellon, to satisfy minimum risk-based capital ratios
using both the U.S. capital rules’ standardized
approach risk-weightings framework (the
“Standardized Approach”) and the advanced
approaches risk-weighting framework (the
“Advanced Approaches”). See “Capital” for details
on these requirements. In addition, these minimum
ratios are supplemented by a capital conservation
buffer required threshold that began being phased in
on Jan. 1, 2016, in increments of 0.625% per year
until it reached 2.5% on Jan. 1, 2019. The capital
conservation buffer can only be satisfied with CET1
capital.
When systemic vulnerabilities are meaningfully
above normal, the capital conservation buffer may be
expanded up to an additional 2.5% through the
imposition of a countercyclical capital buffer. For
internationally active banks such as BNY Mellon, the
countercyclical capital buffer required threshold is a
weighted average of the countercyclical capital
buffers deployed in each of the jurisdictions in which
the bank has private sector credit exposures. The
Federal Reserve, in consultation with the OCC and
FDIC, has affirmed the current countercyclical capital
buffer level for U.S. exposures of 0% and noted that
any future modifications to the buffer would
generally be subject to a 12-month phase-in period.
Any countercyclical capital buffer required threshold
arising from exposures outside the United States will
also generally be subject to a 12-month phase-in
period.
The U.S. capital rules’ buffers are also
supplemented by a risk-based capital surcharge on
G-SIBs which requires G-SIBs to calculate their
surcharges under two methods (referred to as
“method 1” and “method 2”) and use the higher of
the two surcharges. The first method is based on
the BCBS’s framework and considers a G-SIB’s
size, interconnectedness, cross-jurisdictional
activity, substitutability and complexity. The
second method uses similar inputs, but is
calibrated to result in significantly higher
surcharges and replaces substitutability with a
measure of reliance on short-term wholesale
funding. Consistent with the phase-in of the
capital conservation buffer, the G-SIB capital
surcharge began to be phased-in beginning on Jan.
1, 2016 and became fully effective on Jan. 1,
2019. The G-SIB surcharge applicable to BNY
Mellon is 1.5% on a fully phased-in basis.
U.S. Capital Rules - Deductions from and
Adjustments to Capital Elements
The U.S. capital rules provide for a number of
deductions from and adjustments to CET1 capital.
These include, for example, providing that unrealized
gains and losses on all available-for-sale debt
securities may not be filtered out for regulatory
capital purposes, and the requirement that mortgage
servicing rights, deferred tax assets dependent upon
future taxable income and significant investments in
non-consolidated financial entities be deducted from
CET1 to the extent that any one such category
exceeds 10% of CET1 or all such categories in the
aggregate exceed 15% of CET1.
BNY Mellon 63
Supervision and Regulation (continued)
U.S. Capital Rules - Advanced Approaches Risk-
Based Capital Rules
amount and the relevant risk weight for the
counterparty and collateral posted.
Under the U.S. capital rules’ Advanced Approaches
framework, credit risk risk-weightings are generally
based on risk-sensitive approaches that largely rely on
the use of internal credit models and parameters,
whereas under the Standardized Approach credit risk
risk-weightings are generally based on supervisory
risk-weightings which vary primarily by counterparty
type and asset class. BNY Mellon is required to
comply with Advanced Approaches reporting and
public disclosures. Under the U.S. capital rules, this
means, among other things, for purposes of
determining whether we meet minimum risk-based
capital requirements, our CET1 ratio, Tier 1 capital
ratio, and total capital ratio is the lower of that
calculated under the Standardized Approach and
under the Advanced Approaches framework.
U.S. Capital Rules - Generally Applicable Risk-Based
Capital Rules: Standardized Approach
The agencies’ generally applicable risk-based capital
rules (i.e., the Standardized Approach) calculate risk-
weighted assets in the denominator of capital ratios
using a broad array of risk weighting categories that
are intended to be risk sensitive. The risk-weights for
the Standardized Approach generally range from 0%
to 1,250%. Higher risk-weights under the
Standardized Approach apply to a variety of
exposures, including certain securitization exposures,
equity exposures, claims on securities firms and
exposures to counterparties on OTC derivatives.
Concerning securities finance transactions, including
transactions in which we serve as agent and provide
securities replacement indemnification to a securities
lender, the U.S. capital rules do not permit a banking
organization to use a simple VaR approach to
calculate exposure amounts for repo-style
transactions or to use internal models to calculate the
exposure amount for the counterparty credit exposure
for repo-style transactions under the Standardized
Approach (although these methodologies are allowed
in the Advanced Approaches). Under the
Standardized Approach, a banking organization may
use a collateral haircut approach to recognize the
credit risk mitigation benefits of financial collateral
that secures a repo-style transaction, including an
agented securities lending transaction, among other
transactions. To apply the collateral haircut approach,
a banking organization must determine the exposure
64 BNY Mellon
Federal Reserve Proposed Changes to CCAR and its
Capital Rules
On April 10, 2018, the Federal Reserve issued a
proposed rule that would integrate its regulatory
capital, capital planning, and stress test rules, as well
as the CCAR process. The proposal would introduce
a stress capital buffer (“SCB”) that would be part of
the firm’s quarterly capital requirements. The
proposal would replace the current static 2.5% capital
conservation buffer with an SCB requirement for
Standardized Approach capital ratios that would,
among other things, be tied to the projected decrease
in a firm’s common equity Tier 1 capital ratio in the
Federal Reserve’s supervisory severely adverse
scenario. The proposed rule would introduce a new
requirement that firms reduce their planned capital
distributions if those distributions would not be
consistent with the applicable buffer constraints based
on the firms’ own baseline scenario projections. In
addition, the proposed rule would introduce a stress
leverage buffer (“SLB”) that is analogous to the SCB
and applies to firms’ Tier 1 leverage ratios. Under the
proposal, a firm’s first SCB and SLB would become
effective on Oct. 1, 2019.
Leverage Ratios
The U.S. capital rules require a minimum 4%
leverage ratio for all banking organizations, as well as
a 3% Basel III-based SLR for Advanced Approaches
banking organizations, including BNY Mellon, which
became effective Jan. 1, 2018. Unlike the Tier 1
leverage ratio, the SLR includes certain off-balance
sheet exposures in the denominator, including the
potential future credit exposure of derivative
contracts and 10% of the notional amount of
unconditionally cancelable commitments.
The Reform Act directed the U.S. banking agencies to
exclude certain central bank deposit placements from
the total leverage exposure (the SLR denominator) of
custody banks, including BNY Mellon and The Bank
of New York Mellon. The U.S. banking agencies
have not yet proposed rules implementing this
provision. See “Federal Reserve and OCC Proposed
Amendments to the Enhanced Supplementary
Leverage Ratio Requirements for U.S. G-SIBs” below
for a discussion of additional proposed amendments
to applicable SLR requirements.
Supervision and Regulation (continued)
The U.S. G-SIBs (including BNY Mellon) are subject
to an enhanced SLR, which requires us to maintain an
SLR of greater than 5% (composed of the current
minimum requirement of 3% plus a greater than 2%
buffer) and requires bank subsidiaries of those BHCs
to maintain at least a 6% SLR in order to qualify as
“well capitalized” under the prompt corrective action
regulations discussed below. The final enhanced SLR
rule for U.S. G-SIBs, like the SLR more generally
applicable to all Advanced Approaches banking
organizations, became effective on Jan. 1, 2018. At
Dec. 31, 2018, our SLR was 6.0% and the SLR for
our primary banking subsidiary, The Bank of New
York Mellon, was 6.8%.
Federal Reserve and OCC Proposed Amendments to
the Enhanced Supplementary Leverage Ratio
Requirements for U.S. G-SIBs
On April 11, 2018, the Federal Reserve and the OCC
issued a joint notice of proposed rule-making that
would recalibrate the enhanced SLR standards that
apply to U.S. G-SIBs and certain of their IDI
subsidiaries. The proposed rule would replace the 2%
SLR buffer that currently applies to all U.S. G-SIBs
with a buffer equal to 50% of the firm’s risk-based G-
SIB surcharge.
For IDI subsidiaries of U.S. G-SIBs regulated by the
Federal Reserve or the OCC, the proposal would
replace the current 6% SLR threshold requirement for
those institutions to be considered “well capitalized”
under the agencies’ prompt corrective action
framework with an SLR of at least 3% plus 50% of
the G-SIB surcharge applicable to their top-tier
holding companies. The proposed rule would also
make corresponding changes to the total loss-
absorbing capacity (“TLAC”) SLR buffer and long-
term debt requirements for U.S. G-SIBs, as well as
technical changes to the Federal Reserve’s TLAC
rule. The Federal Reserve and OCC have not yet
issued a final rule.
These proposed amendments are separate from the
Reform Act’s change to the SLR denominator of
custody banks discussed above under the heading
“Leverage Ratios.”
BCBS Revisions to Components of Basel III
In December 2017 the BCBS released revisions to
Basel III intended to reduce variability of RWA and
improve the comparability of banks’ risk-based
capital ratios. Among other measures, the final
revisions: (1) establish a revised Standardized
Approach for credit risk that enhances the
Standardized Approach’s granularity and risk
sensitivity; (2) adjust the internal ratings-based
approaches for credit risk by removing the use of the
advanced internal ratings-based approach for certain
asset classes and establishing input floors for the
calculation of RWA; (3) replace the advanced
measurement approach for operational risk with a
revised Standardized Approach for operational risk
based on measures of a bank’s income and historical
losses; (4) revise the leverage ratio exposure measure,
establish a “leverage ratio buffer” for G-SIBs, set at
50% of a G-SIB’s risk-based capital surcharge, and
allow national discretion to exclude central bank
placements in limited circumstances (see “Federal
Reserve and OCC Proposed Amendments to the
Enhanced Supplementary Leverage Ratio
Requirements for U.S. G-SIBs” above); and (5)
introduce a new 72.5% output floor based on the
Standardized Approach. The revised standards are
effective Jan. 1, 2022, with the output floor phasing
in from 2022 to 2027.
In January 2019, the BCBS released revised
minimum capital requirements for market risk. The
revised standards also come into effect Jan. 1, 2022.
There is continuing uncertainty regarding whether
and how the U.S. regulators will implement these
revised Basel standards.
Standardized Approach for Measuring Counterparty
Credit Risk Exposures
On Oct. 30, 2018, the Federal Reserve, FDIC and
OCC jointly issued a Notice of Proposed Rulemaking
(“NPR”), which would amend the U.S. capital rules
to implement a new approach for calculating the
exposure amount for derivative contracts, which is
called the Standardized Approach for Counterparty
Credit Risk (“SA-CCR”). The NPR also incorporates
SA-CCR into the determination of exposure amount
of derivatives for total leverage exposure under the
SLR and the cleared transaction framework under the
U.S. capital rules. Further, the NPR would make
technical amendments to the capital rule with respect
to cleared transactions. The effective date of the
proposed SA-CCR rule for the Advanced Approaches
Banks would be July 1, 2020. BNY Mellon is
evaluating what effect such amendments to the U.S.
capital rules, if implemented, would have on our
financial condition or results of operations.
BNY Mellon 65
Supervision and Regulation (continued)
Total Loss-Absorbing Capacity
On Dec. 15, 2016, the Federal Reserve issued a final
rule (the “TLAC Rule”) establishing external TLAC
and related requirements for U.S. G-SIBs, including
BNY Mellon, at the top-tier holding company level.
The rule became effective on Jan. 1, 2019, and at
Dec. 31, 2018, we had sufficient TLAC to be
compliant with the requirement.
Under the TLAC Rule, U.S. G-SIBs are required to
maintain a minimum eligible external TLAC equal to
the greater of (a) 18% of RWAs plus a buffer (to be
met using only CET1) equal to the sum of 2.5% of
RWAs, the G-SIB surcharge calculated under method
1 and any applicable countercyclical buffer; and (b)
7.5% of their total leverage exposure (the
denominator of the SLR) plus a buffer (to be met
using only Tier 1 Capital) equal to 2%.
U.S. G-SIBs are also required to maintain minimum
external eligible long-term debt (“LTD”) equal to the
greater of (a) 6% of RWAs plus the G-SIB surcharge
(calculated using the greater of method 1 and method
2), and (b) 4.5% of total leverage exposure. In order
to be deemed eligible LTD, debt instruments must,
among other requirements, be unsecured, not be
structured notes, be governed by U.S. law, and have a
maturity of at least one year from the date of
issuance. In addition, the TLAC Rule requires that
LTD issued on or after Dec. 31, 2016 (i) not have
acceleration rights, other than in the event of non-
payment or the bankruptcy or insolvency of the issuer
and (ii) be governed by U.S. law. However, debt
issued by a U.S. G-SIB prior to Dec. 31, 2016 is
permanently grandfathered to the extent these
securities would be ineligible only due to containing
impermissible acceleration rights or being governed
by foreign law.
Further, the top-tier holding companies of U.S. G-
SIBs are not permitted to issue certain guarantees of
subsidiary liabilities, incur liabilities guaranteed by
subsidiaries, issue short-term debt to third parties, or
enter into derivatives and certain other financial
contracts with external counterparties. Certain
liabilities are capped at 5% of the value of the U.S.
G-SIB’s eligible external TLAC instruments. The
Federal Reserve considered requiring internal TLAC
at domestic subsidiaries of U.S. G-SIBs, but has not
proposed rules regarding these instruments.
66 BNY Mellon
Foreign jurisdictions may impose internal TLAC
requirements on the foreign subsidiaries of U.S. G-
SIBs. The draft Capital Requirements Regulation II
in the European Union would require EU material
subsidiaries of non-EU G-SIBs (including BNY
Mellon) to maintain a minimum level of internal loss
absorbing capacity, broadly in line with the Financial
Stability Board (“FSB”) TLAC term sheet,
promulgated by the Financial Stability Board in
November 2015. The Bank of New York Mellon SA/
NV is likely to be considered an EU material
subsidiary for purposes of this regulation.
Prompt Corrective Action
The FDI Act, as amended by the Federal Deposit
Insurance Corporation Improvement Act of 1991
(“FDICIA”), requires the federal banking agencies to
take “prompt corrective action” in respect of
depository institutions that do not meet specified
capital requirements. FDICIA establishes five capital
categories for FDIC-insured banks: “well
capitalized,” “adequately capitalized,”
“undercapitalized,” “significantly undercapitalized,”
and “critically undercapitalized.” The FDI Act
imposes progressively more restrictive constraints on
operations, management and capital distributions the
less capital the institution holds. While these
regulations apply only to banks, such as The Bank of
New York Mellon and BNY Mellon, N.A., the
Federal Reserve is authorized to take appropriate
action against the parent bank holding company, such
as the Parent, based on the under-capitalized status of
any banking subsidiary. In certain circumstances, the
Parent would be required to guarantee the
performance of the capital restoration plan if one of
our banking subsidiaries were undercapitalized.
The federal banking agencies’ prompt corrective
action framework (“PCA rules”) contain “well
capitalized” thresholds for IDIs. Under these rules,
an IDI is deemed to be “well capitalized” if it has
capital ratios as detailed in the “Capital” disclosure.
The PCA rules require an Advanced Approaches
banking organization to maintain an SLR of at least
3% to qualify for the “adequately capitalized” status.
In addition, the U.S. federal banking agencies’
revisions to the enhanced SLR establish a SLR “well
capitalized” threshold of 6% for certain IDIs of U.S.
G-SIBs, including The Bank of New York Mellon and
BNY Mellon N.A.
Supervision and Regulation (continued)
Current Expected Credit Losses Accounting Standard
In June 2016, the Financial Accounting Standards
Board issued an update to the accounting standards
for credit losses that included the “Current Expected
Credit Losses” (“CECL”) methodology, which
replaces the existing incurred loss methodology for
certain financial assets. Upon adopting CECL, a
company will record a one-time adjustment to its
credit loss allowances as of the beginning of its fiscal
year of adoption equal to the difference between the
amounts of its credit loss allowances under the
incurred loss methodology and CECL.
On Dec. 21, 2018 the Federal Reserve, the OCC and
the FDIC approved a final rule modifying their
regulatory capital rules and providing an option to
phase in over a period of three years the regulatory
capital effects of adopting the CECL methodology.
During the phase in, the agencies will continue to
monitor the impact of CECL adoption. The final rule
will take effect April 1, 2019. The Federal Reserve
also indicated that it would maintain the current
framework for calculating credit loss allowances in
CCAR, and would not incorporate CECL into
supervisory stress testing, through the 2021 stress test
cycle.
Liquidity Standards - Basel III and U.S. Rules and
Proposals
BNY Mellon is subject to the Final U.S. LCR Rule,
which is designed to ensure that BNY Mellon and
certain domestic bank subsidiaries maintain an
adequate level of unencumbered HQLA equal to
their expected net cash outflow for a 30-day time
horizon under an acute liquidity stress scenario. As
of Dec. 31, 2018, the Parent and its domestic bank
subsidiaries were in compliance with applicable
LCR requirements.
The BCBS issued the final NSFR document in
October 2014 which contemplates an additional
liquidity measure, referred to as NSFR, which is
designed to promote more medium- and long-term
funding of the assets and activities of banking entities
over a one-year time horizon. In May 2016, the
Federal Reserve, FDIC and OCC proposed an NSFR
rule that would implement a quantitative long-term
liquidity requirement applicable to large and
internationally active banking organizations,
including BNY Mellon. The proposed NSFR rule
would implement a test similar to the Basel III
framework’s test for medium- and long-term funding
of the assets and activities of banking entities over a
one-year time horizon. Under the proposed rule,
BNY Mellon’s NSFR would be expressed as a ratio
of its available stable funding to its required stable
funding amount, and BNY Mellon would be required
to maintain an NSFR of 1.0. BNY Mellon continues
to evaluate the potential effects of this proposal on its
operations. The proposed NSFR rule would have
been effective Jan. 1, 2018 had it been finalized as
proposed; however, final rules have not been issued.
Separately, as noted above, the Final SIFI Rules
address liquidity requirements for BHCs with $100
billion or more in total assets, including BNY Mellon.
These enhanced liquidity requirements include an
independent review of liquidity risk management;
establishment of cash flow projections; a contingency
funding plan, and liquidity risk limits; liquidity stress
testing under multiple stress scenarios and time
horizons tailored to the specific products and profile
of the company; and maintenance of a liquidity buffer
of unencumbered highly liquid assets sufficient to
meet projected net cash outflows over 30 days under
a range of stress scenarios.
Volcker Rule
The Dodd-Frank Act imposed broad prohibitions and
restrictions on proprietary trading and investments in
or sponsorship of hedge funds and private equity
funds by banking organizations and their affiliates,
commonly referred to as the “Volcker Rule.”
The Volcker Rule, subject to certain exceptions,
prohibits “banking entities,” including BNY Mellon,
from engaging in proprietary trading and limits our
sponsorship of, and investments in, private equity and
hedge funds (“covered funds”), including our ability
to own or provide seed capital to covered funds. In
addition, the Volcker Rule restricts us from engaging
in certain transactions with covered funds (including,
without limitation, certain U.S. funds for which BNY
Mellon acts as both sponsor/manager and custodian).
The restrictions concerning proprietary trading do not
contain a broad exemption for asset-liability
management functions, but contain more limited
exceptions for, among other things, bona fide
liquidity risk management and risk-mitigating
hedging activities, as well as certain classes of
exempted instruments, including government
securities. Ownership interests in covered funds that
BNY Mellon 67
Supervision and Regulation (continued)
banking organizations organize and offer are
generally limited to 3% of the total number or value
of the outstanding ownership interests of any
individual fund at any time more than one year after
the date of its establishment, and with respect to the
aggregate value of all such ownership interests in
covered funds (when combined with ownership
interests in covered funds held under the Volcker
Rule’s ABS issuer exemption and underwriting and
market-making exemption), 3% of the banking
organization’s Tier 1 capital. Moreover, a banking
entity relying on the Volcker Rule’s exemption for
sponsoring covered funds must deduct from its Tier 1
capital the value of related ownership interests.
The final Volcker Rule regulations also require us to
develop and maintain an extensive compliance
program, subject to CEO attestation, addressing
proprietary trading and covered fund activities.
In June 2018, the Federal Reserve, OCC, FDIC,
CFTC and SEC approved a proposal to modify the
current regulations implementing the Volcker Rule.
The proposal would establish three categories of
institutions based on trading activity, and the scope
and scale of compliance requirements would vary
based on such categories.
In addition, the proposal would revise the definitions
applicable to the prohibition on proprietary trading so
that all financial instruments accounted for at fair
value on a recurring basis would be subject to the
prohibition, unless an exception or exemption applies.
The proposal would also revise certain of the
exceptions and exemptions. It remains uncertain
whether or when the proposal will be finalized.
Derivatives
Title VII of the Dodd-Frank Act imposes a
comprehensive regulatory structure on the OTC
derivatives markets in which BNY Mellon operates,
including requirements relating to the business
conduct of dealers, trade reporting, margin and
recordkeeping. Title VII also requires persons acting
as swap dealers, including The Bank of New York
Mellon, to register with the CFTC and become
subject to the CFTC’s supervisory, examination and
enforcement powers.
In addition, because BNY Mellon is subject to
supervision by the Federal Reserve, we must comply
with the U.S. prudential margin rules with respect to
68 BNY Mellon
its OTC swap transactions. The variation margin
requirements of these rules already apply, and the
initial margin requirements are expected to become
applicable in September 2019. Furthermore, various
BNY Mellon subsidiaries are also subject to OTC
derivatives regulation by local authorities in Europe
and Asia.
EU Money Market Fund Reforms
The European Union’s Money Market Funds
Regulation (“MMFR”) has applied since July 21,
2018 for new MMFs and Jan. 21, 2019 for existing
MMFs. MMFR is a significant change for the money
market fund sector in the EU and aims to ensure that
MMFs can better withstand redemption pressure in
stressed market conditions by enhancing their
liquidity profile and stability. In particular, constant
net asset value (“CNAV”) MMFs as they currently
exist will need to convert into variable net asset value
MMFs, low volatility net asset value MMFs or public
debt CNAV MMFs. Other significant restrictions
would apply, such as (i) the need for MMFs to apply
liquidity fees and redemption gates and diversify
asset portfolios, (ii) extensive valuation and reporting
requirements and (iii) prohibitions on external
support.
SEC Rules on Mutual Funds
On Oct. 13, 2016, the SEC adopted regulations that
impose new requirements on mutual funds, exchange-
traded funds and other registered investment
companies. The new rules will require mutual funds
(other than money market funds) to provide portfolio-
wide and position-level holdings data to the SEC on a
monthly basis. This data would include the pricing of
portfolio securities, information regarding repurchase
and securities lending activities, and the terms of
derivatives contracts. Information contained in
reports for the last month of each fund’s fiscal quarter
would be made available to the public within 60 days
of the end of the relevant quarter.
The rules also impose liquidity risk management
requirements that are intended to reduce the risk that
funds will not be able to meet shareholder
redemptions and to minimize the impact of
redemptions on remaining shareholders. Each fund
will be required to establish a liquidity risk
management program; classify the investments in its
portfolio into one of four liquidity categories;
maintain a highly liquid investment minimum; and
Supervision and Regulation (continued)
limit illiquid investments to 15% of net assets. The
rules also permit funds to use swing pricing in certain
circumstances although the SEC has delayed the
effective date of these swing pricing provisions. The
compliance dates for the reporting requirements
depend on the applicable reporting form. Most funds
were required to comply with the liquidity risk
management requirements by Dec. 1, 2018. BNY
Mellon is still evaluating the cost of compliance and
the impact of the new regulations on its activities.
Recovery and Resolution
As required by the Dodd-Frank Act, the Federal
Reserve and FDIC have jointly issued a final rule
requiring large financial institutions, such as BNY
Mellon, to submit periodically to the Federal Reserve
and the FDIC a plan - referred to as the 165(d)
resolution plan - for its rapid and orderly resolution in
the event of material financial distress or failure. In
addition, the FDIC requires certain large IDIs, such as
The Bank of New York Mellon, to submit
periodically to the FDIC a plan for resolution in the
event of the institution’s failure. The public portions
of our resolution plans are available on the Federal
Reserve’s and FDIC’s websites.
If the Federal Reserve and FDIC jointly determine
that our future submissions are not credible and the
covered BHC fails to address the deficiencies in a
timely manner, the FDIC and the Federal Reserve
may jointly impose more stringent capital, leverage or
liquidity requirements or restrictions on our growth,
activities or operations. If we continue to fail to
adequately remedy any deficiencies, we could be
required to divest assets or operations that the
regulators determine necessary to facilitate our
orderly resolution.
In connection with our single point of entry resolution
strategy, we have established the IHC to facilitate the
provision of capital and liquidity resources to certain
key subsidiaries in the event of material financial
distress or failure. In 2017, we entered into a binding
support agreement that requires the IHC to provide
that support. The support agreement required the
Parent to transfer its intercompany loans and most of
its cash to the IHC, and requires the Parent to
continue to transfer cash and other liquid financial
assets to the IHC.
BNY Mellon and the other U.S. G-SIBs are subject to
heightened supervisory expectations for recovery and
resolution preparedness under Federal Reserve rules
and guidance. These expectations relate to
capabilities critical to operational resilience and
contingency planning, including: effective processes
for managing, identifying and valuing collateral; a
comprehensive understanding of obligations and
exposures associated with payment, clearing and
settlement activities; the ability to analyze liquidity
and funding sources, uses and risks; demonstrated
management information systems capabilities on a
legal entity basis; and robust arrangements for the
continued provision of shared and outsourced
services. The Federal Reserve incorporates reviews
of these key capabilities as part of its ongoing
supervision of BNY Mellon.
The European Union Bank Recovery and Resolution
Directive (“BRRD”) applies to various subsidiaries
and branches of BNY Mellon. BRRD provides for
recovery and resolution planning and a set of
harmonized powers to resolve or implement recovery
of relevant institutions, including branches of non-
European Economic Area (“EEA”) banks operating
within the EEA. BRRD includes rules regarding the
preparation of recovery and resolution plans, giving
relevant EEA regulators powers to impose
requirements on an institution before resolution
actions become necessary; a set of resolution tools
and powers to facilitate the resolution of failing
entities, such as the power to “bail-in” the debt of an
institution (including certain deposit obligations); and
the power to require a firm to change its structure to
remove impediments to resolvability. Certain BRRD-
related requirements are currently subject to review
under the EU Banking Reform Package, referred to
below, and the European Commission is expected to
commence a broader review of BRRD during 2019.
BRRD includes a minimum requirement for own
funds, defined as regulatory capital, and eligible
liabilities (“MREL”) to ensure that institutions
maintain enough capital capable of being written
down and/or bailed-in. MREL will be set on a case-
by-case basis for each institution subject to BRRD.
MREL is the EU equivalent of TLAC, and is
generally aligned with the FSB’s TLAC proposals. In
contrast with TLAC, MREL will apply to all EU-
domiciled credit institutions and certain other firms
subject to BRRD (not only G-SIBs).
In addition, BRRD requires such institutions and
firms to prepare recovery plans or group recovery
plans. Under BRRD, resolution authorities (rather
BNY Mellon 69
Supervision and Regulation (continued)
than the institutions themselves) are responsible for
drawing up resolution plans.
Final Rule on Resolution Stays for Qualified
Financial Contracts
In 2017, the Federal Reserve, OCC and FDIC
adopted final rules requiring U.S. G-SIBs (and their
subsidiaries and controlled entities) and the U.S.
operations of foreign G-SIBs to amend their covered
qualified financial contracts (“QFCs”), thereby
facilitating the application of U.S. special resolution
regimes as necessary. QFCs generally include
derivatives, repurchase agreements and securities
lending arrangements, among others. The final rule
includes two key requirements. First, the final rule
requires that covered QFCs of such G-SIBs explicitly
provide for the suspension or stay of transfer
restriction rights with respect to such QFCs, allowing
any resolution transfers under U.S. special resolution
regimes to apply to such QFCs. Second, the final rule
requires that covered QFCs of these G-SIBs be
amended to stay the exercise of default or cross-
default rights by relevant QFC counterparties. This
stay would last for a period of up to 48 hours.
The final rule allows these G-SIBs to comply with the
rule by amending covered QFCs (with the consent of
relevant counterparties) using the International Swaps
and Derivatives Association (“ISDA”) 2018 U.S.
Resolution Stay Protocol (the “Protocol”), ISDA
2015 Universal Stay Protocol or by executing
appropriate bilateral amendments to the covered
QFCs. BNY Mellon entities which have been
confirmed to engage in covered QFC activities have
adhered to the Protocol in compliance with the final
rule’s first phase implementation date of Jan. 1, 2019.
BNY Mellon is evaluating the impact of the final rule
on its activities, in particular regarding non G-SIB
counterparty compliance by the second phase
implementation date of July 1, 2019.
Cybersecurity Regulation
The New York State Department of Financial
Services (“NYSDFS”) requires financial institutions
regulated by NYSDFS, including BNY Mellon, to
establish a cybersecurity program, adopt a written
cybersecurity policy, designate a chief information
security officer, and have policies and procedures in
place to ensure the security of information systems
and non-public information accessible to, or held by,
third parties. The NYSDFS rule also includes a
70 BNY Mellon
variety of other requirements to protect the
confidentiality, integrity and availability of
information systems, as well as the annual delivery of
a certificate of compliance.
Insolvency of an Insured Depository Institution or a
Bank Holding Company; Orderly Liquidation
Authority
If the FDIC is appointed as conservator or receiver
for an IDI such as The Bank of New York Mellon or
BNY Mellon National Association (“BNY Mellon,
N.A.”), upon its insolvency or in certain other
circumstances, the FDIC has the power to:
• Transfer any of the depository institution’s assets
and liabilities to a new obligor, including a newly
formed “bridge” bank without the approval of the
depository institution’s creditors;
• Enforce the terms of the depository institution’s
contracts pursuant to their terms without regard to
any provisions triggered by the appointment of
the FDIC in that capacity; or
• Repudiate or disaffirm any contract or lease to
which the depository institution is a party, the
performance of which is determined by the FDIC
to be burdensome and the disaffirmance or
repudiation of which is determined by the FDIC
to promote the orderly administration of the
depository institution.
In addition, under federal law, the claims of holders
of domestic deposit liabilities and certain claims for
administrative expenses against an IDI would be
afforded a priority over other general unsecured
claims against such an institution, including claims of
debt holders of the institution, in the “liquidation or
other resolution” of such an institution by any
receiver. As a result, whether or not the FDIC ever
sought to repudiate any debt obligations of The Bank
of New York Mellon or BNY Mellon, N.A., the debt
holders would be treated differently from, and could
receive, if anything, substantially less than, the
depositors of the bank.
The Dodd-Frank Act created a new resolution regime
(known as the “orderly liquidation authority”) for
systemically important financial companies,
including BHCs and their affiliates. Under the
orderly liquidation authority, the FDIC may be
appointed as receiver for the systemically important
Supervision and Regulation (continued)
institution, and its failed nonbank subsidiaries, for
purposes of liquidating the entity if, among other
conditions, it is determined at the time of the
institution’s failure that it is in default or in danger of
default and the failure poses a risk to the stability of
the U.S. financial system.
If the FDIC is appointed as receiver under the orderly
liquidation authority, then the powers of the receiver,
and the rights and obligations of creditors and other
parties who have dealt with the institution, would be
determined under the Dodd-Frank Act’s orderly
liquidation authority provisions, and not under the
insolvency law that would otherwise apply. The
powers of the receiver under the orderly liquidation
authority were based on the powers of the FDIC as
receiver for depository institutions under the FDI Act.
However, the provisions governing the rights of
creditors under the orderly liquidation authority were
modified in certain respects to reduce disparities with
the treatment of creditors’ claims under the U.S.
Bankruptcy Code as compared to the treatment of
those claims under the new authority. Nonetheless,
substantial differences in the rights of creditors exist
as between these two regimes, including the right of
the FDIC to disregard the strict priority of creditor
claims in some circumstances, the use of an
administrative claims procedure to determine
creditors’ claims (as opposed to the judicial procedure
utilized in bankruptcy proceedings), and the right of
the FDIC to transfer assets or liabilities of the
institution to a third party or a “bridge” entity.
Depositor Preference
Under U.S. federal law, claims of a receiver of an IDI
for administrative expenses and claims of holders of
U.S. deposit liabilities (including foreign deposits that
are payable in the U.S. as well as in a foreign branch
of the depository institution) are afforded priority
over claims of other unsecured creditors of the
institution, including depositors in non-U.S. branches.
As a result, such depositors could receive, if
anything, substantially less than the depositors in U.S.
offices of the depository institution.
Transactions with Affiliates
Transactions between BNY Mellon’s banking
subsidiaries, on the one hand, and the Parent and its
nonbank subsidiaries and affiliates, on the other, are
subject to certain restrictions, limitations and
requirements, which include limits on the types and
amounts of transactions (including extensions of
credit and asset purchases by our banking
subsidiaries) that may take place and generally
require those transactions to be on arm’s-length
terms. In general, extensions of credit by a BNY
Mellon banking subsidiary to any nonbank affiliate,
including the Parent, must be secured by designated
amounts of specified collateral and are limited in the
aggregate to 10% of the relevant bank’s capital and
surplus for transactions with a single affiliate and to
20% of the relevant bank’s capital and surplus for
transactions with all affiliates. There are also
limitations on affiliate credit exposures arising from
derivative transactions and securities lending and
borrowing transactions.
Deposit Insurance
Our U.S. banking subsidiaries, including The Bank of
New York Mellon and BNY Mellon, N.A., accept
deposits, and those deposits have the benefit of FDIC
insurance up to the applicable limit. The current limit
for FDIC insurance for deposit accounts is $250,000
per depositor at each insured bank. Under the FDI
Act, insurance of deposits may be terminated by the
FDIC upon a finding that the IDI has engaged in
unsafe and unsound practices, is in an unsafe or
unsound condition to continue operations or has
violated any applicable law, regulation, rule, order or
condition imposed by a bank’s federal regulatory
agency.
The FDIC’s Deposit Insurance Fund (the “DIF”) is
funded by assessments on IDIs. The FDIC assesses
DIF premiums based on a bank’s average
consolidated total assets, less the average tangible
equity of the IDI during the assessment period. For
larger institutions, such as The Bank of New York
Mellon and BNY Mellon, N.A., assessments are
determined based on CAMELS ratings and forward-
looking financial measures to calculate the
assessment rate, which is subject to adjustments by
the FDIC, and the assessment base.
Under the FDIC’s regulations, a custody bank,
including The Bank of New York Mellon and BNY
Mellon, N.A., may deduct from its assessment base
100% of cash and balances due from depository
institutions, securities, federal funds sold, and
securities purchased under agreement to resell with a
Standardized Approach risk-weight of 0% and may
deduct 50% of such asset types with a Standardized
Approach risk-weight of greater than 0% and up to
BNY Mellon 71
Supervision and Regulation (continued)
and including 20%. This assessment base deduction
may not exceed the average value of deposits that are
classified as transaction accounts and are identified
by the bank as being directly linked to a fiduciary or
custodial and safekeeping account.
The Dodd-Frank Act requires the DIF reserve ratio to
reach a minimum of 1.35% by Sept. 30, 2020, and
authorizes the FDIC to implement special
assessments on IDIs to reach the required ratio. On
Sept. 30, 2018, the FDIC announced that the DIF
reserve ratio had reached 1.36%.
Source of Strength and Liability of Commonly
Controlled Depository Institutions
BHCs are required by law to act as a source of
strength to their bank subsidiaries. Such support may
be required by the Federal Reserve at times when we
might otherwise determine not to provide it. In
addition, any loans by BNY Mellon to its bank
subsidiaries would be subordinate in right of payment
to depositors and to certain other indebtedness of its
banks. In the event of a BHC’s bankruptcy, any
commitment by the BHC to a federal bank regulator
to maintain the capital of a subsidiary bank will be
assumed by the bankruptcy trustee and entitled to a
priority of payment. In addition, in certain
circumstances, BNY Mellon’s IDI subsidiaries could
be held liable for losses incurred by another BNY
Mellon IDI subsidiary. In the event of impairment of
the capital stock of one of BNY Mellon’s national
bank subsidiaries or The Bank of New York Mellon,
BNY Mellon, as the banks’ stockholder, could be
required to pay such deficiency.
Incentive Compensation Arrangements Proposal
Section 956 of the Dodd-Frank Act requires federal
regulators to prescribe regulations or guidelines
regarding incentive-based compensation practices at
certain financial institutions, including BNY Mellon.
In April 2016, a joint proposed rule was released,
replacing a previous 2011 proposal, which each of six
agencies must separately approve. The timeframe for
final implementation is currently unknown.
Anti-Money Laundering and the USA PATRIOT Act
A major focus of governmental policy on financial
institutions has been aimed at combating money
laundering and terrorist financing. The USA
PATRIOT Act of 2001 contains numerous anti-money
72 BNY Mellon
laundering requirements for financial institutions that
are applicable to BNY Mellon’s bank, broker-dealer
and investment adviser subsidiaries and mutual funds
and private investment companies advised or
sponsored by our subsidiaries. Those regulations
impose obligations on financial institutions to
maintain a broad anti-money laundering program that
includes internal controls, independent testing,
compliance management personnel, training, and
customer due diligence processes, as well as
appropriate policies, procedures and controls to
detect, prevent and report money laundering, terrorist
financing and other suspicious activity, and to verify
the identity of their customers. Certain of those
regulations impose specific due diligence
requirements on financial institutions that maintain
correspondent or private banking relationships with
non-U.S. financial institutions or persons.
Financial Crimes Enforcement Network (“FinCEN”)
Final Customer Due Diligence Rule
Effective July 11, 2016, FinCEN issued final rules
under the Bank Secrecy Act to clarify and strengthen
customer due diligence (“CDD”) requirements,
including a new requirement to identify and verify the
identity of beneficial owners of legal entity
customers. Covered financial institutions, including
The Bank of New York Mellon and BNY Mellon,
N.A. must comply with these rules. The rule
reaffirms four pillars of an effective anti-money
laundering (“AML”) program (development of
internal policies, procedures and related controls;
designation of a compliance officer; a thorough and
ongoing training program; and independent review
for compliance) and adds a fifth: CDD, wherein a
covered financial institution is required to implement
and maintain risk-based procedures for conducting
CDD that include the identification and verification
of any beneficial owner(s) of each legal entity
customer at the time a new account is opened on or
after May 11, 2018.
New York State Department of Financial Services
Anti-Money Laundering and Anti-Terrorism
Regulations
Effective Jan. 1, 2017, the NYSDFS issued
regulations requiring regulated institutions, including
The Bank of New York Mellon, to maintain a
transaction monitoring program to monitor
transactions for potential Bank Secrecy Act (“BSA”)
and AML violations and suspicious activity reporting,
Supervision and Regulation (continued)
and a watch list filtering program to interdict
transactions prohibited by applicable sanctions
programs.
The final regulations require a regulated institution to
maintain programs to monitor and filter transactions
for potential BSA and AML violations and prevent
transactions with sanctioned entities. The final
regulation requires regulated institutions annually to
submit a Board resolution or senior officer
compliance finding confirming steps taken to
ascertain compliance with the regulation.
Privacy and Data Protection
The privacy provisions of the Gramm-Leach-Bliley
Act generally prohibit financial institutions, including
BNY Mellon, from disclosing nonpublic personal
financial information of consumer customers to third
parties for certain purposes (primarily marketing)
unless customers have the opportunity to “opt out” of
the disclosure. The Fair Credit Reporting Act
restricts information sharing among affiliates for
marketing purposes.
In the EU, privacy law is primarily regulated by the
General Data Protection Regulation (“GDPR”),
which has been directly binding and applicable for
each EU member state since May 25, 2018. The
GDPR contains enhanced compliance obligations and
increased penalties for non-compliance compared to
prior EU data protection legislation.
Acquisitions/Transactions
Federal and state laws impose notice and approval
requirements for mergers and acquisitions involving
depository institutions or BHCs. The Bank Holding
Company Act of 1956, as amended by the Gramm-
Leach-Bliley Act and by the Dodd-Frank Act (the
“BHC Act”) requires the prior approval of the Federal
Reserve for the direct or indirect acquisition by a
BHC of more than 5% of any class of the voting
shares or all or substantially all of the assets of a
commercial bank, savings and loan association or
BHC. In reviewing bank acquisition and merger
applications, the bank regulatory authorities will
consider, among other things, the competitive effect
of the transaction, financial and managerial resources,
including the capital position of the combined
organization, convenience and needs of the
community factors, including the applicant’s record
under the Community Reinvestment Act of 1977 (the
“CRA”), the effectiveness of the subject
organizations in combating money laundering
activities and the risk to the stability of the U.S.
banking or financial system. In addition, prior
Federal Reserve approval would be required for BNY
Mellon to acquire direct or indirect ownership or
control of any voting shares of a company with assets
of $10 billion or more that is engaged in activities
that are “financial in nature.”
New Rating System for the Supervision of Large
Financial Institutions
On Nov. 2, 2018, the Federal Reserve issued a final
rule (the “LFI Rule”) that establishes a new rating
system for the supervision of large financial
institutions (“LFIs”), including BNY Mellon. The
LFI rating system applies to, among other entities, all
bank holding companies with total consolidated
assets of $100 billion or more. The LFI Rule became
effective on Feb. 1, 2019.
The LFI rating system includes a new four-level
rating scale and three component ratings. The four
levels are: Broadly Meets Expectations;
Conditionally Meets Expectations; Deficient-1; and
Deficient-2. The component ratings are assigned for:
Capital Planning and Positions; Liquidity Risk
Management and Positions; and Governance and
Controls. A firm must be rated “Broadly Meets
Expectations” or “Conditionally Meets Expectations”
for each of its component ratings to be considered
“well managed” in accordance with various statutes
and regulations that permit additional activities,
prescribe expedited procedures or provide other
benefits for “well managed” firms.
The Federal Reserve is expected to assign initial
ratings under the new rating system in 2019 for those
bank holding companies that are subject to the Large
Institution Supervision Coordinating Committee
(“LISCC”) framework, including BNY Mellon.
Regulated Entities of BNY Mellon and Ancillary
Regulatory Requirements
BNY Mellon is registered as a financial holding
company (“FHC”) under the BHC Act. We are
subject to supervision by the Federal Reserve. In
general, the BHC Act limits an FHC’s business
activities to banking, managing or controlling banks,
performing certain servicing activities for
subsidiaries, engaging in activities incidental to
BNY Mellon 73
Supervision and Regulation (continued)
banking, and engaging in any activity, or acquiring
and retaining the shares of any company engaged in
any activity, that is either financial in nature or
complementary to a financial activity and does not
pose a substantial risk to the safety and soundness of
depository institutions or the financial system
generally.
A BHC’s ability to maintain FHC status is dependent
on: (i) its U.S. depository institution subsidiaries
qualifying on an ongoing basis as “well capitalized”
and “well managed” under the prompt corrective
regulations of the appropriate regulatory agency
(discussed above under “Prompt Corrective Action”);
(ii) the BHC itself qualifying on an ongoing basis as
“well capitalized” and “well managed” under
applicable Federal Reserve regulations; and (iii) its
U.S. depository institution subsidiaries continuing to
maintain at least a “satisfactory” rating under the
CRA.
An FHC that does not continue to meet all the
requirements for FHC status will, depending on
which requirements it fails to meet, lose the ability to
undertake new activities, or make acquisitions, that
are not generally permissible for BHCs without FHC
status. As of Dec. 31, 2018, BNY Mellon and our
U.S. bank subsidiaries were “well capitalized” based
on the ratios and rules applicable to them.
The Bank of New York Mellon, BNY Mellon’s
largest banking subsidiary, is a New York state-
chartered bank, and a member of the Federal Reserve
System and is subject to regulation, supervision and
examination by the Federal Reserve, the FDIC and
the NYSDFS. BNY Mellon’s national bank
subsidiaries, BNY Mellon, N.A. and The Bank of
New York Mellon Trust Company, National
Association, are chartered as national banking
associations subject to primary regulation,
supervision and examination by the OCC.
We operate a number of broker-dealers that engage in
securities underwriting and other broker-dealer
activities in the United States. These companies are
SEC-registered broker-dealers and members of
Financial Industry Regulatory Authority, Inc.
(“FINRA”), a securities industry self-regulatory
organization. BNY Mellon’s nonbank subsidiaries
engaged in securities-related activities are regulated
by supervisory agencies in the countries in which
they conduct business.
74 BNY Mellon
Certain of BNY Mellon’s public finance and advisory
activities are regulated by the Municipal Securities
Rulemaking Board and are required under the SEC’s
Municipal Advisors Rule to register with the SEC if
they provide advice to municipal entities or certain
other persons on the issuance of municipal securities,
or about certain investment strategies or municipal
derivatives.
Certain of BNY Mellon’s subsidiaries are registered
with the CFTC as commodity pool operators,
introducing brokers and/or commodity trading
advisors and, as such, are subject to CFTC regulation.
The Bank of New York Mellon is provisionally
registered as a Swap Dealer (as defined in the Dodd-
Frank Act) with the CFTC, and is a member of the
National Futures Association (“NFA”) in that same
capacity. As a Swap Dealer, The Bank of New York
Mellon is subject to regulation, supervision and
examination by the CFTC and NFA.
Certain of our subsidiaries are registered investment
advisors under the Investment Advisers Act of 1940,
as amended, and as such are supervised by the SEC.
They are also subject to various U.S. federal and state
laws and regulations and to the laws and regulations
of any countries in which they conduct business. Our
subsidiaries advise both public investment companies
which are registered with the SEC under the
Investment Company Act of 1940 (the “‘40 Act”),
including the Dreyfus family of mutual funds, and
private investment companies which are not
registered under the ‘40 Act.
Certain of our investment management, trust and
custody operations provide services to employee
benefit plans that are subject to the Employee
Retirement Income Security Act of 1974, as amended
(“ERISA”), administered by the U.S. Department of
Labor (“DOL”). ERISA imposes certain statutory
duties, liabilities, disclosure obligations and
restrictions on fiduciaries, as applicable, related to the
services being performed and fees being paid.
SEC Proposal of Regulation Best Interest
The SEC proposed Regulation Best Interest in May of
2018, which would require a broker-dealer to act in
the “best interest” of a retail customer when making a
recommendation of any securities transaction or
investment strategy to any such customer. Regulation
Best Interest is designed to make it clear that a
broker-dealer may not put its financial interests ahead
Supervision and Regulation (continued)
of the interests of a retail customer in making
recommendations. The SEC also proposed to help
address investor confusion about the nature of their
relationships with investment professionals through a
new short-form disclosure document. Form CRS
would provide retail investors with information about
the nature of their relationship with their investment
professional, and would supplement other more
detailed disclosures. In addition, the SEC issued
interpretive guidance for broker-dealers and
investment advisers and an interpretation regarding
the standard of conduct for investment advisers.
Comments to these proposals were accepted through
August 2018, and the SEC is expected to proceed to
final rulemaking in 2019. BNY Mellon is
considering Regulation Best Interest and these related
developments and evaluating what material impact, if
any, they may have on BNY Mellon.
Operations and Regulations Outside the United
States
In Europe, branches of The Bank of New York
Mellon are subject to regulation in the countries in
which they are established, in addition to being
subject to oversight by the U.S. regulators referred to
above. BNY Mellon SA/NV is a public limited
liability company incorporated under the laws of
Belgium, holds a banking license issued by the
National Bank of Belgium (“NBB”) and is authorized
to carry out all banking and savings activities as a
credit institution. The European Central Bank
(“ECB”) has responsibility for the direct supervision
of significant banks and banking groups in the euro
area, including BNY Mellon SA/NV. The ECB’s
supervision is carried out in conjunction with the
relevant national prudential regulator (NBB in BNY
Mellon SA/NV’s case), as part of the single
supervisory mechanism (“SSM”). BNY Mellon SA/
NV conducts its activities in Belgium as well as
through its branch offices in the UK, Ireland, Italy,
Luxembourg, the Netherlands, France and Germany.
Certain of our financial services operations in the UK
are subject to regulation and supervision by the
Financial Conduct Authority (“FCA”) and the
Prudential Regulation Authority (“PRA”). The PRA
is responsible for the authorization and prudential
regulation of firms that carry on PRA-regulated
activities, including banks. PRA-authorized firms are
also subject to regulation by the FCA for conduct
purposes. In contrast, FCA-authorized firms (such as
investment management firms) have the FCA as their
sole regulator for both prudential and conduct
purposes. As a result, FCA-authorized firms must
comply with FCA prudential and conduct rules and
the FCA’s Principles for Businesses, while dual-
regulated firms must comply with the FCA conduct
rules and FCA Principles, as well as the applicable
PRA prudential rules and the PRA’s Principles for
Businesses.
The PRA regulates The Bank of New York Mellon
(International) Limited, our UK-incorporated bank, as
well as the London branch of The Bank of New York
Mellon. Certain of BNY Mellon’s UK-incorporated
subsidiaries are authorized to conduct investment
business in the UK. Their investment management
advisory activities and their sale and marketing of
retail investment products are regulated by the FCA.
Certain UK investment funds, including investment
funds of BNY Mellon, are registered with the FCA
and are offered for sale to retail investors in the UK.
Since the financial crisis, the European Union and its
Member States have engaged in a significant
overhaul of bank regulation and supervision. To
increase the resilience of banks and to reduce the
impact of potential bank failures, new rules on capital
requirements for banks and bank recovery and
resolution have been adopted.
Aspects of the European Union’s Banking Union
have entered into force in most EU jurisdictions. The
UK is not participating in the Banking Union. The
key components of the Banking Union include the
single resolution mechanism (“SRM”) and the SSM.
The SRM approach endorses the bail-in rules
established in the BRRD and is described in more
detail above in the section addressing Recovery and
Resolution.
In addition, the Capital Requirements Directive IV
(“CRD IV”) and Capital Requirements Regulation
(“CRR”) affect BNY Mellon’s EU subsidiaries by
implementing Basel III and other changes, including
the enhancement of the quality of capital, and the
strengthening of capital requirements for counterparty
credit risk, resulting in higher capital requirements.
In the EU Member States, CRD IV/CRR also
introduces substantive parts of the new European
supervisory architecture, including the development
of a single set of harmonized prudential rules for
financial services. This set of rules replaces existing
separately implemented rules within EU Member
States with a harmonized approach to implementation
BNY Mellon 75
Supervision and Regulation (continued)
across the EU. Elements of CRD IV/CRR apply not
only to BNY Mellon banking branches and
subsidiaries but also to investment management and
brokerage entities. CRD IV/CRR became effective
on Jan. 1, 2014, with certain provisions to be phased
in from 2014 to 2019.
In December 2017, the European Commission
published legislative proposals for a new harmonized
prudential regime for investment firms. Under these
proposals, most EU investment firms would be
subject to a more tailored, proportionate prudential
regime that is separate from the CRD IV/CRR
regime. If these proposals are implemented, certain
of BNY Mellon’s EU investment firms would be
expected to become subject to this new prudential
regime. The extent to which these proposals will be
advanced and implemented is uncertain.
Our Investment Management and Investment
Services businesses are subject to significant
regulation in numerous jurisdictions around the world
relating to, among other things, the safeguarding,
administration and management of client assets and
client funds.
Various new, revised and/or proposed European
Union directives and regulations have or will have a
significant impact on our provision of many of our
products and services, including the Markets in
Financial Instruments Directive II and Markets in
Financial Instruments Regulations (collectively,
“MiFID II”), the Alternative Investment Fund
Managers Directive (“AIFMD”), the Directive on
Undertakings for Collective Investments in
Transferable Securities (“UCITS V”), the Central
Securities Depositories Regulation (“CSDR”), the
regulation on OTC derivatives, central counterparties
and trade repositories (commonly known as
“EMIR”), the Securities Financing Transactions
Regulation (“SFTR”), the Payment Services Directive
II (“PSD II”) and the Benchmarks Regulation. These
European Union directives and regulations may
impact our operations and risk profile but may also
provide new opportunities for the provision of BNY
Mellon products and services. Several of these
European directives and regulations are still subject
to finalization by the legislature and/or substantial
secondary legislation. This creates uncertainty as to
business impact.
The types of activities in which the foreign branches
of our banking subsidiaries and our international
76 BNY Mellon
subsidiaries may engage are subject to various
restrictions imposed by the Federal Reserve. Those
foreign branches and international subsidiaries are
also subject to the laws and regulatory authorities of
the countries in which they operate and, in the case of
banking subsidiaries, may be subject to regulatory
capital requirements in the jurisdictions in which they
operate.
EU Banking Reform Package
In November 2016, the European Commission
published the so-called EU Banking Reform Package.
This legislative package would amend CRD IV, CRR,
BRRD and the Single Resolution Mechanism
Regulation (“SRMR”).
The proposed amendments to CRD IV include a
proposal for non-EU G-SIBs (such as BNY Mellon)
and certain other non-EU banking groups to have up
to two “EU intermediate parent undertakings” (“EU
IPUs”). All EU credit institutions and certain EU
investment firms in such non-EU G-SIBs/banking
groups would need to fall within a corporate structure
headed by one of the EU IPUs. If this proposal is
ultimately implemented, BNY Mellon would need to
undertake some changes in its corporate structure.
The proposed amendments to CRR include provisions
relating to the leverage ratio, NSFR, MREL
(including closer alignment to the final FSB TLAC
standard), a revised Basel market risk framework,
counterparty credit risk, exposures to CCPs,
exposures to collective investment undertakings,
large exposures and reporting/disclosure
requirements.
The EU Banking Reform Package is due to be
finalized during 2019. The time frame for
implementation of the various elements of the
legislative package remains unclear at present.
European Deposit Insurance Scheme
The European Commission has proposed a European
Deposit Insurance Scheme (“EDIS”) for euro area
member states. Under the EDIS proposal, existing
national euro area deposit guarantee schemes would
transition over a number of years to a mutualized
deposit guarantee scheme applicable in the euro area.
The EDIS proposal has stalled and it is unclear
whether it will be implemented in its current form, or
at all.
Supervision and Regulation (continued)
European Financial Markets and Market
Infrastructure
The EU continues to develop proposals and
regulations in relation to financial markets and
market infrastructures. MiFID II took effect on Jan.
3, 2018. It affects EU Member States and those
financial institutions conducting business in the EEA
and has required significant change to comply with
relevant regulatory requirements, including extensive
transaction reporting and market transparency
obligations and a heightened focus on how financial
institutions conduct business with and disclose
information to their clients.
Capital Markets Union
A key policy objective of the 2014-19 European
Commission is to develop a Capital Markets Union
(“CMU”) in the EU. Related initiatives that have
already been substantially progressed include a new
Prospectus Regulation and a new Securitization
Regulation. The Prospectus Regulation applies from
July 21, 2019 (with certain elements subject to an
earlier phase-in period). The Securitization
Regulation has applied to securitization transactions
from Jan. 1, 2019.
A number of CMU-related priorities remain to be
addressed during 2019. The European Commission
proposes to enhance the powers of the European
Supervisory Agencies (“ESAs”), including the
European Banking Authority (“EBA”), the European
Securities and Markets Authority (“ESMA”) and the
European Insurance and Occupational Pensions
Authority (“EIOPA”). In addition, the European
Commission wishes to enhance cross-border funds
distribution and to promote sustainable finance.
Investment Services and Investment Management in
the European Union
The AIFMD has a direct effect on our alternative fund
manager clients and our depository business and
other products offered across Europe as well as upon
our investment management business. AIFMD
imposes heightened obligations upon depositories,
which have operational effects.
Our businesses servicing regulated funds in Europe
and our investment management businesses in Europe
are also affected by the revised directive governing
UCITS V.
On July 12, 2018, the European Commission adopted
regulations for depositary safekeeping duties under
AIFMD and UCITS V. The Commission recognized
the use of omnibus account structures when
accounting for assets in a chain of custody, but
determined that depositaries and trustees must
maintain their own books and records and will no
longer be allowed to rely on a custodian’s records.
BNY Mellon has initiated a project to implement any
changes necessary to comply with these regulations
by the Commission’s deadline of April 1, 2020.
The European Commission is expected to commence
a review of AIFMD and UCITS V legislation during
2019, following the Commission’s initiation of an
industry survey on AIFMD conducted during 2018.
BNY Mellon 77
Risk Factors
Making or continuing an investment in securities
issued by us involves certain risks that you should
carefully consider. The following discussion sets
forth the most significant risk factors that could affect
our business, financial condition or results of
operations. Some of these risks are interrelated and
the occurrence of one may exacerbate the effect of
others. However, factors other than those discussed
below or in other of our reports filed with or
furnished to the SEC also could adversely affect our
business, financial condition or results of operations.
We cannot assure you that the risk factors described
below or elsewhere in our reports address all potential
risks that we may face. These risk factors also serve
to describe factors which may cause our results to
differ materially from those described in forward-
looking statements included herein or in other
documents or statements that make reference to this
Annual Report. See “Forward-looking Statements.”
Operational Risk
A communications or technology disruption or
failure that results in a loss of information, delays
our ability to access information or impacts our
ability to provide services to our clients may
materially adversely affect our business, financial
condition and results of operations.
We use communications and information systems to
conduct our business. Our businesses are highly
dependent on our ability to process large volumes of
data that require global capabilities and scale from
our technology platforms. If our technology or
communications fail, or those of industry utilities or
our service providers fail, we could experience, and
have in the past experienced, production and system
outages or failures or other significant operational
delays. Any such outage, failure or delay could
adversely affect our ability to effect transactions or
service our clients, which could expose us to liability
for damages, result in the loss of business, damage
our reputation, subject us to regulatory scrutiny or
sanctions or expose us to litigation, any of which
could have a material adverse effect on our business,
financial condition and results of operations. Security
or technology disruptions, failures or delays that
impact our communications or information systems
could also adversely affect our ability to manage our
exposure to risk or expand our business.
Upgrading our computer systems, software and
networks may also subject us to disruptions, failures
or delays due to the complexity and
78 BNY Mellon
interconnectedness of our systems, software and
networks. The failure to upgrade or maintain these
computer systems, software and networks could
result in greater susceptibility to attacks, unauthorized
access and misuse, and could also prevent us from
achieving our business continuity and resiliency
objectives. There can be no assurance that any such
disruptions, failures or delays will not occur or, if
they do occur, that they will be adequately addressed.
Third parties with which we do business or that
facilitate our business activities, including exchanges,
clearing houses, financial intermediaries or vendors
that provide services or security solutions for our
operations, could also be sources of technology risk
to us, including from breakdowns, failures or delays
of their own systems or capacity constraints or other
services that impair our ability to process transactions
and communicate with customers and counterparties.
In addition, we are exposed to the risk that a
technology disruption or other information security
event at a vendor common to our third-party service
providers could impede their ability to provide
products or services to us. We may not be able to
effectively monitor or mitigate operational risks
relating to the use of common vendors by third-party
service providers.
As our business areas evolve, whether due to the
introduction of technology, new service offering
requirements for our clients, or changes in regulation
relative to these service offerings, unforeseen risks
materially impacting our business operations could
arise. The technology used can become increasingly
complex and rely on the continued effectiveness of
the programming code and integrity of the inputted
data. Rapid technological changes and competitive
pressures require us to make significant and ongoing
investments in technology not only to develop
competitive new products and services or adopt new
technologies, but to sustain our current businesses.
Our financial performance depends in part on our
ability to develop and market these new products and
services in a timely manner at a competitive price and
adopt or develop new technologies that differentiate
our products or provide cost efficiencies. The failure
to ensure adequate review and consideration of
critical business changes prior to and during
introduction and deployment of key technological
systems or failure to adequately align evolving client
commitments and expectations with operational
capabilities, may adversely impact our ability to
service and retain customers and could have a
negative impact on our operations. The costs we
Risk Factors (continued)
incur in enhancing our technology could be
substantial and may not ultimately improve our
competitiveness or profitability.
We continue to evaluate and strengthen our business
continuity and operational resiliency capabilities and
have increased our investments in technology to
steadily enhance those capabilities, including our
ability to resume and sustain our operations. There
can be no guarantee, however, that a technology
outage will not occur or that our business continuity
and operational resiliency capabilities will enable us
to maintain our operations and appropriately respond
to events. For a discussion of operational risk, see
“Risk Management - Operational Risk” and
“Business Continuity.”
As a result of financial entities, central agents,
clearing agents and houses, exchanges and
technology systems across the globe becoming more
interdependent and complex, a technology failure that
significantly degrades, deletes or compromises the
systems or data of one or more financial entities or
suppliers could have a material impact on
counterparties or other market participants, including
us. A disruptive event or, failure or delay experienced
by one institution could disrupt the functioning of the
overall financial system.
A cybersecurity incident, or a failure to protect our
computer systems, networks and information and
our clients’ information against cybersecurity
threats, could result in the theft, loss, unauthorized
access to, disclosure, use or alteration of
information, system or network 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.
Our businesses rely heavily on technology, and are
vulnerable to cybersecurity threats and disruptions
that are occurring globally with greater frequency.
Cybersecurity threats, which can include, among
other things, hacker attacks, computer viruses or
other malicious software, denial of service efforts,
limited availability of services, phishing attacks,
cyberattacks on our service providers, and
unauthorized access attempts, could adversely impact
our business. These cybersecurity risks are expected
to continue to increase and intensify. While we
deploy a broad range of sophisticated defenses, it is
possible we could suffer a material adverse impact or
disruption.
Cybersecurity incidents may occur through
intentional or unintentional acts by individuals or
groups having authorized or unauthorized access to
our systems or our clients’ or counterparties’
information, which may include confidential
information. These individuals or groups include
employees, vendors and customers, as well as others
with malicious intent. Third parties may also attempt
to place individuals within BNY Mellon or
fraudulently induce employees, vendors, customers or
other users of our systems to disclose sensitive
information in order to gain access to our data or that
of our clients. A cybersecurity incident that results in
the theft, loss, unauthorized access to, disclosure, use
or alteration of information, system or network
failures, or loss of access to information, may require
us to reconstruct lost data (which may not be
possible), reimburse clients for data and credit
monitoring services, result in loss of customer
business, or damage to our computers or systems and
those of our customers and counterparties. These
impacts could be costly and time-consuming and
materially negatively impact our business operations,
financial condition and reputation.
While we seek to mitigate these risks to ensure the
integrity of our systems and information and
continuously evolve our cybersecurity capabilities, it
is possible that we may not anticipate or implement
effective preventive measures against all
cybersecurity threats, or detect all such threats,
especially because the techniques used change
frequently or are not recognized until after they are
launched. Moreover, attacks can originate from a
wide variety of sources, including outside third
parties who are involved with organized crime or who
may be linked to terrorist organizations or hostile
foreign governments, or from cross-contamination of
legitimate parties (clients, utilities, peer institutions,
etc).
The failure to maintain an adequate technology
infrastructure and applications with effective
cybersecurity controls relative to the type, size and
complexity of operations, markets and products
traded, access to trading venues and our market
interconnectedness could impact operations and
impede our productivity and growth, which could
cause our earnings to decline or could 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 cybersecurity threats.
BNY Mellon 79
Risk Factors (continued)
A successful cyberattack could occur and persist for
an extended period of time before being detected. In
addition, because any investigation of a cybersecurity
incident would be inherently unpredictable, the extent
of a particular cybersecurity incident and the path of
investigating the incident may not be immediately
clear. It may take a significant amount of time before
such an investigation can be completed and full and
reliable information about the incident is known.
While such an investigation is ongoing, we may not
necessarily know the extent of the harm or how best
to remediate it, certain errors or actions could be
repeated or compounded before they are discovered
and remediated, and communication to the public,
regulators, clients and other stakeholders may be
inaccurate, any or all of which could further increase
the costs and consequences of a cybersecurity
incident.
Our business may be materially adversely affected
by operational risk.
We are required to accurately process large numbers
of transactions each day on a timely basis. The
transactions we process or execute are operationally
complex and can involve numerous parties,
jurisdictions, regulations and systems, and as such,
are subject to execution and processing errors and
failures. As our businesses evolve to even more
complex and voluminous transactions, at ever
increasing speeds, we must also evolve our processes,
controls, workforce and technology, to accurately and
timely execute those transactions, which may result in
an increased risk of error or significant operational
delay. When errors or delays do occur, they may be
difficult to detect and fix in a timely manner.
As a result, operational errors or significant
operational delays could materially negatively impact
our ability to conduct our business or service our
clients, which could adversely affect our results of
operations due to potentially higher expenses and
lower revenues, could lower our capital ratios, create
liability for us or our clients or negatively impact our
reputation. Recurring operational issues may raise
concerns among regulators regarding our governance
and control environment and culture.
Affiliates or third parties with which we do business
or that facilitate our business activities could also be
sources of execution and processing errors, failures or
significant operational delays. In certain jurisdictions
we may be deemed to be statutorily liable for
operational errors, fraud, breakdowns or delays by
80 BNY Mellon
these affiliates or third parties. Additionally, as a
result of regulations, including the Alternative
Investment Fund Managers Directive and the
Undertakings for Collective Investment in
Transferable Securities V, where, in the European
Economic Area we act as depositary, the Company
could be exposed to restitution risk for, among other
things, errors or fraud perpetrated by a sub-custodian
resulting in a loss or delay in return of client’s
securities. Where we are not acting as a European
Economic Area depositary, but where we provide
custody services to a European Economic Area
depositary, we may accept similar liabilities to that
depositary as a matter of contract.
We rely on a variety of measures to protect our
intellectual property and proprietary information,
including copyrights, trademarks, patents and
controls on access and distribution. These measures
may not prevent misappropriation or infringement of
our intellectual property or proprietary information
and a resulting loss of competitive advantage.
Furthermore, if a third party were to assert a claim of
infringement or misappropriation of its proprietary
rights, obtained through patents or otherwise, against
us, we could be required to spend significant amounts
to defend such claims, develop alternative methods of
operations, pay substantial money damages, obtain a
license from the third party or possibly stop providing
one or more products or services.
We are also subject to laws and regulations relating to
the privacy of the information of clients, employees
or others, and any failure to comply with these laws
and regulations could expose us to liability and/or
reputational damage. As privacy-related laws and
regulations, such as the EU General Data Protection
Regulation (or GDPR), the California Consumer
Privacy Act of 2018, and the New York Department
of Financial Services’ cybersecurity regulation, are
implemented, the time and resources needed for us to
comply with such laws and regulations, as well as our
potential liability for non-compliance and reporting
obligations in the case of data breaches, may
significantly increase. In addition, our businesses are
increasingly subject to laws and regulations relating
to privacy, surveillance, encryption and data use in
the jurisdictions in which we operate. Compliance
with these laws and regulations may require us to
change our policies, procedures and technology for
information security and segregation of data, which
could, among other things, make us more vulnerable
to operational failures, and to monetary penalties for
breach of such laws and regulations.
Risk Factors (continued)
Our risk management framework may not be
effective in mitigating risk and reducing the
potential for losses.
Our risk management framework seeks to mitigate
risk and loss to us. We have established
comprehensive policies and procedures and an
internal control framework designed to provide a
sound operational environment for the types of risk to
which we are subject, including operational risk,
credit risk, market risk, liquidity risk and strategic
risk. We have also established frameworks to
mitigate risk and loss to us as a result of the actions of
affiliates or third parties with which we do business
or that facilitate our business activities. However, as
with any risk management framework, there are
inherent limitations to our current and future risk
management strategies, including risks that we have
not appropriately anticipated or identified.
Our regulators remain focused on ensuring that
financial institutions build and maintain robust risk
management policies. If our regulators perceive the
quality of our risk models and framework to be
insufficient, it may negatively impact our regulators’
evaluations of our capital plans and stress tests.
Accurate and timely enterprise-wide risk information
is necessary to enhance management’s decision-
making in times of crisis. If our risk management
framework proves ineffective or if our enterprise-
wide management information is incomplete or
inaccurate, we could suffer unexpected losses, which
could materially adversely affect our results of
operations or financial condition.
In certain instances, we rely on models to measure,
monitor and predict risks. However, these models are
inherently limited because they involve techniques,
including the use of historical data, trends,
assumptions, and judgments that cannot anticipate
every economic and financial outcome in the markets
in which we operate, nor can they anticipate the
specifics and timing of such outcomes, especially
during severe market downturns or stress events.
These models may not appropriately capture all
relevant risks or accurately predict future events or
exposures. The risk of the unsuccessful development
or implementation of our models, systems or
processes cannot be completely eliminated. The
models that we use to assess and control our market
risk exposures also reflect assumptions about the
degree of correlation among prices of various asset
classes or other market indicators. The 2008 financial
crisis and resulting regulatory reform highlighted
both the importance and some of the limitations of
managing unanticipated risks. In times of market
stress or other unforeseen circumstances, previously
uncorrelated indicators may become correlated, or
previously correlated indicators may move in
different directions. These types of market
movements have at times limited the effectiveness of
our hedging strategies and have caused us to incur
significant losses, and they may do so in the future.
In addition, our businesses and the markets in which
we operate are continuously evolving. We may fail to
fully understand the implications of changes in our
businesses or the financial markets or fail to
adequately or timely enhance our risk framework to
address those changes. If our risk framework is
ineffective, either because it fails to keep pace with
changes in the financial markets, regulatory
requirements, our businesses, our counterparties,
clients or service providers or for other reasons, we
could incur losses, suffer reputational damage or find
ourselves out of compliance with applicable
regulatory or contractual mandates or expectations.
An important aspect of our risk management
framework is creating a risk culture that it is
sustainable and appropriate to our role as a major
financial institution in which all employees fully
understand that there is risk in every aspect of our
business and the importance of managing risk as it
relates to their job functions. If we fail to create the
appropriate environment that sensitizes all of our
employees to managing risk, our business could be
adversely impacted. For more information on how
we monitor and manage our risk management
framework, see “Risk Management - Risk
management overview.”
We are subject to extensive government rulemaking,
policies, regulation and supervision. These rules
and regulations have, and in the future may, compel
us to change how we manage our businesses, which
could have a material adverse effect on our
business, financial condition and results of
operations. In addition, these rules and regulations
have increased our compliance and operational risk
and costs.
As a large, internationally active financial services
company, we operate in a highly regulated
environment, and are subject to a comprehensive
statutory and regulatory regime, including oversight
by governmental agencies both inside and outside the
U.S. Regulations and related regulatory guidance and
BNY Mellon 81
Risk Factors (continued)
supervisory oversight impact how we analyze certain
business opportunities, our regulatory capital and
liquidity requirements, the revenue profile of certain
of our core activities and the products and services
we provide. Any changes to the regulatory
frameworks and environment in which we operate
and the significant management attention and
resources necessary to address those changes could
materially adversely affect our business, financial
condition and results of operations and have other
negative consequences.
The evolving regulatory environment and uncertainty
about the timing and scope of future regulations may
contribute to decisions we may make to suspend,
reduce or withdraw from existing businesses,
activities or initiatives, which may result in potential
lost revenue or significant restructuring or related
costs or exposures.
The monetary, tax and other policies of various
governments, agencies and regulatory authorities both
in the U.S. and globally have a significant impact on
interest rates, currencies, commodity pricing
(including oil), the imposition of tariffs or other
limitations on international trade and travel, and
overall financial market performance, which can
impact our business and results of operations.
Changes in these policies are beyond our control and
can be difficult to predict and we cannot determine
the ultimate effect that any such changes would have
upon our business, financial condition or results of
operations.
Basel III and the Dodd-Frank Act have had a
significant impact on the regulatory structure of the
global financial markets and have imposed significant
operational, compliance and risk management costs,
both as an initial matter, as we have had to develop
and integrate appropriate systems and procedures,
and on a recurring basis, as we monitor, support and
refine those systems and procedures. While U.S.
regulators have finalized regulations implementing
various provisions of the Dodd-Frank Act and Basel
III, additional regulations or modifications to existing
regulations are expected to continue to occur. In
addition, there is uncertainty about the timing and
scope of any changes to Basel III and Dodd-Frank
Act and other regulations, as well as the cost of
complying with any new regulatory regimes. The full
impact of these standards on us, our business
strategies and financial performance will remain
uncertain as long as regulatory reforms continue to be
adopted and market practices develop in response to
82 BNY Mellon
such reforms, and regulatory changes could
materially adversely impact us.
The regulatory and supervisory focus of U.S. banking
agencies is primarily intended to protect the safety
and soundness of the banking system and federally
insured deposits, and not to protect investors in our
securities. Regulatory and supervisory standards and
expectations across jurisdictions may be divergent
and otherwise may not conform and/or may be
applied in a manner that is not harmonized within a
jurisdiction (in relation to national versus non-
national financial services providers) and/or across
jurisdictions. Additionally, banking regulators have
wide supervisory discretion in the ongoing
examination and enforcement of applicable banking
statutes, regulations, and guidelines, and may restrict
our ability to engage in certain activities or
acquisitions, or may require us to maintain more
capital or highly liquid assets.
The U.S. capital rules subject us and our U.S.
banking subsidiaries to more stringent capital
requirements, which could restrict growth, activities
or operations, trigger divestiture of assets or
operations or limit our ability to return capital to
shareholders. Failure to meet current or future capital
requirements, either at the end of each fiscal quarter
or under hypothetical stressed conditions during the
annual CCAR exercise, could materially adversely
affect our financial condition. Additional impacts
relating to compliance with these rules could include,
but are not limited to, potential dilution of existing
shareholders and competitive disadvantage compared
to financial institutions not under the same regulatory
framework. In addition, the SLR subjects us to a
more stringent leverage requirement, which could
restrict growth, activities, operations or could result
in certain restrictions on capital distributions and
discretionary bonus payments.
The LCR requires us to maintain significant holdings
of high quality and potentially lower-yielding liquid
assets. In calculating the LCR, we must also
determine which deposits should be considered to be
stable deposits. Stable deposits must meet a series of
requirements and typically receive favorable outflow
treatment under the LCR. BNY Mellon uses
qualitative and quantitative analysis to identify core
stable deposits. It is possible that our LCR could fall
below 100% as a consequence of the inherent
uncertainties associated with this analysis (including
as a result of additional guidance from our
regulators). In addition to facing potential regulatory
Risk Factors (continued)
consequences (which could be significant), we may
be required to remedy this shortfall by liquidating
assets in our investment portfolio or raising additional
debt, each of which could materially negatively
impact our net interest revenue.
If and when the final rule regarding the NSFR is
ultimately implemented in the U.S., those
requirements could also require BNY Mellon to
further increase its holdings of high quality, and
potentially lower-yielding, liquid assets, and to
reevaluate the composition of its liabilities structure
to include more longer-dated debt.
Our global activities are also subject to extensive
regulation by various non-U.S. regulators, including
governments, securities exchanges, central banks and
other regulatory bodies in the jurisdictions in which
we operate, relating to, among other things, the
safeguarding, administration and management of
client assets and client funds.
Various new, revised and proposed European Union
directives and regulations have an impact on our
provision of many of our products and services.
Implementation of, and revisions to, these directives
and regulations have affected our operations and risk
profile, including the Capital Requirements Directive/
Regulation, the Bank Recovery and Resolution
Directive, the Deposit Guarantee Scheme Directive,
MiFID II, AIFMD, UCITS V and PSD II.
In addition, we are subject in our global operations to
rules and regulations relating to corrupt and illegal
payments and money laundering, economic sanctions
and embargo programs administered by the U.S.
Office of Foreign Assets Control and similar bodies
and governmental agencies worldwide, and laws
relating to doing business with certain individuals,
groups and countries, such as the U.S. Foreign
Corrupt Practices Act, the USA PATRIOT Act, the
Iran Threat Reduction and Syria Human Rights Act of
2012 and the UK Bribery Act. While we have
invested and continue to invest significant resources
in training and in compliance monitoring, the
geographical diversity of our operations, employees,
clients and customers, as well as the vendors and
other third parties that we deal with, presents the risk
that we may be found in violation of such rules,
regulations or laws and any such violation could
subject us to significant penalties or adversely affect
our reputation. In addition, such rules could impact
our ability to engage in business with certain
individuals, entities, groups and countries, which
could materially adversely affect certain of our
businesses and results of operations.
Failure to comply with laws, regulations or policies
applicable to our business could result in sanctions by
regulatory or governmental authorities, civil money
penalties and reputational damage, which could have
a material adverse effect on our business, financial
condition and results of operations. If violations do
occur, they could damage our reputation, increase our
legal and compliance costs, and ultimately adversely
impact our results of operations. Laws, regulations or
policies currently affecting us and our subsidiaries, or
regulatory and governmental authorities’
interpretation of these statutes and regulations may
change at any time, which may adversely impact our
business and results of operations.
See “Supervision and Regulation” for additional
information regarding the potential impact of the
regulatory environment on our business.
Regulatory or enforcement actions or litigation
could materially adversely affect our results of
operations or harm our businesses or reputation.
Like many major financial institutions, we and our
affiliates are the subject of inquiries, investigations,
lawsuits and proceedings by counterparties, clients,
other third parties and regulatory and other
governmental agencies in the U.S. and abroad, as
well as the Department of Justice (the “DOJ”) and
state attorneys general. See “Legal proceedings” in
Note 21 of the Notes to Consolidated Financial
Statements for a discussion of material legal and
regulatory proceedings in which we are involved.
The number of these investigations and proceedings,
as well as the amount of penalties and fines sought,
has remained elevated for many firms in the financial
services industry, including us. We may become
subject to heightened regulatory scrutiny, inquiries or
investigations, and potentially client-related inquiries
or claims, relating to broad, industry-wide concerns
that could lead to increased expenses or reputational
damage. The current trend of large settlements by
financial institutions with governmental entities may
adversely affect the outcomes for other financial
institutions in similar actions, especially where
governmental officials have announced that the large
settlements will be used as the basis or a template for
other settlements. Separately, policy makers in
Europe continue to focus on protection of client
assets, as well as tax avoidance and evasion.
BNY Mellon 83
Risk Factors (continued)
Regulatory authorities may compel companies to
provide investigators with all relevant facts relating to
the individuals substantially involved in or
responsible for the alleged misconduct in order to
qualify for any cooperation credit in criminal
investigations of corporate wrongdoing, or maximum
cooperation credit in civil investigations of corporate
wrongdoing, resulting in increased fines and
penalties.
The complexity of the federal and state regulatory
and enforcement regimes in the U.S., coupled with
the global scope of our operations and the increased
aggressiveness of the regulatory environment
worldwide, also means that a single event may give
rise to a large number of overlapping investigations
and regulatory proceedings, either by multiple federal
and state agencies in the U.S. or by multiple
regulators and other governmental entities in different
jurisdictions. Responding to inquiries, investigations,
lawsuits and proceedings, regardless of the ultimate
outcome of the matter, is time-consuming and
expensive and can divert the attention of our senior
management from our business. The outcome of such
proceedings may be difficult to predict or estimate
until late in the proceedings, which may last a number
of years.
Certain of our subsidiaries are subject to periodic
examination, special inquiries and potential
proceedings by regulatory authorities. If compliance
failures or other violations are found during an
examination, inquiry or proceeding, a regulatory
agency could initiate actions and impose sanctions for
violations, including, for example, regulatory
agreements, cease and desist orders, civil monetary
penalties or termination of a license and could lead to
litigation by investors or clients, any of which could
cause our earnings to decline.
Our businesses involve the risk that clients or others
may sue us, claiming that we or third parties for
whom they say we are responsible have failed to
perform under a contract or otherwise failed to carry
out a duty perceived to be owed to them, including
perceived fiduciary or contractual duties. This risk
may be heightened during periods when credit, equity
or other financial markets are deteriorating in value or
are particularly volatile, or when clients or investors
are experiencing losses. As a publicly held company,
we are also subject to the risk of claims under the
federal securities laws. Volatility in our stock price
increases this risk.
84 BNY Mellon
Actions brought against us may result in lawsuits,
enforcement actions, injunctions, settlements,
damages, fines or penalties, which could have a
material adverse effect on our financial condition or
results of operations or require changes to our
business. Claims for significant monetary damages
are asserted in many of these legal actions, while
claims for disgorgement, penalties and/or other
remedial sanctions may be sought in regulatory
matters. Although we establish accruals for our
litigation and regulatory matters in accordance with
applicable accounting guidance when those matters
proceed to a stage where they present loss
contingencies that are both probable and reasonably
estimable, there may be a material exposure to loss in
excess of any amounts accrued, or in excess of any
loss contingencies disclosed as reasonably possible.
Such loss contingencies may not be probable and
reasonably estimable until the proceedings have
progressed significantly, which could take several
years and occur close to resolution of the matter.
Each of the risks outlined above could result in
increased regulatory supervision and affect our ability
to attract and retain customers or maintain access to
the capital markets.
Our businesses may be negatively affected by
adverse events, publicity, government scrutiny or
other reputational harm.
We are subject to reputational, legal and regulatory
risk in the ordinary course of our business. The
public perception of financial institutions remains
negative. Harm to our reputation can result from
numerous sources, including adverse publicity arising
from events occurring at BNY Mellon or in the
financial markets, our perceived failure to comply
with legal and regulatory requirements or deliver
appropriate standards of service and quality by either
us or our vendors, or a failure to appropriately
describe our products and services, the purported
actions of our employees, alleged financial reporting
irregularities involving ourselves or other large and
well-known companies and perceived conflicts of
interest. In particular, a cybersecurity event
impacting us or our customers’ data could have a
negative impact on our reputation and customer
confidence in BNY Mellon and its cybersecurity
defenses and business continuity and resiliency
capabilities. Our reputation could also be harmed by
the failure of an affiliate, joint venture or a vendor or
other third party with which we do business to
comply with laws or regulations. Damage to our
Risk Factors (continued)
reputation could affect the confidence of clients,
rating agencies, regulators, employees, stockholders
and other stakeholders and could in turn have an
impact on our business and results of operations.
status could lose the ability to undertake new
activities or make acquisitions that are not generally
permissible without FHC status or to continue such
activities.
Additionally, governmental scrutiny from regulators,
legislative bodies and law enforcement agencies with
respect to financial services companies has remained
at elevated levels. Press coverage and other public
statements that assert some form of wrongdoing
(including, in some cases, press coverage and public
statements that do not directly involve BNY Mellon)
often result in some type of investigation or in
lawsuits. Certain enforcement authorities have
recently required admissions of wrongdoing, and in
some cases, criminal pleas, as part of the resolution of
matters brought by them against financial institutions.
Any such resolution of a matter involving BNY
Mellon could lead to increased exposure to civil
litigation, could adversely affect our reputation and
ability to do business in certain products and in
certain jurisdictions and could have other negative
effects.
Failure to satisfy regulatory standards, including
“well capitalized” and “well managed” status or
capital adequacy and liquidity rules more generally,
could result in limitations on our activities and
adversely affect our business and financial
condition.
Under U.S. and international regulatory capital
adequacy rules and other regulatory requirements,
BNY Mellon and our subsidiary banks must meet
thresholds that include quantitative measures of
assets, liabilities and certain off-balance sheet items,
subject to qualitative judgments by regulators about
components, risk weightings and other factors. As
discussed in “Supervision and Regulation,” BNY
Mellon is registered with the Federal Reserve as a
BHC and an FHC. An FHC’s ability to maintain its
status as an FHC is dependent upon a number of
factors, including its U.S. bank subsidiaries’
qualifying on an ongoing basis as “well capitalized”
and “well managed” under the banking agencies’
prompt corrective action regulations as well as
applicable Federal Reserve regulations. Failure by an
FHC or one of its U.S. bank subsidiaries to qualify as
“well capitalized” and “well managed”, if
unremedied over a period of time, would cause it to
lose its status as an FHC and could affect the
confidence of clients in it, compromising its
competitive position. Additionally, an FHC that does
not continue to meet all the requirements for FHC
The failure by one of our bank subsidiaries to
maintain its status as “well capitalized” could lead to,
among other things, higher FDIC assessments and
could have reputational and associated business
consequences.
If we or our subsidiary banks fail to meet U.S. and
international minimum capital rules and other
regulatory requirements, we may not be able to
deploy capital in the operation of our business or
distribute capital to stockholders, which may
adversely affect our business.
Failure to meet any current or future capital or
liquidity requirements, including those imposed by
the U.S. capital rules, the LCR, or by regulators in
implementing other portions of the Basel III
framework, could materially adversely affect our
financial condition. The current regulatory
environment is fluid as requirements are introduced
and amended. See “Supervision and Regulation.”
Compliance with U.S. and international regulatory
capital and liquidity requirements may impact our
ability to return capital to shareholders and may
impact our operations by requiring us to liquidate
assets, increase borrowings, issue additional equity or
other securities, or cease or alter certain operations,
which may adversely affect our results of operations.
Finally, our estimated regulatory capital ratios,
liquidity metrics, and related components are based
on our current interpretation, expectations and
understanding of the applicable rules and are subject
to, among other things, ongoing regulatory review,
regulatory approval of certain statistical models,
additional refinements, modifications or
enhancements (whether required or otherwise) to our
models, and further implementation guidance. Any
modifications resulting from these ongoing reviews
or the continued implementation of the U.S. capital
rules, the LCR, the resolution planning process, and
related amendments could result in changes in our
risk-weighted assets, capital components, liquidity
inflows and outflows, HQLA, or other elements
involved in the calculation of these measures, which
could impact these ratios. Further, because
operational risk is currently measured based not only
upon our historical operational loss experience but
also upon ongoing events in the banking industry
BNY Mellon 85
Risk Factors (continued)
generally, our level of operational risk-weighted
assets could significantly increase or otherwise
remain elevated and may potentially be subject to
significant volatility, negatively impacting our capital
and liquidity ratios. The uncertainty caused by these
factors could ultimately impact our ability to meet our
goals, supervisory requirements, and regulatory
standards.
A failure or circumvention of our controls and
procedures could have a material adverse effect on
our business, reputation, results of operations and
financial condition.
Management regularly reviews and updates our
internal controls, disclosure controls and procedures,
and corporate governance policies and procedures.
Any system of controls, however well designed and
operated, is based in part on certain assumptions and
can provide only reasonable, not absolute, assurances
that the objectives of the system will be met. Any
failure or circumvention of our controls and
procedures or failure to comply with regulations
related to controls and procedures could have a
material adverse effect on our business, reputation,
results of operations and financial condition. If we
identify material weaknesses in our internal control
over financial reporting or are otherwise required to
restate our financial statements, we could be required
to implement expensive and time-consuming
remedial measures and could lose investor confidence
in the accuracy and completeness of our financial
reports. In addition, there are risks that individuals,
either employees or contractors, may circumvent
established control mechanisms in order to, for
example, exceed exposure, liquidity, trading or
investment management limitations, or commit fraud.
The application of our Title I preferred resolution
strategy or resolution under the Title II orderly
liquidation authority could adversely affect the
Parent’s liquidity and financial condition and the
Parent’s security holders.
In 2017, in connection with our single point of entry
resolution strategy under Title I of the Dodd-Frank
Act, the Parent entered into a binding support
agreement with certain key subsidiaries to facilitate
the provision of capital and liquidity resources to
them in the event of material financial distress or
failure. The support agreement requires the Parent to
transfer significant excess liquid financial assets to
the IHC on an ongoing basis, subject to certain
amounts retained by the Parent to meet its near-term
86 BNY Mellon
cash needs, in exchange for unsecured subordinated
funding notes issued by the IHC as well as a
committed line of credit to the Parent to service its
near term obligations. The Parent’s and the IHC’s
obligations under the support agreement are secured.
If our projected liquidity resources deteriorate so
severely that resolution of the Parent becomes
imminent, the committed line of credit the IHC
provided to the Parent will automatically terminate,
with all amounts outstanding becoming due and
payable, and the support agreement will require the
Parent to transfer most of its remaining assets (other
than stock in subsidiaries and a cash reserve to fund
bankruptcy expenses) to the IHC. As a result, during
a period of severe financial stress the Parent could
become unable to meet its debt and payment
obligations (including with respect to its securities),
causing the Parent to seek protection under
bankruptcy laws earlier than it otherwise would have.
If the Parent were to become subject to a bankruptcy
proceeding and our single point of entry strategy is
successful, our material entities will not be subject to
insolvency proceedings and their creditors would not
be expected to suffer losses, while the Parent’s
security holders, including unsecured debt holders,
could face significant losses, potentially including the
loss of their entire investment. The single point of
entry strategy - in which the Parent would be the only
legal entity to enter resolution proceedings - is
designed to result in greater risk of loss to holders of
our unsecured senior debt securities and other
securities than would be the case under a different
resolution strategy.
Further, if the single point of entry strategy is not
successful, our liquidity and financial condition
would be adversely affected and all security holders
may, as a consequence, be in a worse position than if
the strategy had not been implemented.
In addition, Title II of the Dodd-Frank Act established
an orderly liquidation process in the event of the
failure of a large systemically important financial
institution, such as BNY Mellon, in order to avoid or
mitigate serious adverse effects on the U.S. financial
system. Specifically, if BNY Mellon is in default or
danger of default, and certain specified conditions are
met, the FDIC may be appointed receiver under the
orderly liquidation authority, and we would be
resolved under that authority instead of the U.S.
Bankruptcy Code.
Risk Factors (continued)
U.S. supervisors have indicated that a single point of
entry strategy may be a desirable strategy to resolve a
large financial institution such as BNY Mellon under
Title II in a manner that would, similar to our
preferred strategy under our Title I resolution plan,
impose losses on shareholders, unsecured debt
holders and other unsecured creditors of the Parent,
while permitting the holding company’s subsidiaries
to continue to operate and remain solvent. Under
such a strategy, assuming the Parent entered
resolution proceedings and its subsidiaries remained
solvent, losses at the subsidiary level would be
absorbed by the Parent and ultimately borne by the
Parent’s security holders (including holders of the
Parent’s unsecured debt securities), while third-party
creditors of the Parent’s subsidiaries would not be
expected to suffer losses. Accordingly, the Parent’s
security holders (including holders of unsecured debt
securities and other unsecured creditors) could face
losses in excess of what otherwise would have been
the case.
If our resolution plan is determined not to be
credible or not to facilitate an orderly resolution
under the U.S. Bankruptcy Code, our business,
reputation, results of operations and financial
condition could be materially negatively impacted.
We must develop and submit to the Federal Reserve
and the FDIC for review plans for our rapid and
orderly resolution in the event of material financial
distress or failure. If the agencies determine that our
future submissions are not credible or would not
facilitate an orderly resolution under the U.S.
Bankruptcy Code, and we fail to address any such
deficiencies in a timely manner, the agencies may
jointly impose more stringent capital, leverage or
liquidity requirements or restrictions on our growth,
activities or operations.
Acts of terrorism, impacts from climate change,
natural disasters, pandemics, global conflicts and
other geopolitical events may have a negative impact
on our business and operations.
In conducting our business and maintaining and
supporting our global operations, which includes
vendors and other third parties, we are subject to risks
of loss from the outbreak of hostilities, acts of
terrorism, impacts from client change, natural
disasters, pandemics, global conflicts or other similar
catastrophic events that could have a negative impact
on our business and operations. We may also be
impacted by unfavorable political, economic, legal or
other developments, including but not limited to
social or political instability, changes in governmental
policies or policies of central banks, sanctions,
expropriation, nationalization, confiscation of assets,
price, capital and exchange controls, the imposition
of tariffs or other limitations on international trade
and travel, and changes in laws and regulations.
While we have business continuity and disaster
recovery plans in place, such events could still
damage our facilities, disrupt or delay normal
business operations (including communications and
technology), result in harm or cause travel limitations
on our employees, with a similar impact on our
clients, suppliers and counterparties. Catastrophic
events, including those caused by climate change,
could also negatively impact the purchase of our
products and services if those events result in reduced
capital markets activity, lower asset price levels, or
disruptions in general economic activity, or in
financial market settlement functions, which could
negatively impact our business and results of
operation. In addition, catastrophic events, including
those caused by climate change, war, terror attacks,
political unrest, global conflicts, efforts to combat
terrorism and other potential military activities and
outbreaks of hostilities may lead, and in some cases
have led, to an increase in delinquencies,
bankruptcies or defaults that could result in our
experiencing higher levels of non-performing assets,
net charge-offs and provisions for credit losses,
negatively impacting our business and operations.
Market Risk
We are dependent on fee-based business for a
substantial majority of our revenue and our fee-
based revenues could be adversely affected by
slowing in market activity, weak financial markets,
underperformance and/or negative trends in savings
rates or in investment preferences.
Our principal operational focus is on fee-based
business, which is distinct from commercial banking
institutions that earn most of their revenues from
loans and other traditional interest-generating
products and services. In 2018, 78% of our total
revenue was fee-based. Our fee-based businesses
include investment management and performance
fees, custody, corporate trust, depositary receipts,
clearing, collateral management and treasury
services, which are highly competitive businesses.
BNY Mellon 87
Risk Factors (continued)
Fees for many of our products and services are based
on the volume of transactions processed, the market
value of assets managed and administered, securities
lending volume and spreads, and fees for other
services rendered. Corporate actions, cross-border
investing, global mergers and acquisitions activity,
new debt and equity issuances, and secondary trading
volumes all affect the level of our revenues. If the
volumes of these activities decrease due to weak
financial markets or otherwise, our revenues will also
decrease, which would negatively impact our results
of operations.
Poor investment returns in our investment
management business, due to either weak market
conditions or underperformance (relative to our
competitors or to benchmarks) by funds or accounts
that we manage or investment products that we
design or sell, could result in reduced market values
of portfolios that we manage and/or administer and
may affect our ability to retain existing assets and to
attract new clients or additional assets from existing
clients. Market and regulatory trends have resulted in
increased demand for lower fee asset management
products, and for performance-based fees.
Significant declines in the volume of capital markets
activity would reduce the number of transactions we
process and the amount of securities we lend and
therefore would also have an adverse effect on our
results of operations.
Our business generally benefits when individuals
invest their savings in mutual funds and other
collective funds, unit investment trusts or exchange-
traded funds, or contribute more to defined
contribution plans. The current shift to lower fee
investment products has adversely impacted our fees.
When our investment management revenues decline,
we may have, and in the past have had, declines in
the fair value in our Asset Management reporting
unit, one of the two reporting units in our Investment
Management segment. If the fair value of the Asset
Management reporting unit declines below its
carrying value, we would be required to take an
impairment charge.
Weakness and volatility in financial markets and the
economy generally may materially adversely affect
our business, results of operations and financial
condition.
As a financial institution, our Investment
Management, Depositary Receipts and Markets,
including Securities Lending, businesses, are
88 BNY Mellon
particularly sensitive to economic and market
conditions, including in the capital and credit
markets. When these markets are volatile or
disruptive, we could experience a decline in our
marked-to-market assets, including in our securities
portfolio and our equity investments, including seed
capital. Our results of operations may be materially
affected by conditions in the financial markets and
the economy generally, both in the U.S. and
elsewhere around the world. A variety of factors
impact global economies and financial markets,
including interest rates and their associated yield
curves, commodity pricing, such as a continued
weakness in oil prices when compared to historic
levels, certain market and political instabilities,
volatile debt and equity market values, the strength of
the U.S. dollar, the imposition of tariffs or other
limitations on international trade or travel, high
unemployment and governmental budget deficits
(including, in the U.S., at the federal, state and
municipal level), contagion risk from possible default
by other countries on sovereign debt, declining
business and consumer confidence and the risk of
increased inflation. Any resulting economic pressure
on consumers and lack of confidence in the financial
markets may adversely affect certain portions of our
business, financial condition and results of
operations. In particular, we face the following risks
in connection with these factors, some of which are
discussed at greater length in separate risk factors:
• Geopolitical tension and economic instability in
countries around the world can at times increase
the demand for low-risk investments, particularly
in U.S. Treasuries and the dollar. A “flight to
safety” has historically increased BNY Mellon’s
balance sheet, which has negatively impacted,
and could continue to negatively impact, our
leverage-based regulatory capital measures. A
sustained “flight to safety” has historically
triggered a decline in trading, capital markets and
cross-border activity which would likely decrease
our revenue, negatively impacting our results of
operations, financial condition and, if sustained in
the long term, our business.
• The fees earned by our Investment Management
business are higher as assets under management
and/or investment performance increase. Those
fees are also impacted by the composition of the
assets under management, with higher fees for
some asset categories as compared to others.
Uncertain and volatile capital markets could
result in reductions in assets under management
Risk Factors (continued)
because of investors’ decisions to withdraw assets
or from simple declines in the value of assets
under management as markets decline. At Dec.
31, 2018, we estimate that a 5% change in global
equity markets, spread evenly throughout the
year, would impact fee revenue by less than 1%
and diluted earnings per common share by $0.03
to $0.05.
• Market conditions resulting in lower transaction
volumes could have an adverse effect on the
revenues and profitability of certain of our
businesses such as clearing, settlement, payments
and trading.
• Uncertain and volatile capital markets,
particularly declines, could reduce the value of
our investments in securities, including pension
and other post-retirement plan assets and produce
downward pressure on our stock price and credit
availability without regard to our underlying
financial strength.
• Derivative instruments we hold to hedge and
manage exposure to market risks including
interest rate risk, equity price risk, foreign
currency risk and credit risk associated with our
products and businesses might not perform as
intended or expected, resulting in higher realized
losses and unforeseen stresses on liquidity. Our
derivative-based hedging strategies also rely on
the performance of counterparties to such
derivatives. These counterparties may fail to
perform for various reasons resulting in losses on
under-collateralized positions.
• A decline in oil prices may continue to negatively
impact capital markets and may impact the ability
of certain of our clients, including oil and gas
exploration and production companies and
sovereign funds in oil-exporting countries, to
continue using our services or repay outstanding
loans. Increased defaults among oil and gas
exploration and production companies may also
negatively impact the high-yield market and our
high-yield funds.
• The process we use to estimate our projected
credit losses and to ascertain the fair value of
securities held by us is subject to uncertainty in
that it requires use of statistical models and
difficult, subjective and complex judgments,
including forecasts of economic conditions and
how these conditions might impair the ability of
our borrowers and others to meet their
obligations. In uncertain and volatile capital
markets, our ability to estimate our projected
credit losses may be impaired, which could
adversely affect our overall profitability and
results of operations.
Our international clients accounted for 37% of our
revenue in 2018. Given the scope of our global
operations, clients and counterparties, persistent
disruptions in the global financial markets, or the
attempt of a country to abandon the euro or persistent
weakness in a leading global currency could have a
material adverse impact on our business or results of
operations.
For a discussion of our management of market risk,
see “Risk Management - Market risk.”
Transitions away from, or changes in the
calculation of, LIBOR and other benchmark rates
could adversely impact our business and results of
operations.
In 2017, the UK Financial Conduct Authority
announced that it will no longer persuade or compel
contributing banks to submit rates for the calculation
of LIBOR after 2021. As a result, a transition is
underway to move away from LIBOR and other
interbank offered rates (“IBORs”) to transaction-
based alternative risk-free rates. This transition is
further supported by the requirements of the EU
Benchmarks Regulation (“BMR”), where IBORs
which are not anchored in transaction-based data and
rely on quotes or estimates submitted by contributing
banks would not satisfy the relevant BMR
requirements and would either need to be reformed or
discontinued after 2019. Any change to any
alternative rate or benchmark as a result of the move
away from LIBOR or other IBOR or any other
proposals for reform or other initiatives or
investigations, further uncertainty in the timing and
manner of implementation of such changes, or a
waning recognition of LIBOR or other IBOR as an
acceptable benchmark may cause LIBOR, the
applicable or alternative rates or benchmarks to
perform differently, or have other consequences
which cannot be predicted. In the event any such
benchmark or other referenced financial metric is
significantly changed or discontinued (for example,
in the transition away from LIBOR and other
IBORs), or ceases to be recognized as an acceptable
benchmark, there may be uncertainty as to the
calculation of the applicable interest rate or payment
amount, depending on the terms of the governing
instrument.
BNY Mellon 89
Risk Factors (continued)
As a result of our business activities and our
underlying operations, we may be adversely impacted
by the changes involving LIBOR and other
benchmark rates. We are responsible for the use of
benchmark rates in a variety of agency, trustee and
other fiduciary capacities, as well as in our
operational functions and could be subject to claims
alleging that notwithstanding any uncertainty around
the rate environment, we did not correctly discharge
our responsibilities.
Fluctuations in interest rates triggered by the
transition away from LIBOR and other benchmark
rates could adversely affect the availability or cost of
floating-rate funding. We could experience losses on
a product or have to pay more or receive less on
securities that we own or have issued. Mismatches
may arise between existing IBOR-based and
proposed alternative benchmark rates, based on a
number of factors, including differences in currency
denominations as between these rates, differences in
the extent to which transactions that serve as the basis
for such alternative benchmark rates may be secured
or unsecured, and differences in the tenor of
transactions that serve as the basis for alternative
benchmark rates. Divergences between existing
IBOR-based and proposed alternative benchmark
rates may result in our hedges being ineffective. In
addition, uncertainty relating to LIBOR or another
benchmark could result in pricing volatility, increased
capital requirements, loss of market share in certain
products, adverse tax or accounting consequences,
higher compliance, legal and operational costs, and
risks associated with client disclosures, discretionary
actions taken or negotiation of fallback provisions, as
well as business continuity and systems and model
disruption, all of which may adversely impact our
business and results of operations.
The United Kingdom’s referendum decision to leave
the EU has had and may continue to have negative
effects on global economic conditions, global
financial markets, and our business and results of
operations.
On March 29, 2019, the UK is scheduled to withdraw
from the EU. There is a substantial risk that the UK
and EU will not have ratified any terms for the UK’s
withdrawal from the EU by the scheduled withdrawal
date. Further, the UK’s withdrawal from the EU, and
in particular the countries’ failure to agree to terms,
has created an uncertain political and economic
environment in the UK, and may create such
environments in other EU member states.
90 BNY Mellon
In anticipation of the UK’s withdrawal from the EU,
we have executed plans adjusting our business and
operations so we may continue providing our
products and services to our UK and EU clients. Our
plans have been, and continue to be, based on the UK
exiting the EU on March 29, 2019 without an
agreement between the UK and EU on the terms of
the withdrawal and therefore with no transition
period. Accordingly, our plans assume that our UK
subsidiaries will, on March 29, 2019, lose their EU
financial services passport and as a result will not be
able to provide regulated services into the EU without
needing to obtain local authorization. BNY Mellon
maintains a presence in the UK through the London
branch of The Bank of New York Mellon and through
The Bank of New York Mellon (International)
Limited, which is a credit institution incorporated and
authorized in the UK. BNY Mellon maintains a
presence in the EU through The Bank of New York
Mellon SA/NV (“BNY Mellon SA/NV”), which is
headquartered in Belgium and has a branch network
in a number of other EU countries. BNY Mellon SA/
NV benefits from a general banking license for the
provision of banking and investments services. We
have undertaken, and continue to undertake,
adjustments to the operations of BNY Mellon SA/NV
so that it may provide a wider range of services to
clients domiciled in the EU.
If the UK leaves the EU without an agreement, we,
including our European affiliates, may face additional
operational, regulatory and compliance costs,
including costs relating to the transfer of business
operations and, potentially, personnel from our UK
operations to BNY Mellon SA/NV. The outcome of
the UK’s decision to exit the EU has also created
uncertainty with regard to divergent regulatory
standards, which may affect operational capabilities
such as the transfer of data between the UK and EU
after the UK leaves the EU. The effects of the UK’s
exit from the EU, including those described above,
could adversely affect our business, results of
operations and financial condition.
Changes in interest rates and yield curves could
have a material adverse effect on our profitability.
We earn revenue, known as “net interest revenue,” on
the difference between the interest income earned on
our interest-earning assets, such as the loans we make
and the securities we hold in our investment securities
portfolio, and the interest expense incurred on our
interest-bearing liabilities, such as deposits and
Risk Factors (continued)
borrowed money. Our net interest margin, which is
the result of dividing net interest revenue by average
interest-earning assets, and our cash flows, are
sensitive to changes in the spread between short-term
and long-term interest rates (the “yield curve”). Our
net interest margin tends to increase in a positive
yield curve environment and decrease when the yield
curve flattens or inverts. A flattening of the yield
curve, on its own or together with a low interest rate
environment, may adversely impact our revenue and
results of operations by compressing our net interest
spreads, particularly if we are unable to replace our
higher-yielding maturing assets with assets of
comparable yields, which will constrain our ability to
achieve desired net interest margins.
The 100 basis point rise in rates in the past year, or
future rate rises, could trigger one or more of the
following, which could adversely impact our
business, results of operations and financial
condition, including:
•
•
•
•
•
•
•
less liquidity in bonds and fixed-income funds in
the case of a sharp rise in interest rates resulting
in lower performance, yield and fees;
increased number of delinquencies, bankruptcies
or defaults and more nonperforming assets and
net charge-offs, as borrowers may have more
difficulty making higher interest payments;
difficulty in modeling predicted deposit levels
and depositor behavior, which could impact our
ability to manage liquidity and capital;
decreases in deposit levels and higher
redemptions from our fixed-income funds or
separate accounts, as clients move funds into
investments with higher rates of return;
decreases in stable deposit levels, which may
result in further pressure on our LCR measure;
a decline in our risk-based capital ratios;
reduction in accumulated other comprehensive
income (“OCI”) in our shareholders’ equity and
therefore our tangible common equity due to the
impact of rising long term rates on our available-
for-sale securities in our investment portfolio; or
•
higher funding costs.
A declining short-term rate environment will
likely adversely impact our revenue and results of
operations by:
•
•
•
•
continued compression of our net interest
spreads, depending on our balance sheet position;
constraining our ability to achieve a net interest
margin consistent with historical averages;
sustained weakness of our spread-based revenues,
resulting in continued voluntary waiving of
particular fees on certain money market mutual
funds and related distribution fees by us in order
to prevent the yields on such funds from
becoming uneconomic; and
adversely impacting the value of fixed-rate
mortgage-backed securities we hold if there are
increases in mortgage prepayment speeds, which
can be caused by refinancing activity.
Additionally, low short-term rates may result in
excess deposits with high potential runoff rates,
which in turn would increase our assets and result in
further pressure on our LCR measure.
A more detailed discussion of the interest rate and
market risks we face is contained in “Risk
Management.”
We may experience write-downs of securities that we
own and other losses related to volatile and illiquid
market conditions, reducing our earnings and
impacting our financial condition.
We maintain an investment securities portfolio of
various holdings, types and maturities. At Dec. 31,
2018, these securities were primarily classified as
available-for-sale, which are recorded on our balance
sheet at fair value with unrealized gains or losses
reported as a component of accumulated other
comprehensive income, net of tax. The securities in
our held-to-maturity portfolio, recorded on our
balance sheet at amortized cost, were $34.0 billion
and comprised approximately 28% of our investment
securities portfolio at Dec. 31, 2018. To the extent
unhedged, the accounting and regulatory treatment of
our investment securities portfolio in an available-for-
sale accounting environment may have more
volatility than a more traditional held-for-investment
loan portfolio, or a securities portfolio comprised
exclusively of U.S. Treasury securities.
Our investment securities portfolio represents a
greater proportion of our consolidated total assets
(approximately 33% at Dec. 31, 2018), and our loans
represent a smaller proportion of our consolidated
total assets (approximately 16% at Dec. 31, 2018), in
BNY Mellon 91
Risk Factors (continued)
comparison to many other major U.S. financial
institutions due to our custody and trust bank business
model. As such, our capital levels and results of
operations and financial condition are materially
exposed to the risks associated with our investment
portfolio.
If any of our available-for-sale securities experience
an other-than-temporary impairment, it would
negatively impact our earnings. If our held-to-
maturity securities experience a loss in fair value, it
would negatively impact the fair value of our
securities portfolio, although it would not impact our
earnings unless a credit event occurred. Many of
these securities experienced significant liquidity,
valuation and credit quality deterioration during the
2008 financial crisis and could experience a similar
deterioration in another financial crisis. U.S. state
and municipal bonds have been experiencing stress in
light of fiscal concerns.
Under the U.S. capital rules, after-tax changes in the
fair value of available-for-sale investment securities
are included in CET1 capital. Since loans held for
investment, or securities in a held-to-maturity
accounting classification, are not subject to a fair-
value accounting framework, changes in the fair
value of these instruments (other than incurred credit
losses) are not similarly included in the determination
of CET1 capital. As a result, we may experience
increased variability in our CET1 capital relative to
those other major financial institutions who maintain
a lower proportion of their consolidated total assets in
an available-for-sale accounting classification.
Generally, the fair value of available-for-sale
securities in the securities portfolio is determined
based upon market values available from third-party
sources. During periods of market disruption, it may
be difficult to value certain of our investment
securities if trading becomes less frequent and/or
market data becomes less observable. As a result,
valuations may include inputs and assumptions that
are less observable or require greater estimation and
judgment as well as valuation methods which are
more complex. These values may not be ultimately
realizable in a market transaction, and such values
may change very rapidly as market conditions change
and valuation assumptions are modified. Decreases
in value may have a material adverse effect on our
results of operations or financial condition. If any of
our securities suffer credit losses, as we experienced
with some of our investments in 2009, we may
recognize the credit losses as an other-than-temporary
92 BNY Mellon
impairment which could impact our revenue in the
quarter in which we recognize the losses. The
decision on whether to record an other-than-
temporary impairment or write-down is determined in
part by management’s assessment of the financial
condition and prospects of a particular issuer,
projections of future cash flows and recoverability of
the particular security. Management’s conclusions on
such assessments are highly judgmental and include
assumptions and projections of future cash flows
which may ultimately prove to be incorrect as
assumptions, facts and circumstances change. On the
other hand, securities held in a held-to-maturity
accounting environment are limited in the actions we
can take absent a significant deterioration in the
issuer’s creditworthiness. Therefore, we may be
constrained in our ability to liquidate a held-to-
maturity security that is deteriorating in value, which
would negatively impact the fair value of our
securities portfolio. If our determinations change
about our intention or ability to not sell securities that
have experienced a reduction in fair value below their
amortized cost, we could be required to recognize an
other-than-temporary loss in earnings for the entire
difference between fair value and amortized cost.
For information regarding our investment securities
portfolio, refer to “Consolidated balance sheet review
- Investment securities” and for information regarding
the sensitivity of and risks associated with the market
value of portfolio investments and interest rates, refer
to “Critical accounting estimates - Fair value -
Securities.”
Our FX revenue may be adversely affected by
decreases in market volatility and the cross-border
investment activity of our clients.
Our foreign exchange trading generates revenues
which are primarily driven by the volume of client
transactions and the spread realized on these
transactions, both of which are impacted by market
volatility and the impact of foreign exchange hedging
activities. Our clients’ cross-border investing activity
could decrease in reaction to economic and political
uncertainties, including changes in laws or
regulations governing cross-border transactions, such
as currency controls or tariffs. Uncertainties resulting
from terrorist attacks, military actions and other
events may also negatively affect cross-border
investments activity, which could negatively impact
revenue.
Risk Factors (continued)
Volumes and/or spreads in some of our products tend
to benefit from currency volatility and are likely to
decrease during times of lower currency volatility.
Our revenues also depend on our ability to manage
the risk associated with the currency transactions we
execute and program pricing.
Furthermore, a shift by custody clients from the
standing instruction programs to other trading options
combined with competitive market pressures on the
foreign exchange business may negatively impact our
FX revenue. Continued growth of electronic FX
trading capabilities is resulting in a shift of volume to
lower margin channels.
Credit and Liquidity Risk
The failure or perceived weakness of any of our
significant counterparties, many of whom are major
financial institutions and sovereign entities, and our
assumption of credit and counterparty risk, could
expose us to loss and adversely affect our business.
We have exposure to clients and counterparties in
many different industries, particularly financial
institutions, as a result of trading, clearing and
financing, providing custody services, securities
lending services or other relationships. We routinely
execute transactions with global clients and
counterparties in the financial industry as well as
sovereigns and other governmental or quasi-
governmental entities. Our direct exposure consists
of the extension of secured and unsecured credit to
clients and use of our balance sheet. In addition to
traditional credit activities, we also extend intraday
credit in order to facilitate our various processing,
settlement and intermediation activities. Our ability
to engage in funding or other transactions could be
adversely affected by the actions and commercial
soundness of other financial institutions or sovereign
entities, as defaults or non-performance (or even
uncertainty concerning such default or non-
performance) by one or more financial institutions, or
the financial services industry generally, have in the
past led to market-wide liquidity problems and could
lead to losses or defaults by us or by other institutions
(including our counterparties and/or clients) in the
future. The consolidation and failures of financial
institutions during the 2008 financial crisis increased
the concentration of our client and counterparty risk.
As a result of our membership in several industry
clearing or settlement exchanges and central
counterparty clearinghouses, 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. These
obligations may be limited to members that dealt with
the defaulting member or to the amount (or a multiple
of the amount) of our contribution to a clearing or
settlement exchange guarantee fund, or, in a few
cases, the obligation may be unlimited.
The degree of client demand for short-term credit also
tends to increase during periods of market turbulence,
exposing us to further credit-related risks. For
example, investors in mutual funds for which we act
as custodian may engage in significant redemption
activity due to adverse market or economic
conditions. We may then extend intraday credit to
our fund clients in order to facilitate their ability to
pay such redemptions. This may negatively impact
our leverage-based capital ratios, and in times of
sustained market volatility, may result in significant
leverage-based ratio declines.
When we provide credit to clients in connection with
providing cash management, clearing, custodial and
other services, we are exposed to potential loss if the
client experiences credit difficulties. We are also
generally not able to net exposures across affiliated
clients or counterparties and may not be able to net
exposures to the same legal entity across multiple
products. In addition, we may incur a loss in relation
to one entity or product even though our exposure to
one of the entities’ affiliates is over-collateralized.
Moreover, not all of our client or counterparty
exposure is secured.
In our agency securities lending program, we act as
lender’s agent on behalf of our clients, the lenders of
securities, in securities lending transactions with our
clients’ counterparties (including broker-dealers),
acting as borrowers, wherein securities are lent by our
clients and the securities loans are collateralized by
cash or securities posted by such counterparties.
Typically, in the case of cash collateral, our clients
authorize us as their agent to invest the cash collateral
in approved investments pursuant to each client’s
investment guidelines and instructions. Such
approved investments may include reverse repurchase
transactions with repo counterparties. In many cases,
in the securities loans we enter into on behalf of our
clients, we contractually agree to replace the client’s
loaned securities that the borrower failed to return
due to certain defaults by the borrower, mainly the
borrower’s insolvency. Therefore, in situations where
the market value of the loaned securities that the
BNY Mellon 93
Risk Factors (continued)
borrower failed to return to a client (which loaned
securities we are obligated to replace and return to the
client) exceeds the amount of proceeds resulting from
the liquidation of the client’s approved investments
and cash and non-cash collateral of such client, we
may be responsible for the shortfall amount necessary
to purchase any replacement securities. In addition,
in certain cases, we may also undertake the risk of
loss in certain circumstances related to approved
investments that are reverse repurchase transactions
as described above. In these two scenarios, we, rather
than our clients, are exposed to the risks of the
defaulting counterparty in the securities lending
transactions and, where applicable, in the reverse
repurchase transactions. For further discussion on
our securities lending indemnifications, see
“Commitments and contingent liabilities - Off-
balance sheet arrangements” in Note 21 of the Notes
to Consolidated Financial Statements.
From time to time, we assume concentrated credit
risk at the individual obligor, counterparty or group
level, potentially exposing us to a single market or
political event or a correlated set of events. For
example, we may be exposed to defaults by
companies located in countries with deteriorating
economic conditions or by companies in certain
industries. Such concentrations may be material.
Our material counterparty exposures change daily,
and the counterparties or groups of related
counterparties to which our risk exposure is material
also vary during any reported period; however, our
largest exposures tend to be to other financial
institutions, clearing organizations, and governmental
entities, both inside and outside the U.S.
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.
Although our overall business is subject to these
interdependencies, several of our businesses are
particularly sensitive to them, including our currency
and other trading activities, our securities lending and
securities finance businesses and our investment
management business. If we experience any of the
losses described above, it may materially and
adversely affect our results of operations.
94 BNY Mellon
We are also subject to the risk that our rights against
third parties may not be enforceable in all
circumstances. In addition, deterioration in the credit
quality of third parties whose securities or obligations
we hold, including a deterioration in the value of
collateral posted by third parties to secure their
obligations to us under derivatives contracts and other
agreements, could result in losses and/or adversely
affect our ability to rehypothecate or otherwise use
those securities or obligations for liquidity purposes.
Disputes with clients and counterparties as to the
valuation of collateral can significantly increase in
times of market stress and illiquidity. In addition,
disruptions in the liquidity or transparency of the
financial markets may result in our inability to sell,
syndicate or realize the value of our positions,
thereby leading to increased concentrations. An
inability to reduce our positions may not only
increase the market and credit risks associated with
such positions, but may also increase the level of
RWA on our balance sheet, thereby increasing our
capital requirements and funding costs, all of which
could adversely affect the operations and profitability
of our businesses.
Under evolving regulatory restrictions on credit
exposure, which include a broadening of the measure
of credit exposure, we may be required to limit our
exposures to specific obligors or groups, including
financial institutions, to levels that we may currently
exceed. These credit exposure restrictions under such
evolving regulations may adversely affect our
businesses and may require us to modify our
operating models or the policies and practices we use.
Our business, financial condition and results of
operations could be adversely affected if we do not
effectively manage our liquidity.
BNY Mellon’s operating model and overall strategy
rely heavily on our access to financial market utilities
and global capital markets. Without such access, it
would be difficult to process payments and settle and
clear transactions on behalf of our clients.
Deterioration in our liquidity position, whether actual
or perceived, can impact our market access by
affecting participants’ willingness to transact with us.
Changes to our liquidity can be caused by various
factors, such as funding mismatches, market
constraints disabling asset to cash conversion,
inability to issue debt, run-off of core deposits, and
contingent liquidity events such as additional
collateral posting. Changes in economic conditions
Risk Factors (continued)
or exposure to credit, market, operational, legal and
reputational risks can also affect our liquidity.
manner that could have a negative impact on our
capital ratios.
Our business is dependent in part on our ability to
meet our cash and collateral obligations at a
reasonable cost for both expected and unexpected
cash flows. We also must manage liquidity risks on
an intraday basis, in a manner designed to ensure that
we can access required funds during the business day
to make payments or settle immediate obligations,
often in real time. We receive client deposits through
a variety of investment management and investment
servicing businesses and we rely on those deposits as
a low-cost and stable source of funding. Our ability
to continue to receive those deposits, and other short-
term funding sources, is subject to variability based
on a number of factors, including volume and
volatility in the global securities markets, the relative
interest rates that we are prepared to pay for those
deposits, and the perception of the safety of those
deposits or other short-term obligations relative to
alternative short-term investments available to our
clients. We could lose deposits if we suffer a
significant decline in the level of our business
activity, our credit ratings are materially downgraded,
interest rates rise, or we are subject to significant
negative press or significant regulatory action or
litigation, among other reasons. If we were to lose a
significant amount of deposits we may need to
replace such funding with more expensive funding
and/or reduce assets, which would reduce our net
interest revenue.
In addition, our access to the debt capital markets is a
significant source of liquidity. Events or
circumstances often outside of our control, such as
market disruptions, government fiscal and monetary
policies, or loss of confidence by securities
purchasers or counterparties in us or in the funds
markets, could limit our access to capital markets,
increase our cost of borrowing, adversely affect our
liquidity, or impair our ability to execute our business
plan. In addition, clearing organizations, regulators,
clients and financial institutions with which we
interact may exercise the right to require additional
collateral based on market perceptions or market
conditions, which could further impair our access to
and cost of funding. Market perception of sovereign
default risks can also lead to inefficient money
markets and capital markets, which could further
impact BNY Mellon’s funding availability and cost.
Conversely, if we experience excess liquidity inflows,
it could increase interest expense, limit our financial
flexibility, and increase the size of our total assets in a
Under the U.S. capital rules, the size of the capital
surcharge that applies to U.S. G-SIBs is based in part
on its reliance on short-term wholesale funding,
including certain types of deposit funding, which may
increase the cost of such funding. Furthermore,
certain non-U.S. authorities, including the European
Commission, have proposed legislation or regulations
requiring large banks to incorporate a separate
subsidiary in countries in which they operate, and to
maintain independent capital and liquidity at foreign
subsidiaries. If adopted, these requirements could
hinder our ability to efficiently manage our funding
and liquidity in a centralized manner. There can be
no assurances that these measures will be successful
in limiting BNY Mellon’s liquidity risk.
In addition, our cost of funding could be affected by
actions that we may take in order to satisfy applicable
LCR and NSFR requirements, to lower our G-SIB
surcharge, to satisfy the amount of eligible long-term
debt outstanding under the TLAC Rule, to address
obligations under our resolution plan or to satisfy
regulatory requirements in non-U.S. jurisdictions
relating to the pre-positioning of liquidity in certain
subsidiaries.
If we are unable to raise funds using the methods
described above, we would likely need to finance or
liquidate unencumbered assets, such as our central
bank deposits and bank placements, or securities in
our investment portfolio to meet funding needs. We
may be unable to sell some of our assets, or we may
have to sell assets at a discount from market value,
either of which could adversely affect our financial
condition and results of operations. Further, our
ability to sell assets may be impaired if other market
participants are seeking to sell similar assets at the
same time, which could occur in a liquidity or other
market crisis. Additionally, if we experience cash
flow mismatches, deposit run-off or market
constraints resulting from our inability to convert
assets to cash or access capital markets, our liquidity
could be severely impacted. During periods of
market uncertainty, our level of client deposits has in
recent years tended to increase; however, because
these deposits have high potential run-off rates, we
have historically deposited these so-called excess
deposits with central banks and in other highly liquid
and low-yielding instruments.
BNY Mellon 95
Risk Factors (continued)
If we are unable to continue to fund our assets
through deposits or access capital markets on
favorable terms or if we suffer an increase in our
borrowing costs or otherwise fail to manage our
liquidity effectively, our liquidity, net interest margin,
financial results and condition may be materially
adversely affected. In certain cases, this could
require us to raise additional capital through the
issuance of preferred or common stock, which could
dilute the ownership of existing stockholders, and/or
reduce our common stock dividend to preserve
capital.
For a further discussion of our liquidity, see
“Liquidity and dividends.”
We could incur losses if our allowance for credit
losses, including loan and lending-related
commitments reserves, is inadequate.
When we loan money, commit to loan money or
provide credit or enter into another contract with a
counterparty, we incur credit risk, or the risk of loss if
our borrowers do not repay their loans or our
counterparties fail to perform according to the terms
of their agreements. Our revenues and profitability
are adversely affected when our borrowers default, in
whole or in part, on their loan obligations to us or
when there is a significant deterioration in the credit
quality of our loan portfolio. We reserve for potential
future credit losses by recording a provision for credit
losses through a charge to earnings. The allowance
for loan losses and allowance for lending-related
commitments represents management’s estimate of
probable losses inherent in our credit portfolio. We
use a quantitative methodology and qualitative
framework for determining the allowance for loan
losses and the allowance for lending-related
commitments. Within this qualitative framework,
management applies judgment when assessing
internal risk factors and environmental factors to
compute an additional allowance for each component
of the loan portfolio. As is the case with any such
judgments, we could fail to identify these factors or
accurately estimate their impact. We cannot provide
any assurance as to whether charge-offs related to our
credit exposure may occur in the future. Current and
future market and economic developments may
increase default and delinquency rates and negatively
impact the quality of our credit portfolio, which may
impact our charge-offs. Although our current
estimates contemplate current conditions and how we
expect them to change in the future, it is reasonably
possible that actual conditions could be worse than
96 BNY Mellon
anticipated in those estimates, which could materially
affect our results of operations and financial
condition. See “Critical accounting estimates.”
Any material reduction in our credit ratings or the
credit ratings of our principal bank subsidiaries,
The Bank of New York Mellon or BNY Mellon,
N.A., could increase the cost of funding and
borrowing to us and our rated subsidiaries and have
a material adverse effect on our results of
operations and financial condition and on the value
of the securities we issue.
Our debt and preferred stock and the debt and
deposits of our principal bank subsidiaries, The Bank
of New York Mellon and BNY Mellon, N.A., are
currently rated investment grade by the major rating
agencies. These rating agencies regularly evaluate us
and our rated subsidiaries and their outlook on us and
our rated subsidiaries. Their credit ratings are based
on a number of factors, including our financial
strength, performance, prospects and operations as
well as factors not entirely within our control,
including conditions affecting the financial services
industry generally as well as the U.S. government.
Rating agencies employ different models and
formulas to assess the financial strength of a rated
company, and from time to time rating agencies have,
in their discretion, altered these models. Changes to
rating agency models, general economic conditions,
or other circumstances outside of our control could
impact a rating agency’s judgment of the rating or
outlook it assigns us or our rated subsidiaries. There
can be no assurance that we or our rated subsidiaries
will maintain our respective credit ratings or outlook
on our securities.
A material reduction in our credit ratings or the credit
ratings of our rated subsidiaries, which can occur at
any time without notice, could have a material
adverse effect on our access to credit markets, the
related cost of funding and borrowing, our credit
spreads, our liquidity and on certain trading revenues,
particularly in those businesses where counterparty
creditworthiness is critical. In addition, in connection
with certain over-the-counter derivatives contracts
and other trading agreements, counterparties may
require us or our rated subsidiaries to provide
additional collateral or to terminate these contracts
and agreements and collateral financing arrangements
in the event of a credit ratings downgrade below
certain ratings levels. The requirement to provide
additional collateral or terminate these contracts and
agreements could impair our liquidity by requiring us
Risk Factors (continued)
to find other sources of financing or to make
significant cash payments or securities movements. A
downgrade by any one rating agency, depending on
the agency’s relative ratings of the firm at the time of
the downgrade, may have an impact comparable to
the impact of a downgrade by all rating agencies. If a
rating agency downgrade were to occur during
broader market instability, our options for responding
to events may be more limited and more expensive.
An increase in the costs of our funding and
borrowing, or an impairment of our liquidity, could
have a material adverse effect on our results of
operations and financial condition. A material
reduction in our credit ratings also could decrease the
number of investors and counterparties willing or
permitted to do business with or lend to us and
adversely affect the value of the securities we have
issued or may issue in the future.
We cannot predict what actions rating agencies may
take, or what actions we may elect or be required to
take in response thereto, which may adversely affect
us. For further discussion on the impact of a credit
rating downgrade, see “Disclosure of contingent
features in OTC derivative instruments” in Note 22 of
the Notes to Consolidated Financial Statements.
Strategic Risk
New lines of business, new products and services or
transformational or strategic project initiatives may
subject us to additional risks, and the failure to
implement these initiatives could affect our results
of operations.
From time to time, we may launch new lines of
business, offer new products and services within
existing lines of business or undertake
transformational or strategic projects. There are
substantial risks and uncertainties associated with
these efforts. We invest significant time and
resources in developing and marketing new lines of
business, products and services and executing on our
transformational and strategic initiatives. For
example, we have devoted considerable resources to
developing new technology solutions for our clients.
If these technology solutions are not successful, it
could adversely impact our reputation, business and
results of operations.
Regulatory requirements can affect whether
initiatives are able to be brought to market in a
manner that is timely and attractive to our customers.
Initial timetables for the development and
introduction of new lines of business or new products
or services and price and profitability targets may not
be met. Furthermore, our revenues and costs may
fluctuate because new businesses or products and
services generally require startup costs while
revenues may take time to develop, which may
adversely impact our results of operations.
From time to time we undertake transformational or
strategic project initiatives. Significant effort and
resources are necessary to manage and oversee the
successful completion of these initiatives. These
initiatives often place significant demands on
management and a limited number of employees with
subject matter expertise and may involve significant
costs to implement as well as increase operational
risk as employees learn to process transactions under
new systems. The failure to properly execute on
these transformational or strategic initiatives could
adversely impact our business, reputation and results
of operations.
Legal, regulatory and reputational risks may also
exist in connection with dealing with new products or
markets, or clients and customers whose businesses
focus on such products or markets, where there is
regulatory uncertainty or different or conflicting
regulations depending on the regulator or the
jurisdiction.
We are subject to competition in all aspects of our
business, which could negatively affect our ability to
maintain or increase our profitability.
Many businesses in which we operate are intensely
competitive around the world. Competitors include
other banks, trading firms, broker-dealers, investment
banks, asset managers, insurance companies,
financial technology firms and a variety of other
financial services and advisory companies whose
products and services span the markets in which we
operate. We compete on the basis of a number of
factors, including transaction execution, capital or
access to capital, products and services, innovation,
reputation, lending limits, rates and price. Larger and
more geographically diverse companies, and financial
technology firms that invest substantial resources in
developing and designing new technology (in
particular digital and mobile technology) and that are
not subject to the same level of regulation, may be
able to offer financial products and services at more
competitive prices than we are able to offer. Pricing
pressures, as a result of the willingness of competitors
to offer comparable or improved products or services
BNY Mellon 97
Our business may be adversely affected if we are
unable to attract and retain employees.
Our success depends, in large part, on our ability to
attract new employees, retain and motivate our
existing employees, and continue to compensate our
employees competitively amid heightened regulatory
restrictions. Competition for the most skilled
employees in most activities in which we engage can
be intense, and we may not be able to recruit and
retain key personnel.
We rely on certain employees with subject matter
expertise to assist in the implementation of important
initiatives. As technology and risk management
increase in focus in the financial industry,
competition for technologists and risk personnel has
intensified, which could constrain our ability to
execute on certain of our strategic initiatives.
Our ability to attract and retain key executives and
other employees may be negatively affected by recent
legislation and other existing restrictions applicable to
incentive and other compensation programs,
including limits on our ability to deduct for federal
income tax purposes compensation in excess of $1
million paid to certain current and former executives,
as well as deferral, clawback requirements and other
limits on incentive compensation. Some of these
restrictions may not apply to some of our competitors
and to other institutions with which we compete for
talent, in particular as we are more often competing
for personnel with financial technology providers and
other entities that are not regulated banking
organizations that may not have the same limitations
on compensation as we do.
The loss of employees’ skills, knowledge of the
market, industry experience, and the cost of finding
replacements may hurt our business. If we are unable
to continue to attract and retain highly qualified
employees, our performance, including our
competitive position, could be adversely affected.
Risk Factors (continued)
at a lower price, may result in a reduction in the price
we can charge for our products and services, which
could, and in some cases has, negatively affected our
ability to maintain or increase our profitability. Low
economic growth may result in clients exiting
markets, which could lead to a loss of business for us.
In addition, technological advances have made it
possible for other types of non-depository
institutions, such as financial technology firms,
outsourcing companies and data processing
companies, to offer a variety of products and services
competitive with certain areas of our business. In the
future, financial technology firms may be able to
provide additional traditional banking products and
services by obtaining a bank-like charter, such as the
OCC’s fintech charter.
Markets, and the manner in which our clients interact
and transact within markets, can evolve quickly,
particularly if new or disruptive technologies are
introduced. Our failure to either anticipate, or
participate in, the transformational change within a
given market could result in potential negative
financial impact. Competitors may develop
technological advances that could negatively impact
our transaction execution or the pricing of our
clearing, settlement, payments and trading activities.
Increased competition in any of these areas may
require us to make additional capital investments in
our businesses in order to remain competitive. For
example, along with other financial institutions, we
are researching ways to adapt robotics and distributed
ledger technology to bank services. If we are not able
to adapt these technologies as successfully as our
peers, we may become less competitive. In addition,
even if successful from a competitive standpoint, the
use and implementation of new and emerging
technologies may increase the risk that we experience
cybersecurity or other information technology events.
Furthermore, recently implemented and proposed
regulations may impact our ability to conduct certain
of our businesses in a cost-effective manner or at all.
The more restrictive laws and regulations applicable
to the largest U.S. financial services institutions,
including the U.S. capital rules, can put us at a
competitive disadvantage relative to both our non-
U.S. competitors and certain U.S. competitors. See
“Supervision and Regulation.”
98 BNY Mellon
Risk Factors (continued)
Our strategic transactions present risks and
uncertainties and could have an adverse effect on
our business, results of operations and financial
condition.
From time to time, to achieve our strategic objectives,
we have acquired, disposed of, or invested in
(including through joint venture relationships)
companies and businesses, and may do so in the
future. Our ability to pursue or complete strategic
transactions is in certain instances subject to
regulatory approval and we cannot be certain when or
if, or on what terms and conditions, any required
regulatory approvals would be granted. Moreover, to
the extent we pursue a strategic transaction, there can
be no guarantee that the transaction will close when
anticipated, or at all. If a strategic transaction does
not close, or if the strategic transaction fails to
maximize shareholder value or required regulatory
approval is not obtained, it could have an adverse
effect on our business, results of operations and
financial condition.
Each acquisition poses integration challenges,
including successfully retaining and assimilating
clients and key employees, capitalizing on certain
revenue synergies and integrating the acquired
company’s culture, control functions, systems and
technology. In some cases, acquisitions involve entry
into new businesses or new geographic or other
markets, and these situations also present risks and
uncertainties in instances where we may be
inexperienced in these new areas. We may be
required to spend a significant amount of time and
resources to integrate these acquisitions. The
anticipated integration benefits may take longer to
achieve than projected and the time and cost needed
to consolidate control functions, platforms and
systems may significantly exceed our estimates. If
we fail to successfully integrate strategic acquisitions,
including doing so in a timely and cost-effective
manner, we may not realize the expected benefits,
which could have an adverse impact on our business,
financial condition and results of operations. In
addition, we may incur expenses, costs, losses,
penalties, taxes and other liabilities related to the
conduct of the acquired businesses prior to the date of
our ownership (including in connection with the
defense and/or settlement of legal and regulatory
claims, investigations and proceedings) which may
not be recoverable through indemnification or
otherwise. If the purchase price we pay in an
acquisition exceeds the fair value of assets acquired
less the liabilities we assume, then we may need to
recognize goodwill on our consolidated balance
sheet. Goodwill is an intangible asset that is not
eligible for inclusion in regulatory capital under
applicable requirements. Further, if the value of the
acquisition declines, we may be required to record an
impairment charge.
Each disposition also poses challenges, including
separating the disposed businesses, products and
systems in a way that is cost-effective and is not
disruptive to us or our customers. In addition, the
inherent uncertainty involved in the process of
evaluating, negotiating or executing a potential sale
of one of our companies or businesses may cause the
loss of key clients, employees and business partners
which could have an adverse impact on our business,
financial condition and results of operations.
Joint ventures and non-controlling investments
contain potentially increased financial, legal,
reputational, operational, regulatory and/or
compliance risks. We may be dependent on joint
venture partners, controlling shareholders or
management who may have business interests,
strategies or goals that are inconsistent with ours.
Business decisions or other actions or omissions of
the joint venture partner, controlling shareholders or
management may adversely affect the value of our
investment, impacting our results of operations, result
in litigation or regulatory action against us and
otherwise damage our reputation and brand.
Other Risks
Tax law changes or challenges to our tax positions
with respect to historical transactions may adversely
affect our net income, effective tax rate and our
overall results of operations and financial condition.
In 2017, U.S. tax legislation was signed into law,
resulting in tax benefits to us. We continue to
monitor the tax impacts of additional guidance
provided by the Internal Revenue Service with
respect to this and other tax laws. Future tax laws or
the expiration of or changes in existing tax laws, or
the interpretation of those laws worldwide, could also
have a material impact on our business or net income.
Our actions taken in response to, or reliance upon,
such changes in the tax laws may impact our tax
position in a manner that may result in lower
earnings.
In the course of our business, we receive inquiries
and challenges from both U.S. and non-U.S. tax
BNY Mellon 99
Risk Factors (continued)
authorities on the amount of taxes we owe. If we are
not successful in defending these inquiries and
challenges, we may be required to adjust the timing
or amount of taxable income or deductions or the
allocation of income among tax jurisdictions, all of
which can require a greater provision for taxes or
otherwise negatively affect earnings. Probabilities
and outcomes are reviewed as events unfold, and
adjustments to the reserves are made when necessary,
but the reserves may prove inadequate because we
cannot necessarily accurately predict the outcome of
any challenge, settlement or litigation or the extent to
which it will negatively affect us or our business. See
Note 11 of the Notes to Consolidated Financial
Statements for further information.
Our ability to return capital to shareholders is
subject to the discretion of our Board of Directors
and may be limited by U.S. banking laws and
regulations, including those governing capital and
the approval of our capital plan, applicable
provisions of Delaware law or our failure to pay full
and timely dividends on our preferred stock.
Holders of our common and preferred stock are only
entitled to receive such dividends or other
distributions of capital as our Board of Directors may
declare out of funds legally available for such
payments. Although we have historically declared
cash dividends on our common and preferred stock,
we are not required to do so. In addition to the Board
of Directors’ approval, our ability to take certain
actions, including our ability to make certain
acquisitions, declare dividends or repurchase our
common stock, is dependent on, among other things,
Federal Reserve non-objection under the annual
regulatory review of the results of the CCAR process
and the supervisory stress tests required under the
Dodd-Frank Act. These evaluations, in turn, are
dependent on, among other things, our successful
demonstration that we can maintain capital levels
above regulatory minimums in the event of a stressed
market environment, as well as the Federal Reserve’s
qualitative assessment of the robustness of our capital
adequacy process and the assumptions and analysis
underlying the capital plan. There can be no
assurance that the Federal Reserve will not object to
our future capital plans or that we will perform
adequately on our supervisory stress tests. If the
Federal Reserve objects to our proposed capital
actions or we underperform on our stress tests, we
may be required to revise our stress-testing or capital
management approaches, resubmit our capital plan or
postpone, or cancel or alter our planned capital
100 BNY Mellon
actions, and we would not be permitted to make any
capital distributions other than those to which the
Federal Reserve has indicated in writing its non-
objection. In addition, if there have been or will be
changes in our risk profile (including a material
change in business strategy or risk exposure),
financial condition or corporate structure, we may be
required to resubmit our capital plan to the Federal
Reserve.
Our ability to accurately predict or explain the
outcome of the CCAR process is influenced by
evolving supervisory criteria. The Federal Reserve’s
annual assessment of our capital adequacy and
planning process involves not only a quantitative
assessment through the Federal Reserve’s proprietary
stress test models but also a qualitative assessment.
The qualitative assessment involves a number of
factors and is expected to continue to evolve on an
ongoing basis as a result of the Federal Reserve’s
horizontal review of capital plan submissions.
Similarly, the Federal Reserve may, as part of its
stated goal to continually evolve its annual stress
testing requirements, adjust several parameters of the
annual stress testing process, including the severity of
the stress test scenario and the addition of
components deemed important by the Federal
Reserve (e.g., a counterparty failure). Further,
because the Federal Reserve’s proprietary stress test
models and qualitative assessment may differ from
the modeling techniques and capital planning
practices employed by us, it is foreseeable that our
stress test results (using our own models, estimation
methodologies and processes) may not be consistent
with those disclosed by the Federal Reserve. In
addition, the Federal Reserve has proposed to replace
the capital conservation buffer with a “stress capital
buffer,” which would result in the integration of the
G-SIB surcharge with stress-based capital
requirements.
The Federal Reserve’s instructions for the 2018
CCAR provide that, for large BHCs like BNY
Mellon, common stock dividend payout ratios
exceeding 30% of after-tax net income available to
common shareholders under certain baseline
scenarios will receive particularly close scrutiny. A
failure to increase dividends along with our
competitors, or any reduction of, or elimination of,
our common stock dividend would likely adversely
affect the market price of our common stock, impact
our return on equity and market perceptions of BNY
Mellon.
Risk Factors (continued)
Our ability to declare or pay dividends on, or
purchase, redeem or otherwise acquire, shares of our
common stock or any of our shares that rank junior to
preferred stock as to the payment of dividends and/or
the distribution of any assets on any liquidation,
dissolution or winding-up of BNY Mellon will be
prohibited, subject to certain exceptions, in the event
that we do not declare and pay in full dividends for
the then-current dividend period of our Series A
preferred stock or the last preceding dividend period
of our Series C, Series D, Series E or Series F
preferred stock.
In addition, regulatory capital rules that are or will be
applicable to us including the U.S. capital rules risk-
based capital requirements, the SLR, enhanced SLR,
the TLAC Rule and the U.S. G-SIB surcharge may
limit or otherwise restrict how we utilize our capital,
including common stock dividends and stock
repurchases, and may require us to increase or alter
the mix of our outstanding regulatory capital
instruments.
Any requirement to increase our regulatory capital
ratios or alter the composition of our capital could
require us to liquidate assets or otherwise change our
business and/or investment plans, which may
negatively affect our financial results. Further, any
requirement to maintain higher levels of capital may
constrain our ability to return capital to shareholders
either in the form of common stock dividends or
stock repurchases.
The Parent is a non-operating holding company,
and as a result, is dependent on dividends from its
subsidiaries and extensions of credit from its IHC to
meet its obligations, including with respect to its
securities, and to provide funds for share
repurchases and payment of dividends to its
stockholders.
The Parent is a non-operating holding company,
whose principal assets and sources of income are its
principal U.S. bank subsidiaries - The Bank of New
York Mellon and BNY Mellon, N.A. - and its other
subsidiaries, including the IHC. The Parent is a legal
entity separate and distinct from the IHC, as well as
its banks and other subsidiaries. Therefore, the
Parent primarily relies on dividends, interest,
distributions, and other payments from its
subsidiaries, including extensions of credit from the
IHC, to meet its obligations, including its obligations
with respect to its securities, and to provide funds for
share repurchases and payment of common and
preferred dividends to its stockholders, to the extent
declared by the Board of Directors.
There are various limitations on the extent to which
our bank and other subsidiaries can finance or
otherwise supply funds to the Parent (by dividend or
otherwise) and certain of our affiliates. Each of these
restrictions can reduce the amount of funds available
to meet the Parent’s obligations. Many of our
subsidiaries, including our bank subsidiaries, are
subject to laws and regulations that restrict dividend
payments or authorize regulatory bodies to block or
reduce the flow of funds from those subsidiaries to
the Parent or other subsidiaries. In addition, our bank
subsidiaries would not be permitted to distribute a
dividend if doing so would constitute an unsafe and
unsound practice or if the payment would reduce their
capital to an inadequate level. Our subsidiaries may
also choose to restrict dividend payments to the
Parent in order increase their own capital or liquidity
levels. Our bank subsidiaries are also subject to
restrictions on their ability to lend to or transact with
non-bank affiliates, minimum regulatory capital and
liquidity requirements, and restrictions on their ability
to use funds deposited with them in bank or
brokerage accounts to fund their businesses. See
“Supervision and Regulation” and “Liquidity and
dividends” and Note 18 of the Notes to Consolidated
Financial Statements. Further, we evaluate and
manage liquidity on a legal entity basis, which may
place legal and other limitations on our ability to
utilize liquidity from one legal entity to satisfy the
liquidity requirements of another, including the
Parent.
There are also limitations specific to the IHC’s ability
to make distributions or extend credit to the Parent.
The IHC is not permitted to pay dividends to the
Parent if certain key capital, liquidity and operational
risk indicators are breached, and if the resolution of
the Parent is imminent, the committed lines of credit
provided by the IHC to the Parent will automatically
terminate, with all outstanding amounts becoming
due. See “The application of our Title I preferred
resolution strategy or resolution under the Title II
orderly liquidation authority could adversely affect
the Parent’s liquidity and financial condition and the
Parent’s security holders.”
Because the Parent is a holding company, its rights
and the rights of its creditors, including the holders of
its securities, to a share of the assets of any subsidiary
upon the liquidation or recapitalization of the
subsidiary will be subject to the prior claims of the
BNY Mellon 101
Risk Factors (continued)
subsidiary’s creditors (including, in the case of our
banking subsidiaries, their depositors) except to the
extent that the Parent may itself be a creditor with
recognized claims against the subsidiary. The rights
of holders of securities issued by the Parent to benefit
from those distributions will also be junior to those
prior claims. Consequently, securities issued by the
Parent will be effectively subordinated to all existing
and future liabilities of our subsidiaries.
Changes in accounting standards governing the
preparation of our financial statements and future
events could have a material impact on our reported
financial condition, results of operations, cash flows
and other financial data.
From time to time, the FASB, the SEC and bank
regulators change the financial accounting and
reporting standards governing the preparation of our
financial statements or the interpretation of those
standards. These changes are difficult to predict and
can materially impact how we record and report our
financial condition, results of operations, cash flows
and other financial data. In some cases, we may be
required to apply a new or revised standard
retrospectively or to apply an existing standard
differently, also retrospectively, in each case
potentially resulting in the restatement of our prior
period financial statements and our related
disclosures.
Additionally, our accounting policies and methods are
fundamental to how we record and report our
financial condition and results of operations. The
preparation of financial statements in conformity with
U.S. GAAP requires management to make estimates
based upon assumptions about future economic and
market conditions which affect reported amounts and
related disclosures in our financial statements.
Amounts subject to estimates are items such as the
allowance for loan losses and lending-related
commitments, the fair value of financial instruments
and derivatives, goodwill and other intangibles and
litigation and regulatory contingencies. Among other
effects, such changes in estimates could result in
future impairments of, goodwill and intangible assets
and establishment of allowances for loan losses and
lending-related commitments as well as litigation and
regulatory contingencies. If subsequent events occur
that are materially different than the assumptions and
estimates we used, our reported financial condition,
results of operation and cash flows may be materially
negatively impacted. See “Recent Accounting
Developments” for a discussion of recent
developments to our accounting standards.
102 BNY Mellon
Recent Accounting Developments
Recently issued accounting standards
The following ASUs issued by the Financial
Accounting Standards Board (“FASB”) have not yet
been adopted.
ASU 2016-02, Leases
In February 2016, the FASB issued an ASU, Leases.
The primary objective of this ASU is to increase
transparency and comparability by recognizing lease
assets and liabilities on the balance sheet and expand
related disclosures. This ASU requires a “right-of-
use” asset and a payment obligation liability on the
balance sheet for most leases and subleases.
Additionally, depending on the lease classification
under the standard, it may result in different expense
recognition patterns and classification than under
existing accounting principles. For leases classified
as finance leases, it will result in higher expense
recognition in the earlier periods and lower expense
in the later periods of the lease.
The Company adopted this guidance on Jan. 1, 2019
using the alternative transition method, which allows
the adoption of the accounting standard prospectively
without adjusting comparative prior period financial
information. We recognized right-of-use assets of
$1.3 billion and lease liabilities of $1.5 billion on the
consolidated balance sheet, both based on the present
value of the expected remaining lease payments.
ASU 2018-02, Income Statement—Reporting
Comprehensive Income: Reclassification of Certain
Tax Effects from Accumulated Other Comprehensive
Income
In February 2018, the FASB issued an ASU, Income
Statement—Reporting Comprehensive Income:
Reclassification of Certain Tax Effects from
Accumulated Other Comprehensive Income. This
ASU permits a reclassification from accumulated
other comprehensive income to retained earnings for
the tax effects of items within accumulated other
comprehensive income that do not reflect the lower
statutory tax rate which was enacted by the U.S. tax
legislation. BNY Mellon adopted this guidance in the
first quarter of 2019, which resulted in a $90 million
reclassification from accumulated other
comprehensive income to retained earnings.
ASU 2016-13, Financial Instruments – Credit Losses:
Measurement of Credit Losses on Financial
Instruments
In June 2016, the FASB issued an ASU, Financial
Instruments – Credit Losses: Measurement of Credit
Losses on Financial Instruments. This ASU
introduces a new current expected credit losses
model, which will apply to financial assets subject to
credit losses and measured at amortized cost,
including held-to-maturity securities and certain off-
balance sheet credit exposures. The guidance will
also change current practice for the impairment
model for available-for-sale debt securities. The
available-for-sale debt securities model will require
the use of an allowance to record estimated credit
losses and subsequent recoveries.
The standard requires a cumulative effect of initial
application to be recognized in retained earnings at
the date of initial application. BNY Mellon has
developed expected credit loss models and
approaches that include forecasting and other
methodologies, and our focus for the remainder of
2019 is on model validation as well as business
process refinements and testing to ensure the
expected credit losses are calculated in accordance
with the standard. We are continuing to assess the
impact of the standard on our consolidated financial
statements, disclosures and internal control. The
adoption impact will depend on several factors
including the composition and remaining expected
lives of financial instruments at the time of adoption,
the establishment of an allowance for expected credit
losses on held-to-maturity securities, and the
macroeconomic conditions and forecasts that exist at
that date. We plan to adopt the new standard on Jan.
1, 2020.
BNY Mellon 103
Business Continuity
Business continuity and operational resiliency are
priorities for the Company. Core elements of our
business continuity and operational resiliency
strategies include advance planning, maintaining
multiple data centers, testing our capabilities,
maintaining diversity of business operations and
telecommunications infrastructure, and reviewing the
business continuity and information security
capabilities of our service providers. These
capabilities are intended to enable the Company to
maintain its operations and appropriately respond to
events that could damage our physical facilities,
cause delays or disruptions to operational functions
(including telecommunications networks), or impair
the ability of our employees to work, of our vendors
to provide services to us, or of our clients and
counterparties to communicate and transact with us.
Those events include information security incidents,
technology disruptions, acts of terrorism, natural
disasters, pandemics and global conflicts.
We continue to evaluate and strengthen our business
continuity and operational resiliency capabilities and
have increased our investments in technology to
steadily enhance those capabilities, including our
ability to resume and sustain our operations.
104 BNY Mellon
Supplemental Information (unaudited)
Explanation of GAAP and Non-GAAP
financial measures
BNY Mellon has included in this Annual Report
certain Non-GAAP financial measures on a tangible
basis, as a supplement to generally accepted
accounting principles (“GAAP”) information.
Tangible common shareholders’ equity excludes
goodwill and intangible assets, net of deferred tax
liabilities. BNY Mellon believes that the return on
tangible common equity measure is an additional
useful measure for investors because it presents a
measure of those assets that can generate income.
BNY Mellon has provided a measure of tangible book
value per common share, which it believes provides
additional useful information as to the level of
tangible assets in relation to shares of common stock
outstanding.
The presentation of the growth rates of investment
management and performance fees on a constant
currency basis permits investors to assess the
significance of changes in foreign currency exchange
rates. Growth rates on a constant currency basis were
determined by applying the current period foreign
currency exchange rates to the prior period revenue.
BNY Mellon believes that this presentation, as a
supplement to GAAP information, gives investors a
clearer picture of the related revenue results without
the variability caused by fluctuations in foreign
currency exchange rates.
BNY Mellon has presented the operating margin for
the Investment Management business net of
distribution and servicing expense that was passed to
third parties who distribute or service our managed
funds. BNY Mellon believes that this measure is
useful when evaluating the performance of the
Investment Management business relative to industry
competitors.
The following table presents the reconciliation of the return on common equity and tangible common equity.
Return on common equity and tangible common equity reconciliation
(dollars in millions)
Net income applicable to common shareholders of The Bank of New York
Mellon Corporation – GAAP
Add: Amortization of intangible assets
Less: Tax impact of amortization of intangible assets
Adjusted net income applicable to common shareholders of The Bank of
New York Mellon Corporation, excluding amortization of intangible assets
– Non-GAAP
Average common shareholders’ equity
Less: Average goodwill
Average intangible assets
Add: Deferred tax liability – tax deductible goodwill (a)
Deferred tax liability – intangible assets (a)
Average tangible common shareholders’ equity – Non-GAAP
2018
2017
2016
2015
2014
$
$
4,097
180
42
$
3,915
209
72
3,425
237
81
$
3,053
261
89
$
2,494
298
104
$
4,235
$
4,052
$
3,581
$
3,225
$
2,688
$ 37,818
17,458
3,314
1,072
692
$ 18,810
$ 36,145
17,441
3,508
1,034
718
$ 16,948
$ 35,504
17,497
3,737
1,497
1,105
$ 16,872
$ 35,564
17,731
3,992
1,401
1,148
$ 16,390
$ 36,618
18,063
4,305
1,340
1,216
$ 16,806
Return on common shareholders’ equity – GAAP
Return on tangible common shareholders’ equity – Non-GAAP
(a) Deferred tax liabilities are based on fully phased-in U.S. capital rules.
10.8%
22.5%
10.8%
23.9%
9.6%
21.2%
8.6 %
19.7 %
6.8%
16.0%
BNY Mellon 105
Supplemental Information (unaudited) (continued)
The following table presents the reconciliation of book value and tangible book value per common share.
Book value and tangible book value per common share reconciliation
(dollars in millions, unless otherwise noted)
BNY Mellon shareholders’ equity at year end – GAAP
Less: Preferred stock
BNY Mellon common shareholders’ equity at year end – GAAP
$
Less: Goodwill
Intangible assets
Add: Deferred tax liability – tax deductible goodwill (a)
Deferred tax liability – intangible assets (a)
BNY Mellon tangible common shareholders’ equity at year
end – Non-GAAP
Dec. 31,
2018
40,638 $
3,542
37,096
17,350
3,220
1,072
692
2017
41,251 $
3,542
37,709
17,564
3,411
1,034
718
2016
38,811 $
3,542
35,269
17,316
3,598
1,497
1,105
2015
38,037 $
2,552
35,485
17,618
3,842
1,401
1,148
2014
37,441
1,562
35,879
17,869
4,127
1,340
1,216
$
18,290 $
18,486 $
16,957 $
16,574 $
16,439
Year-end common shares outstanding (in thousands)
960,426
1,013,442
1,047,488
1,085,343
1,118,228
Book value per common share – GAAP
Tangible book value per common share – Non-GAAP
(a) Deferred tax liabilities are based on fully phased-in U.S. capital rules.
$
$
38.63 $
19.04 $
37.21 $
18.24 $
33.67 $
16.19 $
32.69 $
15.27 $
32.09
14.70
The following table presents the impact of changes in foreign currency exchange rates on our consolidated
investment management and performance fees.
Constant currency reconciliation – Consolidated
(dollars in millions)
Investment management and performance fees
Impact of changes in foreign currency exchange rates
Adjusted investment management and performance fees – Non-GAAP
2018
3,685 $
—
3,685 $
2017
3,584
34
3,618
$
$
2018 vs.
2017
3%
2%
The following table presents the impact of changes in foreign currency exchange rates on investment management
and performance fees reported in the Investment Management business.
Constant currency reconciliation - Investment Management business
(dollars in millions)
Investment management and performance fees
Impact of changes in foreign currency exchange rates
Adjusted investment management and performance fees – Non-GAAP
2018
3,632 $
—
3,632 $
2017
3,522
34
3,556
$
$
2018 vs.
2017
3%
2%
The following table presents the reconciliation of the pre-tax operating margin for the Investment Management
business.
Pre-tax operating margin reconciliation - Investment Management business
(dollars in millions)
Income before income taxes – GAAP
Total revenue – GAAP
Less: Distribution and servicing expense
Adjusted total revenue, net of distribution and servicing expense – Non-GAAP
Pre-tax operating margin – GAAP (a)
Adjusted pre-tax operating margin, net of distribution and servicing expense – Non-GAAP (a)
(a) Income before taxes divided by total revenue.
2018
$ 1,263
$ 4,084
407
$ 3,677
2017
1,141
3,997
422
3,575
$
$
$
2016
967
3,751
404
3,347
$
$
$
31%
34%
29%
32%
26%
29%
106 BNY Mellon
Supplemental Information (unaudited) (continued)
Rate/volume analysis
Rate/volume analysis (a)
(dollar amounts in millions, presented on an FTE basis)
Interest revenue
Interest-earning assets:
Interest-bearing deposits with banks (primarily foreign banks)
Interest-bearing deposits with the Federal Reserve and other central banks
Federal funds sold and securities purchased under resale agreements
Margin loans
Non-margin loans:
Domestic offices:
Consumer
Commercial
Foreign offices
Total non-margin loans
Securities:
U.S. government obligations
U.S. government agency obligations
State and political subdivisions - tax exempt
Other securities:
Domestic offices
Foreign offices
Total other securities
Trading securities (primarily domestic)
Total securities
Total interest revenue
Interest expense
Interest-bearing liabilities:
Interest-bearing deposits:
Domestic offices
Foreign offices
Total interest-bearing deposits
Federal funds purchased and securities sold under repurchase agreements
Trading liabilities
Other borrowed funds:
Domestic offices
Foreign offices
Total other borrowed funds
Commercial paper
Payables to customers and broker-dealers
Long-term debt
Total interest expense
Changes in net interest revenue
$
$
$
$
$
2018 over (under) 2017
2017 over (under) 2016
Due to change in
Average
balance
Average
rate
Net
change
Due to change in
Average
balance
Average
rate
Net
change
(1) $
(9)
11
(2)
100 $
221
682
169
8
(29)
(25)
(46)
(31)
76
(19)
13
209
103
325
92
247
(12)
99
212
693
167
21
180
78
279
61
323
(31)
(25)
3
(22)
60
64
17 $
151
26
177
5
509
126
29
155
65
573
2,006 $ 2,023
35 $
—
35
(56)
—
24
(2)
22
—
(10)
18
9 $
8 $
395 $
285
680
589
22
430
285
715
533
22
10
—
10
22
137
278
34
(2)
32
22
127
296
1,738 $ 1,747
276
268 $
$
1 $
15 $
(28)
14
(62)
33
(17)
(4)
12
9
71
(15)
(62)
(11)
(73)
(1)
(9)
(72) $
(1) $
3
2
17
4
20
—
20
8
2
69
122 $
(194) $
$
$
$
$
149
176
140
6
121
65
192
38
138
5
67
(45)
22
—
203
875 $
67 $
77
144
172
(3)
(3)
1
(2)
16
50
138
515 $
360 $
16
121
190
78
39
104
61
204
47
209
(10)
5
(56)
(51)
(1)
194
803
66
80
146
189
1
17
1
18
24
52
207
637
166
(a) Changes which are solely due to balance changes or rate changes are allocated to such categories on the basis of the respective percentage changes in
average balances and average rates. Changes in interest revenue or interest expense arising from the combination of rate and volume variances are
allocated proportionately to rate and volume based on their relative absolute magnitudes.
BNY Mellon 107
Selected Quarterly Data (unaudited)
Selected Quarterly Data
(dollar amounts in millions,
except per share amounts)
Consolidated income statement
Fee and other revenue
(Loss) income from consolidated investment
management funds
Net interest revenue
Total revenue
Provision for credit losses
Noninterest expense
Income before taxes
Provision (benefit) for income taxes
Net income
Net loss (income) attributable to noncontrolling
interests
Net income applicable to shareholders of The
Bank of New York Mellon Corporation
Preferred stock dividends
Net income applicable to common shareholders
of The Bank of New York Mellon Corporation
Basic earnings per common share
Diluted earnings per common share
Average balances
Interest-bearing deposits with banks
Securities
Trading securities
Loans
Total interest-earning assets
Total assets
Deposits
Long-term debt
Preferred stock
Total The Bank of New York Mellon Corporation
common shareholders’ equity
Net interest margin
Annualized return on common equity
Pre-tax operating margin
Common stock data (a)
Closing price per share
Cash dividends per share
Market capitalization (b)
Quarter ended
2018
2017
Dec. 31
Sept. 30
June 30 March 31
Dec. 31
Sept. 30
June 30 March 31
$
3,146
$
3,168
$
3,210
$
3,270
$
2,860
$
3,167
$
3,120
$
3,018
(24)
885
4,007
—
2,987
1,020
150
870
11
881
(49)
$
$
$
$
832
0.84
0.84
10
891
4,069
(3)
2,738
1,334
220
1,114
12
916
4,138
(3)
2,747
1,394
286
1,108
(11)
919
4,178
(5)
2,739
1,444
282
1,162
17
851
3,728
(6)
3,006
728
(453)
1,181
(3)
(5)
9
(6)
(2)
1,111
(36)
1,075
1.07
1.06
$
$
1,103
(48)
1,055
1.04
1.03
$
$
1,171
(36)
1,135
1.11
1.10
1,175
(49)
1,126
1.09
1.08
$
$
$
$
$
$
983
0.94
0.94
$
$
926
0.88
0.88
10
839
10
826
33
792
4,016
3,956
3,843
(6)
(7)
(5)
2,654
1,368
348
1,020
1,018
(35)
2,655
1,308
332
976
(1)
975
(49)
2,642
1,206
269
937
(15)
922
(42)
880
0.83
0.83
$ 78,582
118,904
$ 75,907
118,505
$ 85,424
117,761
$ 92,918
118,459
5,543
53,834
285,706
338,591
220,635
28,201
3,542
4,261
53,807
279,218
332,341
209,313
28,074
3,542
3,784
57,066
292,086
346,328
217,567
28,349
3,542
4,183
58,606
302,069
358,175
226,709
28,407
3,542
$ 89,029
$ 86,329
$ 84,148
$ 80,757
120,225
2,723
56,772
297,166
350,786
216,874
28,245
3,542
119,089
2,359
55,944
291,841
345,709
212,658
28,138
3,542
117,227
2,455
58,793
289,496
342,515
216,222
27,398
3,542
114,786
2,254
60,312
283,421
336,200
213,375
25,882
3,542
37,886
38,036
37,750
37,593
36,952
36,780
35,862
34,965
1.24%
8.7%
25%
1.27%
11.2%
33%
1.26%
11.2%
34%
1.22%
12.2%
35%
1.14%
12.1%
20%
1.15%
10.6%
34%
1.14%
10.4%
33%
1.13%
10.2%
31%
$
47.07
$
50.99
$
53.93
$
51.53
$
0.28
45,207
0.28
50,418
0.24
53,927
0.24
52,080
$
53.86
0.24
53.02
0.24
$
51.02
0.19
$
47.23
0.19
54,584
54,294
52,712
49,113
(a) At Dec. 31, 2018, there were 27,805 shareholders registered with our stock transfer agent, compared with 29,472 at Dec. 31, 2017 and 28,015 at Dec. 31,
2016. In addition, there were 45,395 of BNY Mellon’s current and former employees at Dec. 31, 2018 who participate in BNY Mellon’s 401(k) Retirement
Savings Plan. All shares of BNY Mellon’s common stock held by the Plan for its participants are registered in the name of The Bank of New York Mellon,
as trustee.
(b) At period end.
108 BNY Mellon
Forward-looking Statements
Some statements in this document are forward-
looking. These include all statements about the
usefulness of Non-GAAP measures, the future results
of BNY Mellon, our businesses, financial, liquidity
and capital condition, results of operations, liquidity,
risk and capital management and processes, goals,
strategies, outlook, objectives, expectations
(including those regarding our performance results,
expenses, nonperforming assets, seasonality in our
businesses, impacts of currency fluctuations, impacts
of trends on our businesses, regulatory, technology,
market, economic or accounting developments, legal
proceedings and other contingencies), effective tax
rate, estimates (including those regarding expenses,
losses inherent in our credit portfolios, capital ratios
and the tax benefit related to U.S. tax legislation),
intentions (including those regarding our capital
returns and investment in technology), targets,
opportunities, growth and initiatives.
In this report, any other report, any press release or
any written or oral statement that BNY Mellon or its
executives may make, words, such as “estimate,”
“forecast,” “project,” “anticipate,” “likely,” “target,”
“expect,” “intend,” “continue,” “seek,” “believe,”
“plan,” “goal,” “could,” “should,” “would,” “may,”
“might,” “will,” “strategy,” “synergies,”
“opportunities,” “trends,” “future” and words of
similar meaning, may signify forward-looking
statements.
Actual results may differ materially from those
expressed or implied as a result of a number of
factors, including those discussed in “Risk Factors,”
such as:
•
•
a communications or technology disruption or
failure that results in a loss of information, delays
our ability to access information or impacts our
ability to provide services to our clients may
materially adversely affect our business, financial
condition and results of operations;
a cybersecurity incident, or a failure to protect
our computer systems, networks and information
and our clients’ information against cybersecurity
threats, could result in the theft, loss,
unauthorized access to, disclosure, use or
alteration of information, system or network
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;
•
•
our business may be materially adversely affected
by operational risk;
our risk management framework may not be
effective in mitigating risk and reducing the
potential for losses;
• we are subject to extensive government
•
•
•
rulemaking, regulation and supervision; these
rules and regulations have, and in the future may,
compel us to change how we manage our
businesses, which could have a material adverse
effect on our business, financial condition and
results of operations; in addition, these rules and
regulations have increased our compliance and
operational risk and costs;
regulatory or enforcement actions or litigation
could materially adversely affect our results of
operations or harm our businesses or reputation;
our businesses may be negatively affected by
adverse events, publicity, government scrutiny or
other reputational harm;
failure to satisfy regulatory standards, including
“well capitalized” and “well managed” status or
capital adequacy and liquidity rules more
generally, could result in limitations on our
activities and adversely affect our business and
financial condition;
a failure or circumvention of our controls and
procedures could have a material adverse effect
on our business, reputation, results of operations
and financial condition;
the application of our Title I preferred resolution
strategy or resolution under the Title II orderly
liquidation authority could adversely affect the
Parent’s liquidity and financial condition and the
Parent’s security holders;
if our resolution plan is determined not to be
credible or not to facilitate an orderly resolution
under the U.S. Bankruptcy Code, our business,
reputation, results of operations and financial
condition could be materially negatively
impacted;
acts of terrorism, impacts from climate change,
natural disasters, pandemics, global conflicts and
other geopolitical events may have a negative
impact on our business and operations;
• we are dependent on fee-based business for a
•
•
•
•
substantial majority of our revenue and our fee-
based revenues could be adversely affected by
slowing in market activity, weak financial
markets, underperformance and/or negative
trends in savings rates or in investment
preferences;
BNY Mellon 109
Forward-looking Statements (continued)
•
• weakness and volatility in financial markets and
the economy generally may materially adversely
affect our business, results of operations and
financial condition;
transitions away from, or changes in the
calculation of, LIBOR and other benchmark rates
could adversely impact our business and results
of operations;
the United Kingdom’s referendum decision to
leave the EU has had and may continue to have
negative effects on global economic conditions,
global financial markets, and our business and
results of operations;
changes in interest rates and yield curves could
have a material adverse effect on our
profitability;
•
•
•
•
• we may experience write-downs of securities that
we own and other losses related to volatile and
illiquid market conditions, reducing our earnings
and impacting our financial condition;
our FX revenue may be adversely affected by
decreases in market volatility and the cross-
border investment activity of our clients;
the failure or perceived weakness of any of our
significant counterparties, many of whom are
major financial institutions and sovereign entities,
and our assumption of credit and counterparty
risk, could expose us to loss and adversely affect
our business;
our business, financial condition and results of
operations could be adversely affected if we do
not effectively manage our liquidity;
•
•
• we could incur losses if our allowance for credit
losses, including loan and lending-related
commitments reserves, is inadequate;
any material reduction in our credit ratings or the
credit ratings of our principal bank subsidiaries,
The Bank of New York Mellon or BNY Mellon,
N.A., could increase the cost of funding and
borrowing to us and our rated subsidiaries and
have a material adverse effect on our results of
operations and financial condition and on the
value of the securities we issue;
new lines of business, new products and services
or transformational or strategic project initiatives
may subject us to additional risks, and the failure
to implement these initiatives could affect our
results of operations;
•
110 BNY Mellon
•
•
•
•
• we are subject to competition in all aspects of our
business, which could negatively affect our
ability to maintain or increase our profitability;
our business may be adversely affected if we are
unable to attract and retain employees;
our strategic transactions present risks and
uncertainties and could have an adverse effect on
our business, results of operations and financial
condition;
tax law changes or challenges to our tax positions
with respect to historical transactions may
adversely affect our net income, effective tax rate
and our overall results of operations and financial
condition;
our ability to return capital to shareholders is
subject to the discretion of our Board of Directors
and may be limited by U.S. banking laws and
regulations, including those governing capital and
the approval of our capital plan, applicable
provisions of Delaware law or our failure to pay
full and timely dividends on our preferred stock;
the Parent is a non-operating holding company,
and as a result, is dependent on dividends from its
subsidiaries and extensions of credit from its IHC
to meet its obligations, including with respect to
its securities, and to provide funds for share
repurchases and payment of dividends to its
stockholders; and
changes in accounting standards governing the
preparation of our financial statements and future
events could have a material impact on our
reported financial condition, results of operations,
cash flows and other financial data.
•
•
Investors should consider all risk factors discussed in
our 2018 Annual Report and any subsequent reports
filed with the SEC by BNY Mellon pursuant to the
Securities Exchange Act of 1934, as amended (the
“Exchange Act”). All forward-looking statements
speak only as of the date on which such statements
are made, and BNY Mellon undertakes no obligation
to update any statement to reflect events or
circumstances after the date on which such forward-
looking statement is made or to reflect the occurrence
of unanticipated events. The contents of BNY
Mellon’s website or any other websites referenced
herein are not part of this report.
Acronyms
ABS
Asset-backed security
APAC
Asia-Pacific region
ASC
Accounting Standards Codification
ASU
Accounting Standards Update
AUC/A Assets under custody and/or administration
AUM
BCBS
BHCs
bps
CCAR
CDs
CET1
CFTC
CLO
CVA
DVA
EMEA
ERISA
Assets under management
Basel Committee on Banking Supervision
Bank holding companies
basis points
Comprehensive Capital Analysis and Review
Certificates of deposit
Common Equity Tier 1 capital
Commodity Futures Trading Commission
Collateralized loan obligation
Credit valuation adjustment
Debit valuation adjustment
Europe, the Middle East and Africa
Employee Retirement Income Security Act of
1974
Employee Stock Ownership Plan
Economic value of equity
Financial Accounting Standards Board
Financial Conduct Authority
Federal Deposit Insurance Corporation
Financial holding company
ESOP
EVE
FASB
FCA
FDIC
FHC
FINRA Financial Industry Regulatory Authority, Inc.
FTE
FX
GAAP
G-SIBs
HQLA
IDI
IHC
Fully taxable equivalent
Foreign exchange
Generally accepted accounting principles
Global systemically important banks
High-quality liquid assets
Insured depository institution
Intermediate holding company
Liquidity coverage ratio
LCR
LIBOR London Interbank Offered Rate
LTD
External eligible long-term debt
M&I
Merger and integration
MBS
Mortgage-backed security
MMF
Money market funds
N/A
Not applicable or Not available
NAV
Net asset value
N/M
Not meaningful
NSFR
Net stable funding ratio
NYSE
New York Stock Exchange
OCC
Office of the Comptroller of the Currency
OCI
Other comprehensive income
OTC
Over-the-counter
OTTI
Other-than-temporary impairment
PRA
Prudential Regulation Authority
PSUs
Performance share units
REIT
Real estate investment trust
RMBS
Residential mortgage-backed security
RSUs
Restricted stock units
RWAs
Risk-weighted assets
S&P
Standard & Poor’s
SBIC
Small business investment company
SBLC
Standby letters of credit
SEC
Securities and Exchange Commission
SIFIs
Systemically important financial institutions
SLR
Supplementary Leverage Ratio
TDR
Troubled debt restructuring
TLAC
Total loss-absorbing capacity
VaR
Value-at-risk
VIE
Variable interest entity
VME
Voting model entity
BNY Mellon 111
Glossary
Accumulated benefit obligation - The actuarial
present value of benefits (vested and non-vested)
attributed to employee services rendered.
Alternative investments - Usually refers to
investments in hedge funds, leveraged loans,
subordinated and distressed debt, real estate and
foreign currency overlay. Examples of alternative
investment strategies are: long-short equity, event-
driven, statistical arbitrage, fixed-income arbitrage,
convertible arbitrage, short bias, global macro and
equity market neutral.
Asset-backed security (“ABS”) - A financial
security backed by a loan, lease or receivables against
assets other than real estate and mortgage-backed
securities.
Assets under custody and/or administration
(“AUC/A”) - 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. The following
types of assets under administration are not and
historically have not been included in AUC/A:
performance and risk analytics, transfer agency and
asset aggregation services. To the extent that we
provide more than one AUC/A service for a client’s
assets, the value of the asset is only counted once in
the total amount of AUC/A.
Assets under management (“AUM”) - Includes
assets beneficially owned by our clients or customers
which we hold in various capacities that are either
actively or passively managed, as well as the value of
hedges supporting customer liabilities. These assets
and liabilities are not on our balance sheet.
Book value per share - The per share value of a
company based on common shareholders’ equity.
CAMELS - An international bank-rating system
where bank supervisory authorities rate institutions
according to six factors. The six factors are Capital
adequacy, Asset quality, Management quality,
Earnings, Liquidity and Sensitivity to Market Risk.
Collateral management - A comprehensive program
designed to simplify collateralization and expedite
securities transfers for buyers and sellers.
Collateralized loan obligation (“CLO”) - A debt
security backed by a pool of commercial loans.
112 BNY Mellon
Collective trust fund - An investment fund formed
from the pooling of investments by investors.
Common Equity Tier 1 capital (“CET1”) - The
sum of surplus (net of treasury stock), retained
earnings, accumulated other comprehensive income
(loss), and common equity Tier 1 minority interest
subject to certain limitations, minus certain regulatory
adjustments and deductions.
Counterparty risk (default risk) - The risk that a
counterparty will not pay as obligated on a contract,
trade or transaction.
Credit derivatives - Contractual agreements that
provide insurance against a credit event of one or
more referenced credits. Such events include
bankruptcy, insolvency and failure to meet payment
obligations when due.
Credit risk - The risk of loss due to borrower or
counterparty default.
Credit valuation adjustment (“CVA”) - The market
value of counterparty credit risk on OTC derivative
transactions.
Currency swaps - An agreement to exchange
stipulated amounts of one currency for another
currency.
Debit valuation adjustment (“DVA”) - The market
value of our credit risk on OTC derivative
transactions.
Depositary Receipts - A negotiable security that
generally represents a non-U.S. company’s publicly
traded equity.
Derivative - A contract or agreement whose value is
derived from changes in interest rates, foreign
exchange rates, prices of securities or commodities,
credit worthiness for credit default swaps or financial
or commodity indices.
Earnings allocated to participating securities -
Amount of undistributed earnings, after payment of
taxes, preferred stock dividends and the required
adjustment for common stock dividends declared,
that is allocated to securities that are eligible to
receive a portion of the Company’s earnings.
Glossary (continued)
Economic capital - The amount of capital required to
absorb potential losses and reflects the probability of
remaining solvent with a target debt rating over a
one-year time horizon.
Economic value of equity (“EVE”) - An
aggregation of discounted future cash flows of assets
and liabilities over a long-term horizon.
Eurozone - Formed by European Union Member
States whose currency is the euro (€) and in which a
single monetary policy is conducted under the
responsibility of the Governing Council of the
European Central Bank. The Eurozone currently
includes Germany, France, Belgium, the Netherlands,
Luxembourg, Austria, Finland, Italy, Ireland, Spain,
Portugal, Greece, Estonia, Cyprus, Malta, Slovenia,
Slovakia, Latvia and Lithuania.
Fiduciary risk - The risk arising from our role as
trustee, executor, investment agent or guardian in
accordance with governing documents, prudent
person principles and applicable laws, rules and
regulations.
Fixed Income Clearing Corporation (“FICC”) -
An agency that deals with the confirmation,
settlement and delivery of fixed-income assets in the
U.S. The agency ensures the systematic and efficient
settlement of U.S. government securities and
mortgage-backed security transactions in the market.
Foreign currency options - Similar to interest rate
options except they are based on foreign exchange
rates. Also, see interest rate options in this glossary.
Foreign currency swaps - An agreement to exchange
stipulated amounts of one currency for another
currency at one or more future dates.
Foreign exchange contracts - Contracts that provide
for the future receipt or delivery of foreign currency
at previously agreed-upon terms.
Forward rate agreements - Contracts to exchange
payments on a specified future date, based on a
market change in interest rates from trade date to
contract settlement date.
Fully taxable equivalent (“FTE”) - Basis for
comparison of yields on assets having ordinary
taxability with assets for which special tax
exemptions apply. The FTE adjustment reflects an
increase in the interest yield or return on a tax-exempt
asset to a level that would be comparable had the
asset been fully taxable.
Generally accepted accounting principles
(“GAAP”) - Accounting rules and conventions
defining acceptable practices in preparing financial
statements in the U.S. The FASB is the primary
source of accounting rules.
Global systemically important bank (“G-SIB”) - 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.
Grantor Trust - A legal, passive entity through
which pass-through securities are sold to investors.
Hedge fund - A fund which is allowed to use diverse
strategies that are unavailable to mutual funds,
including selling short, leverage, program trading,
swaps, arbitrage and derivatives.
High-quality liquid assets (“HQLA”) -
Unencumbered assets of the types identified in the
U.S. LCR rule, which the U.S. banking agencies
describe as able to be convertible into cash with little
or no expected loss of value during a period of
liquidity stress.
Impairment - When an asset’s market value is less
than its carrying value.
Interest rate options - Contracts to modify interest
rate risk in exchange for the payment of a premium
when the contract is initiated. As a writer of interest
rate options, we receive a premium in exchange for
bearing the risk of unfavorable changes in interest
rates. Conversely, as a purchaser of an option, we
pay a premium for the right, but not the obligation, to
buy or sell a financial instrument or currency at
predetermined terms in the future.
BNY Mellon 113
Glossary (continued)
Interest rate sensitivity - The exposure of net
interest revenue to interest rate movements.
Interest rate swaps - Contracts in which a series of
interest rate flows in a single currency are exchanged
over a prescribed period. Interest rate swaps are the
most common type of derivative contract that we use
in our asset/liability management activities.
Investment grade - Represents Moody’s long-term
rating of Baa3 or better; and/or a Standard & Poor’s,
Fitch or DBRS long-term rating of BBB- or better; or
if unrated, an equivalent rating using our internal risk
ratings. Instruments that fall below these levels are
considered to be non-investment grade.
Joint venture - A company or entity owned and
operated by a group of companies for a specific
business purpose, no one of which has a majority
interest.
Liquidity coverage ratio (“LCR”) - A Basel III
framework requirement for banks and BHCs to
measure liquidity. It is designed to ensure that certain
banking organizations, including BNY Mellon,
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 time horizon.
Litigation risk - Arises when, in the ordinary course
of business, we are named as defendants or made
parties to legal actions.
Master netting agreement - An agreement between
two counterparties that have multiple contracts with
each other that provides for the net settlement of all
contracts through a single payment in the event of
default or termination of any one contract.
Mortgage-backed security (“MBS”) - An asset-
backed security whose cash flows are backed by the
principal and interest payments of a set of mortgage
loans.
Net interest margin - The result of dividing net
interest revenue by average interest-earning assets.
Other-than-temporary impairment (“OTTI”) - An
impairment charge taken on a security whose fair
value has fallen below the carrying value on the
balance sheet and its value is not expected to recover
through the holding period of the security.
114 BNY Mellon
Performance fees - Fees received by an investment
advisor based upon the fund’s performance for the
period relative to various predetermined benchmarks.
Pre-tax operating margin - Income before taxes for
a period divided by total revenue for that period.
Private equity/venture capital - Investment in start-
up companies or those in the early processes of
developing products and services with perceived,
long-term growth potential.
Projected benefit obligation - The actuarial present
value of all benefits accrued on employee service
rendered prior to the calculation date, including
allowance for future salary increases if the pension
benefit is based on future compensation levels.
Rating agency - An independent agency that assesses
the credit quality and likelihood of default of an issue
or issuer and assigns a rating to that issue or issuer.
Real estate investment trust (“REIT”) - An
investor-owned corporation, trust or association that
sells shares to investors and invests in income-
producing property.
Repurchase agreement (“Repo”) - An instrument
used to raise short-term funds whereby securities are
sold with an agreement for the seller to buy back the
securities at a later date.
Reputational risk - Arises when events or actions
that negatively impact our reputation lead to a loss of
existing clients and could make it more challenging to
acquire new business.
Residential mortgage-backed security (“RMBS”) -
An asset-backed security whose cash flows are
backed by principal and interest payments of a set of
residential mortgage loans.
Restricted cash and/or securities - Cash and/or
securities that are segregated under federal and other
regulatory requirements and consists of excess client
funds held by our broker-dealer entities.
Return on average assets - Net income applicable to
common shareholders divided by average assets.
Return on common equity - Net income applicable
to common shareholders divided by average common
shareholders’ equity.
Glossary (continued)
Return on tangible common equity - Net income
applicable to common shareholders, excluding
amortization of intangible assets, divided by average
tangible common shareholders’ equity.
Reverse repurchase agreement - The purchase of
securities with the agreement to sell them at a higher
price at a specific future date.
Securities lending transaction - A fully
collateralized transaction in which the owner of a
security agrees to lend the security typically through
an agent (such as The Bank of New York Mellon) to a
borrower, usually a broker-dealer or bank, on an
open, overnight or term basis, under the terms of a
prearranged contract.
Sub-custodian - A local provider (e.g., a bank)
contracted to provide specific custodial-related
services in a selected country or geographic area.
Supplementary Leverage Ratio (“SLR”) - An
Advanced Approach banking organization’s Basel III
SLR is the simple arithmetic mean of the ratio of its
Tier 1 capital to total leverage exposure (which is
broadly defined to capture both on- and off-balance
sheet exposures).
Tangible book value per share - Amount per share
that common shareholders can expect to receive if the
company goes bankrupt and all of its tangible assets
are liquidated at their book value.
Tangible common shareholders’ equity - Common
equity less goodwill and intangible assets adjusted for
deferred tax liabilities associated with non-tax
deductible intangible assets and tax deductible
goodwill.
Tier 1 leverage ratio - Tier 1 capital divided by
quarterly average total assets, as defined by the
regulators.
Unfunded commitments - Legally binding
agreements to provide a defined level of financing
until a specified future date.
Value-at-risk (“VaR”) - A measure of the dollar
amount of potential loss in value due to adverse
market movements over a defined time horizon with a
specified confidence level.
Variable interest entity (“VIE”) - 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
returns.
BNY Mellon 115
Report of Management on Internal Control Over Financial Reporting
Management of BNY Mellon is responsible for
establishing and maintaining adequate internal
control over financial reporting for BNY Mellon, as
such term is defined in Rule 13a-15(f) under the
Exchange Act.
BNY Mellon’s management, including its principal
executive officer and principal financial officer, has
assessed the effectiveness of BNY Mellon’s internal
control over financial reporting as of December 31,
2018. In making this assessment, management used
the criteria set forth by the Committee of Sponsoring
Organizations of the Treadway Commission in
Internal Control - Integrated Framework (2013).
Based upon such assessment, management believes
that, as of December 31, 2018, BNY Mellon’s
internal control over financial reporting is effective
based upon those criteria.
KPMG LLP, the independent registered public
accounting firm that audited BNY Mellon’s 2018
financial statements included in this Annual Report
under “Financial Statements” and “Notes to
Consolidated Financial Statements,” has issued a
report with respect to the effectiveness of BNY
Mellon’s internal control over financial reporting.
This report appears on page 117.
116 BNY Mellon
Report of Independent Registered Public Accounting Firm
To the Stockholders and Board of Directors
The Bank of New York Mellon Corporation:
Opinion on Internal Control Over Financial Reporting
We have audited The Bank of New York Mellon Corporation and subsidiaries’ (BNY Mellon) internal control over
financial reporting as of December 31, 2018, based on criteria established in Internal Control - Integrated
Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. In our
opinion, BNY Mellon maintained, in all material respects, effective internal control over financial reporting as of
December 31, 2018, based on criteria established in Internal Control - Integrated Framework (2013) issued by the
Committee of Sponsoring Organizations of the Treadway Commission.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United
States) (PCAOB), the consolidated balance sheets of BNY Mellon as of December 31, 2018 and 2017, the related
consolidated statements of income, comprehensive income, changes in equity, and cash flows for each of the years
in the three-year period ended December 31, 2018, and the related notes (collectively, the consolidated financial
statements), and our report dated February 27, 2019 expressed an unqualified opinion on those consolidated
financial statements.
Basis for Opinion
BNY Mellon’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 Report
of Management on Internal Control over Financial Reporting. Our responsibility is to express an opinion on BNY
Mellon’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 BNY Mellon 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 of internal control over financial reporting included obtaining an
understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and
testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our
audit also included 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.
BNY Mellon 117
Report of Independent Registered Public Accounting Firm (continued)
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.
New York, New York
February 27, 2019
118 BNY Mellon
The Bank of New York Mellon Corporation (and its subsidiaries)
Consolidated Income Statement
(in millions)
Fee and other revenue
Investment services fees:
Asset servicing
Clearing services
Issuer services
Treasury services
Total investment services fees
Investment management and performance fees
Foreign exchange and other trading revenue
Financing-related fees
Distribution and servicing
Investment and other income
Total fee revenue
Net securities (losses) gains — including other-than-temporary impairment
Noncredit-related portion of other-than-temporary impairment (recognized in other comprehensive income)
Net securities (losses) gains
Total fee and other revenue
Operations of consolidated investment management funds
Investment (loss) income
Interest of investment management fund note holders
(Loss) income from consolidated investment management funds
Net interest revenue
Interest revenue
Interest expense
Net interest revenue
Total revenue
Provision for credit losses
Noninterest expense
Staff (a)
Professional, legal and other purchased services
Software
Net occupancy
Sub-custodian and clearing (b)
Distribution and servicing
Furniture and equipment
Business development
Bank assessment charges
Amortization of intangible assets
Other (a)(b)(c)
Total noninterest expense
Income
Income before income taxes
Provision for income taxes
Net income
Year ended Dec. 31,
2018
2017
2016
$
4,608 $
1,578
1,099
554
7,839
3,685
732
207
139
240
12,842
(47)
1
(48)
12,794
4,383 $
1,553
977
557
7,470
3,584
668
216
160
64
12,162
6
3
3
12,165
(12)
1
(13)
6,432
2,821
3,611
16,392
(11)
6,145
1,334
772
630
450
406
290
228
170
180
606
11,211
5,192
938
4,254
74
4
70
4,382
1,074
3,308
15,543
(24)
6,033
1,276
744
570
414
419
241
229
220
209
602
10,957
4,610
496
4,114
4,244
1,404
1,026
547
7,221
3,350
701
219
166
341
11,998
79
4
75
12,073
35
9
26
3,575
437
3,138
15,237
(11)
5,809
1,186
647
592
400
405
247
245
219
237
536
10,523
4,725
1,177
3,548
Net loss (income) attributable to noncontrolling interests (includes $12, $(33) and $(10) related to
Preferred stock dividends
consolidated investment management funds, respectively)
Net income applicable to shareholders of The Bank of New York Mellon Corporation
(1)
3,547
(122)
Net income applicable to common shareholders of The Bank of New York Mellon Corporation
3,425
In 2018, we adopted new accounting guidance included in ASU 2017-07, Compensation-Retirement Benefits: Improving the Presentation of Net
Periodic Pension Cost and Net Periodic Postretirement Benefit Cost, which required the reclassification of the components of pension and other
postretirement costs, other than the service cost component. As a result, staff expense increased and other expense decreased. Prior periods
have been reclassified. See Note 2 of the Notes to Consolidated Financial Statements for additional information.
(24)
4,090
(175)
3,915 $
12
4,266
(169)
4,097 $
$
(a)
(b) Beginning in 2018, clearing expense, which was previously included in other expense, was included with sub-custodian expense. Prior periods
have been reclassified.
(c) Beginning in 2018, M&I, litigation and restructuring charges are no longer separately disclosed. Expenses previously reported in this line have
been reclassified to existing expense categories, primarily other expense.
BNY Mellon 119
The Bank of New York Mellon Corporation (and its subsidiaries)
Consolidated Income Statement (continued)
Net income applicable to common shareholders of The Bank of New York Mellon Corporation used
for the earnings per share calculation
(in millions)
Net income applicable to common shareholders of The Bank of New York Mellon Corporation
Less: Earnings allocated to participating securities
Net income applicable to common shareholders of The Bank of New York Mellon Corporation after
required adjustment for the calculation of basic and diluted earnings per common share
Year ended Dec. 31,
2018
4,097 $
27
2017
3,915 $
43
2016
3,425
52
4,070 $
3,872 $
3,373
$
$
Average common shares and equivalents outstanding of The Bank of New York Mellon Corporation
(in thousands)
Basic
Common stock equivalents
Less: Participating securities
Diluted
Year ended Dec. 31,
2018
1,002,922
6,801
(2,582)
1,007,141
2017
1,034,281
13,030
(7,021)
1,040,290
2016
1,066,286
15,672
(9,945)
1,072,013
Anti-dilutive securities (a)
6,804
12,383
31,695
Earnings per share applicable to common shareholders of The Bank of New York Mellon Corporation
(in dollars)
Basic
Diluted
(a) Represents stock options, restricted stock, restricted stock units and participating securities outstanding but not included in the computation of
2018
4.06 $
4.04 $
2017
3.74 $
3.72 $
Year ended Dec. 31,
2016
3.16
3.15
$
$
diluted average common shares because their effect would be anti-dilutive.
See accompanying Notes to Consolidated Financial Statements.
120 BNY Mellon
The Bank of New York Mellon Corporation (and its subsidiaries)
Consolidated Comprehensive Income Statement
(in millions)
Net income
Other comprehensive income, net of tax:
Foreign currency translation adjustments
Unrealized (loss) gain on assets available-for-sale:
Unrealized (loss) gain arising during the period
Reclassification adjustment
Total unrealized (loss) gain on assets available-for-sale
Defined benefit plans:
Net (loss) gain arising during the period
Foreign exchange adjustment
Amortization of prior service credit, net loss and initial obligation included in net periodic
benefit cost
Total defined benefit plans
Net unrealized (loss) gain on cash flow hedges
Total other comprehensive (loss) income, net of tax (a)
Total comprehensive income
Net loss (income) attributable to noncontrolling interests
Other comprehensive loss (income) attributable to noncontrolling interests
Year ended Dec. 31,
2018
4,254 $
2017
4,114 $
2016
3,548
$
(313)
(416)
36
(380)
(189)
—
69
(120)
(10)
(823)
3,431
12
11
853
153
(3)
150
342
1
68
411
9
1,423
5,537
(24)
(15)
(850)
(242)
(49)
(291)
(108)
—
57
(51)
(4)
(1,196)
2,352
(1)
31
Comprehensive income applicable to shareholders of The Bank of New York Mellon
Corporation
$
3,454 $
5,498 $
2,382
(a) Other comprehensive (loss) income attributable to The Bank of New York Mellon Corporation shareholders was $(812) million for the
year ended Dec. 31, 2018, $1,408 million for the year ended Dec. 31, 2017 and $(1,165) million for the year ended Dec. 31, 2016.
See accompanying Notes to Consolidated Financial Statements.
BNY Mellon 121
The Bank of New York Mellon Corporation (and its subsidiaries)
Consolidated Balance Sheet
(dollars in millions, except per share amounts)
Assets
Cash and due from:
Banks
Interest-bearing deposits with the Federal Reserve and other central banks
Interest-bearing deposits with banks ($2,394 and $1,751 is restricted)
Federal funds sold and securities purchased under resale agreements
Securities:
Held-to-maturity (fair value of $33,302 and $40,512)
Available-for-sale
Total securities
Trading assets
Loans
Allowance for loan losses
Net loans
Premises and equipment
Accrued interest receivable
Goodwill
Intangible assets
Other assets (includes $742 and $791, at fair value)
Subtotal assets of operations
Assets of consolidated investment management funds, at fair value
Total assets
Liabilities
Deposits:
Noninterest-bearing (principally U.S. offices)
Interest-bearing deposits in U.S. offices
Interest-bearing deposits in non-U.S. offices
Total deposits
Federal funds purchased and securities sold under repurchase agreements
Trading liabilities
Payables to customers and broker-dealers
Commercial paper
Other borrowed funds
Accrued taxes and other expenses
Other liabilities (including allowance for lending-related commitments of $106 and $102, also includes $88
and $800, at fair value)
Long-term debt (includes $371 and $367, at fair value)
Subtotal liabilities of operations
Liabilities of consolidated investment management funds, at fair value
Total liabilities
Temporary equity
Redeemable noncontrolling interests
Permanent equity
Preferred stock – par value $0.01 per share; authorized 100,000,000 shares; issued 35,826 and 35,826 shares
Common stock – par value $0.01 per share; authorized 3,500,000,000 shares; issued 1,364,877,915 and
1,354,163,581 shares
Additional paid-in capital
Retained earnings
Accumulated other comprehensive loss, net of tax
Less: Treasury stock of 404,452,246 and 340,721,136 common shares, at cost
Total The Bank of New York Mellon Corporation shareholders’ equity
Nonredeemable noncontrolling interests of consolidated investment management funds
Total permanent equity
Total liabilities, temporary equity and permanent equity
See accompanying Notes to Consolidated Financial Statements.
122 BNY Mellon
Dec. 31,
2018
2017
5,864 $
67,988
14,148
46,795
33,982
85,809
119,791
7,035
56,564
(146)
56,418
1,832
671
17,350
3,220
21,298
362,410
463
362,873 $
70,783 $
74,904
93,091
238,778
14,243
3,479
19,731
1,939
3,227
5,669
5,774
29,163
322,003
2
322,005
5,382
91,510
11,979
28,135
40,827
79,543
120,370
6,022
61,540
(159)
61,381
1,634
610
17,564
3,411
23,029
371,027
731
371,758
82,716
52,294
109,312
244,322
15,163
3,984
20,184
3,075
3,028
6,225
6,050
27,979
330,010
2
330,012
129
179
3,542
3,542
14
27,118
28,652
(3,171)
(15,517)
40,638
101
40,739
362,873 $
14
26,665
25,635
(2,357)
(12,248)
41,251
316
41,567
371,758
$
$
$
$
The Bank of New York Mellon Corporation (and its subsidiaries)
Consolidated Statement of Cash Flows
(in millions)
Operating activities
Net income
Net loss (income) attributable to noncontrolling interests
Net income applicable to shareholders of The Bank of New York Mellon Corporation
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for credit losses
Pension plan contributions
Depreciation and amortization
Deferred tax (benefit) expense
Net securities losses (gains)
Change in trading assets and liabilities
Originations of loans held-for-sale
Proceeds from the sales of loans originated for sale
Change in accruals and other, net (a)
Net cash provided by operating activities (a)
Investing activities
Change in interest-bearing deposits with banks (a)
Change in interest-bearing deposits with the Federal Reserve and other central banks
Purchases of securities held-to-maturity
Paydowns of securities held-to-maturity
Maturities of securities held-to-maturity
Purchases of securities available-for-sale
Sales of securities available-for-sale
Paydowns of securities available-for-sale
Maturities of securities available-for-sale
Net change in loans
Sales of loans and other real estate
Change in federal funds sold and securities purchased under resale agreements (a)
Net change in seed capital investments
Purchases of premises and equipment/capitalized software
Proceeds from the sale of premises and equipment
Acquisitions, net of cash
Dispositions, net of cash
Other, net (a)
Net cash provided by (used for) investing activities (a)
Financing activities
Change in deposits
Change in federal funds purchased and securities sold under repurchase agreements
Change in payables to customers and broker-dealers
Change in other borrowed funds
Change in commercial paper
Net proceeds from the issuance of long-term debt
Repayments of long-term debt
Proceeds from the exercise of stock options
Issuance of common stock
Issuance of preferred stock
Treasury stock acquired
Common cash dividends paid
Preferred cash dividends paid
Other, net
Net cash (used for) provided by financing activities
Effect of exchange rate changes on cash
Change in cash and due from banks and restricted cash (a)
Change in cash and due from banks and restricted cash
Cash and due from banks and restricted cash at beginning of period
Cash and due from banks and restricted cash at end of period
Cash and due from banks and restricted cash: (a)
Cash and due from banks at end of period (unrestricted cash)
Restricted cash at end of period
Cash and due from banks and restricted cash at end of period
Supplemental disclosures
Interest paid
Income taxes paid
Income taxes refunded
Year ended Dec. 31,
2018
2017
2016
$
4,254 $
12
4,266
4,114 $
(24)
4,090
(11)
(55)
1,339
(525)
48
(574)
—
—
1,508
5,996
(2,011)
21,954
(5,055)
4,346
6,317
(32,404)
8,247
7,716
9,063
4,620
263
(18,662)
59
(1,108)
23
—
84
(153)
3,299
(2,874)
(920)
(433)
164
(1,136)
5,143
(3,650)
80
40
—
(3,269)
(1,052)
(169)
(22)
(8,098)
(72)
(24)
(114)
1,474
133
(3)
(694)
—
—
(195)
4,667
2,199
(29,613)
(8,329)
4,448
3,992
(26,151)
6,001
9,129
6,319
2,794
392
(2,334)
(124)
(1,197)
—
—
—
(231)
(32,705)
17,069
5,174
(813)
1,852
3,075
4,738
(1,046)
431
34
—
(2,686)
(901)
(175)
26
26,778
189
3,548
(1)
3,547
(11)
(108)
1,502
(126)
(75)
1,522
(350)
831
(465)
6,267
(1,225)
53,347
(6,673)
4,907
3,738
(27,470)
7,580
8,826
11,347
(1,483)
173
(1,407)
(114)
(825)
65
(42)
1
(461)
50,284
(54,738)
(5,013)
(911)
225
—
6,229
(2,953)
438
27
990
(2,398)
(778)
(122)
(46)
(59,050)
(114)
$
$
$
$
1,125
7,133
8,258 $
5,864 $
2,394
8,258 $
2,711 $
983
175
(1,071)
8,204
7,133 $
(2,613)
10,817
8,204
5,382 $
1,751
7,133 $
1,033 $
498
20
4,822
3,382
8,204
406
1,010
307
(a) Reflects the impact of adopting new accounting guidance included in ASU 2016-15 and ASU 2016-18. Prior periods have been restated. See Note 2 of
the Notes to Consolidated Financial Statements for additional information.
See accompanying Notes to Consolidated Financial Statements.
BNY Mellon 123
The Bank of New York Mellon Corporation (and its subsidiaries)
Consolidated Statement of Changes in Equity
The Bank of New York Mellon Corporation shareholders
(in millions, except per
share amount)
Preferred
stock
Common
stock
Additional
paid-in
capital
Retained
earnings
Accumulated
other
comprehensive
(loss), net
of tax
Treasury
stock
Non-redeemable
noncontrolling
interests of
consolidated
investment
management
funds
Total
permanent
equity
Redeemable
non-
controlling
interests/
temporary
equity
$
3,542 $
14 $
26,665 $ 25,635 $
(2,357) $(12,248) $
316 $
41,567 (a) $
179
—
—
—
(55)
—
—
(55)
—
Balance at Dec. 31, 2017
Adjustment for the cumulative
effect of applying ASU
2014-09 for contract revenue
Adjustment for the cumulative
effect of applying ASU
2017-12 for derivatives and
hedging
Adjusted balance at Jan. 1,
2018
Shares issued to shareholders of
noncontrolling interests
Redemption of subsidiary shares
from noncontrolling interests
Other net changes in
noncontrolling interests
Net income (loss)
Other comprehensive (loss)
Dividends:
Common stock at $1.04 per
share
Preferred stock
Repurchase of common stock
Common stock issued under:
Employee benefit plans
Direct stock purchase and
dividend reinvestment plan
Stock awards and options
exercised
—
—
—
3,542
—
—
—
—
—
—
—
—
—
—
—
—
14
—
—
—
—
—
—
—
—
—
—
—
—
27
(2)
—
25
26,665
25,607
(2,359)
(12,248)
316
41,537
—
—
12
—
—
—
—
—
4,266
—
—
—
—
—
(812)
— (1,052)
—
—
—
—
—
—
—
—
—
31
30
380
(169)
—
—
—
—
—
—
— (3,269)
—
—
—
—
—
—
—
—
(203)
(12)
—
—
—
—
—
—
—
—
—
(191)
4,254
(812)
(1,052)
(169)
(3,269)
31
30
380
Balance at Dec. 31, 2018
$
3,542 $
14 $
27,118 $ 28,652 $
(3,171) $(15,517) $
101 $
40,739 (a) $
(a)
Includes total The Bank of New York Mellon Corporation common shareholders’ equity of $37,709 million at Dec. 31, 2017 and $37,096 million at Dec.
31, 2018.
124 BNY Mellon
—
179
61
(92)
(8)
—
(11)
—
—
—
—
—
—
129
The Bank of New York Mellon Corporation (and its subsidiaries)
Consolidated Statement of Changes in Equity (continued)
The Bank of New York Mellon Corporation shareholders
(in millions, except per
share amount)
Preferred
stock
Common
stock
Additional
paid-in
capital
Retained
earnings
Accumulated
other
comprehensive
(loss) income,
net of tax
Treasury
stock
Non-redeemable
noncontrolling
interests of
consolidated
investment
management
funds
Total
permanent
equity
Redeemable
non-
controlling
interests/
temporary
equity
Balance at Dec. 31, 2016
Shares issued to shareholders of
noncontrolling interests
Redemption of subsidiary shares
from noncontrolling interests
Other net changes in
noncontrolling interests
Net income (loss)
Other comprehensive income
Dividends:
Common stock at $0.86 per
share
Preferred stock
Repurchase of common stock
Common stock issued under:
Employee benefit plans
Direct stock purchase and
dividend reinvestment plan
Stock awards and options
exercised
$
3,542 $
13 $
25,962 $ 22,621 $
(3,765) $ (9,562) $
618 $
39,429 (a) $
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
1
—
—
(35)
—
—
—
—
—
28
26
684
—
—
—
4,090
—
(901)
(175)
—
—
—
—
—
—
—
—
1,408
—
—
—
—
—
—
—
—
—
— (2,686)
—
—
—
—
—
—
—
—
—
—
(335)
(370)
33
—
—
—
—
—
—
—
4,123
1,408
(901)
(175)
(2,686)
28
26
685
Balance at Dec. 31, 2017
$
3,542 $
14 $
26,665 $ 25,635 $
(2,357) $(12,248) $
316 $
41,567 (a) $
151
56
(70)
36
(9)
15
—
—
—
—
—
—
179
(a)
Includes total The Bank of New York Mellon Corporation common shareholders’ equity of $35,269 million at Dec. 31, 2016 and $37,709 million at Dec.
31, 2017.
The Bank of New York Mellon Corporation shareholders
(in millions, except per
share amounts)
Preferred
stock
Common
stock
Additional
paid-in
capital
Retained
earnings
Accumulated
other
comprehensive
(loss) income,
net of tax
Treasury
stock
Non-redeemable
noncontrolling
interests of
consolidated
investment
management
funds
Total
permanent
equity
Redeemable
non-
controlling
interests/
temporary
equity
Balance at Dec. 31, 2015
Shares issued to shareholders of
noncontrolling interests
Redemption of subsidiary shares
from noncontrolling interests
Other net changes in
noncontrolling interests
Net income (loss)
Other comprehensive (loss)
Dividends:
Common stock at $0.72 per
share
Preferred stock
Repurchase of common stock
Common stock issued under:
Employee benefit plans
Direct stock purchase and
dividend reinvestment plan
Preferred stock issued
Stock awards and options
exercised
$
2,552 $
13 $
25,262 $ 19,974 $
(2,600) $ (7,164) $
738 $
38,775 (a) $
—
—
—
—
—
—
—
—
—
—
990
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
(24)
—
—
—
—
—
27
21
—
676
—
—
—
3,547
—
(778)
(122)
—
—
—
—
—
—
—
—
—
(1,165)
—
—
—
—
—
—
—
—
—
— (2,398)
—
—
—
—
—
—
—
—
—
—
(130)
10
—
—
—
—
—
—
—
—
—
—
(154)
3,557
(1,165)
(778)
(122)
(2,398)
27
21
990
676
200
55
(102)
38
(9)
(31)
—
—
—
—
—
—
—
Balance at Dec. 31, 2016
$
3,542 $
13 $
25,962 $ 22,621 $
(3,765) $ (9,562) $
618 $
39,429 (a) $
151
(a)
Includes total The Bank of New York Mellon Corporation common shareholders’ equity of $35,485 million at Dec. 31, 2015 and $35,269 million at Dec.
31, 2016.
See accompanying unaudited Notes to Consolidated Financial Statements.
BNY Mellon 125
Notes to Consolidated Financial Statements
Note 1–Summary of significant accounting
and reporting policies
Use of estimates
Nature of operations
BNY Mellon is a global leader in providing a broad
range of financial products and services in domestic
and international markets. Through our two principal
businesses, Investment Management and Investment
Services, we serve the following major classes of
customers - institutions, corporations and high net
worth individuals. For institutions and corporations,
we provide the following services:
•
•
•
•
•
•
•
•
•
•
•
•
•
investment management;
custody;
foreign exchange;
fund services;
broker-dealer services;
securities finance;
collateral and liquidity services;
clearing services;
depositary receipts;
corporate trust;
global payments;
trade finance; and
cash management.
For individuals, we provide mutual funds, separate
accounts, wealth management and private banking
services. BNY Mellon’s investment management
businesses provide investment products in many asset
classes and investment styles on a global basis.
Basis of presentation
The accounting and financial reporting policies of
BNY Mellon, a global financial services company,
conform to U.S. GAAP and prevailing industry
practices.
In the opinion of management, all adjustments
necessary for a fair presentation of financial position,
results of operations and cash flows for the periods
presented have been made. Certain immaterial
reclassifications have been made to prior periods to
place them on a basis comparable with current period
presentation.
126 BNY Mellon
The preparation of financial statements in conformity
with U.S. GAAP requires management to make
estimates based upon assumptions about future
economic and market conditions which affect
reported amounts and related disclosures in our
financial statements. Although our current estimates
contemplate current conditions and how we expect
them to change in the future, it is reasonably possible
that actual conditions could be worse than anticipated
in those estimates, which could materially affect our
results of operations and financial condition.
Amounts subject to estimates are items such as
allowance for loan losses and lending-related
commitments, fair value of financial instruments and
derivatives, goodwill and other intangibles and
litigation and regulatory contingencies. Among other
effects, such changes in estimates could result in
future impairments of investment securities, goodwill
and intangible assets and establishment of allowances
for loan losses and lending-related commitments as
well as accruals for litigation and regulatory
contingencies.
Changes in accounting
See Note 2 for the new accounting standards adopted
in 2018.
Effective Oct. 1, 2016, we changed the accounting
method for the amortization of premiums and
accretion of discounts on mortgage-backed securities
from the prepayment method (also referred to as the
retrospective method) to the contractual method,
which are both acceptable methods under ASC 310,
Receivables. The calculation performed under the
prepayment method was based on estimating
principal prepayment assumptions, principally driven
by interest rates, and estimating the remaining lives
of securities. This method resulted in retrospective
adjustments each period to reflect changes in those
estimates as if the updated estimated lives had been
applied since the acquisition of the securities. Under
the contractual method, no assumption is made
concerning prepayments. As principal prepayments
occur, a portion of the unamortized premium or
discount is recorded in interest revenue such that the
effective yield of a security remains constant
throughout the life of the security.
Notes to Consolidated Financial Statements (continued)
We have determined that the contractual method is
the preferable method of accounting as it is more
aligned with our approach to asset/liability
management, it reduces reliance on complex
estimates and judgments, and it is consistent with the
method predominantly used by our peers. The impact
of this change was not considered material to prior
periods and, as a result, the cumulative effect of the
change of approximately $15 million was reflected as
a positive adjustment to net interest revenue in the
fourth quarter of 2016. We estimate that net interest
revenue for 2016 would have been higher had we
continued to use the prepayment method, but have
not specifically quantified the impact subsequent to
the effective date, as the estimated amortization is
also immaterial.
Parent financial statements
The Parent financial statements in Note 18 include
the accounts of the Parent; those of a wholly owned
financing subsidiary that functions as a financing
entity for BNY Mellon and its subsidiaries; and
MIPA, LLC, a single-member limited liability
company, created to hold and administer corporate-
owned life insurance. Financial data for the Parent,
the financing subsidiary and the single-member
limited liability company are combined for financial
reporting purposes because of the limited function of
these entities and the unconditional guarantee by
BNY Mellon of their obligations.
Acquired businesses
The income statement and balance sheet include
results of acquired businesses accounted for under the
acquisition method of accounting pursuant to ASC
805, Business Combinations and equity investments
from the dates of acquisition. Contingent purchase
consideration was measured at its fair value and
recorded on the purchase date. Any subsequent
changes in the fair value of a contingent consideration
liability are recorded through the income statement.
Equity method investments, including renewable
energy investments
The consolidated financial statements include the
accounts of BNY Mellon and its subsidiaries. Equity
investments of less than a majority but at least 20%
ownership are accounted for by the equity method
and classified as other assets. Earnings on these
investments are reflected in fee and other revenue as
investment services fees, investment management and
performance fees or investment and other income, as
appropriate, in the period earned.
A loss in value of an equity investment that is
determined to be other-than-temporary is recognized
by reducing the carrying value of the equity
investment down to its fair value.
Renewable energy investment projects through
limited liability companies are accounted for using
the equity method of accounting. The hypothetical
liquidation at book value (“HLBV”) methodology is
used to determine the loss that is recognized in each
quarter. HLBV estimates the liquidation value at the
beginning and end of each quarter, with the difference
recognized as the amount of loss under the equity
method.
The pre-tax losses are reported in investment and
other income section of the income statement. The
corresponding tax benefits and credits are recorded as
a reduction to provision for income taxes on the
income statement. The pre-tax losses, tax benefits
and credits are included in our projected annual
effective tax rate.
See Note 7 for the amount of our renewable energy
investments. Below are our most significant equity
method investments, other than the investments in
renewable energy.
Equity method investments at Dec. 31, 2018
(dollars in millions)
CIBC Mellon
Siguler Guff
Percentage
ownership Book value
548
244
50.0% $
20.0% $
Variable interest and voting model entities
We evaluate an entity for possible consolidation in
accordance with ASC 810, Consolidation. We first
determine whether or not we have variable interests
in the entity, which are investments or other interests
that absorb portions of an entity’s expected losses or
receive portions of the entity’s expected returns. Our
variable interests may include decision-maker or
service provider fees, direct and indirect investments
and investments made by related parties, including
related parties under common control. If it is
determined that we do not have a variable interest in
BNY Mellon 127
Notes to Consolidated Financial Statements (continued)
the entity, no further analysis is required and the
entity is not consolidated.
Restricted cash and securities
If we hold a variable interest in the entity, further
analysis is performed to determine if the entity is a
VIE or a voting model entity (“VME”).
We consider the underlying facts and circumstances
of individual entities when assessing whether or not
an entity is a VIE. An entity is determined to be a
VIE if the equity investors:
•
•
do not have sufficient equity at risk for the entity
to finance its activities without additional
subordinated financial support; or
lack one or more of the following characteristics
of a controlling financial interest:
•
the power, through voting rights or similar
rights, to direct the activities of an entity that
most significantly impact the entity’s
economic performance;
the obligation to absorb the expected losses
of the entity; and
the right to receive the expected residual
returns of the entity.
•
•
We reconsider and reassess whether or not we are the
primary beneficiary of a VIE when governing
documents or contractual arrangements are changed
that would reallocate the obligation to absorb
expected losses or receive expected residual returns
between BNY Mellon and the other investors. This
could occur when BNY Mellon disposes of its
variable interests in the fund, when additional
variable interests are issued to other investors or
when we acquire additional variable interests in the
VIE.
We consolidate a VIE if it is determined that we have
a controlling financial interest in the entity. We have
a controlling financial interest in a VIE when we have
both (1) the power to direct the activities of the VIE
that most significantly impact the VIE’s economic
performance and (2) the obligation to absorb losses or
the right to receive benefits of the VIE that could
potentially be significant to that VIE.
For entities that do not meet the definition of a VIE,
the entity is considered a VME. We consolidate these
entities if we can exert control over the financial and
operating policies of an investee, which can occur if
we have a 50% or more voting interest in the entity.
128 BNY Mellon
Cash and securities may be segregated under federal
and other regulatory requirements and consists of
excess client funds held by our broker-dealer entities.
Restricted cash is included in interest-bearing
deposits with banks on the consolidated balance sheet
and with cash and due from banks when reconciling
the beginning and end-of-period balances on the
consolidated statement of cash flows.
Securities purchased under resale agreements and
securities sold under repurchase agreements
Securities purchased under resale agreements and
securities sold under repurchase agreements are
accounted for as collateralized financings. Generally,
these agreements are recorded at the amounts at
which the securities will be subsequently resold or
repurchased, plus accrued interest.
Securities purchased under resale agreements are
fully collateralized with high-quality liquid securities.
Collateral requirements are monitored and additional
collateral is received or provided, as required. As
such, these transactions carry minimal credit risk and
are not allocated an allowance for credit losses.
Where an enforceable netting agreement exists, resale
and repurchase agreements executed with the same
counterparty and the same maturity date are reported
on a net basis.
Available-for-sale securities and held-to-maturity
securities and trading securities
Securities are classified as trading, available-for-sale
or held-to-maturity securities when they are
purchased. Securities are classified as available-for-
sale securities when we intend to hold the securities
for an indefinite period of time or when the securities
may be used for tactical asset/liability purposes and
may be sold from time to time to effectively manage
interest rate exposure, prepayment risk and liquidity
needs. Securities are classified as held-to-maturity
securities when we intend and have the ability to hold
them until maturity. Securities are classified as
trading securities when our intention is to resell the
securities.
Trading securities are measured at fair value and
included in trading assets on the balance sheet.
Trading revenue includes both realized and unrealized
Notes to Consolidated Financial Statements (continued)
gains and losses. The liability incurred on short-sale
transactions, representing the obligation to deliver
securities, is included in trading liabilities at fair
value.
Available-for-sale securities are measured at fair
value. The difference between fair value and
amortized cost representing unrealized gains or losses
on assets classified as available-for-sale, are recorded
net of tax as an addition to or deduction from OCI,
unless a security is deemed to have other-than-
temporary impairment (“OTTI”). Gains and losses
on sales of available-for-sale securities are reported in
the income statement. The cost of debt and equity
securities sold is determined on a specific
identification and average cost method, respectively.
Held-to-maturity securities are measured at amortized
cost.
Income on securities purchased is adjusted for
amortization of premium and accretion of discount on
a level yield basis, generally over their contractual
life.
We routinely conduct periodic reviews to identify and
evaluate each security to determine whether OTTI
has occurred. We examine various factors when
determining whether an impairment, representing the
fair value of a security being below its amortized
cost, is other-than-temporary. The following are
examples of factors that we consider:
• The length of time and the extent to which the
fair value has been less than the amortized cost
basis;
• Whether management has an intent to sell the
security;
• Whether the decline in fair value is attributable to
specific conditions, such as conditions in an
industry or in a geographic area, affecting a
particular investment;
• Whether a debt security has been downgraded by
a rating agency;
• Whether a debt security exhibits cash flow
deterioration; and
• For each non-agency RMBS, we compare the
remaining credit enhancement that protects the
individual security from losses against the
projected losses of principal and/or interest
expected to come from the underlying mortgage
collateral, to determine whether such credit losses
might directly impact the relevant security.
When we do not intend to sell the security and it is
more likely than not that we will not be required to
sell the security prior to recovery of its cost basis, the
credit component of an OTTI of a debt security is
recognized in earnings and the non-credit component
is recognized in OCI.
The determination of whether a credit loss exists is
based on the best estimate of the present value of cash
flows to be collected from the debt security.
Generally, cash flows are discounted at the effective
interest rate implicit in the debt security at the time of
acquisition. For debt securities that are beneficial
interests in securitized financial assets and are not
high credit quality, ASC 325, Investments - Other,
provides that cash flows be discounted at the current
yield used to accrete the beneficial interest.
If we intend to sell the security or it is more likely
than not that we will be required to sell the security
prior to recovery of its cost basis, the non-credit
component of OTTI is recognized in earnings and
subsequently accreted to interest income on an
effective yield basis over the life of the security.
For held-to-maturity debt securities, the amount of
OTTI recorded in OCI for the non-credit portion of a
previous OTTI is amortized prospectively, as an
increase to the carrying amount of the security, over
the remaining life of the security on the basis of the
timing of future estimated cash flows of the
securities.
The accounting policy for the determination of the
fair value of financial instruments has been identified
as a “critical accounting estimate” as it requires us to
make numerous assumptions based on available
market data. See Note 4 for these disclosures.
Loans and leases
Loans are reported net of any unearned income and
deferred fees and costs. Certain loan origination and
upfront commitment fees, as well as certain direct
loan origination and commitment costs, are deferred
and amortized as a yield adjustment over the lives of
the related loans. Loans held for sale are carried at
the lower of cost or fair value.
Unearned revenue on direct financing leases is
accreted over the lives of the leases in decreasing
amounts to provide a constant rate of return on the net
investment in the leases. Revenue on leveraged
BNY Mellon 129
Notes to Consolidated Financial Statements (continued)
leases is recognized on a basis to achieve a constant
yield on the outstanding investment in the lease, net
of the related deferred tax liability, in the years in
which the net investment is positive. Gains and
losses on residual values of leased equipment sold are
included in investment and other income.
Impairment of leveraged lease residual values is
reflected in net interest revenue. Considering the
nature of these leases and the number of significant
assumptions, there is risk associated with the income
recognition on these leases should any of the
assumptions change materially in future periods.
A modified loan is considered a troubled debt
restructuring (“TDR”) if the debtor is experiencing
financial difficulties and the creditor grants a
concession to the debtor that would not otherwise be
considered. A TDR may include a transfer of real
estate or other assets from the debtor to the creditor,
or a modification of the term of the loan. TDRs are
accounted for as impaired loans (see the
Nonperforming assets policy).
Nonperforming assets
Commercial loans are placed on nonaccrual status
when principal or interest is past due 90 days or
more, or when there is reasonable doubt that interest
or principal will be collected.
When a first lien residential mortgage loan reaches 90
days delinquent, it is subject to an impairment test
and may be placed on nonaccrual status. At 180 days
delinquent, the loan is subject to further impairment
testing. The loan will remain on accrual status if the
realizable value of the collateral exceeds the unpaid
principal balance plus accrued interest. If the loan is
impaired, a charge-off is taken and the loan is placed
on nonaccrual status. At 270 days delinquent, all first
lien mortgages are placed on nonaccrual status.
Second lien mortgages are automatically placed on
nonaccrual status when they reach 90 days
delinquent.
When a loan is placed on nonaccrual status,
previously accrued and uncollected interest is
reversed against current period interest revenue.
Interest receipts on nonaccrual and impaired loans are
recognized as interest revenue or are applied to
principal when we believe the ultimate collectability
of principal is in doubt. Nonaccrual loans generally
are restored to an accrual basis when principal and
130 BNY Mellon
interest become current and remain current for a
specified period.
A loan is considered to be impaired when it is
probable that we will be unable to collect all principal
and interest amounts due according to the contractual
terms of the loan agreement. An impairment
allowance is measured based upon the loan’s market
value, the present value of expected future cash
flows, discounted at the loan’s initial effective interest
rate, or at fair value of the collateral if the loan is
collateral dependent. If the loan valuation is less than
the recorded value of the loan, an impairment
allowance is established by a provision for credit loss.
Impairment allowances are not needed when the
recorded investment in an impaired loan is less than
the loan valuation.
Allowance for loan losses and allowance for lending-
related commitments
The allowance for loan losses, shown as a valuation
allowance to loans, and the allowance for lending-
related commitments recorded in other liabilities, are
referred to as BNY Mellon’s allowance for credit
losses. The accounting policy for the determination
of the adequacy of the allowances has been identified
as a “critical accounting estimate” as it requires us to
make numerous complex and subjective estimates
and assumptions relating to amounts which are
inherently uncertain.
The allowance for loan losses is maintained to absorb
losses inherent in the loan portfolio as of the balance
sheet date based on our judgment. The allowance
determination methodology is designed to provide
procedural discipline in assessing the appropriateness
of the allowance. Credit losses are charged against
the allowance. Recoveries are added to the
allowance.
The methodology for determining the allowance for
lending-related commitments considers the same
factors as the allowance for loan losses, as well as an
estimate of the probability of drawdown at default.
We utilize a quantitative methodology and qualitative
framework for determining the allowance for loan
losses and the allowance for lending-related
commitments. Within this qualitative framework,
management applies judgment when assessing
internal risk factors and environmental factors to
compute an additional allowance for each component
of the loan portfolio.
Notes to Consolidated Financial Statements (continued)
The components of the allowance for loan losses and
the allowance for lending-related commitments are
inclusive of the qualitative allowance framework and
consist of the following three elements:
•
•
•
an allowance for impaired credits of $1 million or
greater;
an allowance for higher risk-rated credits and
pass-rated credits; and
an allowance for residential mortgage loans.
Our lending is primarily to institutional customers.
As a result, our loans are generally larger than $1
million. Therefore, the first element, impaired
credits, is based on individual analysis of all impaired
loans of $1 million and greater. The allowance is
measured by the difference between the recorded
value of impaired loans and their impaired value.
Impaired value is either the present value of the
expected future cash flows from the borrower, the
market value of the loan, or the fair value of the
collateral, if the loan is collateral dependent.
The second element, higher risk-rated credits and
pass-rated credits, is based on our incurred loss
model. Individual credit analyses are performed on
such loans before being assigned a credit rating. All
borrowers are collectively evaluated based on their
credit rating. The loss inherent in each loan
incorporates the borrower’s credit rating, facility
rating and maturity. The loss given default, derived
from the facility rating, incorporates a recovery
expectation and an estimate of the use of the facility
at default (usage given default). The borrower’s
probability of default is derived from the associated
credit rating. Borrower ratings are reviewed at least
annually and are periodically mapped to third-party
databases, including rating agency and default and
recovery databases, to ensure ongoing consistency
and validity. Higher risk-rated credits are reviewed
quarterly.
The third element, the allowance for residential
mortgage loans, is determined by segregating six
mortgage pools into delinquency periods ranging
from current through foreclosure. Each of these
delinquency periods is assigned a probability of
default. A specific loss given default is assigned for
each mortgage pool. BNY Mellon assigns all
residential mortgage pools, except home equity lines
of credit, a probability of default and loss given
default based on default and loss data derived from
internal historical data related to our residential
mortgage portfolio. The resulting incurred loss factor
(the probability of default multiplied by the loss given
default) is applied against the loan balance to
determine the allowance held for each pool. For
home equity lines of credit, probability of default and
loss given default are based on external data from
third-party databases due to the small size of the
portfolio and insufficient internal data.
The qualitative framework is used to determine an
additional allowance for each portfolio based on the
factors below:
Internal risk factors:
• Ratio of nonperforming loans to total non-margin
loans;
• Ratio of criticized assets to total loans and
lending-related commitments;
• Borrower concentration; and
• Significant concentrations in high risk industries
and countries.
Environmental risk factors:
• U.S. non-investment grade default rate;
• Unemployment rate; and
• Change in real gross domestic product.
The objective of the qualitative framework is to
capture incurred losses that may not have been fully
captured in the quantitative reserve, which is based
primarily on historical data. Management determines
the qualitative allowance for each period based on
judgment informed by consideration of internal and
external risk factors and other considerations that
may be deemed relevant during the period. Once
determined in the aggregate, our qualitative
allowance is then allocated to each of our loan classes
based on the respective classes’ quantitative
allowance balances with the allocations adjusted,
when necessary, for class specific risk factors.
For each risk factor, we calculate the minimum and
maximum values, and percentiles in-between, to
evaluate the distribution of our historical experience.
The distribution of historical experience is compared
to the risk factor’s current quarter observed
experience to assess the current risk inherent in the
portfolio and overall direction/trend of a risk factor
relative to our historical experience.
Based on this analysis, we assign a risk level - no
impact, low, moderate, high and elevated - to each
BNY Mellon 131
Notes to Consolidated Financial Statements (continued)
risk factor for the current quarter. Management
assesses the impact of each risk factor to determine
an aggregate risk level. We do not quantify the
impact of any particular risk factor. Management’s
assessment of the risk factors, as well as the trend in
the quantitative allowance, supports management’s
judgment for the overall required qualitative
allowance. A smaller qualitative allowance may be
required when our quantitative allowance has
reflected incurred losses associated with the
aggregate risk level. A greater qualitative allowance
may be required if our quantitative allowance does
not yet reflect the incurred losses associated with the
aggregate risk level.
The allocation of the allowance for credit losses is
inherently judgmental, and the entire allowance for
credit losses is available to absorb credit losses
regardless of the nature of the loss.
Premises and equipment
Premises and equipment are carried at cost less
accumulated depreciation and amortization.
Depreciation and amortization is computed using the
straight-line method over the estimated useful life of
the owned asset and, for leasehold improvements,
over the lesser of the remaining term of the leased
facility or the estimated economic life of the
improvement. For owned and capitalized assets,
estimated useful lives range from 2 to 40 years.
Maintenance and repairs are charged to expense as
incurred, while major improvements are capitalized
and amortized to operating expense over their
identified useful lives.
Software
BNY Mellon capitalizes costs relating to acquired
software and internal-use software development
projects that provide new or significantly improved
functionality. We capitalize projects that are expected
to result in longer-term operational benefits, such as
replacement systems or new applications that result in
significantly increased operational efficiencies or
functionality. All other costs incurred in connection
with an internal-use software project are expensed as
incurred. Capitalized software is recorded in other
assets.
132 BNY Mellon
Identified intangible assets and goodwill
Identified intangible assets with estimable lives are
amortized in a pattern consistent with the assets’
identifiable cash flows or using a straight-line method
over their remaining estimated benefit periods if the
pattern of cash flows is not estimable. Intangible
assets with estimable lives are reviewed for possible
impairment when events or changed circumstances
may affect the underlying basis of the asset.
Goodwill and intangibles with indefinite lives are not
amortized, but are assessed annually for impairment,
or more often if events and circumstances indicate it
is more likely than not they may be impaired and to
determine if the lives are no longer indefinite and
should be amortized. The amount of goodwill
impairment is determined by the excess of the
carrying value of the reporting unit over its fair value.
The accounting policy for valuing and impairment
testing of identified intangible assets and goodwill
has been identified as a “critical accounting estimate”
as it requires us to make numerous complex and
subjective estimates. See Note 6 for additional
disclosures related to goodwill and intangible assets.
Investments in qualified affordable housing projects
Investments in qualified affordable housing projects
through a limited liability entity are accounted for
utilizing the proportional amortization method.
Under the proportional amortization method, the
initial cost of the investment is amortized to the
provision for income taxes in proportion to the tax
credits and other tax benefits received. The net
investment performance, including tax credits and
other benefits received, is recognized in the income
statement as a component of income tax expense.
Additionally, the value of the commitments to fund
qualified affordable housing projects is included in
other assets on the balance sheet and a liability is
recorded for the unfunded portion.
Seed capital
Seed capital investments are generally classified as
other assets and carried at fair value. Unrealized
gains and losses on seed capital investments are
recorded in investment and other income. Certain
risk retention investments in our collateralized loan
obligations (“CLOs”) are classified as available-for-
sale securities. Any unrealized gains and losses are
recorded net of tax as an addition to or deduction
Notes to Consolidated Financial Statements (continued)
from other comprehensive income, unless the
investment is deemed to have OTTI.
Noncontrolling interests
Noncontrolling interests included in permanent equity
are adjusted for the income or (loss) attributable to
the noncontrolling interest holders and any
distributions to those shareholders. Redeemable
noncontrolling interests are reported as temporary
equity. BNY Mellon recognizes changes in the
redemption value of the redeemable noncontrolling
interests as they occur and adjusts the carrying value
to be equal to the redemption value.
Fee revenue
Investment Services and Investment Management
revenue is based on terms specified in a contract with
a customer, and excludes any amounts collected on
behalf of third parties. Revenue is recognized when,
or as, a performance obligation is satisfied by
transferring control of a good or service to a
customer. A performance obligation may be satisfied
over time or at a point in time. Revenue from a
performance obligation satisfied over time is
recognized by measuring our progress in satisfying
the performance obligation in a manner that reflects
the transfer of goods and services to the customer.
Revenue from a performance obligation satisfied at a
point in time is recognized at the point in time the
customer obtains control of the promised good or
service. The amount of revenue recognized reflects
the consideration we expect to be entitled to in
exchange for the promised goods and services. Taxes
assessed by a governmental authority, that are both
imposed on, and concurrent with, a specific revenue-
producing transaction, are collected from a customer
and are excluded from revenue.
Performance fees are recognized in the period in
which the performance fees are earned and become
determinable. Performance fees are constrained until
all uncertainties are resolved and reversal of
previously recorded amounts is not probable.
Performance fees are generally calculated as a
percentage of the applicable portfolio’s performance
in excess of a benchmark index or a peer group’s
performance. When a portfolio underperforms its
benchmark or fails to generate positive performance,
subsequent years’ performance must generally exceed
this shortfall prior to fees being earned. Amounts
billable, which are subject to a clawback if future
performance thresholds in current or future years are
not met, are not recognized since the fees are
potentially uncollectible. These fees are recognized
when it is determined that they will be collected.
When a multi-year performance contract provides
that fees earned are billed ratably over the
performance period, only the portion of the fees
earned that are non-refundable are recognized.
Additionally, we recognize revenue from non-
refundable, implementation fees under outsourcing
contracts using a straight-line method, commencing
in the period the ongoing services are performed
through the expected term of the contractual
relationship. Incremental direct set-up costs of
implementation, up to the related customer margin or
minimum fee revenue amount, are deferred and
amortized over the same period that the related
implementation fees are recognized. If a client
terminates an outsourcing contract prematurely, the
unamortized deferred incremental direct set-up costs
and the unamortized deferred implementation fees
related to that contract are recognized in the period
the contract is terminated.
We record foreign exchange and other trading
revenue, financing-related fees and other revenue
when the services are provided and earned based on
contractual terms, when amounts are determined and
collectability is reasonably assured.
Net interest revenue
Revenue on interest-earning assets and expense on
interest-bearing liabilities are recognized based on the
effective yield of the related financial instrument.
The amortization of premiums and accretion of
discounts are included in interest revenue and are
adjusted for prepayments when they occur, such that,
the effective yield remains constant throughout the
contractual life of the security. Negative interest
incurred on assets or charged on liabilities is
presented as contra interest income and contra
expense, respectively.
Foreign currency translation
Assets and liabilities denominated in foreign
currencies are translated to U.S. dollars at the rate of
exchange on the balance sheet date. Transaction
gains and losses are included in the income statement.
Translation gains and losses on investments in foreign
entities with functional currencies that are not the
BNY Mellon 133
Notes to Consolidated Financial Statements (continued)
U.S. dollar are recorded as foreign currency
translation adjustments in OCI. Revenue and expense
transactions are translated at the applicable daily rate
or the weighted average monthly exchange rate when
applying the daily rate is not practical.
Pension
The measurement date for BNY Mellon’s pension
plans is December 31. Plan assets are determined
based on fair value generally representing observable
market prices. The projected benefit obligation is
determined based on the present value of projected
benefit distributions at an assumed discount rate. The
discount rate utilized is based on the yield curves of
high-quality corporate bonds available in the
marketplace. The net periodic pension expense or
credit includes service costs (if applicable), interest
costs based on an assumed discount rate, an expected
return on plan assets based on an actuarially derived
market-related value, amortization of prior service
cost and amortization of prior years’ actuarial gains
and losses.
Actuarial gains and losses include gains or losses
related to changes in the amount of the projected
benefit obligation or plan assets resulting from
demographic or investment experience different than
assumed, changes in the discount rate or other
assumptions. To the extent an actuarial gain or loss
exceeds 10% of the greater of the projected benefit
obligation or the market-related value of plan assets,
the excess is generally recognized over the future
service periods of active employees. Benefit accruals
under the U.S. pension plans are frozen. Future
unrecognized actuarial gains and losses for the U.S.
plans that exceed a threshold amount are amortized
over the average future life expectancy of plan
participants with a maximum of 15 years.
Our expected long-term rate of return on plan assets
is based on anticipated returns for each applicable
asset class. Anticipated returns are weighted for the
expected allocation for each asset class and are based
on forecasts for prospective returns in the equity and
fixed-income markets, which should track the long-
term historical returns for these markets. We also
consider the growth outlook for U.S. and global
economies, as well as current and prospective interest
rates.
value of plan assets adjusted for the difference
between expected returns and actual performance of
plan assets. The difference between actual experience
and expected returns on plan assets is included as an
adjustment in the market-related value over a five-
year period.
See Note 17 for additional disclosures related to
pensions.
Severance
BNY Mellon provides separation benefits for U.S.-
based employees through The Bank of New York
Mellon Corporation Supplemental Unemployment
Benefit Plan. These benefits are provided to eligible
employees separated from their jobs for business
reasons not related to individual performance. Basic
separation benefits are generally based on the
employee’s years of continuous benefited service.
Severance for employees based outside of the U.S. is
determined in accordance with local agreements and
legal requirements. Severance expense is recorded
when management commits to an action that will
result in separation and the amount of the liability can
be reasonably estimated.
Income taxes
We record current tax liabilities or assets through
charges or credits to the current tax provision for the
estimated taxes payable or refundable for the current
year. Deferred tax assets and liabilities are recorded
for future tax consequences attributable to differences
between the financial statement carrying amounts of
assets and liabilities and their respective tax bases.
Deferred tax assets and liabilities are measured using
enacted tax rates expected to apply to taxable income
in the years in which those temporary differences are
expected to be recovered or settled. A deferred tax
valuation allowance is established if it is more likely
than not that all or a portion of the deferred tax assets
will not be realized. A tax position that fails to meet a
more-likely-than-not recognition threshold will result
in either reduction of current or deferred tax assets,
and/or recording of current or deferred tax liabilities.
Interest and penalties related to income taxes are
recorded as income tax expense.
Derivative financial instruments
The market-related value utilized to determine the
expected return on plan assets is based on the fair
Derivatives are recorded on the balance sheet at fair
value and include futures, forwards, interest rate
134 BNY Mellon
Notes to Consolidated Financial Statements (continued)
swaps, foreign currency swaps and options and
similar products. Derivatives in an unrealized gain
position are recognized as assets while derivatives in
unrealized loss position are recognized as liabilities.
Derivatives are reported net by counterparty and after
consideration of cash collateral, to the extent subject
to legally enforceable netting agreements.
Derivatives designated and effective in qualifying
hedging relationships are classified in other assets or
other liabilities on the balance sheet. All other
derivatives are classified within trading assets or
trading liabilities on the balance sheet. Gains and
losses on trading derivatives are generally included in
foreign exchange and other trading revenue.
We enter into various derivative financial instruments
for non-trading purposes primarily as part of our
asset/liability management process. These
derivatives are designated as either fair value or cash
flow hedges of certain assets and liabilities or
forecasted transactions when we enter into the
derivative contracts. Gains and losses associated with
fair value hedges are recorded in income as well as
any change in the value of the related hedged item
associated with the designated risks being hedged.
Gains and losses on cash flow hedges are recorded in
OCI, until reclassified into earnings in the same
period the hedged item impacts earnings. Foreign
currency transaction gains and losses related to a
hedged net investment in a foreign operation, net of
their tax effect, are recorded with cumulative foreign
currency translation adjustments within OCI.
To qualify for hedge accounting each hedge
relationship is required to be highly effective at
reducing the risk associated with the exposure being
hedged, both prospectively and retrospectively. We
formally document all relationships between hedging
instruments and hedged items, as well as our risk-
management objectives and strategy for undertaking
various hedging transactions. At inception, the
potential cause of ineffectiveness related to each of
our hedges is assessed to determine if we can expect
the hedge to be highly effective over the life of the
transaction. At hedge inception, we document the
methodology to be utilized for evaluating
effectiveness on an ongoing basis, and we monitor
ongoing hedge effectiveness at least quarterly.
For qualifying fair value hedges, changes in the fair
value of the derivative, and changes in the value of
the hedged item associated with the designated risks
being hedged, are recognized in earnings. Certain
amounts excluded from the assessment of
effectiveness are recorded in OCI and recognized in
earnings through an amortization approach over the
life of the derivative. We discontinue hedge
accounting prospectively when we determine that the
hedge is no longer effective or the derivative expires,
is sold, or management discontinues the derivative’s
hedge designation. Subsequent gains and losses on
these derivatives are included in foreign exchange
and other trading revenue. For discontinued fair
value hedges, the accumulated gain or loss on the
hedged item is amortized on a yield basis over the
remaining life of the hedged item.
For qualifying cash flow hedges, changes in the fair
value of the derivative are recorded in OCI, until
reclassified into earnings in the same period the
hedged item impacts earnings. If the hedge
relationship is terminated, then the change in value
will be reclassified from OCI to earnings when the
cash flows that were previously hedged affect
earnings. If cash flow hedge accounting is
discontinued as a result of a forecasted transaction no
longer being probable to occur, then the amount
reported in OCI is immediately reclassified to current
earnings.
Derivative amounts affecting earnings are recognized
in the same income statement line as the hedged item
affects earnings, principally interest income, interest
expense and other revenue.
Foreign currency transaction gains and losses related
to qualifying hedges of net investments in a foreign
operation are recorded with cumulative foreign
currency translation adjustments within OCI net of
their tax effect. The Company evaluates effectiveness
of its foreign currency derivatives designated as
hedges of its net investments utilizing the forward
rate method.
The determination of fair value of derivative financial
instruments has been identified as a “critical
accounting estimate.” See Note 22 for additional
disclosures related to derivative financial instruments.
Earnings per common share
Earnings per common share is calculated using the
two-class method under which earnings are allocated
to common shareholders and holders of participating
securities. Unvested stock-based compensation
awards that contain non-forfeitable rights to
BNY Mellon 135
Notes to Consolidated Financial Statements (continued)
dividends or dividend equivalents are considered
participating securities under the two-class method.
Note 2–Accounting changes and new
accounting guidance
The following accounting changes and new
accounting guidance were adopted in 2018.
ASU 2017-12, Derivatives and Hedging: Targeted
Improvements to Accounting for Hedging Activities
In August 2017, the FASB issued an ASU,
Derivatives and Hedging: Targeted Improvements to
Accounting for Hedging Activities. The objective of
this ASU is to improve the financial reporting of
hedging relationships to better portray the economic
results of an entity’s risk management activities and
to simplify the application of hedge accounting
guidance.
The most significant impact of the new guidance to
the Company relates to the new accounting
alternatives for fair value hedges of interest rate risk,
specifically, the ability to hedge only the benchmark
component of the contractual cash flows and partial-
term hedging. The guidance also changed
presentation and disclosure requirements and made
changes to how the shortcut method is applied, which
resulted in the Company using that method going
forward for certain hedging relationships.
BNY Mellon elected to early adopt this ASU on Jan.
31, 2018, which is the “as of” date for which the
Company was permitted to make certain elections
and the measurement date for recording the adoption
impact for certain hedge modifications. As part of the
adoption, we elected to reclassify approximately $1.1
billion of debt securities from held-to-maturity to
available-for-sale which resulted in a decrease of $47
million pre-tax to accumulated other comprehensive
income. The Company also elected to modify certain
hedge relationships as of the adoption date primarily
to utilize the benchmark component method of
measuring hedge effectiveness, as such method is
deemed to more closely match risk management
objectives with accounting results. The Company
recognized a $27 million after-tax increase in retained
earnings as of Jan. 1, 2018 associated with the
adoption impact of these hedge modifications.
Basic earnings per share is calculated by dividing net
income allocated to common shareholders of BNY
Mellon by the average number of common shares
outstanding and vested stock-based compensation
awards where recipients have satisfied either the
explicit vesting terms or retirement-eligibility
requirements.
Diluted earnings per common share is computed
under the more dilutive of either the treasury stock
method or the two-class method. We increase the
average number of shares of common stock
outstanding by the assumed number of shares of
common stock that would be issued assuming the
exercise of stock options and the issuance of shares
related to stock-based compensation awards using the
treasury stock method, if dilutive. Diluted earnings
per share is calculated by dividing net income
allocated to common shareholders of BNY Mellon by
the adjusted average number of common shares
outstanding.
Statement of cash flows
We have defined cash as cash and due from banks.
Cash flows from hedging activities are classified in
the same category as the items hedged. Distributions
received from equity method investees are classified
as cash inflows from operating activities on the
consolidated statement of cash flows. Excess returns
on investments of equity method investments are
classified as cash flows from investing activities on
the consolidated statement of cash flows.
Stock-based compensation
Compensation expense relating to share-based
payments is recognized in the income statement, on a
straight-line basis, over the applicable vesting period.
Certain of our stock compensation grants vest when
the employee retires. New grants with this feature are
expensed by the first date the employee is eligible to
retire. We estimate forfeitures when recording
compensation cost related to share-based payment
awards.
136 BNY Mellon
Notes to Consolidated Financial Statements (continued)
ASU 2017-07, Compensation - Retirement Benefits:
Improving the Presentation of Net Periodic Pension
Cost and Net Periodic Postretirement Benefit Cost
ASU 2016-15, Statement of Cash Flows:
Classification of Certain Cash Receipts and Cash
Payments
In March 2017, the FASB issued an ASU,
Compensation - Retirement Benefits: Improving the
Presentation of Net Periodic Pension Cost and Net
Periodic Postretirement Benefit Cost. This ASU
requires the disaggregation of the service cost
component from the other components of the net
benefit cost in the consolidated income statement.
This ASU also permits only the service cost
component of net benefit cost to be eligible for
capitalization. BNY Mellon adopted this ASU in the
first quarter of 2018, and applied the guidance
retrospectively for the presentation of the service cost
component and the other components in the
consolidated income statement, and prospectively for
the capitalization of the service cost component in
assets. The adoption of this standard increased staff
expense and decreased other expense by $62 million
in 2017 and $75 million in 2016.
ASU 2016-18, Statement of Cash Flows: Restricted
Cash
In November 2016, the FASB issued an ASU,
Statement of Cash Flows: Restricted Cash. This ASU
provides guidance on the presentation of restricted
cash or restricted cash equivalents in the consolidated
statement of cash flows. Restricted cash consists of
excess client funds held by our broker-dealer business
and totaled $2.4 billion at Dec. 31, 2018 and $1.8
billion at Dec. 31, 2017. Restricted cash is included
in interest-bearing deposits with banks on the
consolidated balance sheet and with cash and due
from banks when reconciling the beginning and end-
of-period balances on the consolidated statement of
cash flows.
We adopted the guidance in this ASU retrospectively.
As a result, the change in interest-bearing deposits
with banks, which is included in investing activities
on the consolidated statement of cash flows, was
restated to reflect the decrease in restricted cash of
$1,631 million in 2017 and $898 million in 2016.
The increase in restricted cash was $643 million in
2018.
In August 2016, the FASB issued an ASU, Statement
of Cash Flows: Classification of Certain Cash
Receipts and Cash Payments. This ASU provides
guidance on eight specific cash flow presentation
issues. The most significant impact for BNY Mellon
relates to distributions received from equity method
investees. For equity method investments, BNY
Mellon elected to report distributions received from
equity method investees using the cumulative
earnings approach. Distributions received are
considered returns on investment and classified as
cash inflows from operating activities on the
consolidated statement of cash flows. To the extent
the returns on investment exceeded the cumulative
equity in earnings recognized, the excess would be
considered a return of investment and classified as
cash inflows from investing activities on the
consolidated statement of cash flows. We adopted the
guidance in this ASU retrospectively. As a result, the
change in accruals and other, net, which is included in
operating activities on the consolidated statement of
cash flows, was restated to reflect distributions
received of $24 million in 2017 and $17 million in
2016. The distributions were previously included in
other, net in investing activities on the consolidated
statement of cash flows. Distributions received in
2018 were $24 million. The remaining seven specific
cash flow presentation issues do not materially
impact BNY Mellon.
ASU 2014-09, Revenue from Contracts with
Customers
In May 2014, the FASB issued an ASU, Revenue
from Contracts with Customers. This ASU, as
amended, provides guidance on the recognition of
revenue related to the transfer of promised goods or
services to customers and guidance on accounting for
certain contract costs. The standard provides a single
revenue model to be applied by reporting companies
under U.S. GAAP and supersedes most existing
revenue recognition guidance.
The Company adopted the guidance on Jan. 1, 2018
using the cumulative effect transition method applied
to contracts not completed as of Dec. 31, 2017, which
resulted in a $55 million after-tax reduction to
retained earnings. The comparative financial
information for 2017 and 2016 has not been restated
BNY Mellon 137
Notes to Consolidated Financial Statements (continued)
and continues to be reported under the accounting
standards in effect for that period.
Although the impact of the adoption of this ASU was
not material, the most significant changes and
quantitative impact of the changes are disclosed
below.
Payments to customers
The timing of recognizing the reduction in revenue
for certain payments made to depositary receipts
customers has changed. Prior to adoption, annual
payments to customers were capitalized and
amortized as contra revenue over the remaining
contract period, subject to impairment reviews.
Under the new guidance, annual payments are
recorded as a reduction in revenue in proportion to
the expected annual revenue generated from the
related customer contract.
Costs to obtain a customer contract
Prior to adoption, costs to obtain a customer contract,
primarily sales incentives, were expensed as incurred.
Under the new guidance, an asset is recognized for
the incremental sales incentives that are considered
costs of obtaining a contract with a customer, if those
costs are expected to be recovered.
The table below presents the cumulative effect of the
adoption of the new guidance on the consolidated
balance sheet as of Dec. 31, 2017.
Impact on the consolidated balance sheet
(in millions)
Assets
Other assets
Liabilities
Accrued tax and other
expenses
Other liabilities
Equity
Retained earnings
Dec. 31,
2017
Impact of
adoption
Jan. 1,
2018
$
23,029 $
(9) $
23,020
$
6,225 $
6,050
(18) $
64
6,207
6,114
$
25,635 $
(55) $
25,580
The impact of the new guidance on the consolidated
income statement for 2018 and the consolidated
balance sheet as of Dec. 31, 2018 was de minimis.
See Note 9 for additional revenue and contract costs
disclosures.
138 BNY Mellon
ASU 2016-01, Financial Instruments - Overall:
Recognition and Measurement of Financial Assets
and Financial Liabilities
In January 2016, the FASB issued an ASU, Financial
Instruments—Overall: Recognition and Measurement
of Financial Assets and Financial Liabilities. This
ASU requires investments in equity securities that do
not result in consolidation and are not accounted for
under the equity method to be measured at fair value
with changes in the fair value recognized through net
income, unless one of two available exceptions
applies. The first exception, a scope exception,
allows Federal Reserve Bank stock, FHLB stock and
exchange memberships to remain accounted for at
cost, less impairment. The second practicability
exception is an election available for equity
investments that do not have readily determinable fair
values. For certain investments where the Company
has chosen the practicability exception, such
investments are accounted for at cost adjusted for
impairment, if any, plus or minus observable price
changes.
The Company adopted this guidance in the first
quarter of 2018 using the cumulative effect method of
adoption, with a de minimis impact to retained
earnings. As part of the adoption, we reclassified
money market fund investments of approximately $1
billion to trading assets, primarily from available-for-
sale securities.
We have non-readily marketable equity securities
where we are utilizing the practicability exception of
$55 million at Dec. 31, 2018. We recognized $27
million of net upward adjustments on these securities
in 2018, driven by activity that resulted in observable
price changes.
ASU 2018-13, Fair Value Measurement: Disclosure
Framework - Changes to the Disclosure
Requirements for Fair Value Measurement
In August 2018, the FASB issued an ASU, Fair Value
Measurement: Disclosure Framework - Changes to
the Disclosure Requirements for Fair Value
Measurement. This ASU requires disclosure of the
changes in unrealized gains or losses included in OCI
for Level 3 assets or liabilities held at the end of the
period and the range and weighted-average of the
significant unobservable inputs used in determining
the fair value of Level 3 assets and liabilities. This
ASU removes the requirement to disclose the
Notes to Consolidated Financial Statements (continued)
transfers between Level 1 and Level 2 of the fair
value hierarchy and the valuation process for
determining Level 3 fair value measurements. BNY
Mellon adopted this ASU in the third quarter of 2018
and applied the guidance prospectively for the new
disclosure requirements and retrospectively for
disclosure requirements that have been removed.
ASU 2018-14, Compensation - Retirement Benefits -
Defined Benefit Plans - General: Disclosure
Framework - Changes to the Disclosure
Requirements for Defined Benefit Plans
In August 2018, the FASB issued an ASU,
Compensation - Retirement Benefits - Defined Benefit
Plans - General: Disclosure Framework - Changes to
the Disclosure Requirements for Defined Benefit
Plans. This ASU added the requirement to disclose
the weighted-average interest crediting rates for cash
balance plans and an explanation of the reasons for
significant gains and losses related to changes in the
benefit obligation for the period. This ASU clarified
the requirement to disclose the projected benefit
obligation (“PBO”) and fair value of plan assets for
plans with PBOs in excess of plan assets, and the
accumulated benefit obligation (“ABO”) and fair
value of plan assets for plans with ABOs in excess of
plan assets. Additionally, this ASU removed the
requirement to disclose the amounts in accumulated
OCI expected to be recognized as components of net
periodic benefit cost over the next year and the
sensitivity analysis of changes in the assumed health
care cost trend rate. BNY Mellon early adopted this
ASU in the fourth quarter of 2018 and applied the
guidance retrospectively.
Note 3–Acquisitions and dispositions
We sometimes structure our acquisitions with both an
initial payment and later contingent payments tied to
post-closing revenue or income growth. There were
no contingent payments in 2018.
At Dec. 31, 2018, we are potentially obligated to pay
additional consideration which, using reasonable
assumptions, could range from $4 million to $21
million over the next three years, but could be higher
as certain of the arrangements do not contain a
contractual maximum.
The transactions described below did not have a
material impact on BNY Mellon’s results of
operations.
Transactions in 2018
On Jan. 2, 2018, BNY Mellon completed the sale of
CenterSquare, one of our Investment Management
boutiques, and recorded a gain on this transaction.
CenterSquare had approximately $10 billion in AUM
in U.S. and global real estate and infrastructure
investments. In addition, goodwill of $52 million
was removed from the consolidated balance sheet as a
result of this sale.
On June 29, 2018, BNY Mellon completed the
exchange of its majority equity interest in Amherst
Capital Management LLC for a minority equity stake
in Amherst Holdings LLC. Goodwill of $13 million
was removed from the consolidated balance sheet and
a gain was recorded as a result of this sale.
Transactions in 2016
On April 1, 2016, BNY Mellon acquired the assets of
Atherton Lane Advisers, LLC, a U.S.-based
investment manager with approximately $2.45 billion
in AUM and servicer for approximately 700 high-net-
worth clients, for cash of $38 million, plus contingent
payments measured at $22 million. Goodwill related
to this acquisition totaled $29 million and is included
in the Investment Management business. The
customer relationship intangible asset related to this
acquisition is included in the Investment Management
business, with an estimated life of 14 years, and
totaled $30 million at acquisition.
BNY Mellon 139
Notes to Consolidated Financial Statements (continued)
Note 4–Securities
Securities at Dec. 31, 2017
Amortized
cost
Gross
unrealized
Gains Losses
Fair
value
$
$
$
24,002 $ 108 $ 291 $ 23,819
15,263
15,159
160
264
12,405
8,793
2,949
2,898
2,520
2,085
1,265
1,360
1,249
1,040
917
152
1,409
963
175
36
31
12
18
5
317
6
17
3
1
3
4
—
23
67
23
1
9
11
4
6
11
—
10
6
1
—
12,557
8,762
2,957
2,909
2,529
2,079
1,578
1,360
1,255
1,043
908
149
1,412
963
79,166 $1,000 $ 623 $ 79,543
26,208 $
9,792
1,653
1,593
1,324
84
65
57
28
17
6
51 $ 332 $ 25,927
9,742
1,641
56
12
6
—
30
2
2
—
5
—
—
—
—
9
—
1
—
—
1
—
1,623
1,317
86
64
62
28
16
6
(in millions)
Available-for-sale:
Agency RMBS
U.S. Treasury
Sovereign debt/sovereign
guaranteed
Agency commercial MBS
State and political
subdivisions
CLOs
Foreign covered bonds
Supranational
Non-agency RMBS (a)
Non-agency commercial
MBS
Corporate bonds
Other ABS
U.S. government agencies
Other RMBS
Other debt securities
Money market funds
Total securities
available-for-sale (b)
Held-to-maturity:
Agency RMBS
U.S. Treasury
U.S. government agencies
Sovereign debt/sovereign
guaranteed
Agency commercial MBS
Foreign covered bonds
Other RMBS
Non-agency RMBS
Supranational
State and political
subdivisions
Non-agency commercial
MBS
Total securities held-to-
(a)
(b)
$
40,827 $
96 $ 411 $ 40,512
maturity
Total securities
$ 119,993 $1,096 $1,034 $ 120,055
Includes $1,091 million that was included in the former Grantor
Trust.
Includes gross unrealized gains of $50 million and gross
unrealized losses of $144 million recorded in accumulated other
comprehensive income related to securities that were transferred
from available-for-sale to held-to-maturity. The unrealized
gains and losses are primarily related to Agency RMBS and will
be amortized into net interest revenue over the contractual lives
of the securities.
The following tables present the amortized cost, the
gross unrealized gains and losses and the fair value of
securities at Dec. 31, 2018, Dec. 31, 2017 and Dec.
31, 2016, respectively.
Securities at Dec. 31, 2018
(in millions)
Available-for-sale:
Agency RMBS
U.S. Treasury
Sovereign debt/sovereign
guaranteed
Agency commercial MBS
CLOs
Supranational
Foreign covered bonds
State and political
subdivisions
Other ABS
U.S. government
agencies
Non-agency commercial
MBS
Non-agency RMBS (a)
Corporate bonds
Other debt securities
Total securities
available-for-sale (b)
Held-to-maturity:
Agency RMBS
U.S. Treasury
U.S. government
agencies
Agency commercial MBS
Sovereign debt/sovereign
guaranteed
Non-agency RMBS
Foreign covered bonds
Supranational
State and political
subdivisions
Total securities held-to-
Amortized
cost
Gross
unrealized
Gains Losses
Fair
value
$
25,594 $
20,190
83 $ 369 $ 25,308
20,076
96
210
10,663
9,836
3,410
2,985
2,890
2,251
1,776
1,676
1,491
1,095
1,074
1,236
108
16
—
7
7
18
1
5
1
241
6
6
21
161
46
8
19
22
4
24
28
11
26
4
10,750
9,691
3,364
2,984
2,878
2,247
1,773
1,657
1,464
1,325
1,054
1,238
86,167 $ 595 $ 953 $ 85,809
25,507 $
4,727
1,497
1,195
833
100
80
26
17
32 $ 632 $ 24,907
4,653
77
3
—
—
26
4
1
1
—
10
26
—
2
—
—
—
1,487
1,169
859
102
81
27
17
$
$
(a)
(b)
33,982 $
$
67 $ 747 $ 33,302
maturity
$ 120,149 $ 662 $1,700 $ 119,111
Total securities
Includes $832 million that was included in the former Grantor
Trust.
Includes gross unrealized gains of $39 million and gross
unrealized losses of $87 million recorded in accumulated other
comprehensive income related to securities that were transferred
from available-for-sale to held-to-maturity. The unrealized
gains and losses are primarily related to Agency RMBS and will
be amortized into net interest revenue over the contractual lives
of the securities.
140 BNY Mellon
Notes to Consolidated Financial Statements (continued)
Amortized
cost
Gross
unrealized
Gains Losses
Fair
value
The following table presents the realized gains, losses
and impairments, on a gross basis.
Securities at Dec. 31, 2016
(in millions)
Available-for-sale:
Agency RMBS
U.S. Treasury
Sovereign debt/sovereign
guaranteed
Agency commercial MBS
State and political
subdivisions
CLOs
Foreign covered bonds
Non-agency RMBS (a)
Other ABS
Corporate bonds
Non-agency commercial
MBS
Other RMBS
U.S. government agencies
Other debt securities
Equity securities
Money market funds
Total securities
available-for-sale (b)
Held-to-maturity:
Agency RMBS
U.S. Treasury
Sovereign debt/sovereign
guaranteed
U.S. government agencies
Agency commercial MBS
Other RMBS
Non-agency RMBS
Foreign covered bonds
State and political
subdivisions
Non-agency commercial
MBS
Other debt securities
Total securities held-to-
maturity
Total securities
$
$
$
22,929 $ 148 $ 341 $ 22,736
14,307
14,373
181
115
12,248
6,505
3,392
2,593
2,126
1,700
1,729
1,391
931
517
366
1,952
2
842
261
28
38
6
24
317
4
22
8
4
2
19
1
—
20
84
52
1
9
22
6
17
11
8
9
10
—
—
12,489
6,449
3,378
2,598
2,141
1,995
1,727
1,396
928
513
359
1,961
3
842
73,596 $ 997 $ 771 $ 73,822
25,221 $
11,117
57 $ 299 $ 24,979
11,098
22
41
1,911
1,589
721
142
78
74
19
7
26
42
—
1
—
4
1
—
—
—
—
6
10
4
2
—
1
—
—
1,953
1,583
712
138
80
75
18
7
26
$
40,905 $ 127 $ 363 $ 40,669
$ 114,501 $1,124 $1,134 $ 114,491
(a) Includes $1,357 million that was included in the former Grantor
(b)
Trust.
Includes gross unrealized gains of $62 million and gross
unrealized losses of $190 million recorded in accumulated other
comprehensive income related to investment securities that were
transferred from available-for-sale to held-to-maturity. The
unrealized gains and losses are primarily related to Agency
RMBS and will be amortized into net interest revenue over the
contractual lives of the securities.
Net securities (losses) gains
(in millions)
Realized gross gains
Realized gross losses
Recognized gross impairments
$
Total net securities (losses) gains
$
2018
2017
8 $
(55)
(1)
(48) $
47 $
(40)
(4)
3 $
2016
86
(4)
(7)
75
In 2018, we adopted the new accounting guidance
included in ASU 2016-01, Financial Instruments—
Overall: Recognition and Measurement of Financial
Assets and Financial Liabilities. As a result, money
market fund investments were reclassified to trading
assets, primarily from available-for-sale securities.
In 2018, certain debt securities with an aggregate
amortized cost of $1,117 million and fair value of
$1,070 million were transferred from held-to-maturity
securities to available-for-sale securities as part of the
adoption of ASU 2017-12, Derivatives and Hedging:
Targeted Improvements to Accounting for Hedging
Activities.
In 2017, other RMBS with an aggregate amortized
cost of $74 million and fair value of $76 million were
transferred from held-to-maturity securities to
available-for-sale securities. Due to ratings
downgrades, the Company no longer intends to hold
these securities to maturity.
BNY Mellon 141
Notes to Consolidated Financial Statements (continued)
Temporarily impaired securities
At Dec. 31, 2018, the unrealized losses on the
securities portfolio were primarily attributable to an
increase in interest rates from date of purchase, and
for certain securities that were transferred from
available-for-sale to held-to-maturity, an increase in
interest rates through the date they were transferred.
Specifically, $87 million of the unrealized losses at
Dec. 31, 2018 and $144 million at Dec. 31, 2017
reflected in the available-for-sale sections of the
tables below relate to certain securities (primarily
Agency RMBS) that were transferred in prior periods
from available-for-sale to held-to-maturity. The
unrealized losses will be amortized into net interest
revenue over the contractual lives of the securities.
The transfer created a new cost basis for the
securities. As a result, if these securities have
experienced unrealized losses since the date of
transfer, the corresponding fair value and unrealized
losses would be reflected in the held-to-maturity
sections of the following tables. We do not intend to
sell these securities, and it is not more likely than not
that we will have to sell these securities.
The following tables show the aggregate fair value of securities with 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 more.
Temporarily impaired securities at Dec. 31, 2018
Less than 12 months
12 months or more
Total
$
(in millions)
Available-for-sale:
Agency RMBS
U.S. Treasury
Sovereign debt/sovereign guaranteed
Agency commercial MBS
CLOs
Supranational
Foreign covered bonds
State and political subdivisions
Other ABS
U.S. government agencies
Non-agency commercial MBS
Non-agency RMBS (a)
Corporate bonds
Other debt securities
Total securities available-for-sale (b)
$
Fair
value
Unrealized
losses
Fair
value
Unrealized
losses
Fair
value
Unrealized
losses
6,678 $
6,126
2,185
4,505
3,280
974
1,058
316
1,289
513
1,015
94
685
397
29,115 $
30
23
8
50
46
2
7
1
4
4
14
1
24
1
215
$
$
9,250 $
6,880
988
3,082
2
481
736
668
23
673
362
157
50
256
23,608 $
339
187
13
111
—
6
12
21
—
20
14
10
2
3
738
$
$
15,928 $
13,006
3,173
7,587
3,282
1,455
1,794
984
1,312
1,186
1,377
251
735
653
52,723 $
369
210
21
161
46
8
19
22
4
24
28
11
26
4
953
Held-to-maturity:
Agency RMBS
U.S. Treasury
U.S. government agencies
Agency commercial MBS
Non-agency RMBS
632
77
10
26
2
747
1,700
(a) Includes $22 million with an unrealized loss of less than $1 million for less than 12 months and $3 million with an unrealized loss of less
Total securities held-to-maturity
Total temporarily impaired securities
17,107 $
4,343
1,111
654
31
23,246 $
46,854 $
4,602 $
157
—
477
22
5,258 $
34,373 $
21,709 $
4,500
1,111
1,131
53
28,504 $
81,227 $
576
75
10
19
1
681
1,419
56
2
—
7
1
66
281
$
$
$
$
$
$
$
$
$
than $1 million for 12 months or more that were included in the former Grantor Trust.
(b) Includes gross unrealized losses of $87 million for 12 months or more recorded in accumulated other comprehensive income related to
securities that were transferred from available-for-sale to held-to-maturity. The unrealized losses are primarily related to Agency RMBS
and will be amortized into net interest revenue over the contractual lives of the securities. There were no gross unrealized losses for less
than 12 months.
142 BNY Mellon
Notes to Consolidated Financial Statements (continued)
Temporarily impaired securities at Dec. 31, 2017
Less than 12 months
12 months or more
Total
$
(in millions)
Available-for-sale:
Agency RMBS
U.S. Treasury
Sovereign debt/sovereign guaranteed
Agency commercial MBS
State and political subdivisions
CLOs
Foreign covered bonds
Supranational
Non-agency RMBS (a)
Non-agency commercial MBS
Corporate bonds
U.S. government agencies
Other RMBS
Other debt securities
Total securities available-for-sale (b)
$
Fair
value
Unrealized
losses
Fair
value
Unrealized
losses
Fair
value
Unrealized
losses
8,567 $
7,429
1,880
3,077
732
260
953
700
20
476
274
588
71
1,155
26,182 $
66
131
12
28
3
1
7
6
—
3
2
6
4
1
270
$
$
5,834 $
2,175
559
1,332
518
—
116
333
149
122
288
160
45
35
11,666 $
225
29
11
39
20
—
2
5
4
3
9
4
2
—
353
$
$
14,401 $
9,604
2,439
4,409
1,250
260
1,069
1,033
169
598
562
748
116
1,190
37,848 $
291
160
23
67
23
1
9
11
4
6
11
10
6
1
623
$
Held-to-maturity:
Agency RMBS
U.S. Treasury
U.S. government agencies
Agency commercial MBS
Other RMBS
State and political subdivisions
9,458 $
6,389
791
737
—
—
17,375 $
43,557 $
(a) Includes $7 million with an unrealized loss of less than $1 million for less than 12 months and $12 million with an unrealized loss of $1
Total securities held-to-maturity
Total temporarily impaired securities
12,305 $
2,909
850
60
50
4
21,763 $
9,298
1,641
797
50
4
251
15
8
2
1
1
278
631
81
41
4
7
—
—
133
403
16,178 $
27,844 $
33,553 $
71,401 $
332
56
12
9
1
1
411
1,034
$
$
$
$
$
$
$
$
million for 12 months or more that were included in the former Grantor Trust.
(b) Includes gross unrealized losses of $144 million for 12 months or more recorded in accumulated other comprehensive income related to
securities that were transferred from available-for-sale to held-to-maturity. The unrealized losses are primarily related to Agency RMBS
and will be amortized into net interest revenue over the contractual lives of the securities. There were no gross unrealized losses for less
than 12 months.
The following table shows the maturity distribution by carrying amount and yield (on a tax equivalent basis) of our
securities portfolio.
Maturity distribution and yields
on securities at Dec. 31, 2018
(dollars in millions)
Securities available-for-sale:
One year or less
Over 1 through 5 years
Over 5 through 10 years
Over 10 years
Mortgage-backed securities
Asset-backed securities
Total
Securities held-to-maturity:
One year or less
Over 1 through 5 years
Over 5 through 10 years
Over 10 years
Mortgage-backed securities
Total
U.S. Treasury
State and political
subdivisions
Amount Yield (a) Amount Yield (a) Amount Yield (a) Amount Yield (a) Amount Yield (a)
Other bonds, notes
and debentures
U.S. government
agencies
Mortgage/
asset-backed
Total
$ 7,682
6,753
2,460
3,181
—
—
$ 20,076
$
936
3,480
311
—
—
$ 4,727
2.14% $
2.07
2.25
3.12
—
—
245
317
1,095
—
—
—
2.28% $ 1,657
1.41% $
1.83
2.18
—
—
597
900
—
—
—
1.77% $ 1,497
1.88% $
2.54
2.78
—
—
—
402
1,121
531
193
—
—
2.60% $ 2,247
1.26% $ —
3
2.52
—
—
14
—
—
—
17
2.01% $
2.54% $ 6,032
10,761
2.97
1,930
2.23
181
3.06
—
—
—
—
2.73% $ 18,904
—% $
5.66
—
4.76
—
4.95% $
57
373
509
—
—
939
1.50% $ —
—
1.29
—
0.88
—
1.68
37,788
—
5,137
—
1.32% $ 42,925
0.38% $ —
—
0.47
—
0.85
—
—
26,802
—
0.67% $ 26,802
—% $ 14,361
18,952
—
6,016
—
3,555
—
37,788
3.23
5,137
3.35
3.25% $ 85,809
—% $ 1,590
4,756
—
820
—
14
—
26,802
2.92
2.92% $ 33,982
(a) Yields are based upon the amortized cost of securities.
BNY Mellon 143
Notes to Consolidated Financial Statements (continued)
Other-than-temporary impairment
For each security in the securities portfolio, a
quarterly review is conducted to determine if an
OTTI has occurred. See Note 1 for a discussion of
the determination of OTTI.
The following table reflects securities credit losses
recorded in earnings. The beginning balance
represents the credit loss component for which OTTI
occurred on debt securities in the prior year. The
additions represent the first time a debt security was
credit impaired or when subsequent credit
impairments have occurred. The deductions represent
credit losses on securities that have been sold, are
required to be sold, or for which it is our intention to
sell.
Debt securities credit loss roll forward
(in millions)
Beginning balance as of Dec. 31
Add: Subsequent OTTI credit losses
Less: Realized losses for securities sold
Ending balance as of Dec. 31
2018
84 $
1
7
78 $
2017
88
4
8
84
$
$
The following table presents pre-tax net securities
(losses) gains by type.
Net securities (losses) gains
(in millions)
Agency RMBS
U.S. Treasury
Foreign covered bonds
Non-agency RMBS
Other
$
Total net securities (losses) gains
$
2018
2017
(42) $
(4)
(1)
—
(1)
(48) $
(12) $
(16)
—
4
27
3 $
2016
22
4
10
8
31
75
Pledged assets
At Dec. 31, 2018, BNY Mellon had pledged assets of
$120 billion, including $96 billion pledged as
collateral for potential borrowings at the Federal
Reserve Discount Window and $7 billion pledged as
collateral for borrowing at the FHLB. The
components of the assets pledged at Dec. 31, 2018
included $100 billion of securities, $15 billion of
loans, $4 billion of trading assets and $1 billion of
interest-bearing deposits with banks.
144 BNY Mellon
If there has been no borrowing at the Federal Reserve
Discount Window, the Federal Reserve generally
allows banks to freely move assets in and out of their
pledged assets account to sell or repledge the assets
for other purposes. BNY Mellon regularly moves
assets in and out of its pledged assets account at the
Federal Reserve.
At Dec. 31, 2017, BNY Mellon had pledged assets of
$111 billion, including $92 billion pledged as
collateral for potential borrowing at the Federal
Reserve Discount Window and $5 billion pledged as
collateral for borrowing at the FHLB. The
components of the assets pledged at Dec. 31, 2017
included $96 billion of securities, $13 billion of loans
and $2 billion of trading assets.
At Dec. 31, 2018 and Dec. 31, 2017, pledged assets
included $13 billion and $10 billion, respectively, for
which the recipients were permitted to sell or
repledge the assets delivered.
We also obtain securities as collateral, including
receipts under resale agreements, securities borrowed,
derivative contracts and custody agreements on terms
which permit us to sell or repledge the securities to
others. At Dec. 31, 2018 and Dec. 31, 2017, the
market value of the securities received that can be
sold or repledged was $151 billion and $86 billion,
respectively. We routinely sell or repledge these
securities through delivery to third parties. As of
Dec. 31, 2018 and Dec. 31, 2017, the market value of
securities collateral sold or repledged was $101
billion and $49 billion, respectively.
Restricted cash and securities
Cash and securities may be segregated under federal
and other regulations or requirements. At Dec. 31,
2018 and Dec. 31, 2017, cash segregated under
federal and other regulations or requirements was $2
billion and $2 billion, respectively. Restricted cash is
included in interest-bearing deposits with banks on
the consolidated balance sheet. Securities segregated
for these purposes were $2 billion at Dec. 31, 2018
and $1 billion at Dec. 31, 2017. Restricted securities
were sourced from securities purchased under resale
agreements at Dec. 31, 2018 and Dec. 31, 2017 and
are included in federal funds sold and securities
purchased under resale agreements on the
consolidated balance sheet.
Notes to Consolidated Financial Statements (continued)
Our loan portfolio consists of three portfolio
segments: commercial, lease financings and
mortgages. We manage our portfolio at the class
level, which consists of six classes of financing
receivables: commercial, commercial real estate,
financial institutions, lease financings, wealth
management loans and mortgages, and other
residential mortgages.
The following tables are presented for each class of
financing receivable and provide additional
information about our credit risks and the adequacy
of our allowance for credit losses.
Note 5–Loans and asset quality
Loans
The table below provides the details of our loan
portfolio and industry concentrations of credit risk at
Dec. 31, 2018 and Dec. 31, 2017.
Loans
(in millions)
Domestic:
Commercial
Commercial real estate
Financial institutions
Lease financings
Wealth management loans and
mortgages
Other residential mortgages
Overdrafts
Other
Margin loans
Total domestic
Foreign:
Commercial
Financial institutions
Lease financings
Wealth management loans and
mortgages
Other (primarily overdrafts)
Margin loans
Total foreign
Total loans (a)
Dec. 31,
2018
2017
$
1,949 $
4,787
5,091
706
15,843
594
1,550
1,181
13,343
45,044
183
6,492
551
122
4,031
141
11,520
56,564 $
$
2,744
4,900
5,568
772
16,420
708
963
1,131
15,689
48,895
167
7,483
527
108
4,264
96
12,645
61,540
(a) Net of unearned income of $358 million at Dec. 31, 2018
and $394 million at Dec. 31, 2017 primarily related to
domestic and foreign lease financings.
BNY Mellon 145
Notes to Consolidated Financial Statements (continued)
Allowance for credit losses
Activity in the allowance for credit losses is summarized as follows.
Allowance for credit losses activity for the year ended Dec. 31, 2018
(in millions)
Beginning balance
Charge-offs
Recoveries
Net recoveries
Provision
Ending balance
Allowance for:
Loan losses
Lending-related commitments
Individually evaluated for
impairment:
Loan balance
Allowance for loan losses
Collectively evaluated for
impairment:
Loan balance
Allowance for loan losses
Commercial
Commercial
real estate
Financial
institutions
Lease
financings
Wealth
management
loans and
mortgages
Other
residential
mortgages
All
other
Foreign
Total
$
$
$
$
$
77 $
—
—
—
4
81 $
24 $
57
— $
—
76 $
—
—
—
(1)
75 $
56 $
19
— $
—
23 $
—
—
—
(1)
22 $
7 $
15
— $
—
8 $
—
—
—
(3)
5 $
5 $
—
— $
—
22 $
—
—
—
(1)
21 $
18 $
3
4 $
—
20 $
(1)
2
1
(5)
16 $
16 $
—
— $
—
—
—
—
—
—
—
—
—
—
—
$
$
$
$
35 $
—
1
1
(4)
32 $
20 $
12
261
(1)
3
2
(11)
252
146
106
— $
—
4
—
1,949 $
24
4,787 $
56
5,091 $
7
706 $
5
15,839 $
18
594 $ 16,074 (a) $ 11,520 $ 56,560
146
20
—
16
(a)
Includes $1,550 million of domestic overdrafts, $13,343 million of margin loans and $1,181 million of other loans at Dec. 31, 2018.
Allowance for credit losses activity for the year ended Dec. 31, 2017
(in millions)
Beginning balance
Charge-offs
Recoveries
Net recoveries
Provision
Ending balance
Allowance for:
Loan losses
Lending-related commitments
Individually evaluated for
impairment:
Loan balance
Allowance for loan losses
Collectively evaluated for
impairment:
Loan balance
Allowance for loan losses
Commercial
Commercial
real estate
Financial
institutions
Lease
financings
Wealth
management
loans and
mortgages
Other
residential
mortgages
All
other
Foreign
Total
$
$
$
$
$
82 $
—
—
—
(5)
77 $
24 $
53
— $
—
73 $
—
—
—
3
76 $
58 $
18
— $
—
26 $
—
—
—
(3)
23 $
7 $
16
1 $
—
13 $
—
—
—
(5)
8 $
8 $
—
— $
—
23 $
—
—
—
(1)
22 $
18 $
4
28 $
(1)
5
4
(12)
20 $
20 $
—
5 $
1
— $
—
—
—
—
—
—
—
—
—
—
—
$
$
$
$
36 $
—
—
—
(1)
35 $
24 $
11
— $
—
281
(1)
5
4
(24)
261
159
102
6
1
2,744 $
24
4,900 $
58
5,567 $
7
772 $
8
16,415 $
17
708 $ 17,783 (a) $ 12,645 $ 61,534
158
—
24
20
(a)
Includes $963 million of domestic overdrafts, $15,689 million of margin loans and $1,131 million of other loans at Dec. 31, 2017.
146 BNY Mellon
Notes to Consolidated Financial Statements (continued)
Allowance for credit losses activity for the year ended Dec. 31, 2016
(in millions)
Beginning balance
Charge-offs
Recoveries
Net recoveries
Provision
Ending balance
Allowance for:
Loans losses
Unfunded commitments
Individually evaluated for
impairment:
Loan balance
Allowance for loan losses
Collectively evaluated for
impairment:
Loan balance
Allowance for loan losses
Commercial
Commercial
real estate
Financial
institutions
Lease
financings
Wealth
management
loans and
mortgages
Other
residential
mortgages
All
other
Foreign
Total
$
$
$
$
$
82 $
—
—
—
—
82 $
25 $
57
— $
—
59 $
—
—
—
14
73 $
52 $
21
— $
—
31 $
—
13
13
(18)
26 $
8 $
18
— $
—
15 $
—
—
—
(2)
13 $
13 $
—
4 $
2
19 $
—
—
—
4
23 $
19 $
4
5 $
3
34 $
(2)
5
3
(9)
28 $
28 $
—
— $
—
—
—
—
—
—
—
—
—
—
—
$
$
$
$
35 $
—
1
1
—
36 $
24 $
12
— $
—
275
(2)
19
17
(11)
281
169
112
9
5
2,286 $
25
4,639 $
52
6,342 $
8
985 $
11
15,550 $
16
854 $ 19,760 (a) $ 14,033 $ 64,449
164
—
28
24
(a)
Includes $1,055 million of domestic overdrafts, $17,503 million of margin loans and $1,202 million of other loans at Dec. 31, 2016.
Nonperforming assets
Lost interest
The table below presents our nonperforming assets.
The table below presents the amount of lost interest
income.
Nonperforming assets
(in millions)
Nonperforming loans:
Other residential mortgages
Wealth management loans and
mortgages
Commercial real estate
Total nonperforming loans
Other assets owned
Total nonperforming assets
Dec. 31,
2018
2017
$
$
67 $
9
—
76
3
79 $
78
7
1
86
4
90
At Dec. 31, 2018, undrawn commitments to
borrowers whose loans were classified as nonaccrual
or reduced rate were not material.
Lost interest
(in millions)
Amount by which interest income recognized
on nonperforming loans exceeded reversals
2018
2017
2016
Total
Foreign
Amount by which interest income would have
increased if nonperforming loans at year-
end had been performing for the entire year
$ — $ — $ —
—
—
—
Total
Foreign
$
5 $
—
5 $
—
6
—
BNY Mellon 147
Notes to Consolidated Financial Statements (continued)
Impaired loans
The tables below present information about our impaired loans. We use the discounted cash flow method as the
primary method for valuing impaired loans.
Impaired loans
(in millions)
Impaired loans with an allowance:
Commercial real estate
Financial institutions
Wealth management loans and mortgages
Lease financings
Total impaired loans with an allowance
Impaired loans without an allowance:
2018
2017
2016
Average
recorded
investment
Interest
income
recognized
Average
recorded
investment
Interest
income
recognized
Average
recorded
investment
Interest
income
recognized
$
— $
—
1
—
1
— $
—
—
—
—
— $
1
2
1
4
— $
—
—
—
—
1 $
—
5
3
9
—
—
—
—
—
Commercial real estate
Financial institutions
Wealth management loans and mortgages
—
—
—
—
4
—
—
4
5 $
—
(a) When the discounted cash flows, collateral value or market price equals or exceeds the carrying value of the loan, then the loan does not
Total impaired loans without an allowance (a)
Total impaired loans
1
102
2
105
114 $
—
—
—
—
— $
—
—
—
—
— $
—
—
3
3
7 $
$
require an allowance under the accounting standard related to impaired loans.
Impaired loans
(in millions)
Impaired loans with an allowance:
Commercial real estate
Financial institutions
Wealth management loans and mortgages
Total impaired loans with an allowance
Impaired loans without an allowance:
Wealth management loans and mortgages
Total impaired loans without an allowance (b)
Total impaired loans (c)
Dec. 31, 2018
Unpaid
principal
balance
Related
allowance (a)
Dec. 31, 2017
Unpaid
principal
balance
Related
allowance (a)
Recorded
investment
Recorded
investment
$
$
— $
—
—
—
4
4
4 $
— $
—
—
—
4
4
4 $
— $
—
—
—
N/A
N/A
— $
— $
1
1
2
4
4
6 $
3 $
1
1
5
4
4
9 $
—
—
1
1
N/A
N/A
1
(a) The allowance for impaired loans is included in the allowance for loan losses.
(b) When the discounted cash flows, collateral value or market price equals or exceeds the carrying value of the loan, then the loan does not
require an allowance under the accounting standard related to impaired loans.
(c) Excludes an aggregate of less than $1 million of impaired loans in amounts individually less than $1 million at both Dec. 31, 2018 and
Dec. 31, 2017, respectively. The allowance for loan losses associated with these loans totaled less than $1 million at both Dec. 31, 2018
and Dec. 31, 2017, respectively.
Past due loans
The table below presents our past due loans.
Past due loans and still accruing interest
Dec. 31, 2018
(in millions)
Wealth management loans and mortgages
Other residential mortgages
Commercial real estate
Financial institutions
Total past due loans
Days past due
30-59
60-89
22 $
12
1
3
38 $
1 $
6
—
3
10 $
$
$
Total
past due
28
25
1
6
60
5 $
7
—
—
12 $
Dec. 31, 2017
Days past due
30-59
60-89
$
$
39 $
18
44
1
102 $
5 $
5
—
—
10 $
Total
past due
44
28
44
1
117
— $
5
—
—
5 $
148 BNY Mellon
Notes to Consolidated Financial Statements (continued)
Troubled debt restructurings
A modified loan is considered a TDR if the debtor is
experiencing financial difficulties and the creditor
grants a concession to the debtor that would not
The following table presents our TDRs.
otherwise be considered. A TDR may include a
transfer of real estate or other assets from the debtor
to the creditor, or a modification of the term of the
loan. Not all modified loans are considered TDRs.
TDRs
2018
2017
(dollars in millions)
Other residential mortgages
Wealth management loans and mortgages
Total TDRs
Number of
contracts
17
—
17
Outstanding recorded investment
Pre-modification Post-modification
4
—
4
4
—
4
$
$
$
$
Number of
contracts
50
2
52
Outstanding recorded investment
Pre-modification Post-modification
14
6
20
13
6
19
$
$
$
$
The modifications of the other residential mortgage
loans in 2018 and 2017 consisted of reducing the
stated interest rates and, in certain cases, a
forbearance of default and extending the maturity
dates. The modified loans are primarily collateral
dependent for which the value is based on the fair
value of the collateral.
TDRs that subsequently defaulted
There were six residential mortgage loans and one
wealth management loan, with an aggregate recorded
investment of $1 million, which were restructured in
a TDR during the previous 12 months and
subsequently defaulted in 2018.
Credit quality indicators
Our credit strategy is to focus on investment-grade
clients that are active users of our non-credit services.
Each customer is assigned an internal credit rating,
which is mapped to an external rating agency grade
equivalent, if possible, based upon a number of
dimensions, which are continually evaluated and may
change over time.
The following tables present information about credit quality indicators.
Commercial loan portfolio
Commercial loan portfolio – Credit risk profile
by creditworthiness category
(in millions)
Investment grade
Non-investment grade
Total
Commercial
Dec. 31,
2018
2,036 $
96
2,132 $
Commercial real estate
Dec. 31,
Financial institutions
Dec. 31,
2017
2,685
226
2,911
$
$
2018
4,184 $
603
4,787 $
2017
4,277
623
4,900
$
$
2018
9,586 $
1,997
11,583 $
2017
10,021
3,030
13,051
$
$
The commercial loan portfolio is divided into
investment grade and non-investment grade
categories based on the assigned internal credit
ratings, which are generally consistent with those of
the public rating agencies.
Customers with ratings consistent with BBB- (S&P)/
Baa3 (Moody’s) or better are considered to be
investment grade. Those clients with ratings lower
than this threshold are considered to be non-
investment grade.
BNY Mellon 149
Notes to Consolidated Financial Statements (continued)
Wealth management loans and mortgages
Other residential mortgages
Wealth management loans and mortgages – Credit risk
profile by internally assigned grade
(in millions)
Wealth management loans:
Investment grade
Non-investment grade
Wealth management mortgages
Total
Dec. 31,
2018
2017
$
$
6,901 $
106
8,958
15,965 $
7,042
185
9,301
16,528
Wealth management non-mortgage loans are not
typically rated by external rating agencies. A
majority of the wealth management loans are secured
by the customers’ investment management accounts
or custody accounts. Eligible assets pledged for these
loans are typically investment grade fixed-income
securities, equities and/or mutual funds. Internal
ratings for this portion of the wealth management
portfolio, therefore, would equate to investment-
grade external ratings. Wealth management loans are
provided to select customers based on the pledge of
other types of assets, including business assets, fixed
assets or a modest amount of commercial real estate.
For the loans collateralized by other assets, the credit
quality of the obligor is carefully analyzed, but we do
not consider this portfolio of loans to be investment
grade.
Credit quality indicators for wealth management
mortgages are not correlated to external ratings.
Wealth management mortgages are typically loans to
high-net-worth individuals, which are secured
primarily by residential property. These loans are
primarily interest-only, adjustable rate mortgages
with a weighted-average loan-to-value ratio of 62% at
origination. In the wealth management portfolio, less
than 1% of the mortgages were past due at Dec. 31,
2018.
At Dec. 31, 2018, the wealth management mortgage
portfolio consisted of the following geographic
concentrations: California - 24%; New York - 18%;
Massachusetts - 10%; Florida - 8%; and other - 40%.
The other residential mortgage portfolio primarily
consists of 1-4 family residential mortgage loans and
totaled $594 million at Dec. 31, 2018 and $708
million at Dec. 31, 2017. These loans are not
typically correlated to external ratings. Included in
this portfolio at Dec. 31, 2018 were $128 million of
mortgage loans purchased in 2005, 2006 and the first
quarter of 2007, of which, 11% of the serviced loan
balance was at least 60 days delinquent.
Overdrafts
Overdrafts primarily relate to custody and securities
clearance clients and totaled $5.5 billion at Dec. 31,
2018 and $5.1 billion at Dec. 31, 2017. Overdrafts
occur on a daily basis primarily in the custody and
securities clearance business and are generally repaid
within two business days.
Other loans
Other loans primarily include loans to consumers that
are fully collateralized with equities, mutual funds
and fixed-income securities.
Margin loans
We had $13.5 billion of secured margin loans on our
consolidated balance sheet at Dec. 31, 2018
compared with $15.8 billion at Dec. 31, 2017.
Margin loans are collateralized with marketable
securities, and borrowers are required to maintain a
daily collateral margin in excess of 100% of the value
of the loan. We have rarely suffered a loss on these
types of loans and do not allocate any of our
allowance for credit losses to margin loans.
Reverse repurchase agreements
Reverse repurchase agreements are transactions fully
collateralized with high-quality liquid securities.
These transactions carry minimal credit risk and
therefore are not allocated an allowance for credit
losses.
150 BNY Mellon
Notes to Consolidated Financial Statements (continued)
Note 6–Goodwill and intangible assets
Goodwill
The table below provides a breakdown of goodwill by business.
Goodwill by business
(in millions)
Balance at Dec. 31, 2016
Foreign currency translation
Balance at Dec. 31, 2017
Dispositions
Foreign currency translation
Balance at Dec. 31, 2018
Investment
Services
Investment
Management
Other
$
$
$
8,269 $
120
8,389 $
—
(56)
8,333 $
9,000 $
128
9,128 $
(65)
(93)
8,970 $
47 $
—
47 $
—
—
47 $
Consolidated
17,316
248
17,564
(65)
(149)
17,350
Total goodwill decreased in 2018 compared with 2017 reflecting the impact of foreign exchange translation on non-
U.S. dollar denominated goodwill and dispositions in the Investment Management business.
Intangible assets
The table below provides a breakdown of intangible assets by business.
Intangible assets – net carrying amount by business
(in millions)
Balance at Dec. 31, 2016
Amortization
Foreign currency translation
Balance at Dec. 31, 2017
Amortization
Foreign currency translation
Balance at Dec. 31, 2018
Investment
Services
Investment
Management
Other
$
$
$
1,032 $
(149)
5
888 $
(129)
(1)
758 $
1,717 $
(60)
17
1,674 $
(51)
(10)
1,613 $
849 $
—
—
849 $
—
—
849 $
Consolidated
3,598
(209)
22
3,411
(180)
(11)
3,220
Intangible assets decreased in 2018 compared with 2017 primarily reflecting amortization.
The table below provides a breakdown of intangible assets by type.
Intangible assets
Dec. 31, 2018
Dec. 31, 2017
Gross
carrying
amount
Accumulated
amortization
Net
carrying
amount
Remaining
weighted-
average
amortization
period
Gross
carrying
amount
Accumulated
amortization
Net
carrying
amount
(in millions)
Subject to amortization: (a)
Customer contracts—Investment Services
Customer relationships—Investment
Management
Other
Total subject to amortization
Not subject to amortization: (b)
Tradenames
Customer relationships
$
1,572 $
(1,186) $
899
26
2,497
(699)
(12)
(1,897)
1,332
1,288
2,620
5,117 $
N/A
N/A
N/A
(1,897) $
Total not subject to amortization
Total intangible assets
$
(a) Excludes fully amortized intangible assets.
(b) Intangible assets not subject to amortization have an indefinite life.
386
200
14
600
1,332
1,288
2,620
3,220
10 years
$
2,260 $
(1,744) $
11 years
4 years
10 years
1,262
42
3,564
(1,015)
(23)
(2,782)
516
247
19
782
N/A
N/A
N/A
N/A $
1,334
1,295
2,629
6,193 $
N/A
N/A
N/A
(2,782) $
1,334
1,295
2,629
3,411
BNY Mellon 151
Notes to Consolidated Financial Statements (continued)
Qualified affordable housing project investments
We invest in affordable housing projects primarily to
satisfy the Company’s requirements under the
Community Reinvestment Act. Our total investment
in qualified affordable housing projects totaled $1.0
billion at Dec. 31, 2018 and $1.0 billion at Dec. 31,
2017. Commitments to fund future investments in
qualified affordable housing projects totaled $479
million at Dec. 31, 2018 and $486 million at Dec. 31,
2017 and are recorded in other liabilities. A summary
of the commitments to fund future investments is as
follows: 2019 – $201 million; 2020 – $108 million;
2021 – $122 million; 2022 – $29 million; 2023 – $1
million; and 2024 and thereafter – $18 million.
Tax credits and other tax benefits recognized were
$163 million in 2018, $156 million in 2017 and $155
million in 2016.
Amortization expense included in the provision for
income taxes was $136 million in 2018, $153 million
in 2017 and $115 million in 2016.
Investments valued using net asset value per share
In our Investment Management business, we manage
investment assets, including equities, fixed income,
money market and multi-asset and alternative
investment funds for institutions and other investors.
As part of that activity, we make seed capital
investments in certain funds. We also hold private
equity investments, specifically SBICs, which are
compliant with the Volcker Rule, and certain other
corporate investments. Seed capital, private equity
and other corporate investments are included in other
assets on the consolidated balance sheet. The fair
value of these investments was estimated using the
net asset value (“NAV”) per share for BNY Mellon’s
ownership interest in the funds.
Estimated annual amortization expense for current
intangibles for the next five years is as follows:
For the year ended
Dec. 31,
2019
2020
2021
2022
2023
Impairment testing
$
Estimated amortization expense
(in millions)
115
102
78
60
50
The goodwill impairment test is performed at least
annually at the reporting unit level. Intangible assets
not subject to amortization are tested for impairment
annually or more often if events or circumstances
indicate they may be impaired.
BNY Mellon’s three business segments include seven
reporting units for which goodwill impairment testing
is performed on an annual basis. The Investment
Services segment is comprised of four reporting
units; the Investment Management segment is
comprised of two reporting units and one reporting
unit is included in the Other segment. As a result of
the annual goodwill impairment test of the seven
reporting units conducted in the second quarter of
2018, no goodwill impairment was recognized.
Note 7–Other assets
The following table provides the components of other
assets presented on the consolidated balance sheet.
$
Other assets
(in millions)
Corporate/bank-owned life insurance
Accounts receivable
Fails to deliver
Software
Prepaid pension assets
Renewable energy investments
Income taxes receivable
Equity in a joint venture and other
investments
Qualified affordable housing project
investments
Federal Reserve Bank stock
Prepaid expense
Fair value of hedging derivatives
Seed capital
Other (a)
Total other assets
$
Dec. 31,
2018
4,937 $
3,692
2,274
1,652
1,357
1,264
1,125
1,064
999
484
385
289
224
1,552
21,298 $
2017
4,857
4,590
2,817
1,499
1,416
1,368
1,533
1,083
1,014
477
395
323
288
1,369
23,029
(a) At Dec. 31, 2018 and Dec. 31, 2017, other assets include
$111 million and $82 million, respectively, of Federal Home
Loan Bank stock, at cost.
152 BNY Mellon
Notes to Consolidated Financial Statements (continued)
The table below presents information on our investments valued using NAV.
Other assets valued using NAV
(dollars in millions)
Seed capital
Private equity investments (SBICs) (a)
Other (b)
Total
Dec. 31, 2018
Dec. 31, 2017
Fair
value
Unfunded
commitments
Redemption
frequency
Redemption
notice period
Fair
value
Unfunded
commitments
Redemption
frequency
Redemption
notice period
$
54
74
87
$ —
Daily-
quarterly
1-90 days
$
41
—
N/A
N/A
Daily-
quarterly
1-95 days
40
55
59
$ 215
$
41
$ 154
$
$
1
42
—
43
Daily-
quarterly
N/A
Daily-
quarterly
1-90 days
N/A
1-95 days
(a) Private equity investments include Volcker Rule-compliant investments in SBICs that invest in various sectors of the economy. Private equity
investments do not have redemption rights. Distributions from such investments will be received as the underlying investments in the private
equity investments, which have a life of 10 years, are liquidated.
(b) Primarily relates to investments in funds that relate to deferred compensation arrangements with employees.
Note 8–Deposits
Total time deposits in denominations of $250,000 or
more were $32.1 billion at Dec. 31, 2018 and $37.3
billion at Dec. 31, 2017. At Dec. 31, 2018, the
scheduled maturities of all time deposits are as
follows: 2019 – $40.5 billion; 2020 – $47 million;
2021 – $1 million; 2022 – $- million; 2023 – $-
million; and 2024 and thereafter – $1 million.
Note 9–Contract revenue
Nature of services and revenue recognition
Fee revenue in Investment Services and Investment
Management is primarily variable, based on levels of
AUC/A, AUM and the level of client-driven
transactions, as specified in fee schedules.
Investment Services fees are based primarily on the
market value of AUC/A; client accounts, balances
and the volume of transactions; securities lending
volume and spreads; and fees for other services.
Certain fees based on the market value of assets are
calculated in arrears on a monthly or quarterly basis.
Substantially all services within the Investment
Services business are provided over time. Revenue
on these services is recognized using the time elapsed
method, equal to the expected invoice amount, which
typically represents the value provided to the
customer for our performance completed to date.
Clearing services revenue includes multiple types of
fees, some of which are driven by customer actions
and are delivered at a point-in-time. These
transaction-based fees are generally recognized on
trade date. Other contractual clearing services fees
are driven by the amount of AUC/A or the number of
accounts or securities positions and are billed on a
monthly or quarterly basis.
Investment management fees are dependent on the
overall level and mix of AUM. The management
fees, expressed in basis points, are charged for
managing those assets. Management fees are
typically subject to fee schedules based on the overall
level of assets managed and products in which those
assets are invested.
Investment management fee revenue also includes
transactional- and account-based fees. These fees
along with distribution and servicing fees are
recognized when the services have been completed.
Clients are generally billed for services performed on
a monthly or quarterly basis.
Performance fees are generally calculated as a
percentage of the applicable portfolio’s performance
in excess of a benchmark index or a peer group’s
performance. Performance fees are recognized at the
end of the measurement period when they are
determinable.
See Note 23 for additional information on our
principal businesses, Investment Services and
Investment Management, and the primary services
provided.
BNY Mellon 153
Notes to Consolidated Financial Statements (continued)
Disaggregation of contract revenue
Contract revenue is included in fee revenue on the
consolidated income statement. The following table
presents fee revenue related to contracts with
customers, disaggregated by type, for each business
segment.
Disaggregation of contract revenue by business segment (a)
(in millions)
Fee revenue - contract
revenue:
Investment services
fees:
Asset servicing
Clearing services
Issuer services
Treasury services
Total investment
services fees
Investment
management and
performance fees
Financing-related fees
Distribution and
servicing
Investment and other
income
Total fee revenue -
contract revenue
Fee and other revenue -
not in scope of
ASC 606 (b)(c)
Total fee and other
revenue
Year ended Dec. 31, 2018
Investment
Services
Investment
Management Other
Total
$
4,395 $
1,577
1,099
553
88 $
—
—
1
1 $ 4,484
— 1,577
— 1,099
554
—
7,624
89
1
7,714
54
61
(51)
279
3,619
— 3,673
1
191
(202)
(2)
—
2
1
60
140
79
11,666
7,967
3,698
959
83
84
1,126
$
8,926 $
3,781 $
85 $12,792
(a) Business segment data has been determined on an internal
management basis of accounting, rather than the generally accepted
accounting principles used for consolidated financial reporting.
(b) Primarily includes foreign exchange and other trading revenue,
investment and other income, financing-related fees and net
securities losses, all of which are accounted for using other
accounting guidance.
(c) The Investment Management business includes a loss from
consolidated investment management funds, net of noncontrolling
interests of $1 million in 2018.
Contract balances
Our clients are billed based on fee schedules that are
agreed upon in each customer contract. Receivable
from customers were $3.9 billion at Jan. 1, 2018 and
$2.5 billion at Dec. 31, 2018. An allowance is
maintained for accounts receivables which is
generally based on the number of days outstanding.
Adjustments to the allowance are recorded in other
expense in the consolidated income statement. A
provision of $11 million was recorded in 2018.
154 BNY Mellon
Contract assets represent accrued revenues that have
not yet been billed to the customers due to certain
contractual terms other than the passage of time and
were $30 million at Jan. 1, 2018 and $36 million at
Dec. 31, 2018. Accrued revenues recorded as
contract assets are usually billed on an annual basis.
There were no impairments recorded on contract
assets in 2018.
Both receivables from customers and contract assets
are included in other assets on the consolidated
balance sheet.
Contract liabilities represent payments received in
advance of providing services under certain contracts
and were $167 million at Jan. 1, 2018 and $171
million at Dec. 31, 2018. Contract liabilities are
included in other liabilities on the consolidated
balance sheet. Revenue recognized in 2018 relating
to contract liabilities as of Jan. 1, 2018 was $96
million.
Changes in contract assets and liabilities primarily
relate to either party’s performance under the
contracts.
Contract costs
Incremental costs for obtaining contracts that are
deemed recoverable are capitalized as contract costs.
Such costs result from the payment of sales
incentives, primarily in the Wealth Management
business, and totaled $98 million at Dec. 31, 2018.
Capitalized sales incentives are amortized based on
the transfer of goods or services to which the assets
relate and typically average nine years. The
amortization of capitalized sales incentives, which is
primarily included in staff expense, totaled $22
million in 2018.
Costs to fulfill a contract are capitalized when they
relate directly to an existing contract or specific
anticipated contract, generate or enhance resources
that will be used to fulfill performance obligations
and are recoverable. Such costs generally represent
set-up costs, which include any direct cost incurred at
inception of a contract which enables the fulfillment
of the performance obligation and totaled $20 million
at Dec. 31, 2018. These capitalized costs are
amortized on a straight-line basis over the expected
contract period which generally range from seven to
nine years. The amortization is included in other
expense and totaled $5 million in 2018.
Notes to Consolidated Financial Statements (continued)
There were no impairments recorded on capitalized
contract costs in 2018.
Note 11–Income taxes
Unsatisfied performance obligations
We do not have any unsatisfied performance
obligations other than those that are subject to a
practical expedient election under ASC 606, Revenue
From Contracts With Customers. The practical
expedient election applies to (i) contracts with an
original expected length of one year or less, and (ii)
contracts for which we recognize revenue at the
amount to which we have the right to invoice for
services performed.
Note 10–Net interest revenue
The following table provides the components of net
interest revenue presented on the consolidated income
statement.
Net interest revenue
(in millions)
Interest revenue
Deposits with banks
Deposits with the Federal
Reserve and other central banks
Federal funds sold and securities
purchased under resale
agreements
Margin loans
Non-margin loans
Securities:
Taxable
Exempt from federal income
taxes
Total securities
Trading securities
Total interest revenue
Interest expense
Deposits in domestic offices
Deposits in foreign offices
Federal funds purchased and
securities sold under repurchase
agreements
Trading liabilities
Other borrowed funds
Commercial paper
Customer payables
Long-term debt
Total interest expense
Net interest revenue
Provision for credit losses
Net interest revenue after
provision for credit losses
Year ended Dec. 31,
2018
2017
2016
$
219 $
120 $
104
531
319
198
1,116
510
1,356
2,520
54
2,574
126
6,432
537
340
758
29
58
51
191
857
2,821
3,611
(11)
423
343
1,077
233
265
873
1,977
1,772
64
2,041
59
4,382
107
55
225
7
26
29
64
561
1,074
3,308
(24)
70
1,842
60
3,575
41
(25)
36
6
8
5
12
354
437
3,138
(11)
$ 3,622 $ 3,332 $ 3,149
The components of the income tax provision are as
follows:
Provision for income taxes
(in millions)
Current tax expense (benefit):
Federal
Foreign
State and local
Total current tax expense
Deferred tax (benefit) expense:
Federal
Foreign
State and local
Total deferred tax (benefit)
expense:
Provision for income taxes
$
Year ended Dec. 31,
2018
2017
2016
$
902 $
442
119
1,463
(99) $
388
74
363
823
327
153
1,303
(556)
9
22
36
14
83
(75)
(14)
(37)
(525)
938 $
133
(126)
496 $ 1,177
In December 2017, the Tax Cuts and Jobs Act of 2017
(“U.S. tax legislation”) was signed into law in the
United States. U.S. GAAP requires companies to
recognize the effect of tax law changes on deferred
tax assets and liabilities and other recognized assets
in the period of enactment. Also in December 2017,
the Securities and Exchange Commission staff issued
Staff Accounting Bulletin No.118 (“SAB 118”). SAB
118 allows the recording of a provisional estimate to
reflect the income tax impact of the U.S. tax
legislation and provides a measurement period up to
one year from the enactment date. Due to the timing
of the enactment and the complexity involved in
applying the provisions of the U.S. tax legislation, we
recorded a provisional tax benefit of $710 million in
the fourth quarter of 2017.
In 2018, we completed our analysis of the U.S. tax
legislation and filed our 2017 income tax returns,
taking into account new Internal Revenue Service
(“IRS”) guidance. Accordingly we recorded an
additional $70 million tax benefit for remeasurement
of our net deferred tax liability.
The U.S. tax legislation provided a one-time deemed
repatriation tax on undistributed foreign earnings and
profits (“repatriation tax”). In 2017, we recorded
$723 million provisional repatriation tax. In 2018,
we completed our analysis of foreign earnings taking
into account new IRS guidance and reduced the
repatriation tax by $36 million.
BNY Mellon 155
Notes to Consolidated Financial Statements (continued)
The components of U.S. tax legislation are as
follows:
The statutory federal income tax rate is reconciled to
our effective income tax rate below:
Income tax (benefit) expense
(estimated in millions)
Remeasurement of net deferred tax
liabilities
Repatriation tax
Other items
Net income tax (benefit)
2018
2017
$
$
(70) $ (1,472)
(36)
723
—
39
(106) $
(710)
The components of income before taxes are as
follows:
Income before taxes
(in millions)
Domestic
Foreign
Income before taxes
2017
Year ended Dec. 31,
2018
2016
$ 3,008 $ 2,699 $ 3,147
1,578
$ 5,192 $ 4,610 $ 4,725
1,911
2,184
The components of our net deferred tax liability are
as follows:
Net deferred tax liability
(in millions)
Depreciation and amortization
Pension obligation
Renewable energy investment
Lease financings
Equity investments
Repatriation
Securities valuation
Credit losses on loans
Reserves not deducted for tax
Employee benefits
Other assets
Other liabilities
Net deferred tax liability
Dec. 31,
2018
2017
$ 2,060 $ 1,960
283
278
151
65
617
11
(55)
(103)
(287)
(85)
186
$ 2,496 $ 3,021
300
295
130
65
—
(15)
(54)
(143)
(266)
(65)
189
We believe it is more likely than not that we will fully
realize our deferred tax assets. This conclusion is
based on financial results and profit forecasts.
We have completed our analysis of the U.S. tax
legislation’s impact to foreign earnings and the
amount of foreign earnings considered permanently
reinvested abroad. As of Dec. 31, 2018, we had
approximately $250 million of earnings attributable
to foreign subsidiaries that have been permanently
reinvested abroad and for which no local distribution
tax provision has been recorded. If these earnings
were to be repatriated, the estimated tax liability as of
Dec. 31, 2018 would be up to $50 million.
156 BNY Mellon
Effective tax rate
Federal rate
State and local income taxes, net of
federal income tax benefit
Foreign operations
Tax credits
Tax-exempt income
Leverage lease adjustment
FDIC Assessment
Stock compensation
U.S. tax legislation
Other – net
Effective tax rate
Year ended Dec. 31,
2018
2016
2017
21.0% 35.0% 35.0%
1.6
1.8
2.1
0.5
(5.6)
(4.2)
(3.3)
(2.2)
(3.7)
(0.8)
(1.8)
(1.9)
—
(0.9)
(1.4)
0.5
—
—
(0.6)
—
(1.1)
(1.7)
—
(13.3)
0.4
(1.2)
(0.4)
18.1% 10.8% 24.9%
Unrecognized tax positions
(in millions)
Beginning balance at Jan. 1, – gross $
Prior period tax positions:
Increases
Decreases
Current period tax positions
Settlements
Statute expiration
Ending balance at Dec. 31, – gross $
2018
128 $
2017
146 $
2016
649
6
(8)
9
(32)
—
103 $
20
(4)
10
(44)
—
128 $
8
(40)
16
(477)
(10)
146
Our total tax reserves as of Dec. 31, 2018 were $103
million compared with $128 million at Dec. 31, 2017.
If these tax reserves were unnecessary, $103 million
would affect the effective tax rate in future periods.
We recognize accrued interest and penalties, if
applicable, related to income taxes in income tax
expense. Included in the balance sheet at Dec. 31,
2018 is accrued interest, where applicable, of $22
million. The additional tax expense related to interest
for the year ended Dec. 31, 2018 was $8 million,
compared with $12 million for the year ended Dec.
31, 2017.
It is reasonably possible the total reserve for uncertain
tax positions could decrease within the next 12
months by approximately $20 million as a result of
adjustments related to tax years that are still subject
to examination.
Our federal income tax returns are closed to
examination through 2013. Our New York State,
New York City and UK income tax returns are closed
to examination through 2012.
Notes to Consolidated Financial Statements (continued)
Note 12–Long-term debt
Long-term debt
(in millions)
Senior debt:
Fixed rate
Floating rate
Subordinated debt (a)
Total
(a) Fixed rate.
Dec. 31, 2018
Rate
Maturity
Amount
Dec. 31, 2017
Rate
Amount
2.05 - 5.45%
2.61 - 3.86%
3.00 - 7.50%
2019 - 2028 $
2019 - 2038
2021 - 2029
$
24,995
2,628
1,540
29,163
1.30 - 5.45% $
1.49 - 2.74%
3.00 - 7.50%
$
23,329
2,829
1,821
27,979
Total long-term debt maturing during the next five
years for BNY Mellon is as follows: 2019 – $4.3
billion, 2020 – $5.0 billion, 2021 – $4.6 billion, 2022
– $1.3 billion and 2023 – $5.5 billion.
Note 13–Variable interest entities and
securitization
BNY Mellon has variable interests in VIEs, which
include investments in retail, institutional and
alternative investment funds, including CLO
structures in which we provide asset management
services, some of which are consolidated. The
investment funds are offered to our retail and
institutional clients to provide them with access to
investment vehicles with specific investment
objectives and strategies that address the client’s
investment needs.
BNY Mellon earns management fees from these
funds as well as performance fees in certain funds
and may also provide start-up capital for its new
funds. The funds are primarily financed by our
customers’ investments in the funds’ equity or debt.
Additionally, BNY Mellon invests in qualified
affordable housing and renewable energy projects,
which are designed to generate a return primarily
through the realization of tax credits by the Company.
The projects, which are structured as limited
partnerships and LLCs, are also VIEs, but are not
consolidated.
The following table presents the incremental assets
and liabilities included in BNY Mellon’s consolidated
financial statements as of Dec. 31, 2018 and Dec. 31,
2017. The net assets of any consolidated VIE are
solely available to settle the liabilities of the VIE and
to settle any investors’ ownership liquidation
requests, including any seed capital invested in the
VIE by BNY Mellon.
Consolidated investments
(in millions)
Securities - Available-for-sale
Trading assets
Other assets
Total assets
Other liabilities
Total liabilities
Investment
Management
funds
—
243
220
463 (a) $
2
$
2 (a) $
101 (a) $
$
$
$
$
$
Dec. 31, 2018
Dec. 31, 2017
Total
consolidated
investments
Investment
Management
funds
Securitization
Securitization
$
— $
400
—
400 $
371 $
371 $
— $
— $
643
220
863
373
373
101
$
$
$
$
$
—
516
215
731 (b) $
2
$
2 (b) $
316 (b) $
Total
consolidated
investments
400
516
215
1,131
369
369
316
400 $
—
—
400 $
367 $
367 $
— $
Nonredeemable noncontrolling interests
(a)
(b)
Includes VMEs with assets of $253 million, liabilities of $2 million and nonredeemable noncontrolling interests of less than $1 million.
Includes VMEs with assets of $84 million, liabilities of $1 million and nonredeemable noncontrolling interests of $1 million.
BNY Mellon has not provided financial or other
support that was not otherwise contractually required
to be provided to our VIEs. Additionally, creditors of
any consolidated VIEs do not have any recourse to
the general credit of BNY Mellon.
BNY Mellon 157
Notes to Consolidated Financial Statements (continued)
Non-consolidated VIEs
As of Dec. 31, 2018 and Dec. 31, 2017, the following
assets and liabilities related to the VIEs where BNY
Mellon is not the primary beneficiary are included in
our consolidated financial statements and primarily
relate to accounting for our investments in qualified
affordable housing and renewable energy projects.
The maximum loss exposure indicated in the table
below relates solely to BNY Mellon’s investments in,
and unfunded commitments to, the VIEs.
Non-consolidated VIEs
(in millions)
Securities - Available-for-sale (a)
2,450
Other
(a) Includes investments in the Company’s sponsored CLOs.
Assets
$
214 $
Dec. 31, 2018
Liabilities
Maximum
loss exposure
214
2,929
— $
479
Dec. 31, 2017
Assets
Liabilities
Maximum
loss exposure
$
203 $
2,592
— $
486
203
3,078
Note 14–Shareholders’ equity
Common stock
BNY Mellon has 3.5 billion authorized shares of
common stock with a par value of $0.01 per share.
At Dec. 31, 2018, 960,425,669 shares of common
stock were outstanding.
Common stock repurchase program
In June 2017, in connection with the Federal
Reserve’s non-objection to our 2017 capital plan,
BNY Mellon announced a share repurchase plan
providing for the repurchase of up to $2.6 billion of
common stock. The 2017 capital plan began in the
third quarter of 2017 and continued through the
second quarter of 2018. In June 2018, in connection
with the Federal Reserve’s non-objection to our 2018
capital plan, BNY Mellon announced a share
repurchase plan providing for the repurchase of up to
$2.4 billion of common stock starting in the third
quarter of 2018 and continuing through the second
quarter of 2019. This new share repurchase plan
replaces all previously authorized share repurchase
plans.
In December 2018, BNY Mellon announced that the
Federal Reserve approved the repurchase of $830
million of additional common stock. Our Board of
Directors approved the additional share repurchases,
which were completed in the fourth quarter of 2018.
These repurchases were in addition to the Company’s
repurchase of $2.4 billion of common stock
previously approved by the Board and announced in
June 2018.
Share repurchases may be executed through open
market repurchases, in privately negotiated
transactions or by other means, including through
repurchase plans designed to comply with Rule
10b5-1 and other derivative, accelerated share
repurchase and other structured transactions. In
2018, we repurchased 63.7 million common shares at
an average price of $51.29 per common share for a
total of $3.3 billion. At Dec. 31, 2018, the maximum
dollar value of shares that may yet be purchased
under the June 2018 program, including employee
benefit plan repurchases, totaled $1.3 billion.
Preferred stock
BNY Mellon has 100 million authorized shares of
preferred stock with a par value of $0.01 per share.
The following table summarizes BNY Mellon’s
preferred stock issued and outstanding at Dec. 31,
2018 and Dec. 31, 2017.
158 BNY Mellon
Notes to Consolidated Financial Statements (continued)
Preferred stock summary (a)
Per annum dividend rate
Greater of (i) three-month LIBOR plus 0.565% for the related
distribution period; or (ii) 4.000%
5.2%
4.50% to but excluding June 20, 2023, then a floating rate equal to the
three-month LIBOR plus 2.46%
4.95% to and including June 20, 2020, then a floating rate equal to the
three-month LIBOR plus 3.42%
4.625% to and including Sept. 20, 2026, then a floating rate equal to
the three-month LIBOR plus 3.131%
Series A
Series C
Series D
Series E
Series F
Total
Total shares issued and
outstanding
Dec. 31,
2018
5,001
5,825
5,000
$
2017
5,001
5,825
5,000
10,000
10,000
Carrying value (b)
(in millions)
Dec. 31,
2018
2017
500 $
568
494
990
500
568
494
990
10,000
35,826
10,000
35,826
$
990
3,542 $
990
3,542
(a) All outstanding preferred stock is noncumulative perpetual preferred stock with a liquidation preference of $100,000 per share.
(b) The carrying value of the Series C, Series D, Series E and Series F preferred stock is recorded net of issuance costs.
Holders of both the Series A and Series C preferred
stock are entitled to receive dividends on each
dividend payment date (March 20, June 20,
September 20 and December 20 of each year), if
declared by BNY Mellon’s Board of Directors.
Holders of the Series D preferred stock are entitled to
receive dividends, if declared by BNY Mellon’s
Board of Directors, on each June 20 and December
20, to but excluding June 20, 2023; and on each
March 20, June 20, September 20 and December 20,
from and including June 20, 2023. Holders of the
Series E preferred stock are entitled to receive
dividends, if declared by BNY Mellon’s Board of
Directors, on each June 20 and December 20, to and
including June 20, 2020; and on each March 20, June
20, September 20 and December 20, from and
including Sept. 20, 2020. Holders of the Series F
preferred stock are entitled to receive dividends, if
declared by BNY Mellon’s Board of Directors, on
each March 20 and September 20, commencing
March 20, 2017, to and including Sept. 20, 2026; and
on each March 20, June 20, September 20 and
December 20, commencing Dec. 20, 2026. BNY
Mellon’s ability to declare or pay dividends on, or
purchase, redeem or otherwise acquire, shares of our
common stock or any of our shares that rank junior to
the preferred stock as to the payment of dividends
and/or the distribution of any assets on any
liquidation, dissolution or winding-up of BNY
Mellon will be prohibited, subject to certain
restrictions, in the event that we do not declare and
pay in full preferred dividends for the then current
dividend period of the Series A preferred stock or the
last preceding dividend period of the Series C, Series
D, Series E and Series F preferred stock.
All of the outstanding shares of the Series A preferred
stock are owned by Mellon Capital IV, which will
pass through any dividend on the Series A preferred
stock to the holders of its Normal Preferred Capital
Securities. All of the outstanding shares of the Series
C, Series D, Series E and Series F preferred stock are
held by the depositary of the depositary shares, which
will pass through the applicable portion of any
dividend on the Series C, Series D, Series E and
Series F preferred stock to the holders of record of
their respective depositary shares.
The table below presents the dividends paid on our preferred stock.
Dividend paid per preferred share
Series A
Series C
Series D
Series E
Series F
Depositary
shares
per share
100 (a)
$
4,000
100
100
100
(a) Represents Normal Preferred Capital Securities.
Total
2018
2017
2016
$
per share
4,055.55 $
5,200.00
4,500.00
4,950.00
4,625.00
in millions
20
31
22
50
46
169
$
per share
4,055.55 $
5,200.00
4,500.00
4,950.00
5,254.51
in millions
20
31
22
50
52
175
$
$
per share
4,055.55 $
5,200.00
4,500.00
4,950.00
N/A
in millions
20
30
22
50
—
122
$
BNY Mellon 159
Notes to Consolidated Financial Statements (continued)
The preferred stock is not subject to the operation of a
sinking fund and is not convertible into, or
exchangeable for, shares of our common stock or any
other class or series of our other securities. We may
redeem the Series A or Series C preferred stock, in
whole or in part, at our option. We may also, at our
option, redeem the shares of the Series D preferred
stock, in whole or in part, on or after the dividend
payment date in June 2023, the Series E preferred
stock, in whole or in part, on or after the dividend
payment date in June 2020, and the Series F preferred
stock, in whole or in part, on or after the dividend
payment date in September 2026. The Series C,
Series D, Series E or Series F preferred stock can be
redeemed, in whole but not in part, at any time within
90 days following a regulatory capital treatment event
(as defined in each of the Series C, Series D, Series E
and Series F’s Certificates of Designation).
Redemption of the preferred stock is subject to the
prior approval of the Federal Reserve.
Terms of the Series A, Series C, Series D, Series E
and Series F preferred stock are more fully described
in each of their Certificates of Designations, each of
which is filed as an Exhibit to BNY Mellon’s Annual
Report on Form 10-K for the year ended Dec. 31,
2018.
Temporary equity
Temporary equity was $129 million at Dec. 31, 2018
and $179 million at Dec. 31, 2017. Temporary equity
represents the redemption value recorded for
redeemable noncontrolling interests resulting from
equity-classified share-based payment arrangements
that are currently redeemable or are expected to
become redeemable.
Capital adequacy
Regulators establish certain levels of capital for
BHCs and banks, including BNY Mellon and our
bank subsidiaries, in accordance with established
quantitative measurements. For the Parent to
maintain its status as a FHC, our bank subsidiaries
and BNY Mellon must, among other things, qualify
as “well capitalized.”
160 BNY Mellon
As of Dec. 31, 2018 and Dec. 31, 2017, BNY Mellon
and our U.S. bank subsidiaries were “well
capitalized.”
Our consolidated and largest bank subsidiary, The
Bank of New York Mellon, regulatory capital ratios
are shown below.
Consolidated and largest bank
subsidiary regulatory capital
ratios (a)
Consolidated regulatory capital
ratios:
CET1 ratio
Tier 1 capital ratio
Total capital ratio
Tier 1 leverage ratio
SLR (c)
The Bank of New York Mellon
regulatory capital ratios:
CET1 ratio
Tier 1 capital ratio
Total capital ratio
Tier 1 leverage ratio
SLR (c)
Dec. 31,
2018
2017 (b)
10.7% 10.7%
12.8
13.6
6.6
6.0
12.7
13.4
6.6
N/A
14.0% 14.1%
14.3
14.7
7.6
6.8
14.4
14.7
7.6
N/A
(a) For our CET1, Tier 1 capital and Total capital ratios, our
effective capital ratios under U.S. capital rules are the lower
of the ratios as calculated under the Standardized and
Advanced Approaches, which for the periods noted above
was the Advanced Approaches. The Tier 1 leverage ratio is
based on Tier 1 capital and quarterly average total assets.
For BNY Mellon to qualify as “well capitalized,” its Tier 1
capital and Total capital ratios must be at least 6% and
10%, respectively. For The Bank of New York Mellon, our
largest bank subsidiary, to qualify as “well capitalized,” its
CET1, Tier 1 capital, Total capital and Tier 1 leverage ratios
must be at least 6.5%, 8%, 10% and 5%, respectively.
(b) Reflects transitional adjustments required in 2017 under the
U.S. capital rules.
(c) The SLR is based on Tier 1 capital and total leverage
exposure, which includes certain off-balance sheet exposures
and became a binding measure on Jan. 1, 2018. For The
Bank of New York Mellon to qualify as “well capitalized,”
its SLR must be at least 6%.
Failure to satisfy regulatory standards, including
“well capitalized” status or capital adequacy rules
more generally, could result in limitations on our
activities and adversely affect our financial condition.
If a BHC such as BNY Mellon or bank such as The
Bank of New York Mellon or BNY Mellon, N.A. fails
to qualify as “adequately capitalized,” regulatory
sanctions and limitations are imposed.
Notes to Consolidated Financial Statements (continued)
The following table presents our capital components
and RWAs determined under the Standardized and
Advanced Approaches and the average assets used for
leverage capital purposes.
The following table presents the amount of capital by
which BNY Mellon and our largest bank subsidiary,
The Bank of New York Mellon, exceeded the capital
thresholds determined under U.S. capital rules.
Capital components and risk-
weighted assets
(in millions)
CET1:
Common shareholders’ equity
Adjustments for:
Goodwill and intangible assets (b)
Net pension fund assets
Equity method investments
Deferred tax assets
Other
Total CET1
Other Tier 1 capital:
Preferred stock
Deferred tax assets
Net pension fund assets
Other
Total Tier 1 capital
Tier 2 capital:
Subordinated debt
Allowance for credit losses
Other
Total Tier 2 capital –
Standardized Approach
Excess of expected credit losses
Less: Allowance for credit losses
Dec. 31,
2018
2017 (a)
$ 37,096 $ 37,859
(18,806)
(320)
(361)
(42)
—
17,567
(18,684)
(169)
(372)
(33)
(8)
18,593
3,542
—
—
(65)
3,542
(8)
(42)
(41)
$ 21,044 $ 22,044
$
1,250 $
252
(10)
1,492
65
252
1,250
261
(12)
1,499
31
261
Total Tier 2 capital – Advanced
Approach
$
1,305 $
1,269
Total capital:
Standardized Approach
Advanced Approach
Risk-weighted assets:
Standardized Approach
Advanced Approach:
Credit Risk
Market Risk
Operational Risk
Total Advanced Approach
Average assets for Tier 1 leverage
ratio
Total leverage exposure for SLR
purposes (c)
$ 22,536 $ 23,543
$ 22,349 $ 23,313
$ 149,618 $ 155,621
$ 92,917 $ 101,681
3,657
68,688
$ 164,671 $ 174,026
3,454
68,300
$ 319,007 $ 331,600
$ 347,943
N/A
(a) Reflects transitional adjustments to CET1, Tier 1 capital and
Tier 2 capital required in 2017 under the U.S. capital rules.
(b) Reduced by deferred tax liabilities associated with intangible
assets and tax deductible goodwill.
(c) SLR became a binding measure on Jan. 1, 2018.
Capital above thresholds at Dec. 31, 2018
Consolidated (a)
(in millions)
CET1
Tier 1 capital
Total capital
Tier 1 leverage ratio
SLR (c)
(a) Based on minimum required standards, with applicable
5,217 $
6,224
4,235
8,284
3,647
$
The Bank of
New York
Mellon (b)
10,036
8,372
6,273
6,441
2,336
buffers.
(b) Based on well capitalized standards.
(c) SLR became a binding measure on Jan. 1, 2018.
BNY Mellon 161
Notes to Consolidated Financial Statements (continued)
Note 15–Other comprehensive income (loss)
Components of other comprehensive
income (loss)
Year ended Dec. 31,
(in millions)
Foreign currency translation:
Foreign currency translation adjustments arising
during the period (a)
Total foreign currency translation
Unrealized (loss) gain on assets available-for-sale:
Unrealized (loss) gain arising during period
Reclassification adjustment (b)
Net unrealized (loss) gain on assets available-
for-sale
Defined benefit plans:
Net (loss) gain arising during the period
Foreign exchange adjustment
Amortization of prior service credit, net loss and
initial obligation included in net periodic
benefit cost (b)
Total defined benefit plans
Unrealized (loss) gain on cash flow hedges:
Unrealized hedge (loss) gain arising during
period
Reclassification of net (gain) loss to net income:
FX contracts - trading revenue
FX contracts - other revenue
FX contracts - net interest revenue
FX contracts - staff expense
Total reclassifications to net income (b)
Net unrealized (loss) gain on cash flow
hedges
2018
Tax
(expense)
benefit
Pre-tax
amount
After-tax
amount
Pre-tax
amount
2017
Tax
benefit
(expense)
After-tax
amount
Pre-tax
amount
2016
Tax
(expense)
benefit
After-tax
amount
$
(157) $
(156) $
(313) $
659 $
194 $
(157)
(156)
(313)
659
194
(542)
48
(494)
(244)
—
93
(151)
126
(12)
114
55
—
(24)
31
(416)
36
(380)
(189)
—
69
(120)
237
(3)
234
454
1
100
555
(84)
—
(84)
(112)
—
(32)
(144)
853
853
153
(3)
150
342
1
68
411
$
(518) $
(332) $
(518)
(332)
(388)
(75)
(463)
(151)
(1)
88
(64)
146
26
172
43
1
(31)
13
(850)
(850)
(242)
(49)
(291)
(108)
—
57
(51)
(15)
4
(11)
33
(9)
24
(52)
18
(34)
—
(2)
—
4
2
(13)
—
—
—
(1)
(1)
3
—
(2)
—
3
1
(10)
(2)
(8)
—
(10)
(20)
13
1
2
—
2
5
(4)
(1)
(6)
—
(8)
(15)
9
16
—
18
11
45
(7)
(6)
—
(6)
(3)
(15)
3
10
—
12
8
30
(4)
Total other comprehensive (loss) income
$
(815) $
(8) $
(823) $
1,461 $
(38) $
1,423
$ (1,052) $
(144) $ (1,196)
Includes the impact of hedges of net investments in foreign subsidiaries. See Note 22 for additional information.
(a)
(b) The reclassification adjustment related to the unrealized gain (loss) on assets available-for-sale is recorded as net securities gains on the consolidated
income statement. The amortization of prior service credit, net loss and initial obligation included in net periodic benefit cost is recorded as staff expense
on the consolidated income statement. See Note 22 for the location of the reclassification adjustment related to cash flow hedges on the consolidated
income statement.
Changes in accumulated other comprehensive income (loss) attributable to The Bank of New York Mellon Corporation shareholders
(in millions)
2015 ending balance
Change in 2016
2016 ending balance
Change in 2017
2017 ending balance
Adjustment for the cumulative effect of applying
ASU 2017-12 for derivatives and hedging
Adjusted balance at Jan. 1, 2018
Change in 2018
2018 ending balance
Foreign
currency
translation
ASC 820 Adjustments
Other post-
retirement
benefits
Pensions
Unrealized gain
(loss) on assets
available-for-
sale
Unrealized
gain (loss) on
cash flow
hedges
Total accumulated
other comprehensive
income (loss),
net of tax
$
$
$
$
(1,632)
(819)
(2,451)
838
(1,613)
—
(1,613)
(302)
(1,915)
$
$
$
$
(1,250)
(56)
(1,306)
419
(887)
—
(887)
(118)
(1,005)
$
$
$
$
(47)
5
(42)
(8)
(50)
—
(50)
(2)
(52)
$
$
$
$
327
(291)
36
150
186
(2)
184
(380)
(196)
$
$
$
$
2
(4)
(2)
9
7
—
7
(10)
(3)
$
$
$
$
(2,600)
(1,165)
(3,765)
1,408
(2,357)
(2)
(2,359)
(812)
(3,171)
162 BNY Mellon
Notes to Consolidated Financial Statements (continued)
Note 16–Stock-based compensation
Stock options
Our Long-Term Incentive Plans provide for the
issuance of stock options, restricted stock, restricted
stock units (“RSUs”) and other stock-based awards to
employees and directors of BNY Mellon. At Dec. 31,
2018, under the Long-Term Incentive Plan approved
in April 2014, we may issue 23,524,349 new stock-
based awards. Of this amount, 8,761,715 shares
(subject to potential increase as provided in the Long-
Term Incentive Plan) may be issued as restricted
stock or RSUs. Stock-based compensation expense
related to retirement eligibility vesting totaled $93
million in 2018, $109 million in 2017 and $106
million in 2016.
Our Long-Term Incentive Plans provide for the
issuance of stock options at fair market value at the
date of grant to officers and employees of BNY
Mellon. Generally, each option granted is exercisable
between one and 10 years from the date of grant. No
stock options were granted in 2018, 2017 and 2016.
Compensation costs that were charged against income
were less than $1 million in both 2018 and 2017 and
$2 million in 2016. The income tax benefit
recognized in the consolidated income statement
related to compensation costs was less than $1
million in 2018 and 2017 and $1 million in 2016.
A summary of the status of our options as of Dec. 31, 2018, and changes during the year, is presented below:
Stock option activity
Balance at Dec. 31, 2017
Granted
Exercised
Canceled/Expired
Balance at Dec. 31, 2018
Vested and expected to vest at Dec. 31, 2018
Exercisable at Dec. 31, 2018
Stock options outstanding at Dec. 31, 2018
Shares subject
to option
9,302,140 $
—
(2,539,135)
(48,722)
6,714,283 $
6,714,283
6,714,283
Weighted-average
exercise price
27.27
—
31.29
37.56
25.67
25.67
25.67
Weighted-average
remaining contractual
term (in years)
2.7
2.0
2.0
2.0
Options outstanding
Weighted-average
Weighted-average
remaining contractual
exercise price
life (in years)
25.67
2.0
(a) At Dec. 31, 2017 and Dec. 31, 2016, 9,302,140 and 21,241,568 options were exercisable at a weighted-average price per common share
Weighted-average
exercise price
25.67
Range of exercise prices
$ 18 to 31
Outstanding
6,714,283
Exercisable
6,714,283
Options exercisable (a)
$
$
of $27.27 and $32.57, respectively.
Aggregate intrinsic value of options
(in millions)
Outstanding at Dec. 31,
Exercisable at Dec. 31,
$
$
2018
144 $
144 $
2017
247 $
247 $
2016
315
315
$3 million in 2016. Consistent with the adoption of
ASU 2016-09, the tax benefits in 2018 and 2017 were
recognized in the provision for income taxes and in
2016 were recorded to additional paid-in capital.
The total intrinsic value of options exercised was $61
million in 2018, $159 million in 2017 and $122
million in 2016.
Cash received from option exercises totaled $80
million in 2018, $431 million in 2017 and $438
million in 2016. The actual excess tax benefit
realized for the tax deductions from options exercised
totaled $10 million in 2018, $16 million in 2017 and
Restricted stock, RSUs and Performance share units
Restricted stock and RSUs are granted under our
long-term incentive plans at no cost to the recipient.
These awards are subject to forfeiture until certain
restrictions have lapsed, including continued
employment, for a specified period. The recipient of
a share of restricted stock is entitled to voting rights
and generally is entitled to dividends on the common
BNY Mellon 163
Notes to Consolidated Financial Statements (continued)
stock. An RSU entitles the recipient to receive a
share of common stock after the applicable
restrictions lapse. The recipient generally is entitled
to receive cash payments equivalent to any dividends
paid on the underlying common stock during the
period the RSU is outstanding but does not receive
voting rights.
The fair value of restricted stock and RSUs is equal to
the fair market value of our common stock on the
date of grant. The expense is recognized over the
vesting period, which is generally zero to four years.
The total compensation expense recognized for
restricted stock and RSUs was $270 million in 2018,
$273 million in 2017 and $256 million in 2016. The
total income tax benefit recognized in the
consolidated income statement related to
compensation costs was $65 million in 2018, $66
million in 2017 and $91 million in 2016.
BNY Mellon’s Executive Committee members were
granted a target award of 362,798 performance share
units (“PSUs”) in 2018, 793,847 in 2017 and 548,391
in 2016. The 2018 awards cliff vest in 3 years based
on average revenue growth and average operating
margin, both as adjusted. These awards are classified
as equity and marked-to-market to earnings as the
earnout percentages are determined at the discretion
of the Human Resources Compensation Committee
based on a payout table. The 2017 and 2016 awards
cliff vest in 3 years based on operating earnings per
share with the potential of a risk modifier based on
appropriate growth in RWAs. These awards are
liability classified as they contain an interest rate
condition that is not linked to performance or market
and marked-to-market to earnings as the earnout
percentages are determined at the discretion of the
Human Resources Compensation Committee based
on a payout table.
The following table summarizes our non-vested PSU,
restricted stock and RSU activity for 2018.
Non-vested PSU, restricted stock
and RSU activity
Weighted-
average fair
value at grant
date
Number of
shares
Non-vested PSUs, restricted stock
and RSUs at Dec. 31, 2017
Granted
Vested
Forfeited
Non-vested PSUs, restricted
stock and RSUs at Dec. 31, 2018
16,731,332 $
5,125,001
(7,005,313)
(639,308)
14,211,712 $
42.42
57.67
39.06
45.90
49.43
164 BNY Mellon
As of Dec. 31, 2018, $207 million of total
unrecognized compensation costs related to non-
vested PSUs, restricted stock and RSUs is expected to
be recognized over a weighted-average period of 2.1
years.
The total fair value of restricted stock, RSUs and
PSUs that vested was $289 million in 2018, $260
million in 2017 and $236 million in 2016. The actual
excess tax benefit realized for the tax deductions from
shares vested totaled $26 million in 2018, $34 million
in 2017 and $8 million in 2016. Consistent with the
adoption of ASU 2016-09, the tax benefits in 2018
and 2017 were recognized in the provision for income
taxes and in 2016 were recorded to additional paid-in
capital.
Subsidiary Long-Term Incentive Plans
BNY Mellon also has several subsidiary Long-Term
Incentive Plans which have issued restricted
subsidiary shares to certain employees. These share
awards are subject to forfeiture until certain
restrictions have lapsed, including continued
employment for a specified period of time. The
shares are non-voting and non-dividend paying.
Once the restrictions lapse, which generally occurs in
three to five years, the shares can only be sold, at the
option of the employee, to BNY Mellon at a price
based generally on the fair value of the subsidiary at
the time of repurchase. In certain instances BNY
Mellon has an election to call the shares.
Note 17–Employee benefit plans
BNY Mellon has defined benefit and/or defined
contribution retirement plans and other post-
retirement plans providing healthcare benefits.
The defined benefit pension plans cover
approximately 12,400 U.S. employees and
approximately 14,700 non-U.S. employees.
BNY Mellon has one qualified and several non-
qualified defined benefit pension plans in the U.S.
and several pension plans overseas.
Effective June 30, 2015, the benefit accruals under
the U.S. qualified and nonqualified defined benefit
plans were frozen. This change resulted in no
additional benefits being earned by participants in
those plans based on service or pay after June 30,
2015. These plans were previously closed to new
Notes to Consolidated Financial Statements (continued)
participants effective Dec. 31, 2010, at which time a
non-elective contribution was added to the
Company’s defined contribution plan for employees
not eligible to join the pension plan. Employees
previously participating in the pension plan received
this non-elective contribution starting July 1, 2015.
Effective Dec. 31, 2018, the benefit accruals were
frozen under our largest foreign plan, which covers
Pension and post-retirement healthcare plans
certain UK employees. This change results in no
additional benefits being earned by participants in
that plan based on service or pay after Dec. 31, 2018.
Most UK employees currently earn benefits only on a
defined contribution basis. UK employees impacted
by the pension plan freeze will begin earning benefits
on a defined contribution basis in 2019.
The following tables report the combined data for our domestic and foreign defined benefit pension and post-
retirement healthcare plans.
(dollar amounts in millions)
Weighted-average assumptions used to determine benefit
obligations
Discount rate
Rate of compensation increase
Cash balance interest crediting rate
Change in benefit obligation (a)
Benefit obligation at beginning of period
Service cost
Interest cost
Employee contributions
Actuarial gain (loss)
Curtailments
Benefits paid
Foreign exchange adjustment
Benefit obligation at end of period
Change in fair value of plan assets
Fair value at beginning of period
Actual return on plan assets
Employer contributions
Employee contributions
Benefit payments
Foreign exchange adjustment
Fair value at end of period
Funded status at end of period
Amounts recognized in accumulated other comprehensive
loss (income) consist of:
Pension Benefits
Healthcare Benefits
Domestic
2018
Foreign
2017
2018
2017
Domestic
2018
Foreign
2017
2018
2017
4.45%
N/A
4.00
3.97%
N/A
4.00
2.95%
2.98
N/A
2.45%
3.02
N/A
4.45%
3.00
N/A
3.97%
3.00
N/A
3.10%
N/A
N/A
2.50%
N/A
N/A
$ (4,405)
—
(169)
—
219
—
232
N/A
(4,123)
$ (4,274)
—
(180)
—
(165)
—
214
N/A
(4,405)
$ (1,322)
(28)
(32)
—
173
11
25
69
(1,104)
5,496
(257)
33
—
(232)
N/A
4,906
783
21
—
(214)
N/A
5,040
917
$
5,496
$ 1,091
$
1,393
1
22
—
(25)
(75)
1,316
212
$ (1,248)
(31)
(33)
(1)
88
—
31
(128)
(1,322)
1,090
128
93
1
(31)
112
1,393
71
$
$ (175)
(1)
(7)
—
22
—
12
N/A
(149)
107
(8)
12
—
(12)
N/A
99
(50)
$
$
$
(169)
(1)
(7)
—
(10)
—
12
N/A
(175)
97
10
12
—
(12)
N/A
107
(68)
$
$
(4)
—
—
—
(1)
—
—
—
(5)
—
—
—
—
—
—
—
(5)
$
$
Net loss (gain)
Prior service cost (credit)
Total (before tax effects)
$ — $
—
$ — $
(a) The benefit obligation for pension benefits is the projected benefit obligation, and for healthcare benefits, it is the accumulated benefit obligation.
$ 1,294
—
$ 1,294
$ 1,598
—
$ 1,598
84
(40)
44
97
(49)
48
255
1
256
105
1
106
$
$
$
$
$
$
$
$
(2)
—
—
—
(1)
—
—
(1)
(4)
—
—
—
—
—
—
—
(4)
(1)
—
(1)
A number of key assumptions and measurement date
values determine pension expense. The key elements
include the long-term rate of return on plan assets, the
discount rate, the market-related value of plan assets
and the price used to value stock in the Employee
Stock Ownership Plan (“ESOP”).
The discount rate for U.S. pension plans was
determined after reviewing equivalent rates obtained
by discounting the pension plans’ expected cash flows
using various high-quality, long-term corporate bond
yield curves. We also reviewed the results of several
models that matched bonds to our pension cash flows.
After reviewing the various indices and models, we
selected a discount rate of 4.45% as of Dec. 31, 2018.
BNY Mellon 165
Notes to Consolidated Financial Statements (continued)
The discount rates for foreign pension plans are based
on high-quality corporate bond rates in countries that
have an active corporate bond market. In those
countries with no active corporate bond market,
discount rates are based on local government bond
rates plus a credit spread.
Actuarial gains (loss) on the benefit obligation for
both the domestic and foreign pension plans in 2018,
as well as the domestic pension plans in 2017, were
primarily attributable to changes in discount rates.
The actuarial gain on the benefit obligation for
foreign pension plans in 2017 was primarily
attributable to a decrease in assumed inflation rates
for pension plans in the UK.
Net periodic benefit (credit) cost
Pension Benefits
Healthcare Benefits
Domestic
2017
2018
2016
2018
Foreign
2017
2016
2018
Domestic
2017
2016
2018
Foreign
2017
2016
$ 108
$
97
N/A
$ 102
N/A
3.97% 4.35% 4.48% 2.50% 2.60% 3.60%
6.625
N/A
3.00
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
6.625
3.00
7.00
3.00
N/A
N/A
N/A
N/A
$
$
1
7
(8)
(9)
7
—
(2)
$
$
$
1
7
(7)
1
8
(7)
$ — $ — $ —
—
—
—
—
—
—
(10)
8
—
—
(10)
—
—
6
—
—
—
—
(3) $ — $ — $ — $ —
—
—
—
Pension Benefits
Domestic
Foreign
Healthcare Benefits
Domestic
377 $
(73)
—
304 $
(128) $
(22)
—
(150) $
(6) $
(7)
9
(4) $
Foreign
1
—
—
1
Domestic
2018
Foreign
2017
2018
2017
1,077 $
(160)
917 $
1,282
(191)
1,091
$
$
(50) $
(50) $
(68) $
(68) $
280 $
(68)
212 $
(5) $
(5) $
134
(63)
71
(4)
(4)
(dollar amounts in millions)
Weighted-average assumptions as
of Jan. 1:
Market-related value of plan assets
Discount rate
Expected rate of return on plan assets
Rate of compensation increase
Cash balance interest crediting rate
Components of net periodic benefit
(credit) cost :
Service cost
Interest cost
Expected return on assets
Amortization of:
Prior service cost (credit)
Net actuarial loss
Settlement loss
Net periodic benefit (credit) cost
$
$ 5,238
$ 5,026
$ 4,830
$ 1,266
$ 994
$ 994
3.97% 4.35% 4.48%
6.625
6.625
7.00
N/A
4.00
N/A
4.00
N/A
4.00
$ — $ — $ — $
180
(325)
182
(330)
169
(339)
2.45% 2.53% 3.45%
4.56
4.61
3.02
3.60
5.35
3.51
N/A
N/A
N/A
28
32
(57)
$ 31
33
(50)
$ 29
36
(51)
—
68
5
(97)
$
—
67
2
(76) $
—
69
2
(77)
—
22
—
25
—
35
—
$ 49
1
17
1
$ 33
$
$
$
$
$
$
$
Changes in other comprehensive loss (income) in 2018
(in millions)
Net loss (gain) arising during period
Recognition of prior years’ net (loss)
Recognition of prior years’ service credit
Total recognized in other comprehensive (income) loss (before tax effects)
(in millions)
Pension benefits:
Prepaid benefit cost
Accrued benefit cost
Total pension benefits
Healthcare benefits:
Accrued benefit cost
Total healthcare benefits
166 BNY Mellon
Notes to Consolidated Financial Statements (continued)
The accumulated benefit obligation for all defined benefit plans was $5.2 billion at Dec. 31, 2018 and $5.7 billion at
Dec. 31, 2017.
Plans with obligations in excess of plan
Pension Benefits
assets
(in millions)
Projected benefit obligation
Fair value of plan assets
Accumulated benefit obligation
Fair value of plan assets
(a) Amounts reported in 2017 have been revised based on the clarification provided in ASU 2018-14.
Domestic
2018
160 $
—
160
—
2017
244 (a)
181 (a)
61
25
2018
245 $
177
67
27
2017
191
—
191
—
Foreign
$
$
Healthcare Benefits
Domestic
2018
N/A
N/A
80
—
2017
N/A
N/A
88
—
Foreign
2018
N/A
N/A
5
—
2017
N/A
N/A
4
—
Assumed healthcare cost trend
Plan contributions
The assumed healthcare cost trend rate used in
determining domestic benefit expense for 2019 is
6.00%, decreasing to 4.75% in 2024 for pre-Medicare
costs and 5.50% decreasing to 4.75% in 2022 for
Medicare costs. This projection is based on various
economic models that forecast a decreasing growth
rate of healthcare expenses over time. The
underlying assumption is that healthcare expense
growth cannot outpace gross national product growth
indefinitely, and over time a lower equilibrium
growth rate will be achieved. Further, the ultimate
growth rate of 4.75% bears a reasonable relationship
to the discount rate. In addition, 2020 costs are
assumed to increase beyond the assumed health care
cost trend rate for 2019 due to the assumed
reinstatement of the health insurer fee which was
waived.
The following benefit payments for BNY Mellon’s
pension and healthcare plans, which reflect expected
future service as appropriate, are expected to be paid
over the next 10 years:
Expected benefit payments
(in millions)
Pension benefits:
2019
Year
2020
2021
2022
2023
2024-2028
Total pension benefits
Healthcare benefits:
2019
Year
2020
2021
2022
2023
2024-2028
Total healthcare benefits
Domestic
Foreign
$
$
$
$
265
266
264
261
266
1,297
2,619
11
12
12
11
11
50
107
$
$
$
$
19
20
20
22
24
130
235
—
—
—
—
—
1
1
BNY Mellon expects to make cash contributions to
fund its defined benefit pension plans in 2019 of $14
million for the domestic plans and $19 million for the
foreign plans.
BNY Mellon expects to make cash contributions to
fund its post-retirement healthcare plans in 2019 of
$11 million for the domestic plans and less than $1
million for the foreign plans.
Investment strategy and asset allocation
BNY Mellon is responsible for the administration of
various employee pension and healthcare post-
retirement benefits plans, both domestically and
internationally. The domestic plans are administered
by BNY Mellon’s Benefits Administration
Committee, a named fiduciary. Subject to the
following, at all relevant times, BNY Mellon’s
Benefits Investment Committee, another named
fiduciary to the domestic plans, is responsible for the
investment of plan assets. The Benefits Investment
Committee’s responsibilities include the investment
of all domestic defined benefit plan assets, as well as
the determination of investment options offered to
participants in all domestic defined contribution
plans. The Benefits Investment Committee conducts
periodic reviews of investment performance, asset
allocation and investment manager suitability. In
addition, the Benefits Investment Committee has
oversight of the Regional Governance Committees
for the foreign defined benefit plans.
Our investment objective for U.S. and foreign plans is
to maximize total return while maintaining a broadly
diversified portfolio for the primary purpose of
satisfying obligations for future benefit payments.
BNY Mellon 167
Notes to Consolidated Financial Statements (continued)
Equities are the main holding of the plans.
Alternative investments (including private equities)
and fixed-income securities provide diversification
and, in certain cases, lower the volatility of returns.
In general, equity securities and alternative
investments within any domestic plan’s portfolio can
be maintained in the range of 30% to 70% of total
plan assets, fixed-income securities can range from
20% to 50% of plan assets and cash equivalents can
be held in amounts ranging from 0% to 5% of plan
assets. Actual asset allocation within the approved
ranges varies from time to time based on economic
conditions (both current and forecast) and the advice
of professional advisors.
Our pension assets were invested as follows at Dec.
31, 2018 and Dec. 31, 2017:
Asset allocations
Equities
Fixed income
Alternative investment
Private equities
Real estate
Cash
Total pension benefits
Domestic
2018
2017
52% 63%
45
2
1
—
—
100% 100%
33
2
1
—
1
Foreign
2018
2017
48% 51%
36
9
—
4
3
33
9
—
4
3
100% 100%
We held no The Bank of New York Mellon
Corporation stock in our pension plans at Dec. 31,
2018 and Dec. 31, 2017. Assets of the U.S. post-
retirement healthcare plan are invested in an
insurance contract.
Fair value measurement of plan assets
In accordance with ASC 715, Compensation -
Retirement Benefits, BNY Mellon has established a
three-level hierarchy for fair value measurements of
its pension plan assets based upon the transparency of
inputs to the valuation of an asset as of the
measurement date. The valuation hierarchy is
consistent with guidance in ASC 820, Fair Value
Measurement, which is detailed in Note 19.
The following is a description of the valuation
methodologies used for assets measured at fair value,
as well as the general classification of such assets
pursuant to the valuation hierarchy.
168 BNY Mellon
Cash and currency
This category consists primarily of foreign currency
balances and is included in Level 1 of the valuation
hierarchy. Foreign currency is translated monthly
based on current exchange rates.
Common and preferred stock and mutual funds
These investments include equities and mutual funds
and are valued at the closing price reported in the
active market in which the individual securities are
traded, if available. Where there are no readily
available market quotations, we determine fair value
primarily based on pricing sources with reasonable
levels of price transparency. Common and preferred
stock and mutual funds are included in Level 1 of the
valuation hierarchy.
Collective trust funds
Collective trust funds include commingled and U.S.
equity funds that have no readily available market
quotations. The fair value of the funds is based on
the securities in the portfolio, which typically are the
amount that the fund might reasonably expect to
receive for the securities upon a sale. These funds are
valued using observable inputs on either a daily or
monthly basis. Collective trust funds are included in
Level 2 of the valuation hierarchy.
Fixed-income investments
Fixed-income investments include U.S. Treasury
securities, U.S. government agencies, sovereign
government obligations, U.S. corporate bonds and
foreign corporate debt funds. U.S. Treasury securities
are valued at the closing price reported in the active
market in which the individual security is traded and
included as Level 1 of the valuation hierarchy. U.S.
government agencies, sovereign government
obligations, U.S. corporate bonds and foreign
corporate debt funds are valued based on quoted
prices for comparable securities with similar yields
and credit ratings. When quoted prices are not
available for identical or similar bonds, the bonds are
valued using discounted cash flows that maximize
observable inputs, such as current yields of similar
instruments, but includes adjustments for certain risks
that may not be observable, such as credit and
liquidity risks. U.S. government agencies, sovereign
government obligations, U.S. corporate bonds and
Notes to Consolidated Financial Statements (continued)
foreign corporate debt funds are primarily included in
Level 2 of the valuation hierarchy.
Other assets measured at NAV
Other assets measured at NAV include funds of funds
and venture capital and partnership interests, property
funds and other funds. There are no readily available
market quotations for these funds. The fair value of
the funds of funds is based on NAVs of the funds in
the portfolio, which reflects the value of the
underlying securities. The fair value of the
underlying securities is typically the amount that the
fund might reasonably expect to receive upon selling
those hard to value or illiquid securities within the
portfolios. These funds are either valued on a daily or
monthly basis. The fair value of the venture capital
and partnership interests is based on the pension
plan’s ownership percentage of the fair value of the
underlying funds as provided by the fund managers.
These funds are typically valued on a quarterly basis.
The pension plan’s venture capital and partnership
interests are valued at NAV as a practical expedient
for fair value.
The following tables present the fair value of each
major category of plan assets as of Dec. 31, 2018 and
Dec. 31, 2017, by captions and by ASC 820, Fair
Value Measurement, valuation hierarchy.
Plan assets measured at fair value on a recurring basis—
domestic plans at Dec. 31, 2018
(in millions)
Level 1 Level 2 Level 3
Common and preferred stock:
Total fair
value
U.S. equity
Non-U.S. equity
Collective trust funds:
Commingled
U.S. equity
Fixed income:
U.S. Treasury securities
U.S. government agencies
Sovereign government
obligations
U.S. corporate bonds
Other
Mutual funds
Total domestic plan assets in
the fair value hierarchy
Other assets measured at NAV:
Funds of funds
Venture capital and
partnership interests
Total domestic plan assets, at
fair value
$ 1,514 $ — $ — $
—
160
—
—
—
630
—
3
—
—
114
435
934
—
44
5
972
69
—
—
—
—
—
—
—
—
—
1,514
160
435
934
630
44
8
972
69
114
$ 2,421 $ 2,459 $ — $
4,880
130
30
$
5,040
Total fair
value
194
Plan assets measured at fair value on a recurring basis—
foreign plans at Dec. 31, 2018
(in millions)
Level 1 Level 2 Level 3
Equity funds
Sovereign/government
obligation funds
Corporate debt funds
Cash and currency
Total foreign plan assets in
the fair value hierarchy
Other assets measured at NAV
Total foreign plan assets, at
fair value
$ — $
194 $ — $
—
—
356
126
418
—
—
—
—
126
418
356
$
356 $
738 $ — $
1,094
222
$
1,316
Plan assets measured at fair value on a recurring basis—
domestic plans at Dec. 31, 2017
(in millions)
Level 1 Level 2 Level 3
Common and preferred stock:
Total fair
value
U.S. equity
Non-U.S. equity
Collective trust funds:
Commingled
U.S. equity
Fixed income:
U.S. Treasury securities
U.S. government agencies
Sovereign government
obligations
U.S. corporate bonds
Other
Mutual funds
Total domestic plan assets in
the fair value hierarchy
Other assets measured at NAV:
Funds of funds
Venture capital and
partnership interests
Total domestic plan assets, at
fair value
$ 1,815 $ — $ — $
—
243
—
193
—
— 1,389
452
—
5
—
—
163
—
48
6
910
100
—
—
—
—
—
—
—
—
—
1,815
243
193
1,389
452
48
11
910
100
163
$ 2,678 $ 2,646 $ — $
5,324
129
43
$
5,496
Plan assets measured at fair value on a recurring basis—
foreign plans at Dec. 31, 2017
(in millions)
Level 1 Level 2 Level 3
Equity funds
Sovereign/government
obligation funds
Corporate debt funds
Cash and currency
Total foreign plan assets in
the fair value hierarchy
Other assets measured at NAV
Total foreign plan assets, at fair
value
Total fair
value
711
$
434 $
277 $ — $
—
—
41
104
345
—
—
—
—
104
345
41
$
475 $
726 $ — $
1,201
192
$
1,393
BNY Mellon 169
Notes to Consolidated Financial Statements (continued)
Changes in Level 3 fair value measurements
Assets valued using NAV at Dec. 31, 2017
The table below presents a rollforward of the plan
assets, for the year ended Dec. 31, 2017 (including
the change in fair value), for financial instruments
classified in Level 3 of the valuation hierarchy.
Fair value measurements using significant unobservable
inputs—foreign plans—for the year ended Dec. 31, 2017
(in millions)
Fair value at Dec. 31, 2016
Transfers out of Level 3
Total gains included in plan assets
Fair value at Dec. 31, 2017
Change in unrealized gains or (losses) for the
period included in earnings for assets held at the
end of the reporting period
Corporate
debt funds
17
$
(20)
3
—
$
$
—
(dollar amounts
in millions)
Fair
value
Unfunded
commitments
Redemption
frequency
$ 152 $
—
Monthly
Redemption
notice
period
30-45 days
Funds of funds (a)
Venture capital and
partnership
interests (b)
Property funds (c)
Corporate debt
Other contracts (d)
Total
128
51
20
13
$ 364 $
49
—
—
—
49
N/A
Monthly
N/A
N/A
N/A
0-90 days
N/A
N/A
(a) Funds of funds include multi-strategy hedge funds that utilize
investment strategies that invest over both long-term investment and
short-term investment horizons.
(b) Venture capital and partnership interests do not have redemption
rights. Distributions from such funds will be received as the
underlying investments are liquidated.
(c) Property funds include funds invested in regional real estate
vehicles that hold direct interest in real estate properties.
(d) Other contracts include assets invested in pooled accounts at
insurance companies that are privately valued by the asset manager.
Funds of funds and venture capital and partnership
interests valued using NAV per share
Defined contribution plans
BNY Mellon had pension and post-retirement plan
assets invested in funds of funds, venture capital and
partnership interests, property funds and other
contracts valued using NAV. The funds of funds
investments are redeemable at NAV under agreements
with the funds of funds managers.
Assets valued using NAV at Dec. 31, 2018
(dollar amounts
in millions)
Fair
value
Unfunded
commitments
Redemption
frequency
Funds of funds (a)
Venture capital and
partnership
interests (b)
Property funds (c)
Corporate debt
Other contracts (d)
Total
$ 147 $
148
52
19
16
$ 382 $
Monthly
N/A
Monthly
N/A
N/A
—
—
—
—
—
—
Redemption
notice
period
30-45 days
N/A
0-90 days
N/A
N/A
170 BNY Mellon
BNY Mellon sponsors defined contribution plans in
the U.S. and in certain non-U.S. locations, all of
which are administered in accordance with local laws.
The most significant defined contribution plan is The
Bank of New York Mellon Corporation 401(k)
Savings Plan sponsored by the Company in the U.S.
and covers substantially all U.S. employees.
Under The Bank of New York Mellon Corporation
401(k) Savings Plan, the Company matched 100% of
the first 4% of an employee’s eligible base pay plus
50% of the next 2% of eligible pay contributed by the
participant for a maximum matching contribution of
5% for 2018, 2017 and 2016, subject to statutory
limits.
The U.S. qualified and nonqualified defined benefit
plans were closed to new participants effective Dec.
31, 2010, at which time an annual non-elective
contribution equal to 2% of eligible base pay was
added to The Bank of New York Mellon Corporation
401(k) Savings Plan.
At Dec. 31, 2018 and Dec. 31, 2017, The Bank of
New York Mellon Corporation 401(k) Savings Plan
owned 12.7 million and 13.2 million shares of our
common stock, respectively. The fair value of total
assets was $6.2 billion at Dec. 31, 2018 and $6.6
billion at Dec. 31, 2017. We recorded expense of
$244 million in 2018, $232 million in 2017 and $224
million in 2016 primarily for contributions to our
defined contribution plans.
Notes to Consolidated Financial Statements (continued)
We also have an ESOP covering certain domestic
full-time employees hired on or before July 1, 2008.
The ESOP works in conjunction with the defined
benefit pension plan. Employees are entitled to the
higher of their benefit under the ESOP or such
defined benefit pension plan at retirement. Benefits
payable under the defined benefit pension plan are
offset by the equivalent value of benefits earned
under the ESOP.
At Dec. 31, 2018 and Dec. 31, 2017, the ESOP
owned 5.0 million and 5.4 million shares of our
common stock, respectively. The fair value of total
ESOP assets was $236 million at Dec. 31, 2018 and
$293 million at Dec. 31, 2017. The Company is not
permitted to make contributions to the ESOP.
The Benefits Investment Committee appointed
Fiduciary Counselors, Inc. to serve as the
independent fiduciary to (i) make all fiduciary
decisions related to the continued prudence of
offering the common stock of BNY Mellon or its
affiliates as an investment option under the plans,
other than plan sponsor decisions, and (ii) select and
monitor any actively or passively managed
investments of BNY Mellon or its affiliates to be
offered to participants as investment options under
the plans, excluding self-directed accounts.
Note 18–Company financial information
(Parent Corporation)
In connection with our single point of entry resolution
strategy, we have established an IHC to facilitate the
provision of capital and liquidity resources to certain
key subsidiaries in the event of material financial
distress or failure. In 2017, we entered into a binding
support agreement with those key subsidiaries and
other related entities that requires the IHC to provide
that support. The support agreement requires the
Parent to transfer cash and other liquid financial
assets to the IHC, subject to certain amounts retained
by the Parent to meet its near-term cash needs. The
Parent’s and the IHC’s obligations under the support
agreement are secured. The IHC has provided the
Parent with a committed line of credit that allows the
Parent to draw funds necessary to service near-term
obligations. As a result, during business-as-usual
circumstances, the Parent is expected to continue to
have access to the funds necessary to pay dividends,
repurchase common stock, service its debt and satisfy
its other obligations. If our projected liquidity
resources deteriorate so severely that resolution of the
Parent becomes imminent, the committed line of
credit the IHC provided to the Parent will
automatically terminate, with all amounts outstanding
becoming due and payable, and the support
agreement will require the Parent to transfer most of
its remaining assets (other than stock in subsidiaries
and a cash reserve to fund bankruptcy expenses) to
the IHC. As a result, during a period of severe
financial stress, the Parent could become unable to
meet its debt and payment obligations (including with
respect to its securities), causing the Parent to seek
protection under bankruptcy laws earlier than it
otherwise would have.
Our bank subsidiaries are subject to dividend
limitations under the Federal Reserve Act, as well as
national and state banking laws. Under these statutes,
prior regulatory consent is required for dividends in
any year that would exceed the bank’s net profits for
such year combined with retained net profits for the
prior two years. Additionally, such bank subsidiaries
may not declare dividends in excess of net profits on
hand, as defined, after deducting the amount by
which the principal amount of all loans, on which
interest is past due for a period of six months or more,
exceeds the allowance for credit losses.
The payment of dividends also is limited by
minimum capital requirements imposed on banks. As
of Dec. 31, 2018, BNY Mellon’s bank subsidiaries
exceeded these minimum requirements.
Subsequent to Dec. 31, 2018, our U.S. bank
subsidiaries could declare dividends to the Parent of
approximately $3.7 billion, without the need for a
regulatory waiver. In addition, at Dec. 31, 2018, non-
bank subsidiaries of the Parent had liquid assets of
approximately $1.7 billion.
The bank subsidiaries declared dividends of $3.8
billion in 2018, $1.3 billion in 2017 and $160 million
in 2016. The Federal Reserve and the OCC have
issued additional guidelines that require BHCs and
national banks to continually evaluate the level of
cash dividends in relation to their respective
operating income, capital needs, asset quality and
overall financial condition.
The Federal Reserve policy with respect to the
payment of cash dividends by BHCs provides that, as
a matter of prudent banking, a BHC should not
maintain a rate of cash dividends unless its net
income available to common shareholders has been
BNY Mellon 171
Notes to Consolidated Financial Statements (continued)
sufficient to fully fund the dividends, and the
prospective rate of earnings retention appears to be
consistent with the holding company’s capital needs,
asset quality and overall financial condition. The
Federal Reserve can also prohibit a dividend if
payment would constitute an unsafe or unsound
banking practice. Any increase in BNY Mellon’s
ongoing quarterly dividends would require approval
from the Federal Reserve.
BNY Mellon and other affected BHCs may pay
dividends, repurchase stock, and make other capital
distributions only in accordance with a capital plan
that has been reviewed by the Federal Reserve and as
to which the Federal Reserve has not objected. The
Federal Reserve may object to a capital plan if the
plan does not show that the covered BHC will meet,
for each quarter throughout the nine-quarter planning
horizon covered by the capital plan, all minimum
regulatory capital ratios under applicable capital rules
as in effect for that quarter on a pro forma basis under
the base case and stressed scenarios (including a
severely adverse scenario provided by the Federal
Reserve). The capital plan rules also stipulate that a
covered BHC may not make a capital distribution
unless after giving effect to the distribution it will
meet all minimum regulatory capital ratios. As part
of this process, BNY Mellon also provides the
Federal Reserve with estimates of the composition
and levels of regulatory capital, RWAs and other
measures under Basel III under an identified scenario.
In June 2018, in connection with the Federal
Reserve’s non-objection to our 2018 capital plan,
BNY Mellon announced a share repurchase plan
providing for the repurchase of up to $2.4 billion of
common stock starting in the third quarter of 2018
and continuing through the second quarter of 2019.
This new share repurchase plan replaces all
previously authorized share repurchase plans.
On Dec. 10, 2018, BNY Mellon announced that the
Federal Reserve approved the repurchase of up to
$830 million of additional common stock. Our Board
of Directors approved the additional share
repurchases, all of which were repurchased in the
fourth quarter of 2018. These repurchases were in
addition to the Company’s repurchase of $2.4 billion
of common stock previously approved by the Board
and announced in June 2018.
The Federal Reserve Act limits, and requires
collateral for, extensions of credit by our insured
172 BNY Mellon
subsidiary banks to BNY Mellon and certain of its
non-bank affiliates. Also, there are restrictions on the
amounts of investments by such banks in stock and
other securities of BNY Mellon and such affiliates,
and restrictions on the acceptance of their securities
as collateral for loans by such banks. Extensions of
credit by the banks to each of our affiliates are limited
to 10% of such bank’s regulatory capital, and in the
aggregate for BNY Mellon and all such affiliates to
20%, and collateral must be between 100% and 130%
of the amount of the credit, depending on the type of
collateral.
Our insured subsidiary banks are required to maintain
reserve balances with Federal Reserve Banks under
the Federal Reserve Act and Regulation D. Required
balances averaged $6.1 billion and $5.6 billion for the
years 2018 and 2017, respectively.
In the event of impairment of the capital stock of one
of the Parent’s national banks or The Bank of New
York Mellon, the Parent, as the banks’ stockholder,
could be required to pay such deficiency.
The Parent guarantees the debt issued by Mellon
Funding Corporation, a wholly owned financing
subsidiary of the Company. The Parent also
guarantees committed and uncommitted lines of
credit of Pershing LLC and Pershing Limited
subsidiaries. The Parent guarantees described above
are full and unconditional and contain the standard
provisions relating to parent guarantees of subsidiary
debt. Additionally, the Parent guarantees or
indemnifies obligations of its consolidated
subsidiaries as needed. Generally, there are no stated
notional amounts included in these indemnifications
and the contingencies triggering the obligation for
indemnification are not expected to occur. As a
result, we are unable to develop an estimate of the
maximum payout under these indemnifications.
However, we believe the possibility is remote that we
will have to make any material payment under these
guarantees and indemnifications.
The condensed financial statements of the Parent
include the accounts of the Parent; Mellon Funding
Corporation and MIPA, LLC, a single-member
limited liability company, created to hold and
administer corporate-owned life insurance. Financial
data for the Parent, the financing subsidiary and the
single-member limited liability company are
combined for financial reporting purposes because of
the limited function of these entities and the
Notes to Consolidated Financial Statements (continued)
unconditional guarantee by BNY Mellon of their
obligations.
The Parent’s condensed financial statements are as
follows:
Condensed Income Statement—The Bank of New
York Mellon Corporation (Parent Corporation)
(in millions)
Dividends from bank subsidiaries
Dividends from nonbank subsidiaries
Interest revenue from bank subsidiaries
Interest revenue from nonbank
subsidiaries
Gain on securities held for sale
Other revenue
Total revenue
Interest (including, $59, $73, $88, to
subsidiaries, respectively)
Other expense
Total expense
Income before income taxes and equity
in undistributed net income of
subsidiaries
(Benefit) for income taxes
Equity in undistributed net income:
Bank subsidiaries
Nonbank subsidiaries
Net income
Preferred stock dividends
Net income applicable to common
shareholders of The Bank of New York
Mellon Corporation
Year ended Dec. 31,
2018
2017
$ 3,874 $ 1,405 $
1,869
13
200
1
36
5,993
658
439
1,097
382
25
171
—
67
2,050
663
254
917
2016
125
798
70
121
—
39
1,153
427
262
689
4,896
1,133
(165)
(526)
464
(333)
(508)
(287)
4,266
(169)
1,524
907
4,090
(175)
2,474
276
3,547
(122)
$ 4,097 $ 3,915 $ 3,425
Condensed Balance Sheet—The Bank of New
York Mellon Corporation (Parent Corporation)
(in millions)
Assets:
Cash and due from banks
Securities
Investment in and advances to subsidiaries and
associated companies:
Banks
Other
Subtotal
Corporate-owned life insurance
Other assets
Total assets
Liabilities:
Deferred compensation
Affiliate borrowings
Other liabilities
Long-term debt
Total liabilities
Shareholders’ equity
Total liabilities and shareholders’ equity
Dec. 31,
2018
2017
$
909 $
27
1,301
40
31,285
37,986
69,271
761
740
32,967
37,660
70,627
756
1,135
$ 71,708 $ 73,859
$
445 $
476
3,177
1,373
27,582
32,608
41,251
$ 71,708 $ 73,859
1,616
1,246
27,763
31,070
40,638
Condensed Statement of Cash Flows—The Bank
of New York Mellon Corporation (Parent
Corporation)
(in millions)
Operating activities:
Net income
Adjustments to reconcile net income to
net cash provided by operating activities:
Equity in undistributed net loss (income)
of subsidiaries
Change in accrued interest receivable
Change in accrued interest payable
Change in taxes payable (a)
Other, net
Net cash provided by operating
activities
Investing activities:
Purchases of securities
Proceeds from sales of securities
Change in loans
Acquisitions of, investments in, and
advances to subsidiaries (b)
Other, net
Net cash (used for) investing activities
Financing activities:
Proceeds from issuance of long-term debt
Repayments of long-term debt
Change in advances from subsidiaries
Issuance of common stock
Treasury stock acquired
Issuance of preferred stock
Cash dividends paid
Tax benefit realized on share-based
payment awards
Net cash (used for) provided by
financing activities
Change in cash and due from banks
Cash and due from banks at beginning of
year
Cash and due from banks at end of year
Supplemental disclosures
Interest paid
Income taxes paid
Income taxes refunded
$
$
Year ended Dec. 31,
2018
2017
2016
$ 4,266 $ 4,090 $ 3,547
795
(2,431)
(2,750)
27
29
224
(257)
(6)
42
(600)
38
2
4
452
(31)
5,084
1,133
1,224
—
13
—
(991)
2,729
7
(1,739)
—
13
(53)
1
(39)
(7,208)
—
(5,463)
(317)
—
(2,043)
4,144
(3,650)
(1,561)
120
(3,269)
—
(1,221)
4,738
(997)
(3,930)
465
(2,686)
—
(1,076)
6,229
(2,700)
(1,136)
465
(2,398)
990
(900)
—
—
3
(5,437)
(3,486)
553
(392)
(7,816)
(266)
1,301
9,117
9,383
909 $ 1,301 $ 9,117
629 $
12
7
705 $
61
15
409
1
12
(a)
(b)
Includes payments received from subsidiaries for taxes of $837
million in 2018, $189 million in 2017 and $189 million in 2016.
Includes $2,807 million of cash outflows, net of $2,754 million of
cash inflows in 2018 and $10,296 million of cash outflows, net of
$3,088 million of cash inflows in 2017.
BNY Mellon 173
Notes to Consolidated Financial Statements (continued)
Note 19–Fair value measurement
Fair value is defined as the price that would be
received to sell an asset, or paid to transfer a liability,
in an orderly transaction between market participants
at the measurement date. A three-level hierarchy for
fair value measurements is utilized based upon the
transparency of inputs to the valuation of an asset or
liability as of the measurement date. BNY Mellon’s
own creditworthiness is considered when valuing
liabilities.
Fair value focuses on exit price in an orderly
transaction (that is, not a forced liquidation or
distressed sale) between market participants at the
measurement date under current market conditions.
If there has been a significant decrease in the volume
and level of activity for the asset or liability, a change
in valuation technique or the use of multiple valuation
techniques may be appropriate. In such instances,
determining the price at which willing market
participants would transact at the measurement date
under current market conditions depends on the facts
and circumstances and requires the use of significant
judgment. The objective is to determine from
weighted indicators of fair value a reasonable point
within the range that is most representative of fair
value under current market conditions.
Determination of fair value
We have established processes for determining fair
values. Fair value is based upon quoted market prices
in active markets, where available. For financial
instruments where quotes from recent exchange
transactions are not available, we determine fair value
based on discounted cash flow analysis, comparison
to similar instruments and the use of financial
models. Discounted cash flow analysis is dependent
upon estimated future cash flows and the level of
interest rates. Model-based pricing uses inputs of
observable prices, where available, for interest rates,
foreign exchange rates, option volatilities and other
factors. Models are benchmarked and validated by an
independent internal risk management function. Our
valuation process takes into consideration factors
such as counterparty credit quality, liquidity,
concentration concerns and observability of model
parameters. Valuation adjustments may be made to
record financial instruments at fair value.
Most derivative contracts are valued using internally
developed models which are calibrated to observable
174 BNY Mellon
market data and employ standard market pricing
theory for their valuations. Valuation models
incorporate counterparty credit risk by discounting
each trade’s expected exposures to the counterparty
using the counterparty’s credit spreads, as implied by
the credit default swap market. We also adjust
expected liabilities to the counterparty using BNY
Mellon’s own credit spreads, as implied by the credit
default swap market. Accordingly, the valuation of
our derivative positions is sensitive to the current
changes in our own credit spreads as well as those of
our counterparties.
In certain cases, recent prices may not be observable
for instruments that trade in inactive or less active
markets. Upon evaluating the uncertainty in valuing
financial instruments subject to liquidity issues, we
make an adjustment to their value. The determination
of the liquidity adjustment includes the availability of
external quotes, the time since the latest available
quote and the price volatility of the instrument.
Certain parameters in some financial models are not
directly observable and, therefore, are based on
management’s estimates and judgments. These
financial instruments are normally traded less
actively. We apply valuation adjustments to mitigate
the possibility of error and revision in the model
based estimate value. Examples include products
where parameters such as correlation and recovery
rates are unobservable.
The methods described above for instruments that
trade in inactive or less active markets may produce a
current fair value calculation that may not be
indicative of net realizable value or reflective of
future fair values. We believe our methods of
determining fair value are appropriate and consistent
with other market participants. However, the use of
different methodologies or different assumptions to
value certain financial instruments could result in a
different estimate of fair value.
Valuation hierarchy
A three-level valuation hierarchy is used for
disclosure of fair value measurements based upon the
transparency of inputs to the valuation of an asset or
liability as of the measurement date. The three levels
are described below.
Notes to Consolidated Financial Statements (continued)
Level 1: Inputs to the valuation methodology are
quoted prices (unadjusted) for identical assets or
liabilities in active markets. Level 1 assets and
liabilities include certain debt and equity securities,
derivative financial instruments actively traded on
exchanges and highly liquid government bonds.
Level 2: Observable inputs other than Level 1 prices,
for example, quoted prices for similar assets and
liabilities in active markets, quoted prices for
identical or similar assets or liabilities in markets that
are not active, and inputs that are observable or can
be corroborated, either directly or indirectly, for
substantially the full term of the financial instrument.
Level 2 assets and liabilities include debt instruments
that are traded less frequently than exchange-traded
securities and derivative financial instruments whose
model inputs are observable in the market or can be
corroborated by market-observable data. Examples
in this category are mortgage-backed securities,
corporate debt securities and OTC derivative
contracts.
Level 3: Inputs to the valuation methodology are
unobservable and significant to the fair value
measurement.
A financial instrument’s categorization within the
valuation hierarchy is based upon the lowest level of
input that is significant to the fair value measurement.
Valuation methodology
Following is a description of the valuation
methodologies used for instruments measured at fair
value, as well as the general classification of such
instruments pursuant to the valuation hierarchy.
Securities
We determine fair value primarily based on pricing
sources with reasonable levels of price transparency.
Where quoted prices are available in an active
market, we classify the securities within Level 1 of
the valuation hierarchy. Securities include both long
and short positions. Level 1 securities include U.S.
Treasury and certain sovereign debt securities that are
actively traded in highly liquid OTC markets, money
market funds and exchange-traded equities.
If quoted market prices are not available, fair values
are primarily determined using pricing models using
observable trade data, market data, quoted prices of
securities with similar characteristics or discounted
cash flows. Examples of such instruments, which
would generally be classified within Level 2 of the
valuation hierarchy, include mortgage-backed
securities, state and political subdivisions, certain
sovereign debt, corporate bonds and foreign covered
bonds.
Specifically, the pricing sources obtain recent
transactions for similar types of securities (e.g.,
vintage, position in the securitization structure) and
ascertain variables such as discount rate and speed of
prepayment for the types of transaction and apply
such variables to similar types of bonds. We view
these as observable transactions in the current
marketplace and classify such securities as Level 2.
Pricing sources discontinue pricing any specific
security whenever they determine there is insufficient
observable data to provide a good faith opinion on
price.
In certain cases where there is limited activity or less
transparency around inputs to the valuation, we
classify those securities in Level 3 of the valuation
hierarchy. We have no instruments included in Level
3 of the valuation hierarchy.
At Dec. 31, 2018, approximately 99% of our
securities were valued by pricing sources with
reasonable levels of price transparency. Additional
disclosures of securities are provided in Note 4.
Derivative financial instruments
We classify exchange-traded derivative financial
instruments valued using quoted prices in Level 1 of
the valuation hierarchy. Examples include exchange-
traded equity and foreign exchange options. Since
few other classes of derivative contracts are listed on
an exchange, most of our derivative positions are
valued using internally developed models that use as
their basis readily observable market parameters, and
we classify them in Level 2 of the valuation
hierarchy. Such derivative financial instruments
include swaps and options, foreign exchange spot and
forward contracts and credit default swaps.
Derivatives valued using models with significant
unobservable market parameters in markets that lack
two-way flow are classified in Level 3 of the
valuation hierarchy. Examples may include long-
dated swaps and options, where parameters may be
unobservable for longer maturities; and certain highly
BNY Mellon 175
Notes to Consolidated Financial Statements (continued)
structured products, where correlation risk is
unobservable. As of Dec. 31, 2018 we have no Level
3 derivatives. Additional disclosures of derivative
instruments are provided in Note 22.
Seed capital
In our Investment Management business, we manage
investment assets, including equities, fixed income,
money market and multi-asset and alternative
investment funds for institutions and other investors.
As part of that activity, we make seed capital
investments in certain funds. Seed capital is
generally included in other assets on the consolidated
balance sheet. When applicable, we value seed
capital based on the published NAV of the fund.
For other types of investments in funds, we consider
all of the rights and obligations inherent in our
ownership interest, including the reported NAV as
well as other factors that affect the fair value of our
interest in the fund.
Interests in securitizations
For the interests in securitizations that are classified
in securities available-for-sale, trading assets and
long-term debt, we use discounted cash flow models,
which generally include assumptions of projected
finance charges related to the securitized assets,
estimated net credit losses, prepayment assumptions
and estimates of payments to third-party investors.
When available, we compare our fair value estimates
and assumptions to market activity and to the actual
results of the securitized portfolio.
Other assets measured at NAV
BNY Mellon holds private equity investments,
specifically SBICs, which are compliant with the
Volcker Rule. There are no readily available market
quotations for these investment partnerships. The fair
value of the SBICs is based on our ownership
percentage of the fair value of the underlying
investments as provided by the partnership managers.
These investments are typically valued on a quarterly
basis. Our SBIC private equity investments are
valued at NAV as a practical expedient for fair value.
The following tables present the financial instruments
carried at fair value at Dec. 31, 2018 and Dec. 31,
2017, by caption on the consolidated balance sheet
and by the three-level valuation hierarchy. We have
included credit ratings information in certain of the
tables because the information indicates the degree of
credit risk to which we are exposed, and significant
changes in ratings classifications could result in
increased risk for us.
176 BNY Mellon
Notes to Consolidated Financial Statements (continued)
Assets measured at fair value on a recurring basis at Dec. 31, 2018
(dollars in millions)
Available-for-sale securities:
Level 1
Level 2
Level 3 Netting (a)
Total carrying
value
Agency RMBS
U.S. Treasury
Sovereign debt/sovereign guaranteed
Agency commercial MBS
CLOs
Supranational
Foreign covered bonds
State and political subdivisions
Other asset-backed securities
U.S. government agencies
Non-agency commercial MBS
Non-agency RMBS (b)
Corporate bonds
Other debt securities
Total available-for-sale securities
Trading assets:
Debt instruments
Equity instruments (c)
Derivative assets not designated as hedging:
Interest rate
Foreign exchange
Equity and other contracts
Total derivative assets not designated as hedging
Total trading assets
Other assets:
Derivative assets designated as hedging:
Interest rate
Foreign exchange
Total derivative assets designated as hedging
Other assets (d)
Other assets measured at NAV (d)
Total other assets
Subtotal assets of operations at fair value
Percentage of assets of operations prior to netting
Assets of consolidated investment management funds
Total assets
Percentage of total assets prior to netting
$
$
— $ 25,308
—
4,137
9,691
3,364
2,984
2,878
2,247
1,773
1,657
1,464
1,325
1,054
1,238
59,120
20,076
6,613
—
—
—
—
—
—
—
—
—
—
—
26,689
801
1,114
7
—
9
16
1,931
—
—
—
68
2,594
—
3,583
4,807
59
8,449
11,043
23
266
289
170
— $
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
— $
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
(2,202)
(3,724)
(13)
(5,939)
(5,939)
—
—
—
—
68
28,688
459
70,622
29%
71%
210
$ 28,898
253
$ 70,875
$
29%
71%
—
—
—%
—
— $
—%
—
(5,939)
—
(5,939) $
25,308
20,076
10,750
9,691
3,364
2,984
2,878
2,247
1,773
1,657
1,464
1,325
1,054
1,238
85,809
3,395
1,114
1,388
1,083
55
2,526
7,035
23
266
289
238
215
742
93,586
463
94,049
BNY Mellon 177
1,124
75
608
1,589
83
2,280
3,479
371
74
14
88
3,938
2
3,940
(2,508)
(3,626)
(36)
(6,170)
(6,170)
—
—
—
—
(6,170)
—
(6,170) $
Notes to Consolidated Financial Statements (continued)
Liabilities measured at fair value on a recurring basis at Dec. 31, 2018
(dollars in millions)
Trading liabilities:
Debt instruments
Equity instruments
Derivative liabilities not designated as hedging:
Interest rate
Foreign exchange
Equity and other contracts
Total derivative liabilities not designated as hedging
Total trading liabilities
Long-term debt (c)
Other liabilities – derivative liabilities designated as hedging:
Interest rate
Foreign exchange
12
—
1
13
1,094
—
—
—
3,104
5,215
118
8,437
8,555
371
74
14
—
—
—
—
—
—
—
—
Level 1
Level 2
Level 3 Netting (a)
Total carrying
value
$
1,006
75
$
$
118
—
— $
—
— $
—
Total other liabilities – derivative liabilities designated as
hedging
Subtotal liabilities of operations at fair value
Percentage of liabilities of operations prior to netting
Liabilities of consolidated investment management funds
Total liabilities
Percentage of total liabilities prior to netting
—
1,094
11%
2
1,096
11%
$
88
9,014
89%
—
9,014
89%
$
$
—
—
—%
—
— $
—%
(a) ASC 815, Derivatives and Hedging, permits the netting of derivative receivables and derivative payables under legally enforceable
master netting agreements and permits the netting of cash collateral. Netting is applicable to derivatives not designated as hedging
instruments included in trading assets or trading liabilities and derivatives designated as hedging instruments included in other assets or
other liabilities. Netting is allocated to the derivative products based on the net fair value of each product.
(b) Includes $832 million in Level 2 that was included in the former Grantor Trust.
(c) Includes certain interests in securitizations.
(d) Includes seed capital, private equity investments and other assets.
178 BNY Mellon
Notes to Consolidated Financial Statements (continued)
Assets measured at fair value on a recurring basis at Dec. 31, 2017
(dollars in millions)
Available-for-sale securities:
Level 1
Level 2
Level 3 Netting (a)
Total carrying
value
Agency RMBS
U.S. Treasury
Sovereign debt/sovereign guaranteed
Agency commercial MBS
State and political subdivisions
CLOs
Foreign covered bonds
Supranational
Non-agency RMBS (b)
Non-agency commercial MBS
Corporate bonds
Other asset-backed securities
U.S. government agencies
Other RMBS
Other debt securities
Money market funds (c)
Total available-for-sale securities
Trading assets:
Debt instruments
Equity instruments (c)
Derivative assets not designated as hedging:
Interest rate
Foreign exchange
Equity and other contracts
Total derivative assets not designated as hedging
Total trading assets
Other assets:
Derivative assets designated as hedging:
Interest rate
Foreign exchange
Total derivative assets designated as hedging
Other assets (d)
Other assets measured at NAV (d)
Total other assets
Subtotal assets of operations at fair value
Percentage of assets of operations prior to netting
Assets of consolidated investment management funds
Total assets
Percentage of total assets prior to netting
$
$
— $ 23,819
—
2,638
8,762
2,957
2,909
2,529
2,079
1,578
1,360
1,255
1,043
908
149
1,412
—
53,398
15,263
9,919
—
—
—
—
—
—
—
—
—
—
—
—
963
26,145
690
654
9
—
—
9
1,353
—
—
—
144
1,910
—
6,430
5,104
70
11,604
13,514
278
45
323
170
— $
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
— $
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
(5,075)
(3,720)
(50)
(8,845)
(8,845)
—
—
—
—
144
27,642
493
67,405
29%
71%
322
$ 27,964
409
$ 67,814
$
29%
71%
—
—
—%
—
— $
—%
—
(8,845)
—
(8,845) $
23,819
15,263
12,557
8,762
2,957
2,909
2,529
2,079
1,578
1,360
1,255
1,043
908
149
1,412
963
79,543
2,600
654
1,364
1,384
20
2,768
6,022
278
45
323
314
154
791
86,356
731
87,087
BNY Mellon 179
Notes to Consolidated Financial Statements (continued)
Liabilities measured at fair value on a recurring basis at Dec. 31, 2017
(dollars in millions)
Trading liabilities:
Debt instruments
Equity instruments
Derivative liabilities not designated as hedging:
Interest rate
Foreign exchange
Equity and other contracts
Total derivative liabilities not designated as hedging
Total trading liabilities
Long-term debt (c)
Other liabilities – derivative liabilities designated as hedging:
Interest rate
Foreign exchange
Total other liabilities – derivative liabilities designated as
hedging
Subtotal liabilities of operations at fair value
Percentage of liabilities of operations prior to netting
Liabilities of consolidated investment management funds
Total liabilities
Percentage of total liabilities prior to netting
Level 1
Level 2
Level 3 Netting (a)
Total carrying
value
$
$
979
149
$
80
—
— $
—
— $
—
4
—
—
4
1,132
—
—
—
—
1,132
6,349
5,067
153
11,569
11,649
367
534
266
800
12,816
8%
1
1,133
92%
1
$ 12,817
$
8%
92%
$
—
—
—
—
—
—
—
—
—
—
—%
—
— $
—%
(5,495)
(3,221)
(81)
(8,797)
(8,797)
—
—
—
—
(8,797)
—
(8,797) $
1,059
149
858
1,846
72
2,776
3,984
367
534
266
800
5,151
2
5,153
(a) ASC 815, Derivatives and Hedging, permits the netting of derivative receivables and derivative payables under legally enforceable
master netting agreements and permits the netting of cash collateral. Netting is applicable to derivatives not designated as hedging
instruments included in trading assets or trading liabilities and derivatives designated as hedging instruments included in other assets or
other liabilities. Netting is allocated to the derivative products based on the net fair value of each product.
(b) Includes $1,091 million in Level 2 that was included in the former Grantor Trust.
(c) Includes certain interests in securitizations.
(d) Includes private equity investments and seed capital.
180 BNY Mellon
Notes to Consolidated Financial Statements (continued)
Details of certain available-for-sale securities
measured at fair value on a recurring basis
(dollars in millions)
Non-agency RMBS (c), originated in:
2007
2006
2005
2004 and earlier
Total non-agency RMBS
Non-agency commercial MBS, originated in:
2009-2018
2005
Total non-agency commercial MBS
Foreign covered bonds:
Canada
United Kingdom
Australia
Sweden
Other
Total foreign covered bonds
Sovereign debt/sovereign guaranteed:
United Kingdom
Germany
France
Spain
Italy
Netherlands
Ireland
Hong Kong
Canada
Belgium
Other (e)
Dec. 31, 2018
Dec. 31, 2017
Total
carrying
value
AAA/
AA-
(b)
Ratings (a)
BBB+/
BBB-
A+/
A-
BB+ and
lower
Total
carrying
value
AAA/
AA-
(b)
Ratings (a)
BBB+/
BBB-
A+/
A-
BB+ and
lower
$
$
$
$
$
$
315
363
396
251
1,325
1,464
—
1,464
1,524
529
333
187
305
2,878
15% 2%
—
9
16
9% 11%
19
1
24
3%
—
7
11
5%
96% 4% —%
—
96% 4% —%
—
—
100% —% —%
—
100
—
100
—
100
100
—
100% —% —%
—
—
—
—
80% $
81
83
49
75% $
—% $
—
—% $
—% $
—
—
—
—
—% $
419
467
509
332
1,727 (d)
1,309
51
1,360
1,659
103
265
136
366
2,529
13%
—
6
3
6%
94%
100
94%
3%
17
2
2
6%
6%
—
6%
100% —%
100
100
100
100
100% —%
—
—
—
—
—%
—
6
31
8%
—%
—
—%
—%
—
—
—
—
—%
84%
83
86
64
80%
—%
—
—%
—%
—
—
—
—
—%
$
2,153
1,826
1,548
1,365
939
875
625
450
378
260
331
$ 10,750
100% —% —%
—
100
—
100
—
—
—
—
—
100
— 100
—
—
—
—
100
100
100
68
72% 6% 21%
—
—
100
100
—
—
—
—
—
—
—% $
3,052
—
1,586
—
2,046
—
1,635
—
1,292
—
1,027
—
843
—
—
—
—
—
803
32
273
1% $ 12,557
100% —%
100
100
—
—
100
—
—
—
—
—
— 100
—
—
—
—
—
100
—
50
7%
69%
—%
—
—
100
100
—
—
—
—
—
—
23%
—%
—
—
—
—
—
—
—
—
—
50
1%
Total sovereign debt/sovereign guaranteed
(a) Represents ratings by S&P or the equivalent.
(b) At Dec. 31, 2018 and Dec. 31, 2017, sovereign debt/sovereign guaranteed securities were included in Level 1 and Level 2 in the valuation hierarchy. All
(c)
(d)
(e)
other assets in the table are Level 2 assets in the valuation hierarchy.
Includes $832 million at Dec. 31, 2018 and $1,091 million at Dec. 31, 2017 that were included in the former Grantor Trust.
Includes other RMBS.
Includes non-investment grade sovereign debt/sovereign guaranteed securities related to Brazil of $107 million at Dec. 31, 2018 and $136 million at Dec.
31, 2017.
Assets and liabilities measured at fair value on a
nonrecurring basis
readily marketable equity securities carried at cost
with upward or downward adjustments.
Under certain circumstances, we make adjustments to
fair value our assets, liabilities and unfunded lending-
related commitments although they are not measured
at fair value on an ongoing basis. Examples would be
the recording of an impairment of an asset and non-
The following table presents the financial instruments
carried on the consolidated balance sheet by caption
and level in the fair value hierarchy as of Dec. 31,
2018 and Dec. 31, 2017, for which a nonrecurring
change in fair value has been recorded in the
respective year.
Assets measured at fair value on a
nonrecurring basis
(in millions)
Loans (a)
Other assets (b)
Total assets at fair value on a nonrecurring
basis
Dec. 31, 2018
Dec. 31, 2017
Level 1
Level 2
Level 3
Total carrying
value
Level 1
Level 2
Level 3
Total carrying
value
$
$
— $
—
64 $
57
4 $
—
$
68
57
— $
—
73 $
4
6 $
—
— $
121 $
4 $
125
$
— $
77 $
6 $
79
4
83
(a) The fair value of these loans decreased $1 million in both 2018 and 2017, based on the fair value of the underlying collateral, as required by
(b)
guidance in ASC 310, Receivables, with an offset to the allowance for credit losses.
Includes non-readily marketable equity securities carried at cost with upward or downward adjustments and other assets received in satisfaction
of debt.
BNY Mellon 181
Notes to Consolidated Financial Statements (continued)
Estimated fair value of financial instruments
The following tables present the estimated fair value and the carrying amount of financial instruments not carried at
fair value on the consolidated balance sheet at Dec. 31, 2018 and Dec. 31, 2017, by caption on the consolidated
balance sheet and by the valuation hierarchy.
Summary of financial instruments
Dec. 31, 2018
(in millions)
Assets:
Interest-bearing deposits with the Federal Reserve and other central banks
Interest-bearing deposits with banks
Federal funds sold and securities purchased under resale agreements
Securities held-to-maturity
Loans (a)
Other financial assets
Total
Liabilities:
Noninterest-bearing deposits
Interest-bearing deposits
Federal funds purchased and securities sold under repurchase agreements
Payables to customers and broker-dealers
Commercial paper
Borrowings
Long-term debt
Total
(a) Does not include the leasing portfolio.
Summary of financial instruments
(in millions)
Assets:
Interest-bearing deposits with the Federal Reserve and other central banks
Interest-bearing deposits with banks
Federal funds sold and securities purchased under resale agreements
Securities held-to-maturity
Loans (a)
Other financial assets
Total
Liabilities:
Noninterest-bearing deposits
Interest-bearing deposits
Federal funds purchased and securities sold under repurchase agreements
Payables to customers and broker-dealers
Commercial paper
Borrowings
Long-term debt
Total
(a) Does not include the leasing portfolio.
$
$
$
$
$
$
$
$
Level 1
Level 2
Level 3
Total
estimated
fair value
Carrying
amount
— $
—
—
5,512
—
5,864
67,988 $
14,168
46,795
27,790
55,142
1,383
11,376 $ 213,266 $
70,783 $
— $
— 165,914
14,243
—
19,731
—
1,939
—
3,584
—
—
28,347
— $ 304,541 $
67,988 $
14,168
46,795
33,302
55,142
7,247
67,988
— $
14,148
—
46,795
—
33,982
—
55,161
—
—
7,247
— $ 224,642 $ 225,321
70,783 $
70,783
— $
167,995
— 165,914
14,243
14,243
—
19,731
19,731
—
1,939
1,939
—
3,584
3,584
—
—
28,792
28,347
— $ 304,541 $ 307,067
Dec. 31, 2017
Level 1
Level 2
Level 3
Total
estimated
fair value
Carrying
amount
— $
—
—
11,365
—
5,382
16,747 $ 222,237 $
91,510 $
11,982
28,135
29,147
60,219
1,244
82,716 $
— $
— 160,042
15,163
—
20,184
—
3,075
—
2,931
—
27,789
—
— $ 311,900 $
91,510 $
11,982
28,135
40,512
60,219
6,626
91,510
— $
11,979
—
28,135
—
40,827
—
60,082
—
6,626
—
— $ 238,984 $ 239,159
82,716 $
82,716
— $
161,606
— 160,042
15,163
15,163
—
20,184
20,184
—
3,075
3,075
—
2,931
2,931
—
27,612
27,789
—
— $ 311,900 $ 313,287
182 BNY Mellon
Notes to Consolidated Financial Statements (continued)
The table below summarizes the carrying amount of the hedged financial instruments, the notional amount of the
hedge and the unrealized gain (loss) (estimated fair value) of the derivatives.
Hedged financial instruments
(in millions)
Dec. 31, 2018
Securities available-for-sale (b)
Long-term debt
Dec. 31, 2017
Carrying
amount
Notional
amount of
hedge
Unrealized (a)
Gain
(Loss)
$
19,349 $
16,147
19,437 $
16,600
24 $
—
(74)
—
(301)
(233)
Securities available-for-sale
Long-term debt
102 $
175
(a) Unrealized gain/loss amounts reflect the fact that certain of the derivatives are cleared and settled through central clearing
12,365 $
23,950
12,307 $
23,821
$
counterparties where cash collateral received and paid is deemed a settlement of the derivative.
(b) Includes foreign exchange fair value hedges with a carrying value of $148 million, a notional amount of $147 million and unrealized
gains of $1 million.
Note 20–Fair value option
We elected fair value as an alternative measurement
for selected financial assets and liabilities. The
following table presents the assets and liabilities of
consolidated investment management funds, at fair
value.
Assets and liabilities of consolidated
investment management funds, at fair value
(in millions)
Assets of consolidated investment management
funds:
Trading assets
Other assets
Total assets of consolidated investment
management funds
Liabilities of consolidated investment
management funds:
Other liabilities
Total liabilities of consolidated investment
management funds
Dec. 31,
2018
2017
$
$
$
$
243 $
220
516
215
463 $
731
2 $
2 $
2
2
BNY Mellon values the assets and liabilities of its
consolidated investment management funds using
quoted prices for identical assets or liabilities in
active markets or observable inputs such as quoted
prices for similar assets or liabilities. Quoted prices
for either identical or similar assets or liabilities in
inactive markets may also be used. Accordingly, fair
value best reflects the interests BNY Mellon holds in
the economic performance of the consolidated
investment management funds. Changes in the value
of the assets and liabilities are recorded in the
consolidated income statement as investment income
of consolidated investment management funds and in
the interest of investment management fund note
holders, respectively.
We have elected the fair value option on $240 million
of long-term debt. The fair value of this long-term
debt was $371 million at Dec. 31, 2018 and $367
million at Dec. 31, 2017. The long-term debt is
valued using observable market inputs and is
included in Level 2 of the valuation hierarchy.
The following table presents the changes in fair value
of long-term debt and certain loans for which we
elected the fair value option that we previously held
in 2016, and the location of the changes in the
consolidated income statement. There were no loans
valued under the fair value option election at Dec. 31,
2018, Dec. 31, 2017 and Dec. 31, 2016.
Impact of changes in fair value in the income statement (a)
(in millions)
Loans:
Year ended Dec. 31,
2018
2017
2016
Investment and other income
$ — $ — $
12
Long-term debt:
Foreign exchange and other trading
revenue
$
(4) $
(4) $
(4)
(a) The changes in fair value of the loans and long-term debt are
approximately offset by economic hedges included in foreign
exchange and other trading revenue.
BNY Mellon 183
Notes to Consolidated Financial Statements (continued)
Note 21–Commitments and contingent
liabilities
year, $20.3 billion in one to five years and $570
million over five years.
Off-balance sheet arrangements
In the normal course of business, various
commitments and contingent liabilities are
outstanding that are not reflected in the
accompanying consolidated balance sheets.
Our significant trading and off-balance sheet risks are
securities, foreign currency and interest rate risk
management products, commercial lending
commitments, letters of credit and securities lending
indemnifications. We assume these risks to reduce
interest rate and foreign currency risks, to provide
customers with the ability to meet credit and liquidity
needs and to hedge foreign currency and interest rate
risks. These items involve, to varying degrees, credit,
foreign currency and interest rate risks not recognized
on the balance sheet. Our off-balance sheet risks are
managed and monitored in manners similar to those
used for on-balance sheet risks.
The following table presents a summary of our off-
balance sheet credit risks.
Dec. 31,
Off-balance sheet credit risks
2017
(in millions)
51,467
Lending commitments
3,531
Standby letters of credit (a)
122
Commercial letters of credit
432,084
Securities lending indemnifications (b)(c)
(a) Net of participations totaling $163 million at Dec. 31, 2018
2018
50,631 $
2,817
165
401,504
$
and $672 million at Dec. 31, 2017.
(b) Excludes the indemnification for securities for which BNY
Mellon acts as an agent on behalf of CIBC Mellon clients,
which totaled $56 billion at Dec. 31, 2018 and $69 billion at
Dec. 31, 2017.
(c) Includes cash collateral, invested in indemnified repurchase
agreements, held by us as securities lending agent of $35
billion at Dec. 31, 2018 and $33 billion at Dec. 31, 2017.
The total potential loss on undrawn lending
commitments, standby and commercial letters of
credit, and securities lending indemnifications is
equal to the total notional amount if drawn upon,
which does not consider the value of any collateral.
Since many of the lending commitments are expected
to expire without being drawn upon, the total amount
does not necessarily represent future cash
requirements. A summary of lending commitment
maturities is as follows: $29.8 billion in less than one
184 BNY Mellon
SBLCs principally support obligations of corporate
clients and were collateralized with cash and
securities of $223 million at Dec. 31, 2018 and $160
million at Dec. 31, 2017. At Dec. 31, 2018, $2.0
billion of the SBLCs will expire within one year and
$845 million in one to five years.
We must recognize, at the inception of an SBLC and
foreign and other guarantees, a liability for the fair
value of the obligation undertaken in issuing the
guarantee. The fair value of the liability, which was
recorded with a corresponding asset in other assets,
was estimated as the present value of contractual
customer fees. The estimated liability for losses
related to SBLCs and foreign and other guarantees, if
any, is included in the allowance for lending-related
commitments. The allowance for lending-related
commitments was $106 million at Dec. 31, 2018 and
$102 million at Dec. 31, 2017.
Payment/performance risk of SBLCs is monitored
using both historical performance and internal ratings
criteria. BNY Mellon’s historical experience is that
SBLCs typically expire without being funded.
SBLCs below investment grade are monitored closely
for payment/performance risk. The table below
shows SBLCs by investment grade:
Standby letters of credit
Investment grade
Non-investment grade
Dec. 31,
2018
89%
11%
2017
84%
16%
A commercial letter of credit is normally a short-term
instrument used to finance a commercial contract for
the shipment of goods from a seller to a buyer.
Although the commercial letter of credit is contingent
upon the satisfaction of specified conditions, it
represents a credit exposure if the buyer defaults on
the underlying transaction. As a result, the total
contractual amounts do not necessarily represent
future cash requirements. Commercial letters of
credit totaled $165 million at Dec. 31, 2018 and $122
million at Dec. 31, 2017.
We expect many of the lending commitments and
letters of credit to expire without the need to advance
any cash. The revenue associated with guarantees
frequently depends on the credit rating of the obligor
Notes to Consolidated Financial Statements (continued)
and the structure of the transaction, including
collateral, if any.
A securities lending transaction is a fully
collateralized transaction in which the owner of a
security agrees to lend the security (typically through
an agent, in our case, The Bank of New York
Mellon), to a borrower, usually a broker-dealer or
bank, on an open, overnight or term basis, under the
terms of a prearranged contract.
We typically lend securities with indemnification
against borrower default. We generally require the
borrower to provide collateral with a minimum value
of 102% of the fair value of the securities borrowed,
which is monitored on a daily basis, thus reducing
credit risk. Market risk can also arise in securities
lending transactions. These risks are controlled
through policies limiting the level of risk that can be
undertaken. Securities lending transactions are
generally entered into only with highly rated
counterparties. Securities lending indemnifications
were secured by collateral of $420 billion at Dec. 31,
2018 and $451 billion at Dec. 31, 2017.
CIBC Mellon, a joint venture between BNY Mellon
and the Canadian Imperial Bank of Commerce
(“CIBC”), engages in securities lending activities.
CIBC Mellon, BNY Mellon and CIBC jointly and
severally indemnify securities lenders against specific
types of borrower default. At Dec. 31, 2018 and Dec.
31, 2017, $56 billion and $69 billion, respectively, of
borrowings at CIBC Mellon, for which BNY Mellon
acts as agent on behalf of CIBC Mellon clients, were
secured by collateral of $59 billion and $73 billion,
respectively. If, upon a default, a borrower’s
collateral was not sufficient to cover its related
obligations, certain losses related to the
indemnification could be covered by the indemnitors.
Dec. 31, 2018
Unfunded
commitments
Loans
Financial institutions
portfolio exposure
(in billions)
Securities industry
Banks
Asset managers
Insurance
Government
Other
Total
Commercial portfolio
exposure
(in billions)
Manufacturing
Services and other
Energy and utilities
Media and telecom
Total
$
$
$
$
3.1 $
6.3
1.3
0.1
0.1
0.7
11.6 $
0.8 $
0.7
0.5
0.1
2.1 $
Total
exposure
25.6
7.9
7.4
2.6
0.6
1.5
45.6
22.5 $
1.6
6.1
2.5
0.5
0.8
34.0 $
Total
exposure
5.9
5.5
4.6
1.3
17.3
5.1 $
4.8
4.1
1.2
15.2 $
Dec. 31, 2018
Unfunded
commitments
Loans
Major concentrations in securities lending are
primarily to broker-dealers and are generally
collateralized with cash and/or securities.
Operating leases
Net rent expense for premises and equipment was
$295 million in 2018, $285 million in 2017 and $301
million in 2016.
At Dec. 31, 2018, we were obligated under various
noncancelable lease agreements, some of which
provide for additional rents based upon real estate
taxes, insurance and maintenance and for various
renewal options. A summary of the future minimum
rental commitments under noncancelable operating
leases, net of related sublease revenue, is as follows:
2019—$264 million; 2020—$244 million; 2021—
$211 million; 2022—$172 million; 2023—$136
million and 2024 and thereafter—$432 million.
Industry concentrations
Exposure for certain administrative errors
We have significant industry concentrations related to
credit exposure at Dec. 31, 2018. The tables below
present our credit exposure in the financial
institutions and commercial portfolios.
In connection with certain offshore tax-exempt funds
that we manage, we may be liable to the funds for
certain administrative errors. The errors relate to the
resident status of such funds, potentially exposing the
Company to a tax liability related to the funds’
earnings. The Company is in discussions with tax
authorities regarding the funds. We believe we are
appropriately accrued and the additional reasonably
possible exposure is not significant.
BNY Mellon 185
Notes to Consolidated Financial Statements (continued)
Indemnification arrangements
Legal proceedings
We have provided standard representations for
underwriting agreements, acquisition and divestiture
agreements, sales of loans and commitments, and
other similar types of arrangements and customary
indemnification for claims and legal proceedings
related to providing financial services that are not
otherwise included above. Insurance has been
purchased to mitigate certain of these risks.
Generally, there are no stated or notional amounts
included in these indemnifications and the
contingencies triggering the obligation for
indemnification are not expected to occur.
Furthermore, often counterparties to these
transactions provide us with comparable
indemnifications. We are unable to develop an
estimate of the maximum payout under these
indemnifications for several reasons. In addition to
the lack of a stated or notional amount in a majority
of such indemnifications, we are unable to predict the
nature of events that would trigger indemnification or
the level of indemnification for a certain event. We
believe, however, that the possibility that we will
have to make any material payments for these
indemnifications is remote. At Dec. 31, 2018 and
Dec. 31, 2017, we have not recorded any material
liabilities under these arrangements.
Clearing and settlement exchanges
We are a noncontrolling equity investor in, and/or
member of, several industry clearing or settlement
exchanges through which foreign exchange,
securities, derivatives or other transactions settle.
Certain of these industry clearing and settlement
exchanges require their members to guarantee their
obligations and liabilities and/or to provide liquidity
support in the event other members do not honor their
obligations. We believe the likelihood that a clearing
or settlement exchange (of which we are a member)
would become insolvent is remote. Additionally,
certain settlement exchanges have implemented loss
allocation policies that enable the exchange to
allocate settlement losses to the members of the
exchange. It is not possible to quantify such mark-to-
market loss until the loss occurs. Any ancillary costs
that occur as a result of any mark-to-market loss
cannot be quantified. In addition, we also sponsor
clients as members on clearing and settlement
exchanges and guarantee their obligations. At Dec.
31, 2018 and Dec. 31, 2017, we have not recorded
any material liabilities under these arrangements.
186 BNY Mellon
In the ordinary course of business, BNY Mellon and
its subsidiaries are routinely named as defendants in
or made parties to pending and potential legal actions.
We also are subject to governmental and regulatory
examinations, information-gathering requests,
investigations and proceedings (both formal and
informal). Claims for significant monetary damages
are often asserted in many of these legal actions,
while claims for disgorgement, restitution, penalties
and/or other remedial actions or sanctions may be
sought in governmental and regulatory matters. It is
inherently difficult to predict the eventual outcomes
of such matters given their complexity and the
particular facts and circumstances at issue in each of
these matters. However, on the basis of our current
knowledge and understanding, we do not believe that
judgments, settlements or orders, if any, arising from
these matters (either individually or in the aggregate,
after giving effect to applicable reserves and
insurance coverage) will have a material adverse
effect on the consolidated financial position or
liquidity of BNY Mellon, although they could have a
material effect on our results of operations in a given
period.
In view of the inherent unpredictability of outcomes
in litigation and regulatory matters, particularly
where (i) the damages sought are substantial or
indeterminate, (ii) the proceedings are in the early
stages, or (iii) the matters involve novel legal theories
or a large number of parties, as a matter of course
there is considerable uncertainty surrounding the
timing or ultimate resolution of litigation and
regulatory matters, including a possible eventual loss,
fine, penalty or business impact, if any, associated
with each such matter. In accordance with applicable
accounting guidance, BNY Mellon establishes
accruals for litigation and regulatory matters when
those matters proceed to a stage where they present
loss contingencies that are both probable and
reasonably estimable. In such cases, there may be a
possible exposure to loss in excess of any amounts
accrued. BNY Mellon regularly monitors such
matters for developments that could affect the amount
of the accrual, and will adjust the accrual amount as
appropriate. If the loss contingency in question is not
both probable and reasonably estimable, BNY Mellon
does not establish an accrual and the matter continues
to be monitored for any developments that would
make the loss contingency both probable and
reasonably estimable. BNY Mellon believes that its
Notes to Consolidated Financial Statements (continued)
accruals for legal proceedings are appropriate and, in
the aggregate, are not material to the consolidated
financial position of BNY Mellon, although future
accruals could have a material effect on the results of
operations in a given period.
For certain of those matters described here for which
a loss contingency may, in the future, be reasonably
possible (whether in excess of a related accrued
liability or where there is no accrued liability), BNY
Mellon is currently unable to estimate a range of
reasonably possible loss. For those matters described
here where BNY Mellon is able to estimate a
reasonably possible loss, the aggregate range of such
reasonably possible loss is up to $900 million in
excess of the accrued liability (if any) related to those
matters.
The following describes certain judicial, regulatory
and arbitration proceedings involving BNY Mellon:
Mortgage-Securitization Trusts Proceedings
The Bank of New York Mellon has been named as a
defendant in a number of legal actions brought by
MBS investors alleging that the trustee has expansive
duties under the governing agreements, including the
duty to investigate and pursue breach of
representation and warranty claims against other
parties to the MBS transactions. These actions
include a lawsuit brought in New York State court on
June 18, 2014, and later re-filed in federal court, by a
group of institutional investors who purport to sue on
behalf of 233 MBS trusts.
Matters Related to R. Allen Stanford
In late December 2005, Pershing LLC (“Pershing”)
became a clearing firm for Stanford Group Co.
(“SGC”), a registered broker-dealer that was part of a
group of entities ultimately controlled by R. Allen
Stanford (“Stanford”). Stanford International Bank
(“SIB”), also controlled by Stanford, issued
certificates of deposit (“CDs”). Some investors
allegedly wired funds from their SGC accounts to
purchase CDs. In 2009, the SEC charged Stanford
with operating a Ponzi scheme in connection with the
sale of CDs, and SGC was placed into receivership.
Alleged purchasers of CDs have filed 15 lawsuits
against Pershing that are pending in Texas, including
two putative class actions. The purchasers allege that
Pershing, as SGC’s clearing firm, assisted Stanford in
a fraudulent scheme and assert contractual, statutory
and common law claims. On July 12, 2018, a federal
district court dismissed six of the individual lawsuits
and those cases are on appeal. A series of FINRA
arbitration proceedings also have been initiated by
alleged purchasers asserting similar claims.
Brazilian Postalis Litigation
BNY Mellon Servicos Financeiros DTVM S.A.
(“DTVM”), a subsidiary that provides asset services
in Brazil, acts as administrator for certain investment
funds in which a public pension fund for postal
workers called Postalis-Instituto de Seguridade Social
dos Correios e Telégrafos (“Postalis”) invested. On
Aug. 22, 2014, Postalis sued DTVM in Rio de
Janeiro, Brazil for losses related to a Postalis fund for
which DTVM is administrator. Postalis alleges that
DTVM failed to properly perform duties, including to
conduct due diligence of and exert control over the
manager. On March 12, 2015, Postalis filed a lawsuit
in Rio de Janeiro against DTVM and BNY Mellon
Administração de Ativos Ltda. (“Ativos”) alleging
failure to properly perform duties relating to another
fund of which DTVM is administrator and Ativos is
manager. On Dec. 14, 2015, Associacão dos
Profissionais dos Correiros (“ADCAP”), a Brazilian
postal workers association, filed a lawsuit in São
Paulo against DTVM and other defendants alleging
that DTVM improperly contributed to Postalis
investment losses. On March 20, 2017, the lawsuit
was dismissed without prejudice, and ADCAP has
appealed that decision. On Dec. 17, 2015, Postalis
filed three lawsuits in Rio de Janeiro against DTVM
and Ativos alleging failure to properly perform duties
with respect to investments in several other funds.
On Feb. 4, 2016, Postalis filed a lawsuit in Brasilia
against DTVM, Ativos and BNY Mellon Alocação de
Patrimônio Ltda., an investment management
subsidiary, alleging failure to properly perform duties
and liability for losses with respect to investments in
various funds of which the defendants were
administrator and/or manager. On Jan. 16, 2018, the
Brazilian Federal Prosecution Service (“MPF”) filed
a civil lawsuit in São Paulo against DTVM alleging
liability for Postalis losses based on alleged failures
to properly perform certain duties as administrator to
certain funds in which Postalis invested or controller
of Postalis’s own investment portfolio. On April 18,
2018, the court dismissed the lawsuit without
prejudice, and the MPF has appealed that decision.
On Oct. 31, 2018, Postalis filed an application in
federal court in the Southern District of New York
seeking an order authorizing it to take discovery from
The Bank of New York Mellon Corporation and its
U.S. subsidiaries, purportedly for use in the Brazilian
BNY Mellon 187
Notes to Consolidated Financial Statements (continued)
proceedings. On Dec. 20, 2018, the court denied
Postalis’s application in its entirety.
maker for our customers and facilitating customer
trades in compliance with the Volcker Rule.
Depositary Receipt Litigation
Between late December 2015 and February 2016,
four putative class action lawsuits were filed against
BNY Mellon asserting claims relating to BNY
Mellon’s foreign exchange pricing when converting
dividends and other distributions from non-U.S.
companies in its role as depositary bank to Depositary
Receipt issuers. The claims are for breach of contract
and violations of ERISA. The lawsuits have been
consolidated into two suits that are pending in federal
court in the Southern District of New York. The
parties in the lawsuits have entered into settlement
agreements to resolve the suits, which are subject to
court approval.
Brazilian Silverado Litigation
DTVM acts as administrator for the Fundo de
Investimento em Direitos Creditórios Multisetorial
Silverado Maximum (“Silverado Maximum Fund”),
which invests in commercial credit receivables. On
June 2, 2016, the Silverado Maximum Fund sued
DTVM in its capacity as administrator, along with
Deutsche Bank S.A. - Banco Alemão in its capacity
as custodian and Silverado Gestão e Investimentos
Ltda. in its capacity as investment manager. The
Fund alleges that each of the defendants failed to
fulfill its respective duty, and caused losses to the
Fund for which the defendants are jointly and
severally liable.
Depositary Receipt Pre-Release Inquiry
In March 2014, the Staff of the U.S. Securities and
Exchange Commission’s Enforcement Division (the
“Staff”) commenced an investigation into certain
issuers of American Depositary Receipts (“ADRs”),
including BNY Mellon, for the period of 2011 to
2015. The Staff issued several requests to BNY
Mellon for information relating to the pre-release of
ADRs. BNY Mellon fully cooperated with the
investigation. On Dec. 17, 2018, the SEC announced
that BNY Mellon had settled an administrative
proceeding to resolve the investigation of BNY
Mellon’s pre-release activity, in which BNY Mellon
did not admit or deny the SEC’s findings.
Note 22–Derivative instruments
We use derivatives to manage exposure to market
risk, including interest rate risk, equity price risk and
foreign currency risk, as well as credit risk. Our
trading activities are focused on acting as a market-
188 BNY Mellon
The notional amounts for derivative financial
instruments express the dollar volume of the
transactions; however, credit risk is much smaller.
We perform credit reviews and enter into netting
agreements and collateral arrangements to minimize
the credit risk of derivative financial instruments. We
enter into offsetting positions to reduce exposure to
foreign currency, interest rate and equity price risk.
Use of derivative financial instruments involves
reliance on counterparties. Failure of a counterparty
to honor its obligation under a derivative contract is a
risk we assume whenever we engage in a derivative
contract. There were no counterparty default losses
recorded in 2018 or 2017.
Hedging derivatives
We utilize interest rate swap agreements to manage
our exposure to interest rate fluctuations. We enter
into fair value hedges as an interest rate risk
management strategy to reduce fair value variability
by converting certain fixed rate interest payments
associated with available-for-sale securities and long-
term debt to LIBOR.
The available-for-sale securities hedged consist of
U.S. Treasury bonds, agency and non-agency
commercial MBS, sovereign debt, corporate bonds
and covered bonds that had original maturities of 30
years or less at initial purchase. At Dec. 31, 2018,
$19.2 billion face amount of available-for-sale
securities were hedged with interest rate swaps
designated as fair value hedges that had notional
values of $19.3 billion.
The fixed rate long-term debt instruments hedged
generally have original maturities of five to 30 years.
We issue both callable and non-callable debt. The
debt is hedged with “receive fixed rate, pay variable
rate” swaps. At Dec. 31, 2018, $16.6 billion par
value of debt was hedged with interest rate swaps
designated as fair value hedges that had notional
values of $16.6 billion.
In addition, we utilize forward foreign exchange
contracts as hedges to mitigate foreign exchange
exposures. We use forward foreign exchange
contracts as cash flow hedges to convert certain
forecasted non-U.S. dollar revenue and expenses into
Notes to Consolidated Financial Statements (continued)
U.S. dollars. We use forward foreign exchange
contracts with maturities of 15 months or less as cash
flow hedges to hedge our foreign exchange exposure
to Indian rupee, British pound, Hong Kong dollar,
Singapore dollar and Polish zloty revenue and
expense transactions in entities that have the U.S.
dollar as their functional currency. As of Dec. 31,
2018, the hedged forecasted foreign currency
transactions and designated forward foreign exchange
contract hedges were $234 million (notional), with a
pre-tax loss of $1 million recorded in accumulated
OCI. This loss will be reclassified to earnings over
the next 12 months.
We also utilize forward foreign exchange contracts as
fair value hedges of the foreign exchange risk
associated with available-for-sale securities. Forward
points are designated as an excluded component, and
amortized into earnings over the hedge period. The
unamortized derivative value associated with the
excluded component is recognized in accumulated
OCI. At Dec. 31, 2018, $147 million face amount of
available-for-sale securities were hedged with foreign
currency forward contracts that had a notional value
of $147 million.
Forward foreign exchange contracts are also used to
hedge the value of our net investments in foreign
subsidiaries. These forward foreign exchange
contracts have maturities of less than one year. The
derivatives employed are designated as hedges of
changes in value of our foreign investments due to
exchange rates. Changes in the value of the forward
foreign exchange contracts offset the changes in value
of the foreign investments due to changes in foreign
exchange rates. The change in fair market value of
these forward foreign exchange contracts is reported
within foreign currency translation adjustments in
shareholders’ equity, net of tax. At Dec. 31, 2018,
forward foreign exchange contracts with notional
amounts totaling $5.9 billion were designated as net
investment hedges.
In addition to forward foreign exchange contracts, we
also designate non-derivative financial instruments as
hedges of our net investments in foreign subsidiaries.
Those non-derivative financial instruments
designated as hedges of our net investments in
foreign subsidiaries were all long-term liabilities of
BNY Mellon in various currencies, and, at Dec. 31,
2018, had a combined U.S. dollar equivalent value of
$175 million.
The following table presents the gains (losses) related to our hedging derivative portfolio recognized in the
consolidated income statement.
Income statement impact of fair value and cash flow hedges
(in millions)
Interest rate fair value hedges of available-for-sale securities
Derivative
Hedged item
Interest rate fair value hedges of long-term debt
Derivative
Hedged item
Foreign exchange fair value hedges of available-for-sale securities
Derivative (a)
Hedged item
Cash flow hedges of forecasted FX exposures
Gain (loss) reclassified from OCI into income
Gain reclassified from OCI into income
(Loss) reclassified from OCI into income
(Loss) gain reclassified from OCI into income
Gains (losses) recognized in the consolidated income statement due to fair value and
cash flow hedging relationships
Year ended Dec. 31,
Location of
gains (losses)
2018
2017
2016
Interest income $
Interest income
284 $
(273)
82 $
(97)
Interest expense
Interest expense
(328)
330
(197)
190
Other revenue
Other revenue
Trading revenue
Other revenue
Net interest revenue
Staff expense
(2)
2
—
2
—
(4)
—
—
2
8
—
10
$
11 $
(2) $
49
(50)
(323)
320
—
—
(16)
—
(18)
(11)
(49)
(a)
Includes $1 million associated with the amortization of the excluded component. At Dec. 31, 2018, the remaining accumulated OCI balance associated
with the excluded component was de minimis.
BNY Mellon 189
Notes to Consolidated Financial Statements (continued)
The following table presents the impact of hedging derivatives used in net investment hedging relationships in the
consolidated income statement.
Impact of derivative instruments used in net investment hedging relationships in the income statement
(in millions)
Derivatives in net investment hedging
relationships
FX contracts
Gain or (loss) recognized in
accumulated OCI on derivatives
Year ended Dec. 31,
2018
$
535 $
2017
(625) $
2016
652
Location of gain or (loss) reclassified
from accumulated OCI into income
Net interest revenue
Gain or (loss) reclassified from
accumulated OCI into income
Year ended Dec. 31,
2018
2017
$
— $
— $
2016
—
The following table presents information on the hedged items in fair value hedging relationships.
Hedged items in fair value hedging relationships at Dec. 31, 2018
(in millions)
Available-for-sale securities (a)
Long-term debt
Carrying amount of hedged
asset or liability
Hedge accounting basis
adjustment (decrease)
$
19,201
16,147
$
(125)
(453) (b)
(a) Excludes hedged items where only foreign currency risk is the designated hedged risk, as the basis adjustments related to foreign currency hedges will not
reverse through the consolidated income statement in future periods. The carrying amount excluded for available-for-sale securities was $148 million at
Dec. 31, 2018.
Includes $284 million of basis adjustment on long-term debt associated with terminated hedges.
(b)
The following table summarizes the notional amount and credit exposure of our total derivative portfolio at Dec. 31,
2018 and Dec. 31, 2017.
Impact of derivative instruments on the balance sheet
(in millions)
Derivatives designated as hedging instruments: (a)(b)
Interest rate contracts
Foreign exchange contracts
Total derivatives designated as hedging instruments
Derivatives not designated as hedging instruments: (b)(c)
Interest rate contracts
Foreign exchange contracts
Equity contracts
Credit contracts
Total derivatives not designated as hedging instruments
Total derivatives fair value (d)
Effect of master netting agreements (e)
Fair value after effect of master netting agreements
Notional value
Dec. 31,
Asset derivatives
fair value
Dec. 31,
Liability derivatives
fair value
Dec. 31,
2018
2017
2018
2017
2018
2017
$
35,890 $
6,330
36,315
8,923
$ 248,534 $ 267,485
767,999
1,698
180
831,730
927
150
$
$
$
$
$
$
23 $
266
289 $
278
45
323
3,590 $
4,807
68
—
8,465 $
8,754 $
(5,939)
2,815 $
6,439
5,104
70
—
11,613
11,936
(8,845)
3,091
$
$
$
$
$
$
74 $
14
88 $
534
266
800
3,116 $
5,215
118
1
8,450 $
8,538 $
(6,170)
2,368 $
6,353
5,067
149
4
11,573
12,373
(8,797)
3,576
(a) The fair value of asset derivatives and liability derivatives designated as hedging instruments is recorded as other assets and other
liabilities, respectively, on the consolidated balance sheet.
(b) Pursuant to a rule change at a clearing organization in 2018, cash collateral exchanged is deemed a settlement of the derivative each
day. The impact of the change reduced the gross fair value of derivative assets and liabilities and a corresponding decrease in effect of
master netting agreements, with no impact to the consolidated balance sheet.
(c) The fair value of asset derivatives and liability derivatives not designated as hedging instruments is recorded as trading assets and
trading liabilities, respectively, on the consolidated balance sheet.
(d) Fair values are on a gross basis, before consideration of master netting agreements, as required by ASC 815, Derivatives and Hedging.
(e) Effect of master netting agreements includes cash collateral received and paid of $809 million and $1,040 million, respectively, at Dec.
31, 2018, and $925 million and $877 million, respectively, at Dec. 31, 2017.
190 BNY Mellon
Notes to Consolidated Financial Statements (continued)
Trading activities (including trading derivatives)
Our trading activities are focused on acting as a
market-maker for our customers, facilitating customer
trades and risk mitigating economic hedging in
compliance with the Volcker Rule. The change in the
fair value of the derivatives utilized in our trading
activities is recorded in foreign exchange and other
trading revenue on the consolidated income
statement.
The following table presents our foreign exchange
and other trading revenue.
Foreign exchange and other
trading revenue
(in millions)
Foreign exchange
Other trading revenue
Total foreign exchange and other
trading revenue
$
$
Year ended Dec. 31,
2018
663 $
69
638 $
30
2017
2016
687
14
732 $
668 $
701
Foreign exchange revenue includes income from
purchasing and selling foreign currencies and
currency forwards, futures and options. Other trading
revenue reflects results from trading in cash
instruments including fixed income and equity
securities and non-foreign exchange derivatives.
We also use derivative financial instruments as risk
mitigating economic hedges, which are not formally
designated as accounting hedges. This includes
hedging the foreign currency, interest rate or market
risks inherent in some of our balance sheet exposures,
such as seed capital investments and deposits, as well
as certain investment management fee revenue
streams. We also use total return swaps to
economically hedge obligations arising from the
company’s deferred compensation plan whereby the
participants defer compensation and earn a return
linked to the performance of investments they select.
The gains or losses on these total return swaps are
recorded in staff expense on the consolidated income
statement and was a loss of $20 million in 2018, a
gain of $26 million in 2017 and a gain of $14 million
in 2016.
We manage trading risk through a system of position
limits, a VaR methodology based on historical
simulation and other market sensitivity measures.
Risk is monitored and reported to senior management
by a separate unit, independent from trading, on a
daily basis. Based on certain assumptions, the VaR
methodology is designed to capture the potential
overnight pre-tax dollar loss from adverse changes in
fair values of all trading positions. The calculation
assumes a one-day holding period, utilizes a 99%
confidence level and incorporates non-linear product
characteristics. The VaR model is one of several
statistical models used to develop economic capital
results, which are allocated to lines of business for
computing risk-adjusted performance.
VaR methodology does not evaluate risk attributable
to extraordinary financial, economic or other
occurrences. As a result, the risk assessment process
includes a number of stress scenarios based upon the
risk factors in the portfolio and management’s
assessment of market conditions. Additional stress
scenarios based upon historical market events are also
performed. Stress tests may incorporate the impact of
reduced market liquidity and the breakdown of
historically observed correlations and extreme
scenarios. VaR and other statistical measures, stress
testing and sensitivity analysis are incorporated in
other risk management materials.
Counterparty credit risk and collateral
We assess credit risk of our counterparties through
regular examination of their financial statements,
confidential communication with the management of
those counterparties and regular monitoring of
publicly available credit rating information. This and
other information is used to develop proprietary
credit rating metrics used to assess credit quality.
Collateral requirements are determined after a
comprehensive review of the credit quality of each
counterparty. Collateral is generally held or pledged
in the form of cash and/or highly liquid government
securities. Collateral requirements are monitored and
adjusted daily.
Additional disclosures concerning derivative financial
instruments are provided in Note 19.
Disclosure of contingent features in OTC derivative
instruments
Certain OTC derivative contracts and/or collateral
agreements contain credit-risk contingent features
triggered upon a rating downgrade in which the
counterparty has the right to request additional
collateral or the right to terminate the contracts in a
net liability position.
BNY Mellon 191
Notes to Consolidated Financial Statements (continued)
The following table shows the aggregate fair value of
OTC derivative contracts in net liability positions that
contained credit-risk contingent features and the
value of collateral that has been posted.
The following table shows the fair value of contracts
falling under early termination provisions that were in
net liability positions for three key ratings triggers.
(in millions)
Aggregate fair value of OTC derivatives
in net liability positions (a)
Collateral posted
(a) Before consideration of cash collateral.
Dec. 31,
2018
$
$
2,877 $
2,801 $
2017
2,393
2,115
The aggregate fair value of OTC derivative contracts
containing credit-risk contingent features can
fluctuate from quarter to quarter due to changes in
market conditions, composition of counterparty
trades, new business or changes to the contingent
features.
The Bank of New York Mellon, our largest banking
subsidiary, enters into the substantial majority of our
OTC derivative contracts and/or collateral
agreements. As such, the contingent features may be
triggered if The Bank of New York Mellon’s long-
term issuer rating was downgraded.
Offsetting assets and liabilities
Potential close-out exposures (fair value) (a)
(in millions)
If The Bank of New York Mellon’s
rating changed to: (b)
Dec. 31,
2018
Dec. 31,
2017
A3/A-
Baa2/BBB
Ba1/BB+
92
748
2,007
(a) The amounts represent potential total close-out values if The
15 $
116 $
1,041 $
$
$
$
Bank of New York Mellon’s long-term issuer rating were to
immediately drop to the indicated levels, and do not reflect
collateral posted.
(b) Represents rating by Moody’s/S&P.
If The Bank of New York Mellon’s debt rating had
fallen below investment grade on Dec. 31, 2018 and
Dec. 31, 2017, existing collateral arrangements would
have required us to post additional collateral of $100
million and $102 million, respectively.
The following tables present derivative instruments and financial instruments that are either subject to an
enforceable netting agreement or offset by collateral arrangements. There were no derivative instruments or
financial instruments subject to a legally enforceable netting agreement for which we are not currently netting.
Offsetting of derivative assets and financial assets at Dec. 31, 2018
(in millions)
Derivatives subject to netting arrangements:
Gross
amounts
offset in the
balance
sheet
(a)
Net assets
recognized
in the
balance
sheet
Gross amounts not offset
in the balance sheet
Financial
instruments
Cash
collateral
received
Net
amount
Gross assets
recognized
$
Interest rate contracts
Foreign exchange contracts
Equity and other contracts
Total derivatives subject to netting arrangements
Total derivatives not subject to netting arrangements
319
615
25
959
1,653
2,612
—
302
2,914
(a) Includes the effect of netting agreements and net cash collateral received. The offset related to the OTC derivatives was allocated to the
Total derivatives
Reverse repurchase agreements
Securities borrowing
Total
2,202
3,724
13
5,939
—
5,939
76,040 (b)
—
81,979
2,654 $
4,409
38
7,101
1,653
8,754
112,245
10,588
131,587 $
133 $
70
—
203
—
203
36,205
10,286
46,694 $
452 $
685
25
1,162
1,653
2,815
36,205
10,588
49,608 $
— $
—
—
—
—
—
—
—
— $
$
$
$
various types of derivatives based on the net positions.
(b) Offsetting of reverse repurchase agreements relates to our involvement in the FICC, where we settle government securities transactions
on a net basis for payment and delivery through the Fedwire system.
192 BNY Mellon
Notes to Consolidated Financial Statements (continued)
Offsetting of derivative assets and financial assets at Dec. 31, 2017
(in millions)
Derivatives subject to netting arrangements:
Gross
amounts
offset in the
balance
sheet
(a)
Net assets
recognized
in the
balance
sheet
Gross amounts not offset
in the balance sheet
Financial
instruments
Cash
collateral
received
Net
amount
Gross assets
recognized
$
Interest rate contracts
Foreign exchange contracts
Equity and other contracts
Total derivatives subject to netting arrangements
Total derivatives not subject to netting arrangements
662
830
17
1,509
1,288
2,797
13
341
3,151
(a) Includes the effect of netting agreements and net cash collateral received. The offset related to the OTC derivatives was allocated to the
Total derivatives
Reverse repurchase agreements
Securities borrowing
Total
5,075
3,720
50
8,845
—
8,845
25,848 (b)
—
34,693
178 $
116
—
294
—
294
16,923
10,858
28,075 $
840 $
946
17
1,803
1,288
3,091
16,936
11,199
31,226 $
5,915 $
4,666
67
10,648
1,288
11,936
42,784
11,199
65,919 $
— $
—
—
—
—
—
—
—
— $
$
$
$
various types of derivatives based on the net positions.
(b) Offsetting of reverse repurchase agreements relates to our involvement in the FICC, where we settle government securities transactions
on a net basis for payment and delivery through the Fedwire system.
Offsetting of derivative liabilities and financial liabilities at Dec. 31, 2018
(in millions)
Derivatives subject to netting arrangements:
Interest rate contracts
Foreign exchange contracts
Equity and other contracts
Total derivatives subject to netting arrangements
Total derivatives not subject to netting arrangements
Total derivatives
Repurchase agreements
Securities lending
Total
Gross
amounts
offset in the
balance
sheet
(a)
Gross
liabilities
recognized
Net
liabilities
recognized
in the
balance
sheet
Gross amounts not offset
in the balance sheet
Financial
instruments
Cash
collateral
pledged
$
$
3,144 $
4,747
75
7,966
572
8,538
84,665
997
94,200 $
2,508
3,626
36
6,170
—
6,170
76,040 (b)
—
82,210
$
$
636 $
1,121
39
1,796
572
2,368
8,625
997
11,990 $
547 $
187
37
771
—
771
8,625
937
10,333 $
— $
—
—
—
—
—
—
—
— $
Net
amount
89
934
2
1,025
572
1,597
—
60
1,657
(a) Includes the effect of netting agreements and net cash collateral paid. The offset related to the OTC derivatives was allocated to the
various types of derivatives based on the net positions.
(b) Offsetting of repurchase agreements relates to our involvement in the FICC, where we settle government securities transactions on a net
basis for payment and delivery through the Fedwire system.
BNY Mellon 193
Notes to Consolidated Financial Statements (continued)
Offsetting of derivative liabilities and financial liabilities at Dec. 31, 2017
(in millions)
Derivatives subject to netting arrangements:
Interest rate contracts
Foreign exchange contracts
Equity and other contracts
Total derivatives subject to netting arrangements
Total derivatives not subject to netting arrangements
Total derivatives
Repurchase agreements
Securities lending
Total
Gross
amounts
offset in the
balance
sheet
(a)
Gross
liabilities
recognized
Net
liabilities
recognized
in the
balance
sheet
Gross amounts not offset
in the balance sheet
Financial
instruments
Cash
collateral
pledged
$
$
6,810 $
4,765
143
11,718
655
12,373
33,908
2,186
48,467 $
5,495
3,221
81
8,797
—
8,797
25,848 (b)
—
34,645
$
$
1,315 $
1,544
62
2,921
655
3,576
8,060
2,186
13,822 $
1,222 $
177
58
1,457
—
1,457
8,059
2,091
11,607 $
— $
—
—
—
—
—
—
—
— $
Net
amount
93
1,367
4
1,464
655
2,119
1
95
2,215
(a) Includes the effect of netting agreements and net cash collateral paid. The offset related to the OTC derivatives was allocated to the
various types of derivatives based on the net positions.
(b) Offsetting of repurchase agreements relates to our involvement in the FICC, where we settle government securities transactions on a net
basis for payment and delivery through the Fedwire system.
Secured borrowings
The following table presents the contract value of repurchase agreements and securities lending transactions
accounted for as secured borrowings by the type of collateral provided to counterparties.
Repurchase agreements and securities lending transactions accounted for as secured borrowings
(in millions)
Repurchase agreements:
U.S. Treasury
U.S. government agencies
Agency RMBS
Corporate bonds
Other debt securities
Equity securities
Total
Securities lending:
U.S. government agencies
Other debt securities
Equity securities
Total
Total borrowings
Dec. 31, 2018
Remaining contractual maturity
Overnight and
continuous
Up to 30
days
30 days or
more
$
$
$
$
$
76,822 $
759
3,184
416
271
163
81,615 $
7 $
294
696
997 $
82,612 $
— $
—
—
—
—
—
— $
— $
—
—
— $
— $
— $
—
4
1,413
1,106
527
3,050 $
— $
—
—
— $
3,050 $
Total
76,822
759
3,188
1,829
1,377
690
84,665
7
294
696
997
85,662
Dec. 31, 2017
Remaining contractual maturity
Overnight and
continuous
Up to 30
days
30 days or
more
$
$
$
$
$
26,883 $
570
2,574
373
253
655
31,308 $
72 $
316
1,798
2,186 $
33,494 $
11 $
180
109
—
—
—
300 $
— $
—
—
— $
300 $
— $
—
—
1,052
731
517
2,300 $
— $
—
—
— $
2,300 $
Total
26,894
750
2,683
1,425
984
1,172
33,908
72
316
1,798
2,186
36,094
BNY Mellon’s repurchase agreements and securities
lending transactions primarily encounter risk
associated with liquidity. We are required to pledge
collateral based on predetermined terms within the
agreements. If we were to experience a decline in the
fair value of the collateral pledged for these
transactions, we could be required to provide
additional collateral to the counterparty, therefore
decreasing the amount of assets available for other
liquidity needs that may arise. BNY Mellon also
offers tri-party collateral agency services in the tri-
party repo market where we are exposed to credit
risk. In order to mitigate this risk, we require dealers
to fully secure intraday credit.
194 BNY Mellon
Notes to Consolidated Financial Statements (continued)
Note 23–Lines of business
We have an internal information system that produces performance data along product and service lines for our two
principal businesses and the Other segment. The primary products and services and types of revenue for our
principal businesses and a description of the Other segment are presented below.
Investment Services business
Line of business
Asset Servicing
Pershing
Issuer Services
Treasury Services
Primary products and services
Custody, accounting, ETF services,
middle-office solutions, transfer agency,
services for private equity and real estate
funds, foreign exchange, securities
lending, liquidity/lending services, prime
brokerage and data analytics
Clearing and custody, investment, wealth
and retirement solutions, technology and
enterprise data management, trading
services and prime brokerage
Corporate Trust (trustee, administration
and agency services and reporting and
transparency) and Depositary Receipts
(issuer services and support for brokers
and investors)
Integrated cash management solutions
including payments, foreign exchange,
liquidity management, receivables
processing and payables management
and trade finance and processing
Primary types of revenue
- Asset servicing fees (includes
securities lending revenue)
- Foreign exchange revenue
- Net interest revenue
- Financing-related fees
- Clearing services fees
- Net interest revenue
- Issuer services fees
- Net interest revenue
- Foreign exchange revenue
- Treasury services fees
- Net interest revenue
Clearance and Collateral Management
U.S. government clearing, global
collateral management and tri-party repo
- Asset servicing fees
- Net interest revenue
Investment Management business
Line of business
Asset Management
Wealth Management
Other segment
Primary products and services
Diversified investment management
strategies and distribution of investment
products
Primary types of revenue
- Investment management fees
- Performance fees
- Distribution and servicing fees
Investment management, custody, wealth
and estate planning and private banking
services
- Investment management fees
- Net interest revenue
Description
Includes leasing portfolio, corporate
treasury activities, including our
securities portfolio, derivatives and other
trading activity, corporate and bank-
owned life insurance, renewable energy
investments and business exits
Primary types of revenue
- Net interest revenue
- Investment and other income
- Net gain (loss) on securities
- Other trading revenue
BNY Mellon 195
Notes to Consolidated Financial Statements (continued)
Business accounting principles
Our business data has been determined on an internal
management basis of accounting, rather than the
generally accepted accounting principles used for
consolidated financial reporting. These measurement
principles are designed so that reported results of the
businesses will track their economic performance.
Business results are subject to reclassification when
organizational changes are made. There were no
significant organizational changes in 2018. The
results are also subject to refinements in revenue and
expense allocation methodologies, which are
typically reflected on a prospective basis.
The accounting policies of the businesses are the
same as those described in Note 1.
The results of our businesses are presented and
analyzed on an internal management reporting basis.
• Revenue amounts reflect fee and other revenue
generated by each business. Fee and other
revenue transferred between businesses under
revenue transfer agreements is included within
other revenue in each business.
• Revenues and expenses associated with specific
client bases are included in those businesses. For
example, foreign exchange activity associated
with clients using custody products is included in
Investment Services.
• Net interest revenue is allocated to businesses
based on the yields on the assets and liabilities
generated by each business. We employ a funds
transfer pricing system that matches funds with
the specific assets and liabilities of each business
based on their interest sensitivity and maturity
characteristics.
• The provision for credit losses associated with the
respective credit portfolios is reflected in each
business segment.
Incentives expense related to restricted stock is
allocated to the businesses.
•
• Support and other indirect expenses are allocated
to businesses based on internally developed
methodologies.
• Recurring FDIC expense is allocated to the
businesses based on average deposits generated
within each business.
• Litigation expense is generally recorded in the
business in which the charge occurs.
• Management of the securities portfolio is a shared
service contained in the Other segment. As a
result, gains and losses associated with the
valuation of the securities portfolio are included
in the Other segment.
• Client deposits serve as the primary funding
source for our securities portfolio. We typically
allocate all interest revenue to the businesses
generating the deposits. Accordingly, accretion
related to the portion of the securities portfolio
restructured in 2009 has been included in the
results of the businesses.
• Balance sheet assets and liabilities and their
related income or expense are specifically
assigned to each business. Businesses with a net
liability position have been allocated assets.
• Goodwill and intangible assets are reflected
within individual businesses.
Total revenue includes approximately $2.6 billion in
2018, $2.4 billion in 2017 and $2.2 billion in 2016 of
international operations domiciled in the UK which
comprised 16%, 15% and 14% of total revenue,
respectively.
196 BNY Mellon
Notes to Consolidated Financial Statements (continued)
The following consolidating schedules present the contribution of our businesses to our overall profitability.
For the year ended Dec. 31, 2018
(dollars in millions)
Total fee and other revenue
Net interest revenue (expense)
Total revenue
Provision for credit losses
Noninterest expense
Income (loss) before taxes
Investment
Services
8,926
3,372
12,298
1
8,058
4,239
$
$
Investment
Management
$
3,781
303
4,084
3
2,818
1,263
(a) $
(a)
(a) $
$
Consolidated
$
12,792
3,611
16,403
(11)
11,210
5,204
(a)
(a)
(b)
(a)(b)
$
Pre-tax operating margin (c)
Average assets
(a) Both total fee and other revenue and total revenue include a net loss from consolidated investment management funds of $1 million,
343,774
262,747
31,446
32%
31%
34%
$
$
$
$
representing $13 million of losses and a loss attributable to noncontrolling interests of $12 million. Income before taxes is net of a loss
attributable to noncontrolling interests of $12 million.
(b) Noninterest expense includes a loss attributable to noncontrolling interests of $1 million related to other consolidated subsidiaries.
(c) Income before taxes divided by total revenue.
For the year ended Dec. 31, 2017
(dollars in millions)
Total fee and other revenue
Net interest revenue (expense)
Total revenue (loss)
Provision for credit losses
Noninterest expense
Income (loss) before taxes
Investment
Services
8,527
3,058
11,585
(7)
7,747
3,845
$
$
Investment
Management
3,668
329
3,997
2
2,854
1,141
$
$
(a) $
(a)
(a) $
Consolidated
$
$
12,202
3,308
15,510
(24)
10,948
4,586
(a)
(a)
(b)
(a)(b)
Pre-tax operating margin (c)
Average assets
(a) Both total fee and other revenue and total revenue include net income from consolidated investment management funds of $37 million,
343,848
254,646
31,450
30%
33%
29%
$
$
$
$
representing $70 million of income and noncontrolling interests of $33 million. Income before taxes is net of noncontrolling interests of
$33 million.
(b) Noninterest expense includes a loss attributable to noncontrolling interest of $9 million related to other consolidated subsidiaries.
(c) Income before taxes divided by total revenue.
Consolidated
$
12,089
3,138
15,227
(11)
10,514
4,724
(a)
(a)
(b)
(a)(b)
For the year ended Dec. 31, 2016
(dollars in millions)
Total fee and other revenue
Net interest revenue
Total revenue
Provision for credit losses
Noninterest expense
$
Investment
Services
8,299
2,797
11,096
8
7,342
3,746
(a) $
(a)
$
Investment
Management
3,424
327
3,751
6
2,778
967
26%
Income before taxes
Pre-tax operating margin (c)
Average assets
(a) Both total fee and other revenue and total revenue include net income from consolidated investment management funds of $16 million,
358,477
273,808
30,169
(a) $
31%
34%
$
$
$
$
$
$
$
representing $26 million of income and noncontrolling interests of $10 million. Income before taxes is net of noncontrolling interests of
$10 million.
(b) Noninterest expense includes a loss attributable to noncontrolling interest of $9 million related to other consolidated subsidiaries.
(c) Income before taxes divided by total revenue.
BNY Mellon 197
Other
85
(64)
21
(15)
334
(298)
N/M
49,581
Other
7
(79)
(72)
(19)
347
(400)
N/M
57,752
Other
366
14
380
(25)
394
11
N/M
54,500
Notes to Consolidated Financial Statements (continued)
Note 24–International operations
International activity includes Investment Services
and Investment Management fee revenue generating
businesses, foreign exchange trading activity, loans
and other revenue producing assets and transactions
in which the customer is domiciled outside of the
United States and/or the international activity is
resident at an international entity. Due to the nature
of our international and domestic activities, it is not
possible to precisely distinguish our international
operations between internationally and domestically
domiciled customers. As a result, it is necessary to
make certain subjective assumptions such as:
•
Income from international operations is
determined after internal allocations for interest
revenue, taxes, expenses and provision for credit
losses.
• Expense charges to international operations
include those directly incurred in connection with
such activities, as well as an allocable share of
general support and overhead charges.
Total assets, total revenue, income before income taxes and net income of our international operations are shown in
the table below.
International operations
(in millions)
2018
2017
2016
Total assets at period end (a)
Total revenue
Income before income taxes
Net income
Total assets at period end (a)
Total revenue
Income before income taxes
Net income
Total assets at period end (a)
Total revenue
Income before income taxes
Net income
International
EMEA
APAC
Other
Total
International
Total
Domestic
$
$
$
74,982 (b) $
4,252 (b)
1,694
1,345
88,490 (b) $
3,982 (b)
1,497
1,186
73,303 (b) $
3,744 (b)
1,263
1,013
23,199 $
1,103
564
448
20,676 $
997
538
426
18,074 $
922
485
389
1,483 $
684
455
361
1,737 $
610
296
234
1,350 $
549
286
229
$
$
$
99,664
6,039
2,713
2,154
110,903
5,589
2,331
1,846
92,727
5,215
2,034
1,631
$
$
$
263,209
10,353
2,479
2,100
260,855
9,954
2,279
2,268
240,742
10,022
2,691
1,917
Total
362,873
16,392
5,192
4,254
371,758
15,543
4,610
4,114
333,469
15,237
4,725
3,548
(a) Total assets include long-lived assets, which are not considered by management to be significant in relation to total assets. Long-lived
assets are primarily located in the United States.
(b) Includes assets of approximately $30.6 billion, $32.9 billion and $29.6 billion and revenue of approximately $2.6 billion, $2.4 billion and
$2.2 billion in 2018, 2017 and 2016, respectively, of international operations domiciled in the UK, which is 8%, 9% and 9% of total
assets and 16%, 15% and 14% of total revenue, respectively.
Note 25–Supplemental information to the Consolidated Statement of Cash Flows
Non-cash investing and financing transactions that, appropriately, are not reflected in the consolidated statement of
cash flows are listed below.
Non-cash investing and financing transactions
(in millions)
Transfers from loans to other assets for other real estate owned
Change in assets of consolidated VIEs
Change in liabilities of consolidated VIEs
Change in nonredeemable noncontrolling interests of consolidated investment management funds
Securities purchased not settled
Securities sold not settled
Securities matured not settled
Available-for-sale securities transferred to trading assets
Held-to-maturity securities transferred to available-for-sale
Premises and equipment/capitalized software funded by capital lease obligations
Year ended Dec. 31,
2018
2017
$
2 $
3 $
268
—
215
227
187
—
963
1,087
26
500
313
302
112
587
70
—
74
347
2016
4
170
69
120
75
—
—
—
10
13
198 BNY Mellon
Report of Independent Registered Public Accounting Firm
To the Stockholders and Board of Directors
The Bank of New York Mellon Corporation:
Opinion on the Consolidated Financial Statements
We have audited the accompanying consolidated balance sheets of The Bank of New York Mellon Corporation and
subsidiaries (BNY Mellon) as of December 31, 2018 and 2017, the related consolidated statements of income,
comprehensive income, changes in equity, and cash flows for each of the years in the three-year period ended
December 31, 2018, and the related notes (collectively, the consolidated financial statements). In our opinion, the
consolidated financial statements present fairly, in all material respects, the financial position of BNY Mellon as of
December 31, 2018 and 2017, and the results of its operations and its cash flows for each of the years in the three-
year period ended December 31, 2018, in conformity with U.S. generally accepted accounting principles.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United
States) (PCAOB), BNY Mellon’s internal control over financial reporting as of December 31, 2018, based on
criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring
Organizations of the Treadway Commission, and our report dated February 27, 2019 expressed an unqualified
opinion on the effectiveness of BNY Mellon’s internal control over financial reporting.
Basis for Opinion
These consolidated financial statements are the responsibility of BNY Mellon’s management. Our responsibility is
to express an opinion on these 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 BNY Mellon in accordance with
the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission
and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of
material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks
of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing
procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the
amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the
accounting principles used and significant estimates made by management, as well as evaluating the overall
presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis for our
opinion.
We have served as BNY Mellon’s auditor since 2007.
New York, New York
February 27, 2019
BNY Mellon 199
Directors, Executive Committee and Other Executive Officers
Effective February 27, 2019
Directors
Steven D. Black
Co-Chief Executive Officer
Bregal Investments
Private equity firm
Linda Z. Cook
Partner, Managing Director and Member of the
Executive Committee of EIG Global Energy
Partners, an investment firm, and Chief
Executive Officer of Harbour Energy, Ltd.,
an energy investment vehicle
Joseph J. Echevarria
Retired Chief Executive Officer
Deloitte LLP
Global provider of audit, consulting, financial
advisory, risk management, tax and related
services
Edward P. Garden
Chief Investment Officer and a founding partner,
Trian Fund Management, L.P.
Alternative investment management firm
Jeffrey A. Goldstein
Chairman
SpringHarbor Holding Company LLC and a
Senior Advisor, Hellman & Friedman LLC
Private equity firm
John M. Hinshaw
Former Executive Vice President and
Chief Customer Officer at
Hewlett Packard Enterprise Company
Global provider of IT, technology and enterprise
products and solutions
Mark A. Nordenberg
Chancellor Emeritus,
Chair of the Institute of Politics and
Distinguished Service Professor of Law
University of Pittsburgh
Major public research university
Elizabeth E. Robinson
Former Global Treasurer, Partner and
Managing Director of
The Goldman Sachs Group, Inc.
Global financial services company
Edmund F. (Ted) Kelly
Retired Chairman
Liberty Mutual Group
Multi-line insurance company
Charles W. Scharf
Chairman and Chief Executive Officer
The Bank of New York Mellon Corporation
Jennifer B. Morgan
Executive Board Member of SAP and
President of SAP Americas and Asia Pacific Japan,
Global Customer Operations
Global software company
Samuel C. Scott III
Retired Chairman, President and
Chief Executive Officer
Ingredion Incorporated (formerly Corn
Products International, Inc.)
Global ingredient solutions provider
Executive Committee and Other Executive Officers
Paul Camp
Chief Executive Officer, Treasury Services
Lisa Dolly
Chief Executive Officer, Pershing LLC
Bridget E. Engle *
Chief Information Officer
Thomas P. (Todd) Gibbons *
Chief Executive Officer, Clearing, Markets
and Client Management
Mitchell E. Harris *
Chief Executive Officer, Investment Management
Monique R. Herena *
Chief Human Resources Officer
Hani A. Kablawi *
Chief Executive Officer, Global Asset Servicing
and Chairman, Europe, Middle East and Africa
Roman Regelman *
Head of Digital
Catherine Keating
Chief Executive Officer, BNY Mellon Wealth
Management
Kurtis R. Kurimsky *
Corporate Controller
Francis (Frank) La Salla *
Chief Executive Officer, Issuer Services
J. Kevin McCarthy *
General Counsel
Michelle M. Neal
Chief Executive Officer, BNY Mellon Markets
Lester J. Owens *
Head of Operations
Brian Ruane
Chief Executive Officer, BNY Mellon
Government Securities Services Corp.
Michael P. Santomassimo *
Chief Financial Officer
Charles W. Scharf *
Chairman and Chief Executive Officer
Akash A. Shah *
Head of Strategy
James S. Wiener *
Chief Risk Officer
*
Designated as an Executive Officer.
200 BNY Mellon
Performance Graph
Cumulative shareholder returns (a)
(in dollars)
The Bank of New York Mellon Corporation
S&P 500 Financials Index
S&P 500 Index
Peer Group
(a) Returns are weighted by market capitalization at the beginning of the measurement period.
2013
100.0
100.0
100.0
100.0
2014
118.3
115.2
113.7
115.5
$
$
$
2015
122.2
113.4
115.3
115.3
Dec. 31,
$
$
2016
143.0
139.3
129.1
139.3
2017
165.4
170.2
157.2
168.8
$
2018
147.5
148.0
150.3
141.0
This graph shows The Bank of New York Mellon Corporation’s cumulative total shareholder returns over the five-
year period from Dec. 31, 2013 to Dec. 31, 2018. Our peer group is composed of financial services companies
which provide investment management and investment servicing. We also utilize the S&P 500 Financials Index as a
benchmark against our performance. The graph shows the cumulative total returns for the same five-year period of
the S&P 500 Financials Index, the S&P 500 Index as well as our peer group listed below. The comparison assumes
a $100 investment on Dec. 31, 2013 in The Bank of New York Mellon Corporation common stock, in the S&P 500
Financials Index, in the S&P 500 Index and in the peer group detailed below and assumes that all dividends were
reinvested.
Peer Group
BlackRock, Inc.
The Charles Schwab Corporation
Franklin Resources, Inc.
JPMorgan Chase & Co.
Morgan Stanley
Northern Trust Corporation
The PNC Financial Services Group, Inc.
Prudential Financial, Inc.
State Street Corporation
U.S. Bancorp
Wells Fargo & Company
BNY Mellon 201
Corporate Information
BNY Mellon is a global investments company dedicated to helping its clients manage and service their financial assets
throughout the investment lifecycle. Whether providing financial services for institutions, corporations or individual
investors, BNY Mellon delivers informed investment services and investment management in 35 countries. As of
December 31, 2018, BNY Mellon had $33.1 trillion in assets under custody and/or administration, and $1.7 trillion in
assets under management. BNY Mellon can act as a single point of contact for clients looking to create, trade, hold,
manage, service, distribute or restructure investments. BNY Mellon is the corporate brand of The Bank of New York
Mellon Corporation (NYSE: BK). Additional information is available on www.bnymellon.com. Follow us on
Twitter @BNYMellon or visit our newsroom at www.bnymellon.com/newsroom for the latest company news.
CORPORATE HEADQUARTERS
240 Greenwich Street, New York, NY 10286
+ 1 212 495 1784
www.bnymellon.com
ANNUAL MEETING
The Annual Meeting of Shareholders will be held in New York at
240 Greenwich Street at 9 a.m. on Tuesday, April 9, 2019.
EXCHANGE LISTING
BNY Mellon’s common stock is traded on the New York Stock Exchange
under the trading symbol BK. Mellon Capital IV’s 6.244% Fixed-to-Floating
Rate Normal Preferred Capital Securities fully and unconditionally
guaranteed by BNY Mellon (symbol BK/P) and depositary shares, each
representing a 1/4,000th interest in a share of BNY Mellon’s Series C
Noncumulative Perpetual Preferred Stock (symbol BK PrC), also are listed
on the New York Stock Exchange.
STOCK PRICES
Prices for BNY Mellon’s common stock can be viewed at
www.bnymellon.com/investorrelations.
CORPORATE GOVERNANCE
Corporate governance information is available at
www.bnymellon.com/governance.
CORPORATE SOCIAL RESPONSIBILITY
Information about BNY Mellon’s commitment to corporate social
responsibility is available at www.bnymellon.com/csr. BNY Mellon’s
Corporate Social Responsibility (CSR) Report, which includes our
Equal Employment Opportunity/Affirmative Action policies, can be
viewed and printed at www.bnymellon.com/csr.
INVESTOR RELATIONS
Visit www.bnymellon.com/investorrelations or
call +1 212 635 8529.
COMMON STOCK DIVIDEND PAYMENTS
Subject to approval of the Board of Directors, dividends are paid
on BNY Mellon’s common stock quarterly in February, May, August
and November.
TRANSFER AGENT AND REGISTRAR
EQ Shareowner Services
SHAREHOLDER SERVICES
EQ Shareowner Services maintains the records for our registered
shareholders and can provide a variety of services such as those involving:
• Change of name or address
• Consolidation of accounts
• Duplicate mailings
• Dividend reinvestment enrollment
• Direct deposit of dividends
• Transfer of stock to another person
For assistance from EQ Shareowner Services,
visit www.shareowneronline.com or call +1 800 205 7699.
DIRECT STOCK PURCHASE AND DIVIDEND
REINVESTMENT PLAN
The Direct Stock Purchase and Dividend Reinvestment Plan provides a
way to purchase shares of common stock directly from BNY Mellon at the
current market value. Non-shareholders may purchase their first shares of
BNY Mellon’s common stock through the Plan, and shareholders may increase
their shareholding by reinvesting cash dividends and through optional cash
investments. Plan details are in a prospectus, which may be viewed online
at www.shareowneronline.com, or obtained in printed form by calling
+1 800 205 7699.
ELECTRONIC DEPOSIT OF DIVIDENDS
Registered shareholders may have quarterly dividends paid on
BNY Mellon’s common stock deposited electronically to their checking
or savings accounts. To have dividends deposited electronically, go to
www.shareowneronline.com to set up your account(s) for direct deposit.
If you prefer, you may also send a request by mail to EQ Shareowner
Services, Shareholder Relations, P.O. Box 64874, St. Paul, MN 55164-0874.
For more information, call +1 800 205 7699.
SHAREHOLDER ACCOUNT ACCESS
BY INTERNET
www.shareowneronline.com
Shareholders can register to receive shareholder information electronically.
To enroll, visit www.shareowneronline.com.
FORM 10-K AND SHAREHOLDER PUBLICATIONS
For a free copy of BNY Mellon’s Annual Report on Form 10-K, including the
financial statements and the financial statement schedules, or quarterly
reports on Form 10-Q as filed with the Securities and Exchange Commission,
send a request by email to investorrelations@bnymellon.com, or by
mail to Investor Relations at The Bank of New York Mellon Corporation,
240 Greenwich Street, New York, NY 10286. The 2018 Annual Report, as well
as Forms 10-K, 10-Q and 8-K and quarterly earnings and other news releases
can be found at www.bnymellon.com/investorrelations.
BY PHONE
Toll-free in the U.S. +1 800 205 7699
Outside the U.S. +1 651 450 4064
BY MAIL
EQ Shareowner Services
P.O. Box 64874
St. Paul, MN 55164-0874
The contents of the listed Internet sites are not incorporated in this Annual Report.
The Bank of New York Mellon Corporation
240 Greenwich Street
New York, NY 10286
United States
+1 212 495 1784
bnymellon.com