STATE STREET CORPORATION GENERAL
As ofDecember 31, 2019 , we had consolidated total assets of$245.61 billion , consolidated total deposits of$181.87 billion , consolidated total shareholders' equity of$24.43 billion and over 39,000 employees. We operate in more than 100 geographic markets worldwide, including theU.S. ,Canada ,Europe , theMiddle East andAsia . Our operations are organized into two lines of business, Investment Servicing and Investment Management, which are defined based on products and services provided. Investment Servicing provides services for institutional clients, including mutual funds, collective investment funds and other investment pools, corporate and public retirement plans, insurance companies, investment managers, foundations and endowments worldwide. Products include: custody; product and participant level accounting; daily pricing and administration; master trust and master custody; depotbank services (a fund oversight role created by non-U.S. regulation); record-keeping; cash management; foreign exchange, brokerage and other trading services; securities finance and enhanced custody products; deposit and short-term investment facilities; loans and lease financing; investment manager and alternative investment manager operations outsourcing; performance, risk and compliance analytics; and financial data management to support institutional investors. Our CRD business also falls within our Investment Servicing line of business and includes products and services, such as: portfolio modeling and construction; trade order management; investment risk and compliance; and wealth management solutions. Investment Management, through State Street Global Advisors, provides a broad range of investment management strategies and products for our clients. Our investment management strategies and products span the risk/reward spectrum, including core and enhanced indexing, multi-asset strategies, active quantitative and fundamental active capabilities and alternative investment strategies. Our AUM is currently primarily weighted to indexed strategies. In addition, we provide a breadth of services and solutions, including environmental, social and governance investing, defined benefit and defined contribution and Global Fiduciary Solutions (formerly Outsourced Chief Investment Officer). State Street Global Advisors is also a provider of ETFs, including the SPDR® ETF brand. While management fees are primarily determined by the values of AUM and the investment strategies employed, management fees reflect other factors as well, including the benchmarks specified in the respective management agreements related to performance fees. For financial and other information about our lines of business, refer to "Line of Business Information" in this Management's Discussion and Analysis and Note 24 to the consolidated financial statements in this Form 10-K. This Management's Discussion and Analysis should be read in conjunction with the consolidated financial statements and accompanying notes to consolidated financial statements in this Form 10-K. Certain previously reported amounts presented in this Form 10-K have been reclassified to conform to current-period presentation. We prepare our consolidated financial statements in conformity withU.S. GAAP. The preparation of financial statements in conformity withU.S. GAAP requires management to make estimates and assumptions in its application of certain accounting policies that materially affect the reported amounts of assets, liabilities, equity, revenue and expenses. The significant accounting policies that require us to make judgments, estimates and assumptions that are difficult, subjective or complex about matters that are uncertain and may change in subsequent periods include: • accounting for fair value measurements;
• impairment of goodwill and other intangible assets; and
• contingencies.
These significant accounting policies require the most subjective or complex judgments, and underlying estimates and assumptions could be subject to revision as new information becomes available. Additional information about these significant accounting policies is included under "Significant Accounting Estimates" in this Management's Discussion and Analysis. Certain financial information provided in this Form 10-K, including this Management's Discussion and Analysis, is prepared on both aU.S. GAAP, or reported basis, and a non-GAAP basis, including certain non-GAAP measures used in the calculation of identified regulatory ratios. We measure and compare certain financial information on a non-GAAP basis, including information that management uses in evaluating our business and activities. Non-GAAP financial information should be considered in addition to, and not as a substitute for or superior to, financial information prepared in conformity withU.S. GAAP. Any non-GAAP financial information presented in this Form 10-K,State Street Corporation
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
including this Management's Discussion and Analysis, is reconciled to its most
directly comparable currently applicable regulatory ratio or U.S. GAAP-basis
measure. We further believe that our presentation of fully taxable-equivalent
NII, a non-GAAP measure, which reports non-taxable revenue, such as interest
income associated with tax-exempt investment securities, on a fully
taxable-equivalent basis, facilitates an investor's understanding and analysis
of our underlying financial performance and trends.
This Management's Discussion and Analysis contains statements that are
considered "forward-looking statements" within the meaning of U.S. securities
laws. Forward-looking statements include statements about our goals and
expectations regarding our business, financial and capital condition, results of
operations, strategies, cost savings and transformation initiatives, investment
portfolio performance, dividend and stock purchase programs, outcomes of legal
proceedings, market growth, acquisitions, joint ventures and divestitures,
client growth and new technologies, services and opportunities, as well as
industry, governmental, regulatory, economic and market trends, initiatives and
developments, the business environment and other matters that do not relate
strictly to historical facts. These forward-looking statements involve certain
risks and uncertainties which could cause actual results to differ materially.
We undertake no obligation to revise the forward-looking statements contained in
this Management's Discussion and Analysis to reflect events after the time we
file this Form 10-K with the SEC . Additional information about forward-looking
statements and related risks and uncertainties is provided in "Risk Factors" in
this Form 10-K.
We provide additional disclosures required by applicable bank regulatory
standards, including supplemental qualitative and quantitative information with
respect to regulatory capital (including market risk associated with our trading
activities) and the liquidity coverage ratio, summary results of State
Street-run stress tests which we conduct under the Dodd-Frank Act and resolution
plan disclosures required under the Dodd-Frank Act. These additional disclosures
are available on the "Investor Relations" section of our website under "Filings
and Reports."
We have included our website address in this report as an inactive textual
reference only. Information on our website is not incorporated by reference in
this Form 10-K.
We use acronyms and other defined terms for certain business terms and
abbreviations, as defined on the acronyms list and glossary in this Form 10-K.
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
OVERVIEW OF FINANCIAL RESULTS
TABLE 1: OVERVIEW OF FINANCIAL RESULTS
Years Ended December 31,
(Dollars in millions, except per share amounts) 2019 2018 2017
Total fee revenue(1)(2) $ 9,147 $ 9,454 $ 9,001
Net interest income 2,566 2,671 2,304
Total other income 43 - 6 - (39 )
Total revenue(1)(2) 11,756 12,131 11,266
Provision for loan losses 10 15 2
Total expenses(1)(2) 9,034 9,015 8,269
Income before income tax expense 2,712 3,101 2,995
Income tax expense 470 508 839
Net income $ 2,242 $ 2,593 $ 2,156
Adjustments to net income:
Dividends on preferred stock(3) $ (232 ) $ (188 ) $ (182 )
Earnings allocated to participating securities(4) (1 ) (1 ) (2 )
Net income available to common shareholders $ 2,009 $ 2,404 $ 1,972
Earnings per common share:
Basic $ 5.43 $ 6.46 $ 5.26
Diluted 5.38 6.39 5.19
Average common shares outstanding (in thousands):
Basic 369,911 371,983 374,793
Diluted 373,666 376,476
380,213
Cash dividends declared per common share
$ 1.60 Return on average common equity 9.4 % 12.1 % 10.5 % Pre-tax margin 23.1 25.6 26.6 (1) CRD contributed approximately$385 million and$201 million in total revenue and total expenses, respectively, in 2019. Revenue includes approximately$370 million in software and processing fees and$15 million in brokerage and other trading services within foreign exchange trading services, and expenses include approximately$148 million in compensation and employee benefits and$53 million in other expense lines. In addition, CRD-related expenses in 2019 include$65 million in amortization of other intangible assets. CRD contributed approximately$119 million and$39 million in total revenue and total expenses, respectively, in 2018. Revenue includes approximately$114 million in software and processing fees and$5 million in brokerage and other trading services within foreign exchange trading services, and expenses include approximately$28 million in compensation and employee benefits and$11 million in other expense lines. In addition, CRD-related expenses in 2018 include$18 million in amortization of other intangible assets. (2) The revenue recognition standard impact was approximately$319 million in total revenue and total expenses for 2018, compared to 2017, including approximately$190 million in management fees,$58 million in foreign exchange trading services and$71 million across all other revenue lines, and expenses contributed approximately$183 million in other expenses,$106 million in transaction processing and$30 million across other expense line items. (3) Additional information about our preferred stock dividends is provided in Note 15 to the consolidated financial statements in this Form 10-K. (4) Represents the portion of net income available to common equity allocated to participating securities, composed of unvested and fully vested SERP (Supplemental executive retirement plans) shares and fully vested deferred director stock awards, which are equity-based awards that contain non-forfeitable rights to dividends, and are considered to participate with the common stock in undistributed earnings. State Street Corporation
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The following "Financial Results and Highlights" section provides information
related to significant events, as well as highlights of our consolidated
financial results for the year ended December 31, 2019 presented in Table 1:
Overview of Financial Results. More detailed information about our consolidated
financial results, including the comparison of our financial results for the
year ended December 31, 2019 to those for the year ended December 31, 2018 , is
provided under "Consolidated Results of Operations", "Line of Business
Information" and "Capital" which follows these sections, as well as in our
consolidated financial statements in this Form 10-K.
The comparison of our financial results for the year ended December 31, 2018 to
those for the year ended December 31, 2017 , is included in our Management's
Discussion and Analysis in the Annual Report on Form 10-K for the fiscal year
ended December 31, 2018 filed with the SEC on February 21, 2019 , as amended by
Exhibit 99.2 to our Current Report on Form 8-K filed with the SEC on May 2,
2019 .
For the fourth quarter of 2019, we recorded a charge of $140 million to increase
our legal accrual for government investigations and civil litigation associated
with our invoicing matter first reported in December 2015 . This additional legal
accrual relates to events that developed subsequent to January 17, 2020 , the
date we originally announced our financial results for the fourth quarter and
year ended December 31, 2019 , and was reported on February 20, 2020 . The effects
of the additional accrual are reflected in the financial and other information
reported in this Form 10-K.
In this Management's Discussion and Analysis, where we describe the effects of
changes in FX rates, those effects are determined by applying applicable
weighted average FX rates from the relevant 2018 period to the relevant 2019
period results.
Financial Results and Highlights
• EPS of $5.38 in 2019 decreased 16% compared to $6.39 in 2018. Both years
include the impact of notable items:
• 2019 notable items included:
• repositioning charges of approximately
• acquisition and restructuring costs of approximately$77 million , primarily related to CRD; • gain of approximately$44 million on the extinguishment of approximately$297 million of our outstanding floating rate junior subordinated debentures due 2047 following a cash tender offer;
• legal and related expenses of approximately
• costs of$22 million due to the redemption of all
outstanding Series
E non-cumulative perpetual preferred stock representing the
difference between the redemption value and the net carrying value
of the preferred stock.
• 2018 notable items included:
• repositioning charges of approximately
• legal and related expenses of approximately
• acquisition and restructuring costs primarily related to CRD of
approximately $24 million .
• CRD was acquired on October 1, 2018 . Total revenue contributed by CRD was
approximately $385 million and $119 million in 2019 and 2018,
respectively. Total expenses contributed by CRD were approximately $201
million and $39 million in 2019 and 2018, respectively. In addition,
CRD-related expenses include
of other intangible assets in 2019 and 2018, respectively.
• Total expenses were up slightly in 2019 compared to 2018, including the
impact of the incremental legal reserve, and reflect our successfully
executed previously announced 2019 expense savings program. That program
achieved approximately
expense savings of approximately
initiatives and
benefits, exceeding our revised goal of
(itself reflecting an increase from our initial goal of $350 million gross
savings).
• In 2019, return on equity of 9.4% decreased from 12.1% in 2018, primarily
due to a decrease in net income available to common shareholders. Pre-tax
margin of 23.1% in 2019 decreased from 25.6% in 2018, primarily due to a
decrease in total revenue.
• Operating leverage was (3.3)% in 2019. Operating leverage represents the
difference between the percentage change in total revenue and the
percentage change in total expenses, in each case relative to the prior
year period.
• We purchased a total of approximately
common stock in 2019 and 2018, respectively. These purchases were all
conducted under share purchase
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
programs approved by our Board of Directors. Our current share purchase program
authorizes the purchase of up to $2.0 billion of our common stock from July 1,
2019 through June 30, 2020 (the 2019 Program). $1.0 billion remains available
for repurchases under that program in the first and second quarters of 2020. The
lower level of common stock repurchases in 2018 reflects our funding plan for
our acquisition of CRD, which included an issuance of approximately $1.15
billion of common stock and a suspension of approximately $950 million of common
stock repurchases in 2018.
Revenue
• Total revenue and fee revenue both decreased 3% in 2019 compared to 2018,
primarily driven by decreases in servicing fees, management fees, foreign
exchange trading services and securities finance revenues and, in the case
of total revenue, by NII. These decreases were partially offset by higher
software and processing fee revenue in 2019, which includes a full year of
revenue from CRD. Total fee revenue in the second half of 2019 was
approximately
2019, representing a 2% increase, primarily driven by higher equity
markets as well as moderating fee pressure in the second half of the year.
• Total revenues contributed by CRD in 2019 were approximately $385
million , including $370 million in software and processing fees and
$15 million in brokerage and other trading services, within foreign
exchange trading services.
• Servicing fee revenue decreased 6% in 2019 compared to 2018, primarily due
to elevated fee pressure and lower client activity and flows.
• Management fee revenue decreased 4% in 2019 compared to 2018, primarily
reflecting the run rate impact of late 2018 outflows and mix changes away
from higher fee products, partially offset by higher equity market levels.
• Foreign exchange trading services decreased 7% in 2019 compared to 2018
primarily due to lower market volatility.
• Securities finance revenue decreased 13% in 2019 compared to 2018,
reflecting lower securities on loan, enhanced custody balances andspreads, and the impact of balance sheet optimization efforts implemented
in the second half of 2018.
• Software and processing fees revenue increased 64% in 2019 compared to
2018 primarily due to
2018.
• NII decreased 4% in 2019 compared to 2018, primarily due to lower average
non-interest bearing client deposit balances and lower long-end U.S.
market rates, partially offset by FICC, investment portfolio and loan
growth.
Expenses
• Total expenses were up slightly in 2019 compared to 2018, primarily
reflecting the impact of the incremental legal reserve of
technology infrastructure investments and the impact of the CRD
acquisition, partially offset by savings from resource discipline, process
re-engineering and automation initiatives and lower repositioning charges
in 2019 compared to 2018.
• We recorded a repositioning charge in 2019 of approximately $110
million , consisting of $98 million of compensation and employee
benefits expenses and $12 million of occupancy expenses, to further
drive process automation, information technology optimizations and
organization rationalization in 2020.
• Total expenses contributed by CRD in 2019 and 2018 were
approximately $201 million and $39 million , respectively, including
$148 million and $28 million in compensation and employee benefits
and $53 million and $11 million in other expense lines,
respectively. In addition, CRD-related expenses in 2019 and 2018
included $65 million and $18 million , respectively inamortization
of other intangible assets.
• We recorded a $140 million increase to our legal accrual for
government investigations and civil litigation associated with our
invoicing matter first reported in December 2015 . The accrual
reflects our intention to seek to resolve these matters.
AUC/A and AUM
• AUC/A increased 9% as of
primarily due to higher end of period market levels and client flows,
partially offset by a previously announced client transition. In 2019,
newly announced asset servicing mandates totaled approximately $1.84
trillion , in line with a high
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
of $1.89 trillion in 2018, primarily driven by additional services for an
existing large asset manager client. Servicing assets remaining to be installed
in future periods totaled approximately $1.17 trillion as of December 31, 2019 .
• AUM increased 24% as of December 31, 2019 compared to December 31, 2018 ,
primarily due to higher end of period market levels and net inflows,
driven by institutional, ETF and cash inflows.
Capital and Capital Redemptions
• In 2019, we returned a total of approximately $2.33 billion to our
shareholders in the form of common stock dividends and share purchases.
• We declared aggregate common stock dividends of $1.98 per share,
totaling $728 million in 2019, compared to $1.78 per share, totaling
$665 million in 2018, representing an increase ofapproximately 11%
on a per share basis.
• In 2019, we acquired 24.9 million shares of common stock at an
average per share cost of $64.30 and an aggregate cost of
approximately $1.6 billion . In 2018, we acquired 3.3 million shares
of common stock at an average per share cost of $105.31 and an
aggregate cost of approximately $350 million . These purchases were
all conducted under share purchase programs approved by our Board of
Directors.
• In
plan included as part of our 2019 CCAR submission. Pursuant to that plan,
our Board authorized the 2019 Program and we increased our quarterly
common stock dividend to $0.52 per share in the third quarter of 2019.
• Our CET1 capital ratio was 11.7% as of both December 31, 2019 and 2018,
and Tier 1 leverage ratio decreased to 6.9% as of December 31, 2019 ,
compared to 7.2% as of December 31, 2018 . As of December 31, 2019 ,
advanced approaches capital ratios were binding for the period. As of
the period.
Capital Redemptions • We redeemed all outstanding Series E non-cumulative perpetual preferred
stock as of December 15, 2019 at a redemption price of $750 million
($100,000 per share equivalent to
$25.00 per depositary share) plus accrued and unpaid dividends. The difference
of $22 million between the redemption value and the net carrying value resulted
in an EPS impact of approximately ($0.06 ) per share in 2019.
• On February 12, 2020 , we announced that we will redeem all 5,000 of our
outstanding shares of our non-cumulative perpetual preferred stock, Series
C, for cash at a redemption price of $100,000 per share (equivalent to
$25.00 per depositary share) plus all declared and unpaid dividends. The
redemption price will be payable on
will be reflected in our first quarter 2020 results of operations.
Debt Issuances and Redemptions
• On
fixed-to-floating rate senior notes due 2025 and
principal amount of fixed-to-floating rate senior subordinated notes due
2034 in a public offering.
• On
2.400% Senior Notes due 2030 in a public offering.
Debt Redemptions • In the fourth quarter of 2019, we completed a cash tender offer for
approximately
of outstanding floating rate junior subordinated debentures due 2047,
resulting in a gain of approximately
• In the fourth quarter of 2019, we redeemed approximately
our $150 million aggregate principal amount of outstanding floating rate
junior subordinated debentures due 2028.
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
CONSOLIDATED RESULTS OF OPERATIONS
This section discusses our consolidated results of operations for 2019 compared
to 2018 and should be read in conjunction with the consolidated financial
statements and accompanying condensed notes to the consolidated financial
statements in this Form 10-K.
Total Revenue
TABLE 2: TOTAL REVENUE
Years Ended December 31,
(Dollars in % Change 2019 vs. % Change 2018 vs.
millions) 2019 2018 2017 2018 2017
Fee revenue:
Servicing fees $ 5,074 $ 5,421 $ 5,365 (6 )% 1 %
Management fees(1) 1,771 1,851 1,616 (4 ) 15
Foreign exchange
trading services(2) 1,111 1,201 1,071 (7 ) 12
Securities finance 471 543 606 (13 ) (10 )
Software and
processing fees(2) 720 438 343 64 28
Total fee revenue(2) 9,147 9,454 9,001 (3 ) 5
Net interest income:
Interest income 3,941 3,662 2,908 8 26
Interest expense 1,375 991 604 39 64
Net interest income 2,566 2,671 2,304 (4 ) 16
Other income:
Gains (losses)
related to
investment
securities, net (1 ) 9 (39 ) nm nm
Other income 44 (3 ) - nm nm
Total other income 43 - 6 - (39 ) nm nm
Total revenue(2) $ 11,756 $ 12,131 $ 11,266 (3 ) 8
(1) The revenue recognition standard impact was approximately $319 million in
total revenue for 2018, including approximately $190 million in management fees,
$58 million in foreign exchange trading services and $71 million across all
other revenue lines.
(2) CRD contributed approximately $385 million in total revenue in 2019,
including approximately $370 million in software and processing fees and $15
million in brokerage and other trading services within foreign exchange trading
services. CRD contributed approximately $119 million in total revenue in 2018,
including approximately $114 million in software and processing fees and $5
million in brokerage and other trading services within foreign exchange trading
services.
nm Not meaningful
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
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Fee Revenue
Table 2: Total Revenue, provides the breakout of fee revenue for the years ended
December 31, 2019 , 2018 and 2017. Servicing and management fees collectively
made up approximately 75%, 77% and 78% of the total fee revenue in 2019, 2018
and 2017, respectively.
Servicing Fee Revenue
Generally, our servicing fee revenues are affected by several factors including
changes in market valuations, client activity and asset flows, net new business
and the manner in which we price our services. We provide a range of services to
our clients, including core custody services, accounting, reporting and
administration and middle office services, and the nature and mix of services
provided affects our servicing fees. The basis for fees will differ across
regions and clients. On average and over time, approximately 55% of our
servicing fee revenues have been variable due to changes in asset valuations
including changes in daily average valuations of AUC/A; another 15% of our
servicing fees are impacted by the volume of activity in the funds we serve; and
the remaining 30% of our servicing fees tend not to be variable in nature nor
impacted by market fluctuations or values.
Changes in Market Valuations
Our servicing fee revenue is impacted by both our levels and the geographic and
product mix of our AUC/A. Increases or decreases in market valuations have a
corresponding impact on the level of our AUC/A and servicing fee revenues,
though the degree of impact will vary depending on asset types and classes and
geography of assets held within our clients' portfolios.
Over the five years ended December 31, 2019 , we estimate that worldwide market
valuations impacted our servicing fee revenues by approximately (2)% to 5%
annually and approximately 0% and 2% in 2019 and 2018, respectively. See Table
3: Daily Averages, Month-End Averages and Year-End Equity Indices for selected
indices. While the specific indices presented are indicative of general market
trends, the asset types and classes relevant to individual client portfolios can
and do differ, and the performance of associated relevant indices and of client
portfolios can therefore differ from the performance of the indices presented.
In addition, our asset classifications may differ from those industry
classifications presented.
We estimate, using relevant information as of December 31, 2019 and assuming
that all other factors remain constant, that:
• A 10% increase or decrease in worldwide equity valuations, on a weighted
average basis, over the relevant periods for which our servicing fees are
calculated, would result in a corresponding change in our total servicing
fee revenues, on average and over time, of approximately 3%; and
• A 10% increase or decrease in worldwide fixed income valuations, on aweighted average basis, over the relevant periods for which our servicing
fees are calculated, would result in a corresponding change in our total
servicing fee revenues, on average and over time, of approximately 1%.
TABLE 3: DAILY AVERAGES, MONTH-END AVERAGES AND YEAR-END EQUITY INDICES(1)
Daily Averages of Indices Month-End Averages of Indices Year-End Indices
Years Ended December 31, Years Ended December 31, Years Ended December 31,
2019 2018 % Change 2019 2018 % Change 2019 2018 % Change S&P 500®
2,913 2,746 6 % 2,938 2,738 7 % 3,231 2,507 29 % MSCI EAFE® 1,892
1,965 (4 ) 1,903 1,957 (3 ) 2,037 1,720 18 MSCI® Emerging 1,036
1,093 (5 ) 1,043 1,090 (4 ) 1,115 966 15
Markets
(1) The index names listed in the table are service marks of their respective
owners.
NA Not applicable
TABLE 4: YEAR-END DEBT INDICES(1)
As of December 31,
2019 2018 % Change
Barclays Capital
(1) The index names listed in the table are service marks of their respective
owners.
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
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Client Activity and Asset Flows
Client activity and asset flows are impacted by the number of transactions we
execute on behalf of our clients, including FX settlements, equity and
derivative trades, and wire transfer activity, as well as actions by our clients
to change the asset class in which their assets are invested. Our servicing fee
revenues are impacted by a number of factors, including transaction volumes,
asset levels and asset classes in which funds are invested, as well as industry
trends associated with these client-related activities.
Our clients may change the asset classes in which their assets are invested,
based on their market outlook, risk acceptance tolerance or other
considerations. Over the five years ended December 31, 2019 , we estimate that
client activity and asset flows, together, impacted our servicing fee revenues
by approximately (1)% to 2% annually and approximately (1)% and 1% in 2019 and
2018, respectively. See Table 5: Industry Asset Flows for selected asset flow
information. While the asset flows presented are indicative of general market
trends, the asset types and classes relevant to individual client portfolios can
and do differ, and our flows may differ from those market trends. In addition,
our asset classifications may differ from those industry classifications
presented.
TABLE 5: INDUSTRY ASSET FLOWS
Years Ended December 31,
(In billions) 2019 2018
North America - ICI Market Data(1)(2)(3)
Long-Term Funds(4) $ (95.6 ) $ (349.6 )
Money Market 584.4 119.8
Exchange-Traded Fund 328.2 310.9
Total ICI Flows $ 817.0 $ 81.1
Europe - Broadridge Market Data(1)(5)(6)
Long-Term Funds(4) $ 188.8 $ (52.1 )
Money Market 54.9 12.4
Total Broadridge Flows $ 243.7 $ (39.7 )
(1) Industry data is provided for illustrative purposes only and is not intended
to reflect our activity or its clients' activity.
(2) Source: Investment Company Institute . Investment Company Institute (ICI)
data includes funds not registered under the Investment Company Act of 1940.
Mutual fund data represents estimates of net new cash flow, which is new sales
minus redemptions combined with net exchanges, while ETF data represents net
issuance, which is gross issuance less gross redemptions. Data for mutual funds
that invest primarily in other mutual funds and ETFs that invest primarily in
other ETFs were excluded from the series. ICI classifies mutual funds and ETFs
based on language in the fund prospectus.
(3) The year ended December 31, 2019 data includes ICI actuals for January 2019
through November 2019 and ICI estimates for December 2019 .
(4) The long-term fund flows reported by ICI are composed of North America
Market flows mainly in Equities, Hybrids and Fixed-Income Asset Classes. The
long-term fund flows reported by Broadridge are composed of the European,
Middle-Eastern, and African market flows mainly in Equities, Fixed-Income and
Multi Asset Classes.
(5) Source: © Copyright 2019, Broadridge Financial Solutions, Inc. Funds of
funds have been excluded from Broadridge data (to avoid double counting).
Therefore, a market total is the sum of all the investment categories excluding
the three funds of funds categories (in-house, ex-house and hedge). ETFs are
included in Broadridge's database on mutual funds, but this excludes
exchange-traded commodity products that are not mutual funds.
(6) The year ended December 31, 2019 data is on a rolling twelve month basis for
December 2018 through November 2019 for EMEA (Copyright 2019 Broadridge
Financial Solutions, Inc.).
Pricing
The industry in which we operate has historically faced pricing pressure, and our servicing fee revenues are also affected by such pressures today. Consequently, no assumption should be drawn as to future revenue run rate from announced servicing wins, as the amount of revenue associated with AUC/A can vary materially. On average, over the five years endedDecember 31, 2019 , we estimate that pricing pressure with respect to existing clients has impacted our servicing fees by approximately (2)% annually, with the impact ranging from (1)% to (4)% in any given year, and approximately (4)% in both 2019 and 2018. Pricing concessions can be a part of a contract renegotiation with a client including terms that may benefit us, such as extending the terms of our relationship with the client, expanding the scope of services that we provide or reducing our dependency on manual processes through the standardization of the services we provide. The timing of the impact of additional revenue generated by anticipated additional services, and the amount of revenue generated, may differ from the impact of pricing concessions on existing services due to the necessary time required to onboard those new services, the nature of those services and client investment practices. These same market pressures also impact the fees we negotiate when we win business from new clients. Net New Business Over the five years endedDecember 31, 2019 , net new business, which includes business both won and lost, has affected our servicing fee revenues by approximately 2% on average with a range of 0% to 3% annually and approximately 0% and 1% in 2019 and 2018, respectively, inclusive of a client transition. New business impacting servicing fees can include: custody; product and participant level accounting; daily valuation and administration; record-keeping; cash management; and other services. Revenues associated with new servicing mandates may vary based on the breadth of services provided, the time required to install the assets, and the types of assets installed. Management Fee Revenue Management fees generally are affected by our level of AUM, which we report based on month-end valuations. Management fees for certain components of managed assets, such as ETFs, mutual funds and UCITS, are affected by daily average valuations of AUM. Management fee revenue is more sensitive to market valuations than servicing fee revenue, as a higher proportion of the underlying services provided, and the associated management fees earned, are dependent on equity and fixed-income security valuations. Additional factors, such as the relative mix of assets managed, may have a significant effect on ourState Street Corporation
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AND RESULTS OF OPERATIONS
management fee revenue. While certain management fees are directly determined by
the values of AUM and the investment strategies employed, management fees may
reflect other factors, including performance fee arrangements, as well as our
relationship pricing for clients.
Asset-based management fees for passively managed products, to which our AUM is
currently primarily weighted, are generally charged at a lower fee of AUM than
for actively managed products. Actively managed products may also include
performance fee arrangements which are recorded when the fee is earned, based on
predetermined benchmarks associated with the applicable account's performance.
In light of the above, we estimate, using relevant information as of December
31, 2019 and assuming that all other factors remain constant, including the
impact of business won and lost and client flows, that:
• A 10% increase or decrease in worldwide equity valuations, on a weighted
average basis, over the relevant periods for which our management fees are
calculated, would result in a corresponding change in our total management
fee revenues, on average and over time, of approximately 5%; and
• A 10% increase or decrease in worldwide fixed-income valuations, on aweighted average basis, over the relevant periods for which our management
fees are calculated, would result in a corresponding change in our total
management fee revenues, on average and over time, of approximately 4%.
Daily averages, month-end averages and year-end indices demonstrate worldwide changes in equity and debt markets that affect our management fee revenue. Year-end indices affect the values of AUM as of those dates. See Table 3: Daily Averages, Month-End Averages and Year-End Equity Indices for selected indices. Additional information about fee revenue is provided under "Line of Business Information" included in this Management's Discussion and Analysis. Net Interest Income See Table 2: Total Revenue, for the breakout of interest income and interest expense for the years endedDecember 31, 2019 , 2018 and 2017. NII is defined as interest income earned on interest-earning assets less interest expense incurred on interest-bearing liabilities. Interest-earning assets, which principally consist of investment securities, interest-bearing deposits with banks, resale agreements, loans and other liquid assets, are financed primarily by client deposits, short-term borrowings and long-term debt. NIM represents the relationship between annualized FTE NII and average total interest-earning assets for the period. It is calculated by dividing FTE NII by average interest-earning assets. Revenue that is exempt from income taxes, mainly earned from certain investment securities (state and political subdivisions), is adjusted to a FTE basis using theU.S. federal and state statutory income tax rates. NII on a FTE basis decreased in 2019 compared to 2018, primarily due to lower long-end U.S. market rates and lower average non-interest bearing deposit balances, partially offset by FICC expansion and higher core loan and investment securities balances. Investment securities net premium amortization, which is included in interest income, was$434 million in 2019 compared to$391 million in 2018 and$364 million in 2017, primarily related to higher MBS premium amortization. Interest income related to debt securities is recognized in our consolidated statement of income using the effective interest method, or on a basis approximating a level rate of return over the contractual or estimated life of the security. The rate of return considers any non-refundable fees or costs, as well as purchase premiums or discounts, resulting in amortization or accretion, accordingly. The amortization of premiums and accretion of discounts are adjusted for prepayments when they occur, such that the level rate of return remains constant throughout the contractual life of the security. The following table presents the investment securities amortizable purchase premium net of discount accretion for the periods indicated: TABLE 6: INVESTMENT SECURITIES NET PREMIUM AMORTIZATION Years Ended December 31, (Dollars in millions) 2019 2018 2017 Unamortized premiums, net of discounts at period end$ 1,585 $ 1,575 $ 2,249 Net premium amortization 434 391 364 Investment securities duration (years) 2.7 3.1 2.7 State Street Corporation | 64
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
See Table 7: Average Balances and Interest Rates - Fully Taxable-Equivalent
Basis, for the breakout of NII on a FTE basis for the years ended December 31,
2019 , 2018 and 2017.
TABLE 7: AVERAGE BALANCES AND INTEREST RATES - FULLY TAXABLE-EQUIVALENT BASIS(1)
Years Ended December 31,
2019 2018 2017
(Dollars
in millions; fully Interest
taxable-equivalent Average Interest Average Interest Average Revenue/
basis) Balance Revenue/Expense Rate Balance Revenue/Expense Rate Balance Expense Rate
Interest-bearing
deposits with
banks $ 48,500 $ 416 .86 % $ 54,328 $ 387 .71 % $ 47,514 $ 180 .38 %
Securities
purchased under resale agreements(2) 2,506 364 14.54 2,901 335 11.55 2,131 264 12.38 Trading account assets 884 1 .11 1,051 - - 1,011 (1 ) (.12 ) Investment securities 91,768 2,009 2.19 88,070 1,927 2.19 95,779 1,891 1.97 Loans and leases 24,073 775 3.22 23,573 698 2.96 21,916 519 2.37
Other
interest-earning
assets 14,160 395 2.79 15,714 372 2.37 22,884 222 .97 Average total interest-earning assets$ 181,891 $ 3,960 2.18$ 185,637 $ 3,719 2.00$ 191,235 $ 3,075 1.61 Interest-bearing deposits: U.S.$ 67,547 $ 539 .80 %$ 54,953 $ 256 .47 %$ 30,623 $ 96 .31 % Non-U.S.(3) 61,301 124 .20 70,623 107 .15 91,937 67 .07 Total
interest-bearing
deposits(3)(4) 128,848 663 .51 125,576 363 .29 122,560 163 .13 Securities sold under repurchase agreements 1,616 31 1.90 2,048 13 .62 3,683 2 .05 Other short-term borrowings 1,524 21 1.37 1,327 17 1.28 1,313 10 .80 Long-term debt 11,474 414 3.61 10,686 389 3.64 11,595 308 2.66
Other
interest-bearing
liabilities 4,103 246 6.00 4,956 209 4.20 4,607 121 2.63 Average total interest-bearing liabilities$ 147,565 $ 1,375 .93$ 144,593 $ 991 .68$ 143,758 $ 604 .42 Interest rate spread 1.25 % 1.32 % 1.19 % Net interest income, fully taxable-equivalent basis $ 2,585 $ 2,728$ 2,471 Net interest margin, fully taxable-equivalent basis 1.42 % 1.47 % 1.29 % Tax-equivalent adjustment (19 ) (57 ) (167 ) Net interest income, GAAP basis $ 2,566 $ 2,671$ 2,304 (1) Rates earned/paid on interest-earning assets and interest-bearing liabilities include the impact of hedge activities associated with our asset and liability management activities where applicable. (2) Reflects the impact of balance sheet netting under enforceable netting agreements of approximately$86.67 billion ,$35.74 billion and$31.15 billion for the years endedDecember 31, 2019 , 2018 and 2017, respectively. Excluding the impact of netting, the average interest rates would be approximately 0.41%, 0.87% and 0.79% for the years endedDecember 31, 2019 , 2018 and 2017, respectively. (3) Average rate includes the impact of FX swap costs of approximately$153 million ,$106 million and$141 million for the years endedDecember 31, 2019 , 2018 and 2017, respectively. Average rates for total interest-bearing deposits excluding the impact of FX swap costs were 0.40%, 0.20% and 0.02% for the years endedDecember 31, 2019 , 2018 and 2017, respectively. (4) Total deposits averaged$158.26 billion compared to$161.41 billion and$163.81 billion for 2018 and 2017, respectively. Changes in the components of interest-earning assets and interest-bearing liabilities are discussed in more detail below. Additional information about the components of interest income and interest expense is provided in Note 17 to the consolidated financial statements in this Form 10-K. State Street Corporation
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Average total interest-earning assets were $181.89 billion in 2019 compared to
$185.64 billion in 2018. The decrease is primarily driven by lower average total
client deposits.
Interest-bearing deposits with banks averaged $48.50 billion in 2019 compared to
$54.33 billion in 2018. These deposits primarily reflect our maintenance of cash
balances at the Federal Reserve , the European Central Bank (ECB) and other
non-U.S. central banks. The lower levels of average cash balances with central
banks reflect lower levels of client deposits and an increase in the investment
portfolio.
Securities purchased under resale agreements averaged $2.51 billion in 2019
compared to $2.90 billion in 2018. While the on-balance sheet amount has
remained relatively stable, the impact of balance sheet netting increased to
$86.67 billion on average in 2019, respectively, compared to $35.74 billion in
2018. We maintain an agreement with Fixed Income Clearing Corporation (FICC), a
clearing organization that enables us to net all securities sold under
repurchase agreements against those purchased under resale agreements with
counterparties that are also members of the clearing organization. The increase
in average balance sheet netting, in 2019 compared to 2018, is primarily due to
the expansion of our FICC program and new client activity.
We have been a netting and sponsoring member within FICC since 2005. FICC
expanded the service in 2017, and since then, we have increased our
participation. We enter into repurchase and resale transactions in eligible
securities with sponsored clients and with other FICC members and, pursuant to
FICC Government Securities Division rules, submit, novate and net the
transactions. We may sponsor clients to clear their eligible repurchase
transactions with FICC, backed by our guarantee to FICC of the prompt and full
payment and performance of our sponsored member clients' respective obligations.
We obtain a security interest from our sponsored clients in the high quality
securities collateral that they receive, which is designed to mitigate our
potential exposure to FICC.
Average investment securities increased to $91.77 billion in 2019 from $88.07
billion in 2018 primarily driven by increased investment in MBS.
Loans averaged $24.07 billion in 2019 compared to $23.57 billion in 2018.
Average core loans, which exclude overdrafts, averaged $19.95 billion in 2019
compared to $18.65 billion in 2018.
Average other interest-earning assets, largely associated with our enhanced
custody business, decreased to $14.16 billion in 2019 from $15.71 billion in
2018, primarily driven by a reduction in the level of cash collateral posted.
Enhanced custody is our securities financing business where we act as principal
with respect to our custody clients and generate
securities finance revenue. The NII earned on these transactions is generally
lower than the interest earned on other alternative investments.
Aggregate average total interest-bearing deposits increased to $128.85 billion
in 2019 from $125.58 billion in 2018. Average U.S. interest-bearing deposits
increased as a result of a gradual shift from non-interest bearing deposits and
new deposit initiatives. Future deposit levels will be influenced by the
underlying asset servicing business, client deposit behavior and market
conditions, including the general levels of U.S. and non-U.S. interest rates.
Average other short-term borrowings, typically associated with our tax-exempt
investment program, increased to $1.52 billion in 2019 from $1.33 billion in
2018.
Average long-term debt was $11.47 billion in 2019 compared to $10.69 billion in
2018. These amounts reflect issuances, redemptions and maturities of senior debt
during the respective periods, including the issuance of $1.0 billion of senior
debt and $500 million of subordinated debt in November 2019 .
Average other interest-bearing liabilities were $4.10 billion in 2019 compared
to $4.96 billion in 2018. Other interest-bearing liabilities primarily reflect
our level of cash collateral received from clients in connection with our
enhanced custody business, which is presented on a net basis where we have
enforceable netting agreements.
Several factors could affect future levels of NII and NIM, including the volume
and mix of client deposits and funding sources; central bank actions; balance
sheet management activities; changes in the level and slope of U.S. and non-U.S.
interest rates; revised or proposed regulatory capital or liquidity standards,
or interpretations of those standards; the yields earned on securities purchased
compared to the yields earned on securities sold or matured and changes in the
type and amount of credit or other loans we extend.
Based on market conditions and other factors, including regulatory standards, we
continue to reinvest the majority of the proceeds from pay-downs and maturities
of investment securities in highly-rated U.S. and non-U.S. securities, such as
federal agency MBS, sovereign debt securities and U.S. Treasury and agency
securities. The pace at which we reinvest and the types of investment securities
purchased will depend on the impact of market conditions, the implementation of
regulatory standards, including interpretation of those standards and other
factors over time. We expect these factors and the levels of global interest
rates to impact our reinvestment program and future levels of NII and NIM.
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Provision for Loan Losses
We recorded a provision for loan losses of $10 million in 2019 compared to $15
million in 2018 and $2 million in 2017. Additional information is provided under
"Loans and Leases" in "Financial Condition" in this Management's Discussion and
Analysis and in Note 4 to the consolidated financial statements in this Form
10-K.
Expenses
Table 8: Expenses, provides the breakout of expenses for the years ended
December 31, 2019 , 2018 and 2017.
TABLE 8: EXPENSES
Years Ended December 31, % Change
(Dollars in % Change 2019 vs. 2018 vs.
millions) 2019 2018 2017 2018 2017
Compensation and
employee
benefits(1) $ 4,541 $ 4,780 $ 4,394 (5 )% 9 %
Information systems
and communications 1,465 1,324 1,167 11 14
Transaction
processing
services(2) 983 985 838 - 18
Occupancy 470 500 461 (6 ) 9
Acquisition costs 79 31 21 155 48
Restructuring
charges, net (2 ) (7 ) 245 (71 ) nm
Amortization of
other intangible
assets(1) 236 226 214 4 6
Other:
Professional
services 321 357 340 (10 ) 5
Other(2) 941 819 589 15 39
Total other(2) 1,262 1,176 929 7 27
Total expenses(1) $ 9,034 $ 9,015 $ 8,269 - 9
Number of employees
at year-end 39,103 40,142 36,643 (3 ) 10
(1) CRD contributed approximately $201 million in total expenses in 2019,
including approximately $148 million in compensation and employee benefits and
$53 million in other expense lines. In addition, CRD-related expenses in 2019
include $65 million in amortization of other intangible assets.
CRD contributed approximately $39 million in total expenses in 2018, including
approximately $28 million in compensation and employee benefits and $11 million
in other expense lines. In addition, CRD-related expenses in 2018 include $18
million in amortization of other intangible assets.
(2) The revenue recognition standard contributed approximately $319 million in
total expenses for 2018, including approximately $183 million in other expenses,
$106 million in transaction processing and $30 million across other expense line
items.
nm Not meaningful
Compensation and employee benefits expenses decreased 5% in 2019 compared to
2018, primarily driven by savings from the process re-engineering and resource
discipline savings initiatives under our expense savings program and lower
repositioning charges in 2019 compared to 2018, partially offset by the impact
of the CRD acquisition and annual merit increases.
Total headcount decreased by approximately 3% as of December 31, 2019 compared
to December 31, 2018 , primarily driven by productivity savings, including a
reduction in headcount in higher cost locations.
Information systems and communications expenses increased 11% in 2019 compared
to 2018. The increase was primarily related to technology infrastructure
enhancements.
Transaction processing services expenses remained flat in 2019 compared to 2018.
Occupancy expenses decreased 6% in 2019 compared to 2018, primarily due to lower
repositioning charges in 2019 compared to 2018 and the advancement of our global
footprint strategy.
Amortization of other intangible assets increased 4% in 2019 compared to 2018,
primarily due to the CRD acquisition.
Other expenses increased 7% in 2019 compared to 2018, primarily driven by higher
legal expenses and State Street Foundation funding, partially offset by lower
professional services, travel, and insurance costs.
Acquisition Costs
We recorded approximately $79 million of acquisition costs in 2019 compared to
$31 million in 2018, related to our acquisition of CRD, and $21 million in 2017
related to our acquisition of the GEAM business. As we integrate CRD into our
business, we expect to incur a total of approximately $200 million of
acquisition costs, including merger and integration costs, through 2021, out of
which $110 million has been incurred as of December 31, 2019 , since the
acquisition.
Restructuring and Repositioning Charges
Repositioning Charges
In late 2018, we initiated an expense program to accelerate efforts to become a
higher-performing organization and help navigate challenging market and industry
conditions, with an initial goal to realize $350 million in gross expense
savings in 2019, which was subsequently revised to $400 million gross savings
for 2019. In 2019, we achieved approximately $415 million of gross expense
savings under this program, including approximately $230 million in resource
discipline initiatives and $185 million in process re-engineering and automation
benefits.
Resource discipline initiatives include reducing senior management headcount,
rigorous performance management, vendor management and optimization of real
estate. Process re-engineering and automation benefits can include high-cost
location workforce reductions, reducing manual/bespoke and redundant activities,
streamlining operational centers and moving to common platforms/retiring legacy
applications.
Expenses for 2019 included a repositioning charge of $110 million to further
drive process
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
automation, information technology optimizations and organization
rationalization in 2020, consisting of $98 million of compensation and employee
benefits and $12 million of occupancy expenses. Total repositioning charges were
$300 million in 2018.
The following table presents aggregate activity for repositioning charges and
activity related to previous Beacon restructuring charges for the periods
indicated:
TABLE 9: RESTRUCTURING AND REPOSITIONING CHARGES
Employee Real Estate
(In millions) Related Costs Actions Asset and Other Write-offs Total
Accrual Balance at
December 31, 2016 $ 37 $ 17 $ 2 $ 56
Accruals for Beacon 186 32 27 245
Payments and Other
Adjustments (57 ) (17 ) (26 ) (100 )
Accrual Balance at
December 31, 2017 166 32 3 201
Accruals for Beacon (7 ) - - (7 )
Accruals for
Repositioning Charges 259 41 - 300
Payments and Other
Adjustments (115 ) (36 ) (2 ) (153 )
Accrual Balance at
December 31, 2018 303 37 1 341
Accruals for Beacon (2 ) - - (2 )
Accruals for
Repositioning Charges 98 12 - 110
Payments and Other
Adjustments (209 ) (42 ) - (251 )
Accrual Balance at
December 31, 2019 $ 190 $ 7 $ 1 $ 198
Income Tax Expense
Income tax expense was $470 million in 2019 compared to $508 million and $839
million in 2018 and 2017, respectively. Our effective tax rate was 17.3% in
2019, compared to 16.3% and 27.9% in 2018 and 2017, respectively. The effective
tax rate for 2019 included a benefit attributable to a foreign legal entity
restructuring which was partially offset by legal accruals, limitations on
foreign tax credit benefits and a decrease in deductions related to stock based
compensation. The effective tax rate in 2018 included an additional deferred tax
benefit of $32 million related to adjustments from the Tax Cuts and Jobs Act
provisional estimate recorded in 2017.
Additional information regarding income tax expense, including unrecognized tax
benefits and tax contingencies, are provided in Notes 13 and 22 to the
consolidated financial statements in this Form 10-K.
LINE OF BUSINESS INFORMATION
Our operations are organized into two lines of business: Investment Servicing
and Investment Management, which are defined based on products and services
provided. The results of operations for these
lines of business are not necessarily comparable with those of other companies,
including companies in the financial services industry.
Investment Servicing, through State Street Global Services, State Street Global
Markets , State Street Global Exchange and CRD, provides services for
institutional clients, including mutual funds, collective investment funds and
other investment pools, corporate and public retirement plans, insurance
companies, investment managers, foundations and endowments worldwide. Products
include: custody; product and participant level accounting; daily pricing and
administration; master trust and master custody; depotbank services (a fund
oversight role created by non-U.S. regulation); record-keeping; cash management;
foreign exchange, brokerage and other trading services; securities finance and
enhanced custody products; deposit and short-term investment facilities; loans
and lease financing; investment manager and alternative investment manager
operations outsourcing; performance, risk and compliance analytics; and
financial data management to support institutional investors. Our CRD business
also falls within our Investment Servicing line of business and includes
products and services, such as: portfolio modeling and construction; trade order
management; investment risk and compliance; and wealth management solutions.
Investment Management, through State Street Global Advisors, provides a broad
range of investment management strategies and products for our clients. Our
investment management strategies and products span the risk/reward spectrum,
including core and enhanced indexing, multi-asset strategies, active
quantitative and fundamental active capabilities and alternative investment
strategies. Our AUM is currently primarily weighted to indexed strategies. In
addition, we provide a breadth of services and solutions, including
environmental, social and governance investing, defined benefit and defined
contribution and Global Fiduciary Solutions (formerly Outsourced Chief
Investment Officer). State Street Global Advisors is also a provider of ETFs,
including the SPDR® ETF brand. While management fees are primarily determined by
the values of AUM and the investment strategies employed, management fees
reflect other factors as well, including the benchmarks specified in the
respective management agreements related to performance fees.
For information about our two lines of business, as well as the revenues,
expenses and capital allocation methodologies associated with them, refer to
Note 24 to the consolidated financial statements in this Form 10-K.
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Investment Servicing
TABLE 10: INVESTMENT SERVICING LINE OF BUSINESS RESULTS
Years Ended December 31, % Change % Change
(Dollars in millions, except where 2019 vs. 2018 vs.
otherwise noted) 2019 2018 2017 2018 2017
Servicing fees $ 5,074 $ 5,429 $ 5,365 (7 )% 1 %
Foreign exchange trading services(1) 974 1,071 999 (9 ) 7
Securities finance 462 543 606 (15 ) (10 )
Software and processing fees(1) 691 443 336 56 32
Total fee revenue(1) 7,201 7,486 7,306 (4 ) 2
Net interest income 2,590 2,691 2,309 (4 ) 17
Total other income 43 6 (39 ) nm nm
Total revenue(1) 9,834 10,183 9,576 (3 ) 6
Provision for loan losses 10 15 2 (33 ) 650
Total expenses(1) 7,140 7,081 6,717 1 5
Income before income tax expense
(13 ) 8 Pre-tax margin 27 % 30 % 30 % Average assets (in billions)$ 220.3 $ 220.2 $ 214.0 (1) CRD contributed approximately$385 million and$201 million in total revenue and total expenses, respectively, in 2019, including approximately$370 million in software and processing fees and$15 million in brokerage and other trading services within foreign exchange trading services, and expenses contributed approximately$148 million in compensation and employee benefits and$53 million in other expense lines. In addition, CRD-related expenses in 2019 include$65 million in amortization of other intangible assets. CRD contributed approximately$119 million and$39 million in total revenue and total expenses, respectively, in 2018. Revenue includes approximately$114 million in software and processing fees and$5 million in brokerage and other trading services within foreign exchange trading services, and expenses include approximately$28 million in compensation and employee benefits and$11 million in other expense lines. In addition, CRD-related expenses in 2018 include$18 million in amortization of other intangible assets. nm Not meaningful Servicing Fees Servicing fees, as presented in Table 10: Investment Servicing Line of Business Results, decreased 7% in 2019 compared to 2018 primarily due to elevated fee pressure and lower client activity and flows. FX rates negatively impacted servicing fees by 1% in 2019 and positively impacted servicing fees by 1% in 2018. Servicing fees generated outside theU.S. were approximately 47% of total servicing fees in both 2019 and 2018 compared to approximately 45% in 2017. TABLE 11: ASSETS UNDER CUSTODY AND/OR ADMINISTRATION BY PRODUCT % Change % Change (In billions) December 31, 2019 December 31, 2018 December 31, 2017 2019 vs. 2018 2018 vs. 2017 Collective funds $ 9,796 $ 8,999 $ 9,707 9 % (7 )% Mutual funds 9,221 7,912 7,603 17 4 Insurance and other products 8,417 8,220 9,105 2 (10 ) Pension products 6,924 6,489 6,704 7 (3 ) Total $ 34,358 $ 31,620 $ 33,119 9 (5 )
TABLE 12: ASSETS UNDER CUSTODY AND/OR ADMINISTRATION BY ASSET CLASS
% Change % Change
(In billions) December 31, 2019 December 31, 2018 December 31, 2017 2019 vs. 2018 2018 vs. 2017
Equities $ 19,301 $ 18,041 $ 19,214 7 % (6 )%
Fixed-income 10,766 9,758 10,070 10 (3 )
Short-term and
other
investments 4,291 3,821 3,835 12 -
Total $ 34,358 $ 31,620 $ 33,119 9 (5 )
TABLE 13: ASSETS UNDER CUSTODY AND/OR ADMINISTRATION BY GEOGRAPHY(1)
% Change % Change
(In billions) December 31, 2019 December 31, 2018 December 31, 2017 2019 vs. 2018 2018 vs. 2017
Americas $ 25,018 $ 23,203 $ 24,418 8 % (5 )%
Europe /Middle
East/Africa 7,325 6,699 7,028 9 (5 )
Asia/Pacific 2,015 1,718 1,673 17 3
Total $ 34,358 $ 31,620 $ 33,119 9 (5 )
(1) Geographic mix is generally based on the domicile of the entity servicing the funds and is not necessarily representative of the underlying asset mix.
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Asset servicing mandates newly announced in 2019 totaled approximately $1.84
trillion , in line with a high of $1.89 trillion in 2018. Servicing assets
remaining to be installed in future periods totaled approximately $1.17 trillion
as of December 31, 2019 , which will be reflected in AUC/A in future periods
after installation and will generate servicing fee revenue in subsequent
periods. The full revenue impact of such mandates will be realized over several
quarters as the assets are installed and additional services are added over that
period.
New asset servicing mandates may be subject to completion of definitive
agreements, approval of applicable boards and shareholders and customary
regulatory approvals. New asset servicing mandates and servicing assets
remaining to be installed in future periods exclude certain new business which
has been contracted, but for which the client has not yet provided permission to
publicly disclose and the expected installation date extends beyond one quarter.
These excluded assets, which from time to time may be significant, will be
included in new asset servicing mandates and reflected in servicing assets
remaining to be installed in the period in which the client provides its
permission. Servicing mandates and servicing assets remaining to be installed in
future periods are presented on a gross basis and therefore also do not include
the impact of clients who have notified us during the period of their intent to
terminate or reduce their relationship with us, which may from time to time be
significant.
With respect to these new servicing mandates, once installed we may provide
various services, including accounting, bank loan servicing, compliance
reporting and monitoring, custody, depository banking services, FX, fund
administration, hedge fund servicing, middle office outsourcing, performance and
analytics, private equity administration, real estate administration, securities
finance, transfer agency and wealth management services. Revenues associated
with new servicing mandates may vary based on the breadth of services provided
and the timing of installation, and the types of assets.
For additional information about the impact of worldwide equity and fixed-income
valuations on our fee revenue, as well as other key drivers of our servicing fee
revenue, refer to "Fee Revenue" in "Consolidated Results of Operations" included
in this Management's Discussion and Analysis.
Foreign Exchange Trading Services
Foreign exchange trading services revenue, as presented in Table 10: Investment
Servicing Line of Business Results, decreased 9% in 2019 compared to 2018,
primarily due to lower market volatility. Foreign exchange trading services is
composed of revenue generated by FX trading and revenue generated by
brokerage and other trading services, which made up 56% and 44%, respectively, of foreign exchange trading services revenue in 2019. We primarily earn FX trading revenue by acting as a principal market-maker through both "direct sales and trading" and "indirect FX trading." • Direct sales and trading: Represent FX transactions at negotiated rates
with clients and investment managers that contact our trading desk
directly. These principal market-making activities include transactions
for funds serviced by third party custodians or prime brokers, as well as
those funds under custody with us.
• Indirect FX trading: Represents FX transactions with clients, for which we
are the funds' custodian, or their investment managers, routed to our FX
desk through our asset-servicing operation. We execute indirect FX trades
as a principal at rates disclosed to our clients.
Our FX trading revenue is influenced by multiple factors, including: the volume
and type of client FX transactions and related spreads; currency volatility,
reflecting market conditions; and our management of exchange rate, interest rate
and other market risks associated with our FX activities. The relative impact of
these factors on our total FX trading revenues often differs from period to
period. For example, assuming all other factors remain constant, increases or
decreases in volumes or bid-offer spreads across product mix tend to result in
increases or decreases, as the case may be, in client-related FX revenue.
Our clients that utilize indirect FX trading can, in addition to executing their
FX transactions through dealers not affiliated with us, transition from indirect
FX trading to either direct sales and trading execution, including our "Street
FX" service, or to one of our electronic trading platforms. Street FX, in which
we continue to act as a principal market-maker, enables our clients to define
their FX execution strategy and automate the FX trade execution process, both
for funds under custody with us as well as those under custody at another bank.
We also earn foreign exchange trading services revenue through "electronic FX
services" and "other trading, transition management and brokerage revenue."
• Electronic FX services: Our clients may choose to execute FX transactions
through one of our electronic trading platforms. These transactions
generate revenue through a "click" fee.
• Other trading, transition management and brokerage revenue: As our clients
look to us to
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
enhance and preserve portfolio values, they may choose to utilize our Transition
or Currency Management capabilities or transact with our Equity Trade execution
group. These transactions, which are not limited to foreign exchange, generate
revenue via commissions charged for trades transacted during the management of
these portfolios.
Securities Finance
Our securities finance business consists of three components:
(1) an agency lending program for State Street Global Advisors managed
investment funds with a broad range of investment objectives, which we refer to
as the State Street Global Advisors lending funds;
(2) an agency lending program for third-party investment managers and asset
owners, which we refer to as the agency lending funds; and
(3) security lending transactions which we enter into as principal, which we
refer to as our enhanced custody business.
Securities finance revenue earned from our agency lending activities, which is
composed of our split of both the spreads related to cash collateral and the
fees related to non-cash collateral, is principally a function of the volume of
securities on loan, the interest rate spreads and fees earned on the underlying
collateral and our share of the fee split.
As principal, our enhanced custody business borrows securities from the lending
client or other market participants and then lends such securities to the
subsequent borrower, either our client or a broker/dealer. We act as principal
when the lending client is unable to, or elects not to, transact directly with
the market and execute the transaction and furnish the securities. In our role
as principal, we provide support to the transaction through our credit rating.
While we source a significant proportion of the securities furnished by us in
our role as principal from third parties, we have the ability to source
securities through assets under custody from clients who have designated us as
an eligible borrower.
Securities finance revenue, as presented in Table 10: Investment Servicing Line
of Business Results, decreased 15% in 2019 compared to 2018, reflecting lower
securities on loan, enhanced custody balances and spreads and the impact of
balance sheet optimization efforts implemented in the second half of 2018.
Market influences may continue to affect client demand for securities finance,
and as a result our revenue from, and the profitability of, our securities
lending activities in future periods. In addition, the
constantly evolving regulatory environment, including revised or proposed
capital and liquidity standards, interpretations of those standards, and our own
balance sheet management activities, may influence modifications to the way in
which we deliver our agency lending or enhanced custody businesses, the volume
of our securities lending activity and related revenue and profitability in
future periods.
Software and Processing Fees
Software and processing fees revenue includes diverse types of fees and revenue,
including fees from software licensing and maintenance, fees from our structured
products business and other revenue including equity income from our joint
venture investments, gains and losses on sales of other assets and amortization
of our tax-advantaged investments.
Software and processing fees revenue, presented in Table 10: Investment
Servicing Line of Business Results, increased significantly in 2019 compared to
2018 and reflects approximately $370 million from CRD in 2019. CRD was acquired
on October 1, 2018 . Revenue related to the front office solutions provided by
CRD is primarily driven by the sale of term software licenses and software as
service arrangements, including professional services such as consulting and
implementation services, software support and maintenance. Revenue for a sale of
software to be installed on premise is recognized at a point in time when the
customer benefits from obtaining access to and use of the software license.
Revenue for a Software as a Service (SaaS) related arrangement is recognized
over time as services are provided.
Other Income
In the fourth quarter of 2019, we completed a cash tender offer for
approximately $297 million of our $800 million aggregate principal amount of
outstanding floating rate junior subordinated debentures due 2047, resulting in
a gain of approximately $44 million .
Expenses
Total expenses for Investment Servicing increased 1% in 2019 compared to 2018.
The increases are primarily due to the impact of the CRD acquisition, technology
infrastructure investments and business volumes, partially offset by savings
from resource discipline initiatives and process re-engineering benefits through
our expense savings program. Total expenses contributed by CRD in 2019 were
approximately $201 million . In addition, CRD-related expenses in 2019 include
$65 million in amortization of other intangible assets. Additional information
about expenses is provided under "Expenses" in "Consolidated Results of
Operations" included in this Management's Discussion and Analysis.
State Street Corporation | 71
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Investment Management
TABLE 14: INVESTMENT MANAGEMENT LINE OF BUSINESS RESULTS
Years Ended December 31, % Change
(Dollars in millions, except where % Change 2019 2018 vs.
otherwise noted) 2019 2018 2017 vs. 2018 2017
Management fees $ 1,771 $ 1,851 $ 1,616 (4 )% 15 %
Foreign exchange trading
services(1) 137 130 72 5 81
Securities finance 9 - - nm nm
Software and processing fees(2) 29 (5 ) 7 nm (171 )
Total fee revenue 1,946 1,976 1,695 (2 ) 17
Net interest income (24 ) (20 ) (5 ) 20 nm
Total revenue 1,922 1,956 1,690 (2 ) 16
Total expenses 1,535 1,544 1,286 (1 ) 20
Income before income tax expense
(6 ) 2 Pre-tax margin 20 % 21 % 24 % Average assets (in billions)$ 3.0 $ 3.2 $ 5.4 (1) Includes revenues from distributing and marketing activities forU.S. mutual funds and ETFs associated with State Street Global Advisors. (2) Includes other revenue items that are primarily driven by equity market movements. nm Not meaningful Management Fees Management fees decreased 4% in 2019 compared to 2018, primarily reflecting the run rate impact of late 2018 outflows and mix changes away from higher fee products, partially offset by higher equity market levels. Management fees generated outside theU.S. were approximately 27% of total management fees in both 2019 and 2018 compared to approximately 28% in 2017. TABLE 15: ASSETS UNDER MANAGEMENT BY ASSET CLASS AND INVESTMENT APPROACH December 31, % Change % Change (In billions) 2019 December 31, 2018 December 31, 2017 2019 vs. 2018 2018 vs. 2017 Equity: Active $ 88 $ 80 $ 95 10 % (16 )% Passive 1,903 1,464 1,650 30 (11 ) Total equity 1,991 1,544 1,745 29 (12 ) Fixed-income: Active 89 81 77 10 5 Passive 379 341 337 11 1 Total fixed-income 468 422 414 11 2 Cash(1) 324 287 330 13 (13 ) Multi-asset-class solutions: Active 24 19 18 26 6 Passive 133 113 129 18 (12 ) Total multi-asset-class solutions 157 132 147 19 (10 ) Alternative investments(2): Active 21 21 23 - (9 ) Passive 155 105 123 48 (15 ) Total alternative investments 176 126 146 40 (14 ) Total$ 3,116 $ 2,511 $ 2,782 24 (10 ) (1) Includes both floating- and constant-net-asset-value portfolios held in commingled structures or separate accounts. (2) Includes real estate investment trusts, currency and commodities, including SPDR® Gold Shares and SPDR®Gold MiniSharesSM Trust . We are not the investment manager for the SPDR® Gold Shares and SPDR®MiniSharesSM Trust , but act as the marketing agent. State Street Corporation | 72
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONSTABLE 16: EXCHANGE-TRADED FUNDS BY ASSET CLASS(1)
% Change % Change
(In billions) December 31, 2019 December 31, 2018 December 31, 2017 2019 vs. 2018 2018 vs. 2017
Alternative
Investments(2) $ 56 $ 43 $ 48 30 % (10 )%
Cash 9 9 2 - 350
Equity 618 482 531 28 (9 )
Fixed-Income 85 66 63 29 5
Total
Exchange-Traded
Funds $ 768 $ 600 $ 644 28 (7 )
(1) ETFs are a component of AUM presented in the preceding table.
(2) Includes real estate investment trusts, currency and commodities, including
SPDR® Gold Shares and SPDR® Gold MiniSharesSM Trust . We are not the investment
manager for the SPDR® Gold Shares and SPDR® MiniSharesSM Trust , but act as the
marketing agent.
TABLE 17: GEOGRAPHIC MIX OF ASSETS UNDER MANAGEMENT(1)
December 31, % Change % Change
(In billions) 2019 December 31, 2018 December 31, 2017 2019 vs. 2018 2018 vs. 2017
North America $ 2,115 $ 1,731 $ 1,931 22 % (10 )%
Europe/Middle
East/Africa 493 421 521 17 (19 )
Asia/Pacific 508 359 330 42 9
Total $ 3,116 $ 2,511 $ 2,782 24 (10 )
(1) Geographic mix is based on client location or fund management location. TABLE 18: ACTIVITY IN ASSETS UNDER MANAGEMENT BY PRODUCT CATEGORY
Multi-Asset-Class Alternative
(In billions) Equity Fixed-Income Cash(1) Solutions Investments(2) Total
Balance as of December 31,
2016 $ 1,474 $ 378 $ 333 $ 126 $ 157 $ 2,468
Long-term institutional flows,
net(3) (74 ) 2 - 4 (21 ) (89 )
Exchange-Traded Fund flows,
net 26 10 - - 1 37
Cash fund flows, net - - (8 ) - - (8 )
Total flows, net (48 ) 12 (8 ) 4 (20 ) (60 )
Market appreciation 293 15 2 12 3 325
Foreign exchange impact 26 9 3 5 6 49
Total market/foreign exchange
impact 319 24 5 17 9 374
Balance as of December 31,
2017 $ 1,745 $ 414 $ 330 $ 147 $ 146 $ 2,782
Long-term institutional flows,
net(3) (45 ) 12 - (3 ) (2 ) (38 )
Exchange-traded fund flows,
net (3 ) 7 6 - (2 ) 8
Cash fund flows, net - - (50 ) - - (50 )
Total flows, net (48 ) 19 (44 ) (3 ) (4 ) (80 )
Market appreciation
(depreciation) (142 ) (7 ) 3 (10 ) (10 ) (166 )
Foreign exchange impact (11 ) (4 ) (2 ) (2 ) (6 ) (25 )
Total market/foreign exchange
impact (153 ) (11 ) 1 (12 ) (16 ) (191 )
Balance as of December 31,
2018 $ 1,544 $ 422 $ 287 $ 132 $ 126 $ 2,511
Long-term institutional flows,
net(3) 26 (7 ) - 3 16 38
Exchange-traded fund flows,
net 13 15 - - 6 34
Cash fund flows, net - - 31 - - 31
Total flows, net 39 8 31 3 22 103
Market appreciation
(depreciation) 404 38 6 22 28 498
Foreign exchange impact 4 - - - - 4
Total market/foreign exchange
impact 408 38 6 22 28 502
Balance as of December 31,
2019 $ 1,991 $ 468 $ 324 $ 157 $ 176 $ 3,116
(1) Includes both floating- and constant-net-asset-value portfolios held in
commingled structures or separate accounts.
(2) Includes real estate investment trusts, currency and commodities, including
SPDR® Gold Shares, SPDR Long Dollar Gold Trust and SPDR® Gold MiniSharesSM
Trust , for which we are not the investment manager but act as the marketing
agent.
(3) Amounts represent long-term portfolios, excluding ETFs.
State Street Corporation | 73
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONSExpenses
Total expenses for Investment Management decreased 1% in 2019 compared to 2018, primarily due to savings from resource discipline initiatives and process re-engineering benefits through our expense savings program. Additional information about expenses is provided under "Expenses" in "Consolidated Results of Operations" included in this Management's Discussion and Analysis. FINANCIAL CONDITION The structure of our consolidated statement of condition is primarily driven by the liabilities generated by our Investment Servicing and Investment Management lines of business. Our clients' needs and our operating objectives determine balance sheet volume, mix and currency denomination. As our clients execute their worldwide cash management and investment activities, they utilize deposits and short-term investments that constitute the majority of our liabilities. These liabilities are generally in the form of interest-bearing transaction account deposits, which are denominated in a variety of currencies; non-interest-bearing demand deposits; and repurchase agreements, which generally serve as short-term investment alternatives for our clients. Deposits and other liabilities resulting from client initiated transactions are invested in assets that generally have contractual maturities significantly longer than our liabilities; however, we evaluate the operational nature of our deposits and seek to maintain appropriate short-term liquidity of those liabilities that are not operational in nature and maintain longer-termed assets for our operational deposits. Our assets consist primarily of securities held in our AFS or HTM portfolios and short-duration financial instruments, such as interest-bearing deposits with banks and securities purchased under resale agreements. The actual mix of assets is determined by the characteristics of the client liabilities and our desire to maintain a well-diversified portfolio of high-quality assets.
TABLE 19: AVERAGE STATEMENT OF CONDITION(1)
Years Ended December 31,
(In millions) 2019 2018 2017
Assets:
Interest-bearing deposits with banks $ 48,500 $ 54,328 $ 47,514
Securities purchased under resale agreements 2,506 2,901 2,131
Trading account assets 884 1,051 1,011
Investment securities 91,768 88,070 95,779
Loans and leases 24,073 23,573 21,916
Other interest-earning assets 14,160 15,714 22,884
Average total interest-earning assets 181,891 185,637
191,235
Cash and due from banks 3,390 3,178
3,097
Other non-interest-earning assets 38,053 34,570
25,118
Average total assets$ 223,334 $ 223,385 $ 219,450 Liabilities and shareholders' equity: Interest-bearing deposits: U.S.$ 67,547 $ 54,953 $ 30,623 Non-U.S. 61,301 70,623 91,937 Total interest-bearing deposits(2) 128,848 125,576
122,560
Securities sold under repurchase agreements 1,616 2,048 3,683 Other short-term borrowings 1,524 1,327 1,313 Long-term debt 11,474 10,686 11,595 Other interest-bearing liabilities 4,103 4,956
4,607
Average total interest-bearing liabilities 147,565 144,593
143,758
Non-interest-bearing deposits(2) 29,414 35,832
41,248
Other non-interest-bearing liabilities 21,299 19,804
12,379
Preferred shareholders' equity 3,653 3,327
3,197
Common shareholders' equity 21,403 19,829
18,868
Average total liabilities and shareholders' equity
$ 219,450 (1) Additional information about our average statement of condition, primarily our interest-earning assets and interest-bearing liabilities, is provided in "Net Interest Income" included in this Management's Discussion and Analysis. (2) Total deposits averaged$158.26 billion in 2019 compared to$161.41 billion and$163.81 billion in 2018 and 2017, respectively.State Street Corporation
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Investment Securities
TABLE 20: CARRYING VALUES OF INVESTMENT SECURITIES
As of December 31,
(In millions) 2019 2018 2017
Available-for-sale:
U.S. Treasury and federal agencies: Direct obligations$ 3,487 $ 1,039 $ 223 Mortgage-backed securities 17,838 15,968 10,872
Total
531 541 3,358
Credit cards 89 583 1,542
Collateralized loan obligations 1,820 593 1,447
Total asset-backed securities 2,440 1,717 6,347
Non-U.S. debt securities:
Mortgage-backed securities 1,980 1,682 6,695
Asset-backed securities 2,179 1,574 2,947
Government securities 12,373 12,793 10,721
Other 8,658 6,602 6,108
Total non-U.S. debt securities 25,190 22,651 26,471
State and political subdivisions 1,783 1,918 9,151
Collateralized mortgage obligations 104 197 1,054
Other U.S. debt securities 2,973 1,658 2,560
U.S. equity securities(2) - - 46
U.S. money-market mutual funds(2) - - 397
Total $ 53,815 $ 45,148 $ 57,121 Held-to-maturity(3):
U.S. Treasury and federal agencies: Direct obligations$ 10,311 $ 14,794 $ 17,028 Mortgage-backed securities 26,297 21,647 16,651
Total
3,783 3,191 3,047
Credit cards - 193 798
Other - 1 1
Total asset-backed securities 3,783 3,385 3,846
Non-U.S. debt securities:
Mortgage-backed securities 366 638 939
Asset-backed securities - 223 263
Government securities 328 358 474
Other - 46 48
Total non-U.S. debt securities 694 1,265 1,724
Collateralized mortgage obligations 697 823 1,209
Total $ 41,782 $ 41,914 $ 40,458
(1) Primarily comprised of securities guaranteed by the federal government with
respect to at least 97% of defaulted principal and accrued interest on the
underlying loans.
(2) Upon adoption of ASU 2016-01, Financial Instruments-Overall (Subtopic
825-10): Recognition and Measurement of Financial Assets and Financial
Liabilities, in 2018, we reclassified money-market funds and equity securities
classified as AFS to held at fair value through profit and loss in other assets.
(3) Includes securities at amortized cost or fair value on the date of transfer
from AFS.
Additional information about our investment securities portfolio is provided in
Note 3 to the consolidated financial statements in this Form 10-K.
We manage our investment securities portfolio to align with the interest rate
and duration characteristics of our client liabilities and in the context of the
overall structure of our consolidated statement of condition, in consideration
of the global interest rate environment. We consider a well-diversified,
high-credit quality investment securities portfolio to be an important element
in the management of our consolidated statement of condition.
Average duration of our investment securities portfolio was 2.7 years and 3.1
years as of December 31, 2019 and December 31, 2018 , respectively. The decrease
in securities duration is primarily driven by the impact of lower long-end U.S.
interest rates shortening the duration of mortgage backed securities.
Approximately 90% of the carrying value of the portfolio was rated "AAA" or "AA"
as of both December 31, 2019 and December 31, 2018 .
TABLE 21: INVESTMENT PORTFOLIO BY EXTERNAL CREDIT RATING
December 31, 2019 December 31, 2018
AAA(1) 77 % 76 %
AA 13 14
A 5 5
BBB 5 5
Below BBB - -
100 % 100 %
(1) Includes U.S. Treasury and federal agency securities that are split-rated,
"AAA" by Moody's Investors Service and "AA+" by Standard & Poor's and also
includes Agency MBS securities which are not explicitly rated but which have an
explicit or assumed guarantee from the U.S. government.
As of December 31, 2019 and December 31, 2018 , the investment portfolio was
diversified with respect to asset class composition. The following table
presents the composition of these asset classes.
TABLE 22: INVESTMENT PORTFOLIO BY ASSET CLASS
December 31, 2019 December 31, 2018
U.S. Agency 41 % 40 %
Mortgage-backed securities
Foreign sovereign 19 19
U.S. Treasuries 14 18
Asset-backed securities 11 11
Other credit 15 12
100 % 100 %
State Street Corporation | 75
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Non-U.S. Debt Securities
Approximately 27% of the aggregate carrying value of our investment securities
portfolio was non-U.S. debt securities as of both December 31, 2019 and December
31, 2018 .
TABLE 23: NON-U.S. DEBT SECURITIES
(In millions) December 31, 2019 December 31, 2018
Available-for-sale:
Canada $ 2,611 $ 2,185
Australia 2,409 2,847
France 2,223 1,875
European(1) 2,101 1,087
Germany 1,944 1,547
United Kingdom 1,608 2,580
Spain 1,531 1,504
Netherlands 1,524 1,116
Austria 1,398 1,312
Japan 1,363 1,352
Ireland 1,235 1,301
Italy 1,113 1,010
Belgium 977 952
Finland 846 789
Hong Kong 617 458
Asian(1) 581 338
Sweden 156 186
Luxembourg 124 -
Brazil 93 -
Norway 51 94
Other(2) 685 118
Total $ 25,190 $ 22,651
Held-to-maturity:
Singapore $ 214 $ 242
United Kingdom 126 363
Germany 112 115
Australia 109 158
Spain 85 92
Netherlands - 187
Other(3) 48 108
Total $ 694 $ 1,265
(1) Consists entirely of supranational bonds.
(2) Included approximately $618 million and $78 million as of December 31, 2019
and December 31, 2018 , respectively, related to supranational and non-U.S.
agency bonds.
(3) Included approximately $46 million and $61 million as of December 31, 2019
and December 31, 2018 , respectively, related to Italy and Portugal , all of which
were related to MBS.
Approximately 74% of the aggregate carrying value of these non-U.S. debt
securities was rated "AAA" or "AA" as of both December 31, 2019 and December 31,
2018 . The majority of these securities comprised senior positions within the
security structures; these positions have a level of protection provided through
subordination and other forms of credit protection. As of December 31, 2019 and
December 31, 2018 , approximately 27% and 31%, respectively, of the aggregate
carrying value of these non-U.S. debt securities was floating-rate.
As of
unrealized gains of $209 million and gross unrealized losses of $14
million , associated with non-U.S. AFS debt securities; and
• a pre-tax net unrealized gain of
gains of
with non-
As ofDecember 31, 2019 , the underlying collateral for non-U.S. MBS and ABS primarily includedU.K. , Australian, Italian and Dutch mortgages. The securities listed under "Canada" were composed of Canadian government securities, corporate debt and non-U.S. agency securities. The securities listed under "France" were composed of sovereign bonds, corporate debt, covered bonds, ABS and Non-U.S. agency securities. The securities listed under "Japan" were substantially composed of Japanese government securities. Municipal Obligations We carried approximately$1.8 billion of municipal securities classified as state and political subdivisions in our investment securities portfolio as ofDecember 31, 2019 , as shown in Table 20: Carrying Values ofInvestment Securities , all of which were classified as AFS. As ofDecember 31, 2019 , we also provided approximately$9.5 billion of credit and liquidity facilities to municipal issuers. TABLE 24: STATE AND MUNICIPAL OBLIGORS(1) Credit and Total Municipal Liquidity % of Total Municipal (Dollars in millions) Securities Facilities(2) Total ExposureDecember 31, 2019 State of Issuer: Texas $ 275 $ 2,345$ 2,620 23 % California 111 2,114 2,225 20 New York 283 1,531 1,814 16 Massachusetts 442 809 1,251 11 Total $ 1,111 $ 6,799$ 7,910 December 31, 2018 State of Issuer: Texas $ 315 $ 2,467$ 2,782 25 % California 108 1,693 1,801 16 New York 231 1,518 1,749 15 Massachusetts 467 978 1,445 13 Total $ 1,121 $ 6,656$ 7,777
(1) Represented 5% or more of our aggregate municipal credit exposure of
approximately
State Street Corporation | 76
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Our aggregate municipal securities exposure presented in Table 24: State and
Municipal Obligors, was concentrated primarily with highly-rated counterparties,
with approximately 83% of the obligors rated "AAA" or "AA" as of December 31,
2019 . As of that date, approximately 20% and 79% of our aggregate municipal
securities exposure was associated with general obligation and revenue bonds,
respectively. The portfolios are also diversified geographically, with the
states that represent our largest exposures widely dispersed across the U.S.
Additional information with respect to our assessment of OTTI of our municipal
securities is provided in Note 3 to the consolidated financial statements in
this Form 10-K.
TABLE 25: CONTRACTUAL MATURITIES AND YIELDS
As of December 31, 2019 Under 1 Year 1 to 5 Years 6 to 10 Years Over 10 Years Total
(Dollars in millions) Amount Yield Amount Yield Amount Yield Amount Yield Amount
Available-for-sale(1):
U.S. Treasury and
federal agencies:
Direct obligations $ 1,058 2.10 % $ 1,010 1.50 % $ 1,419 1.64 % $ - - % 3,487
Mortgage-backed
securities 118 3.71 970 3.30 2,951 2.54 13,799 3.77 17,838
Total U.S. treasury and
federal agencies 1,176 1,980 4,370 13,799 21,325
Asset-backed securities:
Student loans 72 2.72 184 2.42 96 2.10 179 2.77 531
Credit cards - - - - 89 2.51 - - 89
Collateralized loan
obligations - - 745 2.60 958 2.89 117 2.82 1,820
Total asset-backed
securities 72 929 1,143 296 2,440
Non-U.S. debt
securities:
Mortgage-backed
securities 430 0.65 569 0.87 196 1.12 785 1.85 1,980
Asset-backed securities 487 1.01 981 0.35 366 0.79 345 0.47 2,179
Government securities 4,183 0.25 7,381 1.61 809 4.39 - - 12,373
Other 884 2.35 6,689 1.29 1,063 1.51 22 3.64 8,658
Total non-U.S. debt
securities 5,984 15,620 2,434 1,152 25,190
State and political
subdivisions(2) 238 5.97 635 5.86 554 4.65 356 5.71 1,783
Collateralized mortgage
obligations - - - - - - 104 3.55 104
Other U.S. debt
securities 760 3.00 2,083 2.69 130 2.41 - - 2,973
Total $ 8,230 $ 21,247 $ 8,631 $ 15,707 $ 53,815 Held-to-maturity(1):U.S. Treasury and federal agencies: Direct obligations$ 4,116 2.27 %$ 6,161 2.31 %$ 5 2.44 %$ 29 2.1 %$ 10,311 Mortgage-backed securities 9 2.88 438 2.65 2,515 2.92 23,335 3.39 26,297 TotalU.S. treasury and federal agencies 4,125 6,599 2,520 23,364 36,608 Asset-backed securities: Student loans 96 2.09 207 2.34 408 2.42 3,072 2.53 3,783 Other - - - - - - - 2.79 - Total asset-backed securities 96 207 408 3,072 3,783 Non-U.S. debt securities: Mortgage-backed securities 16 2.97 33 1.93 4 1.80 313 0.92 366 Government securities 328 3.8 - - - - - - 328 Total non-U.S. debt securities 344 33 4 313 694 Collateralized mortgage obligations 2 2.09 283 2.52 13 2.39 399 2.79 697 Total$ 4,567 $ 7,122 $ 2,945 $ 27,148 $ 41,782 (1) The maturities of MBS, ABS and CMOs are based on expected principal payments. (2) Yields were calculated on a FTE basis, using applicable statutory tax rates (21.0% as ofDecember 31, 2019 ). State Street Corporation
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONSImpairment
Impairment exists when the fair value of an individual security is below its amortized cost basis. Impairment of a security is further assessed to determine whether such impairment is other-than-temporary. For AFS and HTM debt securities, we record impairment in our consolidated statement of income when management intends to sell (or may be required to sell) the securities before they recover in value, or when management expects the present value of cash flows expected to be collected from the securities to be less than the amortized cost of the impaired security (a credit loss). We conduct periodic reviews of individual securities to assess whether OTTI exists. Our assessment of OTTI involves an evaluation of economic and security-specific factors. Such factors are based on estimates, derived by management, which contemplate current market conditions and security-specific performance. To the extent that market conditions are worse than management's expectations or due to idiosyncratic bond performance, OTTI could increase, in particular the credit-related component that would be recorded in our consolidated statement of income. Additional information with respect to OTTI, net impairment losses and gross unrealized losses is provided in Note 3 to the consolidated financial statements in this Form 10-K. Our evaluation of potential OTTI of structured credit securities with collateral in theU.K. and continentalEurope takes into account the outcome from the Brexit referendum and other geopolitical events, and assumes no disruption of payments on these securities. Loans and Leases TABLE 26:U.S. AND NON-U.S. LOANS AND LEASES As of December 31, (In millions) 2019 2018 2017 2016 2015 Domestic(1): Commercial and financial$ 18,762 $ 19,479 $ 18,696 $ 16,412 $ 15,899 Commercial real estate 1,766 874 98 27 28 Lease financing(2) - - 267 338 337 Total domestic 20,528 20,353 19,061 16,777 16,264 Foreign(1): Commercial and financial 5,781 5,436 3,837 2,476 1,957 Lease financing(2) - - 396 504 578 Total foreign 5,781 5,436 4,233 2,980 2,535
Total loans and leases(3)(4)
$ 18,799 Average loans and leases$ 24,073 $ 23,573 $ 21,916 $ 19,013 $ 17,948 (1) Domestic and foreign categorization is based on the borrower's country of domicile. (2) We wound down our lease financing business in 2018. (3) Includes$3,256 million and$5,444 million of overdrafts as ofDecember 31, 2019 andDecember 31, 2018 , respectively. (4) As ofDecember 31, 2019 , floating rate loans totaled$24,289 million and fixed rate loans totaled$2,020 million . The decrease in domestic loans in the commercial and financial segment as ofDecember 31, 2019 compared toDecember 31, 2018 was primarily driven by a decrease in loans to investment funds and senior secured loans. The increase in foreign loans in the same period was primarily driven by an increase in loans to investment funds and senior secured loans. As ofDecember 31, 2019 andDecember 31, 2018 , our investment in senior secured loans, otherwise known as leveraged loans, totaled approximately$4.46 billion and$4.42 billion , respectively. In addition, we had binding unfunded commitments as ofDecember 31, 2019 andDecember 31, 2018 of$176 million and$238 million , respectively, to participate in such syndications. Additional information about these unfunded commitments is provided in Note 12 to the consolidated financial statements in this Form 10-K. These senior secured loans, which are primarily rated "speculative" under our internal risk-rating framework (refer to Note 4 to the consolidated financial statements in this Form 10-K), are externally rated "BBB," "BB" or "B," with approximately 86% and 90% of the loans rated "BB" or "B" as ofDecember 31, 2019 andDecember 31, 2018 , respectively. Our investment strategy involves generally limiting our investment to larger, more liquid credits underwritten by major global financial institutions, applying our internal credit analysis process to each potential investment and diversifying our exposure by counterparty and industry segment. However, these loans have significant exposure to credit losses relative to higher-rated loans in our portfolio. Additional information about all of our loan segments, as well as underlying classes, is provided in Note 4 to the consolidated financial statements in this Form 10-K. No loans were modified in troubled debt restructurings as of bothDecember 31, 2019 andDecember 31, 2018 . TABLE 27: CONTRACTUAL MATURITIES FOR LOANS As of December 31, 2019 (In millions) Under 1 year 1 to 5 years Over 5 years Total Domestic: Commercial and financial$ 10,883 $ 5,464 $ 2,415 $ 18,762 Commercial real estate - 277 1,489 1,766 Total domestic 10,883 5,741 3,904 20,528 Foreign: Commercial and financial 3,525 1,569 687 5,781 Total foreign 3,525 1,569 687 5,781 Total loans$ 14,408 $ 7,310 $ 4,591 $ 26,309 State Street Corporation | 78
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONSTABLE 28: CLASSIFICATION OF LOAN BALANCES DUE AFTER ONE YEAR (In millions)
As of December 31 , 2019
Loans with predetermined interest rates $
1,971
Loans with floating or adjustable interest rates 9,930 Total $ 11,901
TABLE 29: ALLOWANCE FOR LOAN AND LEASE LOSSES
Years Ended December 31,
(In millions) 2019 2018 2017 2016 2015
Allowance for loan and lease losses: Beginning balance$ 67 $ 54 $ 53 $ 46 $ 38 Provision for loan and lease losses(1) 10 15 2 10 12 Charge-offs(2) (3 ) (2 ) (1 ) (3 ) (4 ) Ending balance$ 74 $ 67 $ 54 $ 53 $ 46 (1) The provision for loan and lease losses is primarily related to commercial and financial loans. (2) The charge-offs are related to commercial and financial loans. We recorded a provision for loan losses of$10 million in 2019 compared to$15 million in 2018 and$2 million in 2017. As ofDecember 31, 2019 , approximately$61 million of our allowance for loan and lease losses (ALLL) was related to senior secured loans included in the commercial and financial segment compared to$60 million as ofDecember 31, 2018 . As this portfolio grows and matures, our ALLL related to these loans may increase through additional provisions for credit losses. The remaining$13 million and$7 million as ofDecember 31, 2019 and 2018, respectively, was related to other components of commercial and financial loans. Cross-Border Outstandings Cross-border outstandings are amounts payable to us by non-U.S. counterparties which are denominated inU.S. dollars or other non-local currency, as well as non-U.S. local currency claims not funded by local currency liabilities. Our cross-border outstandings consist primarily of deposits with banks; loans and lease financing, including short-duration advances; investment securities; amounts related to FX and interest rate contracts; and securities finance. In addition to credit risk, cross-border outstandings have the risk that, as a result of political or economic conditions in a country, borrowers may be unable to meet their contractual repayment obligations of principal and/or interest when due because of the unavailability of, or restrictions on, FX needed by borrowers to repay their obligations. As market and economic conditions change, the major independent credit rating agencies may downgradeU.S. and non-U.S. financial institutions and sovereign issuers which have been, and may in the future be, significant counterparties to us, or whose financial instruments serve as collateral on which we rely for credit risk mitigation purposes, and may do so again in the future. As a result, we may be exposed to increased counterparty risk, leading to negative ratings volatility. The cross-border outstandings presented in Table 30: Cross-border outstandings, represented approximately 28% of our consolidated total assets as of bothDecember 31, 2019 andDecember 31, 2018 . TABLE 30: CROSS-BORDER OUTSTANDINGS(1) Investment Securities and Derivatives and Total Cross-Border (In millions) Other Assets Securities on Loan Outstandings December 31, 2019 Germany $ 20,968 $ 217 $ 21,185 United Kingdom 13,764 1,468 15,232 Japan 11,121 555 11,676 Luxembourg 3,399 668 4,067 Canada 2,955 783 3,738 Australia 3,100 597 3,697 France 2,813 240 3,053 Ireland 1,988 641 2,629 Switzerland 1,724 589 2,313 December 31, 2018 Germany $ 20,157 $ 489 $ 20,646 Japan 13,985 1,084 15,069 United Kingdom 12,623 1,176 13,799 Australia 4,217 1,349 5,566 Canada 3,010 1,507 4,517 Ireland 2,019 809 2,828 France 2,495 294 2,789 Luxembourg 2,033 710 2,743 December 31, 2017 Germany $ 18,201 $ 295 $ 18,496 Japan 15,250 549 15,799 United Kingdom 12,051 1,253 13,304 Australia 5,278 390 5,668 Canada 4,215 707 4,922 France 2,684 344 3,028 (1) Cross-border outstandings included countries in which we do business, and which amounted to at least 1% of our consolidated total assets as of the dates indicated. As ofDecember 31, 2019 , aggregate cross-border outstandings inthe Netherlands amounted to between 0.75% and 1% of our consolidated assets, at approximately$1.89 billion . As of bothDecember 31, 2018 andDecember 31, 2017 , there were no countries whose aggregate cross-border outstandings amounted to between 0.75% and 1% of our consolidated assets. State Street Corporation
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Risk Management
General
In the normal course of our global business activities, we are exposed to a
variety of risks, some inherent in the financial services industry, others more
specific to our business activities. Our risk management framework focuses on
material risks, which include the following:
• credit and counterparty risk;
• liquidity risk, funding and management;
• operational risk;
• information technology risk;
• market risk associated with our trading activities;
• market risk associated with our non-trading activities, which we refer to
as asset-and-liability management, and which consists primarily of
interest rate risk;
• strategic risk; • model risk; and
• reputational, fiduciary and business conduct risk.
Many of these risks, as well as certain factors underlying each of these risks
that could affect our businesses and our consolidated financial statements, are
discussed in detail under "Risk Factors" in this Form 10-K.
The scope of our business requires that we balance these risks with a
comprehensive and well-integrated risk management function. The identification,
assessment, monitoring, mitigation and reporting of risks are essential to our
financial performance and successful management of our businesses. These risks,
if not effectively managed, can result in losses to us as well as erosion of our
capital and damage to our reputation. Our approach, including Board and senior
management oversight and a system of policies, procedures, limits, risk
measurement and monitoring and internal controls, allows for an assessment of
risks within a framework for evaluating opportunities for the prudent use of
capital that appropriately balances risk and return.
Our objective is to optimize our return while operating at a prudent level of
risk. In support of this objective, we have instituted a risk appetite framework
that aligns our business strategy and financial objectives with the level of
risk that we are willing to incur.
Our risk management is based on the following major goals:
• A culture of risk awareness that extends across all of our business
activities;
• The identification, classification and quantification of our material risks;
• The establishment of our risk appetite and associated limits and policies,
and our compliance with these limits;
• The establishment of a risk management structure at the "top of the house"
that enables the control and coordination of risk-taking across the
business lines;
• The implementation of stress testing practices and a dynamic
risk-assessment capability;
• A direct link between risk and strategic-decision making processes and
incentive compensation practices; and
• The overall flexibility to adapt to the ever-changing business and market
conditions.
Our risk appetite framework outlines the quantitative limits and qualitative
goals that define our risk appetite, as well as the responsibilities for
measuring and monitoring risk against limits, and for reporting, escalating,
approving and addressing exceptions. Our risk appetite framework is established
by ERM, a corporate risk oversight group, in conjunction with the MRAC and the
RC of the Board. The Board formally reviews and approves our risk appetite
statement annually, or more frequently as required.
The risk appetite framework describes the level and types of risk that we are
willing to accommodate in executing our business strategy, and also serves as a
guide in setting risk limits across our business units. In addition to our risk
appetite framework, we use stress testing as another important tool in our risk
management practice. Additional information with respect to our stress testing
process and practices is provided under "Capital" in this Management's
Discussion and Analysis.
Governance and Structure
We have an approach to risk management that involves all levels of management,
from the Board and its committees, including its E&A Committee, RC, the HRC and
TOPS, to each business unit and each employee. We allocate responsibility for
risk oversight so that risk/return decisions are made at an appropriate level,
and are subject to robust and effective review and challenge. Risk management is
the responsibility of each employee, and is implemented through three lines of
defense: the business units, which own and manage the risks inherent in their
business, are considered the first line of defense; ERM and other support
functions, such as Compliance, Finance and Vendor Management, provide the second
line of defense; and Corporate Audit, which assesses the effectiveness of the
first two lines of defense.
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The responsibilities for effective review and challenge reside with senior
managers, management oversight committees, Corporate Audit and, ultimately, the
Board and its committees. While we believe that our risk management program is
effective in managing the risks in our businesses, internal and external factors
may create risks that cannot always be identified or anticipated.
Corporate-level risk committees provide focused oversight, and establish
corporate standards and policies for specific risks, including credit, sovereign
exposure, market, liquidity, operational, information technology as well as new
business products, regulatory compliance and ethics, vendor risk and model
risks. These committees have been delegated the responsibility to develop
recommendations and remediation strategies to address issues that affect or have
the potential to affect us.
We maintain a risk governance committee structure which serves as the formal
governance mechanism through which we seek to undertake the consistent
identification, management and mitigation of various risks facing us in
connection with its business activities. This governance structure is enhanced
and integrated through multi-disciplinary involvement, particularly through ERM.
The following chart presents this structure.
Management Risk Governance Committee Structure
Executive Management Committees:
Management Risk and Capital Business Technology and Operational
Committee Conduct Risk Risk Committee
(MRAC) Committee (TORC)
(BCRC)
Risk Committees:
Asset-Liability Credit Risk Fiduciary Operational Technology
Committee and Policy Review Risk Risk
(ALCO) Committee Committee Committee Committee
(CRPC)
Trading and Basel New Business Executive
Market Risk Oversight and Product Information
Committee Committee Approval Security
(TMRC) (BOC) Committee Committee
Recovery and
Resolution Model Risk Compliance
Planning Committee and Ethics
Executive (MRC) Committee
Review Board
CCAR Steering SSGA Risk Legal Entity
Committee Committee Oversight
Committee
Regulatory Conduct
Country Risk Reporting Standards
Committee Oversight Committee
Committee
Enterprise Risk Management
The goal of ERM is to ensure that risks are proactively identified,
well-understood and prudently managed in support of our business strategy. ERM
provides risk oversight, support and coordination to allow for the consistent
identification, measurement and management of risks across business units
separate from the business units' activities, and is responsible for the
formulation and maintenance of corporate-wide risk management policies and
guidelines. In addition, ERM establishes and reviews limits and, in
collaboration with business unit management, monitors key risks. Ultimately, ERM
works to validate that risk-taking occurs within the risk appetite statement
approved by the Board and conforms to associated risk policies, limits and
guidelines.
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The Chief Risk Officer (CRO) is responsible for our risk management globally,
leads ERM and has a dual reporting line to our CEO and the Board's RC. ERM
manages its responsibilities globally through a three-dimensional organization
structure:
• "Vertical" business unit-aligned risk groups that support business managers
with risk management, measurement and monitoring activities;
• "Horizontal" risk groups that monitor the risks that cross all of our
business units (for example, credit and operational risk); and
• Risk oversight for international activities, which combines intersecting
"Verticals" and "Horizontals" through a hub and spoke model to provide
important regional and legal entity perspectives to the global risk
framework.
Sitting on top of this three-dimensional organization structure is a centralized
group responsible for the aggregation of risk exposures across the vertical,
horizontal and regional dimensions, for consolidated reporting, for setting the
corporate-level risk appetite framework and associated limits and policies, and
for dynamic risk assessment across our business.
Board Committees
The Board has four committees which assist it in discharging its
responsibilities with respect to risk management: the RC, the E&A Committee, the
HRC and the TOPS.
The RC is responsible for oversight related to the operation of our global risk
management framework, including policies and procedures establishing risk
management governance and processes and risk control infrastructure for our
global operations. The RC is responsible for reviewing and discussing with
management our assessment and management of all risks applicable to our
operations, including credit, market, interest rate, liquidity, operational,
regulatory, technology, business, compliance and reputation risks, and related
policies.
In addition, the RC provides oversight of capital policies, capital planning and
balance sheet management, resolution planning and monitors capital adequacy in
relation to risk. The RC is also responsible for discharging the duties and
obligations of the Board under applicable Basel and other regulatory
requirements.
The E&A Committee oversees management's operation of our comprehensive system of
internal controls covering the integrity of our consolidated financial
statements and reports, compliance with laws, regulations and corporate
policies. The E&A Committee acts on behalf of the Board in monitoring and
overseeing the performance of Corporate Audit and in reviewing certain
communications with banking regulators. The
E&A Committee has direct responsibility for the appointment, compensation,
retention, evaluation and oversight of the work of our independent registered
public accounting firm, including sole authority for the establishment of
pre-approval policies and procedures for all audit engagements and any non-audit
engagements.
The HRC has direct responsibility for the oversight of human capital management,
all compensation plans, policies and programs in which executive officers
participate and incentive, retirement, welfare as well as equity plans in which
certain of our other employees participate. In addition, the HRC oversees the
alignment of our incentive compensation arrangements with our safety and
soundness, including the integration of risk management objectives, and related
policies, arrangements and control processes consistent with applicable related
regulatory rules and guidance.
The TOPS leads and assists in the Board's oversight of technology and
operational risk management and the role of these risks in executing our
strategy and supporting our global business requirements. The TOPS reviews
strategic initiatives from a technology and operational risk perspective and
reviews and approves technology-related risk matters. In addition, TOPS reviews
matters related to corporate information security and cyber-security programs,
business continuity and technology resiliency, data and access management and
third-party risk management.
Executive Management Committees
MRAC is the senior management decision-making body for risk and capital issues,
and oversees our financial risks, our consolidated statement of condition, and
our capital adequacy, liquidity and recovery and resolution planning. Its
responsibilities include:
• The approval of the policies of our global risk, capital and liquidity
management frameworks, including our risk appetite framework;
• The monitoring and assessment of our capital adequacy based on internal
policies and regulatory requirements;
• The oversight of our firm-wide risk identification, model risk governance,
stress testing and Recovery and Resolution Plan programs; and
• The ongoing monitoring and review of risks undertaken within the
businesses, and our senior management oversight and approval of risk
strategies and tactics.
MRAC, is co-chaired by our CRO and Chief Financial Officer, who regularly
present to the RC on developments in the risk environment and performance trends
in our key business areas.
BCRC provides additional risk governance and leadership, by overseeing our
business practices in
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terms of our compliance with laws, regulations and our standards of business
conduct, our commitments to clients and others with whom we do business, and
potential reputational risks. Management considers adherence to high ethical
standards to be critical to the success of our business and to our reputation.
The BCRC is co-chaired by our Chief Compliance Officer and our General Counsel.
TORC oversees and assesses the effectiveness of corporate-wide technology and
operational risk management programs, to manage and control technology and
operational risk consistently across the organization. TORC is co-chaired by the
Chief Operating Officer and the Chief Risk Officer.
Risk Committees
The following risk committees, under the oversight of the respective executive
management committees, have focused responsibilities for oversight of specific
areas of risk management:
Management Risk and Capital Committee
• ALCO is the senior corporate oversight and decision-making body for
balance sheet strategy, Global Treasury business activities and risk
management for interest rate risk, liquidity risk and non-trading market
risk. ALCO's roles and responsibilities are designed to be complementary
to, and in coordination with the MRAC, which approves the corporate risk
appetite and associated balance sheet strategy;
• CRPC has primary responsibility for the oversight and review of credit and
counterparty risk across business units, as well as oversight, review and
approval of the credit risk policies and guidelines; the Committee
consists of senior executives within ERM, and reviews policies and
guidelines related to all aspects of our business which give rise to
credit risk; our business units are also represented on the CRPC; credit
risk policies and guidelines are reviewed periodically, but at least
annually;
• TMRC reviews the effectiveness of, and approves, the market risk framework
at least annually; it is the senior oversight and decision-making
committee for risk management within our global markets businesses; the
TMRC is responsible for the formulation of guidelines, strategies and
workflows with respect to the measurement, monitoring and control of our
trading market risk, and also approves market risk tolerance limits,
collateral and margin policies and trading authorities; the TMRC meetsregularly to monitor the management of our trading market risk activities;
• BOC provides oversight and governance over
requirements, assesses compliance with respect to
approves all material methodologies and changes, policies and reporting;
•
development of recovery and resolution plans as required by banking
regulators;
• MRC monitors the overall level of model risk and provides oversight of the
model governance process pertaining to financial models, including the
validation of key models and the ongoing monitoring of model performance.
The MRC may also, as appropriate, mandate remedial actions and
compensating controls to be applied to models to address modeling
deficiencies as well as other issues identified;
•
tests performed in conformity with the
the Dodd-Frank Act, and is responsible for the overall management, review,
and approval of all material assumptions, methodologies, and results of
each stress scenario;
• The State Street Global Advisors Risk Committee is the most senior
oversight and decision making committee for risk management within State
Street Global Advisors; the committee is responsible for overseeing thealignment of State Street Global Advisors' strategy, and risk appetite, as
well as alignment with our corporate-wide strategies and risk management
standards; and
• The Country Risk Committee oversees the identification, assessment,
monitoring, reporting and mitigation, where necessary, of country risks.
•
oversight of regulatory reporting and related report governance processes
and accountabilities.
Business Conduct Risk Committee
• The Fiduciary Review Committee reviews and assesses the fiduciary risk
management programs of those units in which we serve in a fiduciary
capacity;
•
evaluation of the risk inherent in proposed new products or services and
new business, and extensions
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of existing products or services, evaluations including economic justification,
material risk, compliance, regulatory and legal considerations, and capital and
liquidity analyses;
• The Compliance and Ethics Committee provides review and oversight of our
compliance programs, including our culture of compliance and high
standards of ethical behavior;
•
the governance of our legal entities, monitors adherence to those
standards, and oversees the ongoing evaluation of our legal entity
structure, including the formation, maintenance and dissolution of legal
entities; and
• The Conduct Standards Committee provides oversight of our enforcement of
employee conduct standards.
Technology and Operational Risk Committee • The Operational Risk Committee, along with the support of regional
business or entity-specific working groups and committees, is responsible
for oversight of our operational risk programs, including determining that
the implementation of those programs is designed to identify, manage and
control operational risk in an effective and consistent manner across the
firm;
• The Technology Risk Committee is responsible for the global oversight,
review and monitoring of operational, legal and regulatory compliance and
reputational risk that may result in a significant change to our
Information Technology risk profile or a material financial loss or
reputational impact to global technology services. The Committee serves as
a forum to provide regular reporting to TORC and escalate technology risk
and control issues to TORC, as appropriate; and
•
Enterprise Information Security posture and program, including
cyber-security protections, provides enterprise-wide oversight and
assessment of the effectiveness of all Information Security Programs to
promote that controls are measured and managed, and serves as an
escalation point for cyber-security issues.
Credit Risk Management
Core Policies and Principles
We define credit risk as the risk of financial loss if a counterparty, borrower
or obligor, collectively referred to as a counterparty, is either unable or
unwilling to
repay borrowings or settle a transaction in accordance with underlying
contractual terms. We assume credit risk in our traditional non-trading lending
activities, such as loans and contingent commitments, in our investment
securities portfolio, where recourse to a counterparty exists, and in our direct
and indirect trading activities, such as principal securities lending and
foreign exchange and indemnified agency securities lending. We also assume
credit risk in our day-to-day treasury and securities and other settlement
operations, in the form of deposit placements and other cash balances, with
central banks or private sector institutions.
We distinguish between three major types of credit risk:
• Default risk - the risk that a counterparty fails to meet its contractual
payment obligations;
• Country risk - the risk that we may suffer a loss, in any given country,
due to any of the following reasons: deterioration of economic conditions,
political and social upheaval, nationalization and appropriation of
assets, government repudiation of indebtedness, exchange controls and
disruptive currency depreciation or devaluation; and
• Settlement risk - the risk that the settlement or clearance of
transactions will fail, which arises whenever the exchange of cash,
securities and/or other assets is not simultaneous.
The acceptance of credit risk by us is governed by corporate policies and
guidelines, which include standardized procedures applied across the entire
organization. These policies and guidelines include specific requirements
related to each counterparty's risk profile; the markets served; counterparty,
industry and country concentrations; and regulatory compliance. These policies
and procedures also implement a number of core principles, which include the
following:
• We measure and consolidate credit risks to each counterparty, or group of
counterparties, in accordance with a "one-obligor" principle that
aggregates risks across our business units;
• ERM reviews and approves all extensions of credit, or material changes to
extensions of credit (such as changes in term, collateral structure or
covenants), in accordance with assigned credit-approval authorities;
• Credit-approval authorities are assigned to individuals according to their
qualifications, experience and training, and these authorities are
periodically reviewed. Our largest exposures require approval by the
Credit Committee, a sub-committee of the CRPC.
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AND RESULTS OF OPERATIONSWith respect to small and low-risk extensions of credit to certain types of counterparties, approval authority is granted to individuals outside of ERM; • We seek to avoid or limit undue concentrations of risk. Counterparty (or
groups of counterparties), industry, country and product-specific
concentrations of risk are subject to frequent review and approval in
accordance with our risk appetite;
• We determine the creditworthiness of counterparties through a risk
assessment, including the use of internal risk-rating methodologies;
• We seek to review all extensions of credit and the creditworthiness of
counterparties at least annually. The nature and extent of these reviews
are determined by the size, nature and term of the extensions of credit
and the creditworthiness of the counterparty; and
• We subject all corporate policies and guidelines to annual review as an
integral part of our periodic assessment of our risk appetite.
Our corporate policies and guidelines require that the business units which engage in activities that give rise to credit and counterparty risk comply with procedures that promote the extension of credit for legitimate business purposes; are consistent with the maintenance of proper credit standards; limit credit-related losses; and are consistent with our goal of maintaining a strong financial condition.Structure and Organization The Credit and Global Markets Risk group within ERM is responsible for the assessment, approval and monitoring of credit risk across our business. The group is managed centrally, has dedicated teams in a number of locations worldwide across our businesses, and is responsible for related policies and procedures, and for our internal credit-rating systems and methodologies. In addition, the group, in conjunction with the business units, establishes measurements and limits to control the amount of credit risk accepted across its various business activities, both at the portfolio level and for each individual counterparty or group of counterparties, to individual industries, and also to counterparties by product and country of risk. These measurements and limits are reviewed periodically, but at least annually. In conjunction with other groups in ERM, the Credit and Global Markets Risk group is jointly responsible for the design, implementation and oversight of our credit risk measurement and management systems, including data and assessment systems, quantification systems and the reporting framework. Various key committees are responsible for the oversight of credit risk and associated credit risk policies, systems and models. All credit-related activities are governed by our risk appetite framework and our credit risk guidelines, which define our general philosophy with respect to credit risk and the manner in which we control, manage and monitor such risks. The previously described CRPC (refer to "Risk Committees") has primary responsibility for the oversight, review and approval of the credit risk guidelines and policies. Credit risk guidelines and policies are reviewed periodically, but at least annually. The Credit Committee, a sub-committee of the CRPC, has responsibility for assigning credit authority and approving the largest and higher-risk extensions of credit to individual counterparties or groups of counterparties. CRPC provides periodic updates to MRAC and the Board's RC. Credit Ratings We perform initial and ongoing reviews to exercise due diligence on the creditworthiness of our counterparties when conducting any business with them or approving any credit limits. This due diligence process generally includes the assignment of an internal credit rating, which is determined by the use of internally developed and validated methodologies, scorecards and a 15-grade rating scale. This risk-rating process incorporates the use of risk-rating tools in conjunction with management judgment; qualitative and quantitative inputs are captured in a replicable manner and, following a formal review and approval process, an internal credit rating based on our rating scale is assigned. Credit ratings are reviewed and approved by the Credit and Global Markets Risk group or designees within ERM. To facilitate comparability across the portfolio, counterparties within a given sector are rated using a risk-rating tool developed for that sector. Our risk-rating methodologies are approved by the CRPC, after completion of internal model validation processes, and are subject to an annual review, including re-validation. We generally rate our counterparties individually, although accounts defined by us as low-risk are rated on a pooled basis. We evaluate and rate the credit risk of our counterparties on an ongoing basis. Risk Parameter Estimates Our internal risk-rating system seeks to promote a clear and consistent approach to the determination of appropriate credit risk classifications for our credit counterparties and exposures, tracking the changes in risk associated with these counterparties and exposures over time. This capability enhances our ability to more accurately calculate both risk exposures and capital, enabling better strategic decision making across the organization.State Street Corporation
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONSWe use credit risk parameter estimates for the following purposes: • The assessment of the creditworthiness of new counterparties and, in
conjunction with our risk appetite statement, the development of
appropriate credit limits for our products and services, including loans,
foreign exchange, securities finance, placements and repurchase
agreements;
• The use of an automated process for limit approvals for certain low-risk
counterparties, as defined in our credit risk guidelines, based on the
counterparty's probability-of-default, or PD, rating class;
• The development of approval authority matrices based on PD; riskier
counterparties with higher ratings require higher levels of approval for a
comparable PD and limit size compared to less risky counterparties with
lower ratings;
• The analysis of risk concentration trends using historical PD and
exposure-at-default, or EAD, data;
• The standardization of rating integrity testing by GCR using rating
parameters;
• The determination of the level of management review of short-duration
advances depending on PD; riskier counterparties with higher rating class
values generally trigger higher levels of management escalation for
comparable short-duration advances compared to less risky counterparties
with lower rating-class values;
• The monitoring of credit facility utilization levels using EAD values and
the identification of instances where counterparties have exceeded limits;
• The aggregation and comparison of counterparty exposures with risk
appetite levels to determine if businesses are maintaining appropriate
risk levels; and
• The determination of our regulatory capital requirements for the AIRB
provided in the Basel framework.
Credit Risk Mitigation
We seek to limit our credit exposure and reduce our potential credit losses
through various types of risk mitigation. In our day-to-day management of credit
risks, we utilize and recognize the following types of risk mitigation.
Collateral
In many parts of our business, we regularly require or agree for collateral to
be received from or provided to clients and counterparties in connection with
contracts that incur credit risk. In our trading businesses, this collateral is
typically in the form of cash and highly-rated securities (government securities
and other bonds or equity securities). Credit risks in our non-trading and
securities finance businesses are also often secured by bonds and equity
securities and by other types of assets. Collateral serves to reduce the risk of
loss inherent in an exposure by improving the prospect of recovery in the event
of a counterparty default. However, rapidly changing market values of the
collateral we hold, unexpected increases in the credit exposure to a client or
counterparty, reductions in the value or change in the type of securities held
by us, as well as operational errors or errors in the manner in which we seek to
exercise our rights, may reduce the risk mitigation effects of collateral or
result in other security interests not being effective to reduce potential
credit exposure. While collateral is often an alternative source of repayment,
it generally does not replace the requirement within our policies and guidelines
for high-quality underwriting standards. We also may choose to incur credit
exposure without the benefit of collateral or other risk mitigating credits
rights.
Our credit risk guidelines require that the collateral we accept for risk
mitigation purposes is of high quality, can be reliably valued and can be
liquidated if or when required. Generally, when collateral is of lower quality,
more difficult to value or more challenging to liquidate, higher discounts to
market values are applied for the purposes of measuring credit risk. For certain
less liquid collateral, longer liquidation periods are assumed when determining
the credit exposure.
All types of collateral are assessed regularly by ERM, as is the basis on which
the collateral is valued. Our assessment of collateral, including the ability to
liquidate collateral in the event of a counterparty default, and also with
regard to market values of collateral under a variety of hypothetical market
conditions, is an integral component of our assessment of risk and approval of
credit limits. We also seek to identify, limit and monitor instances of
"wrong-way" risk, where a counterparty's risk of default is positively
correlated with the risk of our collateral eroding in value.
We maintain policies and procedures requiring that documentation used to
collateralize a transaction is legal, valid, binding and enforceable in the
relevant jurisdictions. We also conduct legal reviews to assess whether our
documentation meets these standards on an ongoing basis.
Netting
Netting is a mechanism that allows institutions and counterparties to net
offsetting exposures and payment obligations against one another through the use
of qualifying master netting agreements. A master netting agreement allows the
netting of rights and obligations arising under derivative or other transactions
that have
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been entered into under such an agreement upon the counterparty's default,
resulting in a single net claim owed by, or to, the counterparty. This is
commonly referred to as "close-out netting," and is pursued wherever possible.
We may also enter into master agreements that allow for the netting of amounts
payable on a given day and in the same currency, reducing our settlement risk.
This is commonly referred to as "payment netting," and is widely used in our
foreign exchange activities.
As with collateral, we have policies and procedures in place to apply close-out
and payment netting only to the extent that we have verified legal validity and
enforceability of the master agreement. In the case of payment netting,
operational constraints may preclude us from reducing settlement risk,
notwithstanding the legal right to require the same under the master netting
agreement. In the event we become unable, due to operational constraints,
actions by regulators, changes in accounting principles, law or regulation (or
related interpretations) or other factors, to net some or all of our offsetting
exposures and payment obligations under those agreements, we would be required
to gross up our assets and liabilities on our statement of condition and our
calculation of RWA, accordingly. This would result in a potentially material
increase in our regulatory ratios, including LCR, and present increased credit,
liquidity, asset-and-liability management and operational risks, some of which
could be material.
Guarantees
A guarantee is a financial instrument that results in credit support being
provided by a third party, (i.e., the protection provider) to the underlying
obligor (the beneficiary of the provided protection) on account of an exposure
owing by the obligor. The protection provider may support the underlying
exposure either in whole or in part. Support of this kind may take different
forms. Typical forms of guarantees provided to us include financial guarantees,
letters of credit, bankers' acceptances, purchase undertaking agreements
contracts and insurance.
We have established a review process to evaluate guarantees under the applicable
requirements of our policies and Basel III requirements. Governance for this
evaluation is covered under policies and procedures that require regular reviews
of documentation, jurisdictions and credit quality of protection providers.
Pursuant to the Basel III rule, we are permitted to reflect the application of
credit risk mitigation which may include, for example, guarantees, collateral,
netting, secured interests in non-financial assets and credit default swaps. We
do not actively use credit default swaps as a risk mitigation tool, although it
increasingly applies the recognition of guarantees, collateral and
security over non-financial assets to mitigate overall risk within its
counterparty credit portfolio.
Credit Limits
Central to our philosophy for our management of credit risk is the approval and
imposition of credit limits, against which we monitor the actual and potential
future credit exposure arising from our business activities with counterparties
or groups of counterparties. Credit limits are a reflection of our risk
appetite, which may be determined by the creditworthiness of the counterparty,
the nature of the risk inherent in the business undertaken with the
counterparty, or a combination of relevant credit factors. Our risk appetite for
certain sectors and certain countries and geographic regions may also influence
the level of risk we are willing to assume to certain counterparties.
The analysis and approval of credit limits is undertaken in a consistent manner
across our businesses, although the nature and extent of the analysis may vary,
based on the type, term and magnitude of the risk being assumed. Credit limits
and underlying exposures are assessed and measured on both a gross and net basis
where appropriate, with net exposure determined by deducting the value of any
collateral held. For certain types of risk being assumed, we will also assess
and measure exposures under a variety of hypothetical market conditions. Credit
limit approvals across our business are undertaken by the Credit and Global
Markets Risk group, by individuals to whom credit authority has been delegated,
or by the Credit Committee.
Credit limits are re-evaluated annually, or more frequently as needed, and are
revised periodically on prevailing and anticipated market conditions, changes in
counterparty or country-specific credit ratings and outlook, changes in our risk
appetite for certain counterparties, sectors or countries, and enhancements to
the measurement of credit utilization.
Reporting
Ongoing active monitoring and management of our credit risk is an integral part
of our credit risk management framework. We maintain management information
systems to identify, measure, monitor and report credit risk across businesses
and legal entities, enabling ERM and our businesses to have timely access to
accurate information on credit limits and exposures. Monitoring is performed
along the dimensions of counterparty, industry, country and product-specific
risks to facilitate the identification of concentrations of risk and emerging
trends.
Key aspects of this credit risk reporting structure include governance and
oversight groups, policies that define standards for the reporting of credit
risk, data aggregation and sourcing systems and separate testing of relevant
risk reporting functions by Corporate Audit.
State Street Corporation | 87
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The Credit Portfolio Management group routinely assesses the composition of our
overall credit risk portfolio for alignment with our stated risk appetite. This
assessment includes routine analysis and reporting of the portfolio, monitoring
of market-based indicators, the assessment of industry trends and developments
and regular reviews of concentrated risks. The Credit Portfolio Management group
is also responsible, in conjunction with the business units, for defining the
appetite for credit risk in the major sectors in which we have a concentration
of business activities. These sector-level risk appetite statements, which
include counterparty selection criteria and granular underwriting guidelines,
are reviewed periodically and approved by the CRPC.
Monitoring
Regular surveillance of credit and counterparty risks is undertaken by our
business units, the Credit and Global Markets Risk group and designees with ERM,
allowing for frequent and extensive oversight. This surveillance process
includes, but is not limited to, the following components:
• Annual Reviews. A formal review of counterparties is conducted at least
annually and includes a thorough review of operating performance, primary
risk factors and our internal credit risk rating. This annual review also
includes a review of current and proposed credit limits, an assessment of
our ongoing risk appetite and verification that supporting legal
documentation remains effective.
• Interim Monitoring. Periodic monitoring of our largest and riskiest
counterparties is undertaken more frequently, utilizing financial
information, market indicators and other relevant credit and performance
measures. The nature and extent of this interim monitoring is individually
tailored to certain counterparties and/or industry sectors to identify
material changes to the risk profile of a counterparty (or group of
counterparties) and assign an updated internal risk rating in a timely
manner.
We maintain an active "watch list" for all counterparties where we have
identified a concern that the actual or potential risk of default has increased.
The watch list status denotes a concern with some aspect of a counterparty's
risk profile that warrants closer monitoring of the counterparty's financial
performance and related risk factors. Our ongoing monitoring processes are
designed to facilitate the early identification of counterparties whose
creditworthiness is deteriorating; any counterparty may be placed on the watch
list by ERM at its sole discretion.
Counterparties that receive an internal risk rating within a certain range on
our rating scale are eligible for
watch list designation. These risk ratings generally correspond with the
non-investment grade or near non-investment grade ratings established by the
major independent credit-rating agencies, and also include the regulatory
classifications of "Special Mention," "Substandard," "Doubtful" and "Loss."
Counterparties whose internal ratings are outside this range may also be placed
on the watch list.
The Credit and Global Markets Risk group maintains primary responsibility for
our watch list processes, and generates a monthly report of all watch list
counterparties. The watch list is formally reviewed at least on a quarterly
basis, with participation from senior ERM staff, and representatives from the
business units and our corporate finance and legal groups as appropriate. These
meetings include a review of individual watch list counterparties, together with
credit limits and prevailing exposures, and are focused on actions to contain,
reduce or eliminate the risk of loss to us. Identified actions are documented
and monitored.
Controls
GCR provides a separate level of surveillance and oversight over the integrity
of our credit risk management processes, including the internal risk-rating
system. GCR reviews counterparty credit ratings for all identified sectors on an
ongoing basis. GCR is subject to oversight by the CRPC, and provides periodic
updates to the Board's RC.
Specific activities of GCR include the following:
• Perform separate and objective assessments of our credit and counterparty
exposures to determine the nature and extent of risk undertaken by the
business units;
• Execute periodic credit process and credit product reviews to assess the
quality of credit analysis, compliance with policies, guidelines and
relevant regulation, transaction structures and underwriting standards,
and risk-rating integrity;
• Identify and monitor developing counterparty, market and/or industry
sector trends to limit risk of loss and protect capital;
• Deliver regular and formal reporting to stakeholders, including examresults, identified issues and the status of requisite actions to remedy
identified deficiencies;
• Allocate resources for specialized risk assessments (on an as-needed
basis); and
• Liaise with assurance partners and regulatory personnel on matters
relating to risk rating, reporting and measurement.
State Street Corporation | 88
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Reserve for Credit Losses
We maintain an allowance for loan and lease losses to support our on-balance
sheet credit exposures. We also maintain a reserve for unfunded commitments and
letters of credit to support our off-balance credit exposure. The two components
together represent the reserve for credit losses. Review and evaluation of the
adequacy of the reserve for credit losses is ongoing throughout the year, but
occurs at least quarterly, and is based, among other factors, on our evaluation
of the level of risk in the portfolio, the volume of adversely classified loans,
previous loss experience, current trends, and economic conditions and their
effect on our counterparties. Additional information about the allowance for
loan losses is provided in Note 4 to the consolidated financial statements in
this Form 10-K.
Liquidity Risk Management
Our liquidity framework contemplates areas of potential risk based on our
activities, size and other appropriate risk-related factors. In managing
liquidity risk we employ limits, maintain established metrics and early warning
indicators and perform routine stress testing to identify potential liquidity
needs. This process involves the evaluation of a combination of internal and
external scenarios which assist us in measuring our liquidity position and in
identifying potential increases in cash needs or decreases in available sources
of cash, as well as the potential impairment of our ability to access the global
capital markets.
We manage our liquidity on a global, consolidated basis. We also manage
liquidity on a stand-alone basis at our Parent Company, as well as at certain
branches and subsidiaries of State Street Bank . State Street Bank generally has
access to markets and funding sources limited to banks, such as the federal
funds market and the Federal Reserve's discount window. The Parent Company is
managed to a more conservative liquidity profile, reflecting narrower market
access. Additionally, the Parent Company typically holds, or has direct access
to, primarily through SSIF (a direct subsidiary of the Parent Company), as
discussed in "Supervision and Regulation" in Business in this Form 10-K, enough
cash to meet its current debt maturities and cash needs, as well as those
projected over the next one-year period. Absent financial distress at the Parent
Company, the liquid assets available at SSIF continue to be available to the
Parent Company. As of December 31, 2019 , the value of our Parent Company's net
liquid assets totaled $428 million , compared with $486 million as of December
31, 2018 , which amount does not include available liquidity through SSIF. As of
December 31, 2019 , our Parent Company and State Street Bank had approximately
$1.7 billion of senior notes or subordinated debentures outstanding that will
mature in the next twelve months.
As a SIFI, our liquidity risk management activities are subject to heightened
and evolving regulatory requirements, including interpretations of those
requirements, under specific U.S. and international regulations and also
resulting from published and unpublished guidance, supervisory activities, such
as stress tests, resolution planning, examinations and other regulatory
interactions. Satisfaction of these requirements could, in some cases, result in
changes in the composition of our investment portfolio, reduced NII or NIM, a
reduction in the level of certain business activities or modifications to the
way in which we deliver our products and services. If we fail to meet regulatory
requirements to the satisfaction of our regulators, we could receive negative
regulatory stress test results, incur a resolution plan deficiency or
determination of a non-credible resolution plan or otherwise receive an adverse
regulatory finding. Our efforts to satisfy, or our failure to satisfy, these
regulatory requirements could materially adversely affect our business,
financial condition or results of operations.
Governance
Global Treasury is responsible for our management of liquidity. This includes
the day-to-day management of our global liquidity position, the development and
monitoring of early warning indicators, key liquidity risk metrics, the creation
and execution of stress tests, the evaluation and implementation of regulatory
requirements, the maintenance and execution of our liquidity guidelines and
contingency funding plan (CFP), and routine management reporting to ALCO, MRAC
and the Board's RC.
Global Treasury Risk Management, part of ERM, provides separate oversight over
the identification, communication and management of Global Treasury's risks in
support of our business strategy. Global Treasury Risk Management reports to the
CRO. Global Treasury Risk Management's responsibilities relative to liquidity
risk management include the development and review of policies and guidelines;
the monitoring of limits related to adherence to the liquidity risk guidelines
and associated reporting.
State Street Corporation | 89
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Liquidity Framework
Our liquidity framework contemplates areas of potential risk based on our
activities, size and other appropriate risk-related factors. In managing
liquidity risk we employ limits, maintain established metrics and early warning
indicators, and perform routine stress testing to identify potential liquidity
needs. This process involves the evaluation of a combination of internal and
external scenarios which assist us in measuring our liquidity position and in
identifying potential increases in cash needs or decreases in available sources
of cash, as well as the potential impairment of our ability to access the global
capital markets.
We manage liquidity according to several principles that are equally important
to our overall liquidity risk management framework:
• Structural liquidity management addresses liquidity by monitoring and
directing the composition of our consolidated statement of condition.
Structural liquidity is measured by metrics such as the percentage of
total wholesale funds to consolidated total assets, and the percentage of
non-government investment securities to client deposits. In addition, on a
regular basis and as described below, our structural liquidity is
evaluated under various stress scenarios.
• Tactical liquidity management addresses our day-to-day funding
requirements and is largely driven by changes in our primary source offunding, which are client deposits. Fluctuations in client deposits may be
supplemented with short-term borrowings, repurchase agreements, FHLB
products and certificates of deposit.
• Stress testing and contingent funding planning are longer-term strategic
liquidity risk management practices. Regular and ad hoc liquidity stress
testing are performed under various severe but plausible scenarios at the
consolidated level and at significant subsidiaries, including State Street
Bank. These tests contemplate severe market and events specific to us
under various time horizons and severities. Tests contemplate the impact
of material changes in key funding sources, credit ratings, additional
collateral requirements, contingent uses of funding, systemic shocks to
the financial markets and operational failures based on market and
assumptions specific to us. The stress tests evaluate the required level
of funding versus available sources in an adverse environment. As stress
testing contemplates potential forward-looking scenarios, results also
serve
as a trigger to activate specific liquidity stress levels and contingent funding
actions.
CFPs are designed to assist senior management with decision-making associated
with any contingency funding response to a possible or actual crisis scenario.
The CFPs define roles, responsibilities and management actions to be taken in
the event of deterioration of our liquidity profile caused by either an event
specific to us or a broader disruption in the capital markets. Specific actions
are linked to the level of stress indicated by these measures or by management
judgment of market conditions.
Liquidity Risk Metrics
In managing our liquidity, we employ early warning indicators and metrics. Early
warning indicators are intended to detect situations which may result in a
liquidity stress, including changes in our common stock price and the spread on
our long-term debt. Additional metrics that are critical to the management of
our consolidated statement of condition and monitored as part of our routine
liquidity management include measures of our fungible cash position, purchased
wholesale funds, unencumbered liquid assets, deposits and the total of
investment securities and loans as a percentage of total client deposits.
Asset Liquidity
Central to the management of our liquidity is asset liquidity, which consists
primarily of HQLA. HQLA is the amount of liquid assets that qualify for
inclusion in the LCR. As a banking organization, we are subject to a minimum LCR
under the LCR rule approved by U.S. banking regulators. The LCR is intended to
promote the short-term resilience of internationally active banking
organizations, like us, to improve the banking industry's ability to absorb
shocks arising from market stress over a 30 calendar day period and improve the
measurement and management of liquidity risk. The LCR measures an institution's
HQLA against its net cash outflows. HQLA primarily consists of unencumbered cash
and certain high quality liquid securities that qualify for inclusion under the
LCR rule. The LCR was fully implemented beginning on January 1, 2017 . We report
LCR to the Federal Reserve daily. For the quarters ended December 31, 2019 and
December 31, 2018 , daily average LCR for the Parent Company was 110% and 108%,
respectively. The average HQLA for the Parent Company under the LCR final rule
definition was $100.23 billion and $91.67 billion , post-prescribed haircuts, for
the quarters ended December 31, 2019 and December 31, 2018 , respectively. The
increase in average HQLA for the quarter ended December 31, 2019 , compared to
the quarter ended December 31, 2018 , was primarily a result of an increase in
HQLA purchases as part of the repositioning of the investment portfolio.
State Street Corporation | 90
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
We maintained average cash balances in excess of regulatory requirements
governing deposits with the Federal Reserve of approximately $41.56 billion at
the Federal Reserve , the ECB and other non-U.S. central banks as of December 31,
2019 , compared to $44.17 billion as of December 31, 2018 . The lower levels of
average cash balances with central banks reflect an increase in the investment
portfolio.
Liquid securities carried in our asset liquidity include securities pledged
without corresponding advances from the Federal Reserve Bank of Boston (FRBB),
the FHLB, and other non-U.S. central banks. State Street Bank is a member of the
FHLB. This membership allows for advances of liquidity in varying terms against
high-quality collateral, which helps facilitate asset-and-liability management.
As of December 31, 2019 , we had no outstanding borrowings from the FHLB. As of
December 31, 2018 , we had approximately $2 billion of outstanding borrowings
from the FHLB.
Access to primary, intra-day and contingent liquidity provided by these
utilities is an important source of contingent liquidity with utilization
subject to underlying conditions. As of December 31, 2019 and December 31, 2018 ,
we had no outstanding primary credit borrowings from the FRBB discount window or
any other central bank facility.
In addition to the securities included in our asset liquidity, we have
significant amounts of other unencumbered investment securities. These
securities are available sources of liquidity, although not as rapidly deployed
as those included in our asset liquidity.
The average fair value of total unencumbered securities was $76.94 billion for
the quarter ended December 31, 2019 , compared to $65.94 billion for the quarter
ended December 31, 2018 .
Measures of liquidity include LCR and NSFR, which are described in "Supervision
and Regulation" in Business in this Form 10-K.
Uses of Liquidity
Significant uses of our liquidity could result from the following: withdrawals
of client deposits; draw-downs by our custody clients of lines of credit;
advances to clients to settle securities transactions; or other permitted
purposes. Such circumstances would generally arise under stress conditions
including deterioration in credit ratings. A recurring use of our liquidity
involves our deployment of HQLA from our investment portfolio to post collateral
to financial institutions serving as sources of securities under our enhanced
custody program.
We had unfunded commitments to extend credit with gross contractual amounts
totaling $29.70 billion and $28.95 billion and standby letters of credit
totaling $3.32 billion and $2.99 billion as of December 31, 2019
and December 31, 2018 , respectively. These amounts do not reflect the value of
any collateral. As of December 31, 2019 , approximately 73% of our unfunded
commitments to extend credit and 10% of our standby letters of credit expire
within one year. Since many of our commitments are expected to expire or renew
without being drawn upon, the gross contractual amounts do not necessarily
represent our future cash requirements.
Information about our resolution planning and the impact actions under our
resolution plans could have on our liquidity is provided in "Supervision and
Regulation" in Business in this Form 10-K.
Funding
Deposits
We provide products and services including custody, accounting, administration,
daily pricing, FX services, cash management, financial asset management,
securities finance and investment advisory services. As a provider of these
products and services, we generate client deposits, which have generally
provided a stable, low-cost source of funds. As a global custodian, clients
place deposits with our entities in various currencies. As of both December 31,
2019 and December 31, 2018 , approximately 60% of our average total deposit
balances were denominated in U.S. dollars, approximately 20% in EUR, 10% in GBP
and 10% in all other currencies.
Short-Term Funding
Our on-balance sheet liquid assets are also an integral component of our
liquidity management strategy. These assets provide liquidity through maturities
of the assets, but more importantly, they provide us with the ability to raise
funds by pledging the securities as collateral for borrowings or through
outright sales. In addition, our access to the global capital markets gives us
the ability to source incremental funding from wholesale investors. As discussed
earlier under "Asset Liquidity," State Street Bank's membership in the FHLB
allows for advances of liquidity with varying terms against high-quality
collateral.
Short-term secured funding also comes in the form of securities lent or sold
under agreements to repurchase. These transactions are short-term in nature,
generally overnight and are collateralized by high-quality investment
securities. These balances were $1.10 billion and $1.08 billion as of December
31, 2019 and December 31, 2018 , respectively.
State Street Corporation | 91
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
State Street Bank currently maintains a line of credit with a financial
institution of CAD $1.40 billion , or approximately $1.08 billion , as of December
31, 2019 , to support its Canadian securities processing operations. The line of
credit has no stated termination date and is cancelable by either party with
prior notice. As of both December 31, 2019 and December 31, 2018 , there was no
balance outstanding on this line of credit.
Long-Term Funding
We have the ability to issue debt and equity securities under our current
universal shelf registration statement to meet current commitments and business
needs, including accommodating the transaction and cash management needs of our
clients. In addition, State Street Bank also has current authorization from the
Board to issue up to $5 billion in unsecured senior debt and an additional $500
million of subordinated debt.
On January 24, 2020 , we issued $750 million aggregate principal amount of 2.400%
Senior Notes due 2030 in a public offering.
Agency Credit Ratings
Our ability to maintain consistent access to liquidity is fostered by the
maintenance of high investment grade ratings as measured by the major
independent credit rating agencies. Factors essential to maintaining high credit
ratings include:
• diverse and stable core earnings;
• relative market position;
• strong risk management;
• strong capital ratios;
• diverse liquidity sources, including the global capital markets and client
deposits;
• strong liquidity monitoring procedures; and
• preparedness for current or future regulatory developments.
High ratings limit borrowing costs and enhance our liquidity by: • providing assurance for unsecured funding and depositors;
• increasing the potential market for our debt and improving our ability to
offer products;
• serving markets; and
• engaging in transactions in which clients value high credit ratings.
A downgrade or reduction of our credit ratings could have a material adverse
effect on our liquidity by restricting our ability to access the capital
markets, which could increase the related cost of funds. In turn, this could
cause the sudden and large-scale withdrawal of unsecured deposits by our
clients, which could lead to draw-downs of unfunded commitments to extend credit
or trigger requirements under securities purchase
commitments; or require additional collateral or force terminations of certain
trading derivative contracts.
A majority of our derivative contracts have been entered into under bilateral
agreements with counterparties who may require us to post collateral or
terminate the transactions based on changes in our credit ratings. We assess the
impact of these arrangements by determining the collateral that would be
required assuming a downgrade by all rating agencies. The additional collateral
or termination payments related to our net derivative liabilities under these
arrangements that could have been called by counterparties in the event of a
downgrade in our credit ratings below levels specified in the agreements is
provided in Note 10 to the consolidated financial statements in this Form 10-K.
Other funding sources, such as secured financing transactions and other margin
requirements, for which there are no explicit triggers, could also be adversely
affected.
TABLE 31: CREDIT RATINGS
As of December 31, 2019
Standard & Poor's Moody's Investors Service Fitch
State Street:
Senior debt A A1 AA-
Subordinated debt A- A2 A+
Junior subordinated debt BBB A3 NR
Preferred stock BBB Baa1 BBB
Outlook Stable Stable Stable
State Street Bank:
Short-term deposits A-1+ P-1 F1+
Long-term deposits AA- Aa1 AA+
Senior debt/Long-term issuer AA- Aa3 AA
Subordinated debt A Aa3 A+
Outlook Stable Stable Stable
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Contractual Cash Obligations and Other Commitments
The long-term contractual cash obligations included within Table 32: Long-Term
Contractual Cash Obligations were recorded in our consolidated statement of
condition as of December 31, 2019 , except for the interest portions of long-term
debt and finance leases.
TABLE 32: LONG-TERM CONTRACTUAL CASH OBLIGATIONS
December 31, 2019 Payments Due by Period
Less than 1 1-3 4-5 Over 5
(In millions) year years years years Total
Long-term debt(1)(2) $ 1,691 $ 1,492 $ 4,340 $ 4,850 $ 12,373
Operating leases 183 344 251 356 1,134
Finance lease obligations(2) 41 82 31 - 154
Tax liability - - 23
24 47
Total contractual cash obligations
(1) Long-term debt excludes finance lease obligations (presented as a separate line item) and the effect of interest rate swaps. Interest payments were calculated at the stated rate with the exception of floating-rate debt, for which payments were calculated using the indexed rate in effect as ofDecember 31, 2019 . (2) Additional information about contractual cash obligations related to long-term debt and operating and finance leases is provided in Notes 9 and 20 to the consolidated financial statements in this Form 10-K. Total contractual cash obligations shown in Table 32: Long-Term Contractual Cash Obligations do not include: • Obligations which will be settled in cash, primarily in less than one year, such as client deposits, federal funds purchased, securities sold
under repurchase agreements and other short-term borrowings. Additional
information about deposits, federal funds purchased, securities sold under
repurchase agreements and other short-term borrowings is provided in
Note 8 to the consolidated financial statements in this Form 10-K.
• Obligations related to derivative instruments because the
derivative-related amounts recorded in our consolidated statement of
condition as of December 31, 2019 did not represent the amounts that may
ultimately be paid under the contracts upon settlement. Additionalinformation about our derivative instruments is provided in Note 10 to the
consolidated financial statements in this Form 10-K. We have obligations
under pension and other post-retirement benefit plans, with additional
information provided in Note 19 to the consolidated financial statements
in this Form 10-K, which are not included in Table 32: Long-Term
Contractual Cash Obligations.
TABLE 33: OTHER COMMERCIAL COMMITMENTS
Duration of Commitment as of
Less than 1-3 4-5 Over 5 Total amounts
(In millions) 1 year years years years committed(1)
Indemnified securities
financing $ 367,901 $ - $ - $ - $ 367,901
Unfunded credit
facilities 18,737 6,221 4,312 427 29,697
Standby letters of
credit 326 1,920 1,065 13 3,324
Purchase obligations(2) 90 162 19 20 291
Total commercial
commitments $ 387,054 $ 8,303 $ 5,396 $ 460 $ 401,213
(1) Total amounts committed reflect participations to independent third parties,
if any.
(2) Amounts represent obligations pursuant to legally binding agreements, where
we have agreed to purchase products or services with a specific minimum quantity
defined at a fixed, minimum or variable price over a specified period of time.
Additional information about the commitments presented in Table 33: Other
commercial commitments, except for purchase obligations, is provided in Note 12
to the consolidated financial statements in this Form 10-K.
Operational Risk Management
Overview
Operational risk is the risk of loss resulting from inadequate or failed
internal processes, people and systems or from external events. Operational risk
encompasses fiduciary risk and legal risk. Fiduciary risk is defined as the risk
that we fail to properly exercise our fiduciary duties in our provision of
products or services to clients. Legal risk is the risk of loss resulting from
failure to comply with laws and contractual obligations.
Operational risk is inherent in the performance of investment servicing and
investment management activities on behalf of our clients. Whether it be
fiduciary risk, risk associated with execution and processing or other types of
operational risk, a consistent, transparent and effective operational risk
framework is key to identifying, monitoring and managing operational risk.
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
We have established an operational risk framework that is based on three major
goals:
•Strong, active governance;
•Ownership and accountability; and
•Consistency and transparency.
Governance
Our Board is responsible for the approval and oversight of our overall
operational risk framework. It does so through its TOPS, which reviews our
operational risk framework and approves our operational risk policy annually.
Our operational risk policy establishes our approach to our management of
operational risk across our business. The policy identifies the responsibilities
of individuals and committees charged with oversight of the management of
operational risk, and articulates a broad mandate that supports implementation
of the operational risk framework.
ERM and other control groups provide the oversight, validation and verification
of the management and measurement of operational risk.
Executive management actively manages and oversees our operational risk
framework through membership on various risk management committees, including
MRAC, the BCRC, TORC, the Operational Risk Committee, the Executive Information
Security Steering Committee , Business Controls Steering Committee, Compliance
and Ethics Committee and the Fiduciary Review Committee, all of which ultimately
report to the appropriate committee of the Board.
The Operational Risk Committee, chaired by the global head of Operational Risk
and co-chaired by the FLOD Head of Business Controls, provides cross-business
oversight of operational risk, operational risk programs and their
implementation to identify, measure, manage and control operational risk in an
effective and consistent manner and reviews and approves operational risk
guidelines intended to maintain a consistent implementation of our corporate
operational risk policy and framework.
Ownership and Accountability
We have implemented our operational risk framework to support the broad mandate
established by our operational risk policy. This framework represents an
integrated set of processes and tools that assists us in the management and
measurement of operational risk, including our calculation of required capital
and RWA.
The framework takes a comprehensive view and integrates the methods and tools
used to manage and measure operational risk. The framework utilizes aspects of
the COSO framework and other industry leading practices, and is designed
foremost to address our risk management needs while complying with
regulatory requirements. The operational risk framework is intended to provide a
number of important benefits, including:
• A common understanding of operational risk management and its supporting
processes;
• The clarification of responsibilities for the management of operational
risk across our business;
• The alignment of business priorities with risk management objectives;
• The active management of risk and early identification of emerging risks;
• The consistent application of policies and the collection of data for risk
management and measurement; and
• The estimation of our operational risk capital requirement.
The operational risk framework employs a distributed risk management infrastructure executed by ERM groups aligned with the business units, which are responsible for the implementation of the operational risk framework at the business unit level. As with other risks, senior business unit management is responsible for the day-to-day operational risk management of their respective businesses. It is business unit management's responsibility to provide oversight of the implementation and ongoing execution of the operational risk framework within their respective organizations, as well as coordination and communication with ERM. Consistency and Transparency A number of corporate control functions are directly responsible for implementing and assessing various aspects of our operational risk framework, with the overarching goal of consistency and transparency to meet the evolving needs of the business: • The global head of Operational Risk, a member of the CRO's executive
management team, leads ERM's corporate ORM group. ORM is responsible for
the strategy, evolution and consistent implementation of our operational
risk guidelines, framework and supporting tools across our business. ORM
reviews and analyzes operational key risk information, events, metrics and
indicators at the business unit and corporate level for purposes of risk
management, reporting and escalation to the CRO, senior management and
governance committees;
• ERM's Corporate Risk Analytics group develops and maintains operational
risk capital estimation models, and ORM's Capital Analysis group
calculates our required capital for operational risk;
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• ERM's MVG independently validates the quantitative models used to measureoperational risk, and ORM performs validation checks on the output of the
model;
• CIS establishes the framework, policies and related programs to measure,
monitor and report on information security risks, including the
effectiveness of cyber-security program protections. CIS defines and
manages the enterprise-wide information security program. CIS coordinates
with Information Technology, control functions and business units to
support the confidentiality, integrity and availability of corporate
information assets. CIS identifies and employs a risk-based methodology
consistent with applicable regulatory cyber-security requirements and
monitors the compliance of our systems with information security policies;
and
• Corporate Audit performs separate reviews of the application ofoperational risk management practices and methodologies utilized across
our business.
Our operational risk framework consists of five components, each described below, which provide a working structure that integrates distinct risk programs into a continuous process focused on managing and measuring operational risk in a coordinated and consistent manner. Risk Identification and Assessments The objective of risk identification and assessments is to understand business unit strategy, risk profile and potential exposures. It is achieved through a series of risk assessments across our business using techniques for the identification, assessment and measurement of risk across a spectrum of potential frequency and severity combinations. Three primary risk assessment programs, which occur annually, augmented by other business-specific programs, are the core of this component: • The risk and control assessment program seeks to understand the risks
associated with day-to-day activities, and the effectiveness of controls
intended to manage potential exposures arising from these activities.
These risks are typically frequent in nature but generally not severe in
terms of exposure;
• The Material Risk Identification process utilizes a bottom-up approach to
identify our most significant risk exposures across all on- and
off-balance sheet risk-taking activities. The program is specifically
designed to consider risks that could have a material impact irrespective
of their likelihood or frequency. This can include risks that may have an
impact
on longer-term business objectives, such as significant change management activities or long-term strategic initiatives; • The Scenario Analysis program focuses on the set of risks with the highest
severity and most relevance from a capital perspective. These are
generally referred to as "tail risks," and serve as important benchmarks
for our loss distribution approach model (see below); they also provide
inputs into stress testing; and
• Business-specific programs to identify, assess and measure risk, including
new business and product review and approval, new client screening, and,
as deemed appropriate, targeted risk assessments.
Capital Analysis
The primary measurement tool used is an internally developed loss distribution
approach (LDA) model. We use the LDA model to quantify required operational risk
capital, from which we calculate RWA related to operational risk. Such required
capital and RWA totaled $3.84 billion and $47.96 billion , respectively, as of
December 31, 2019 , compared to $3.68 billion and $46.06 billion , respectively,
as of December 31, 2018 ; refer to the "Capital" section in "Financial
Condition," of this Management's Discussion and Analysis.
The LDA model incorporates the four required operational risk elements described
below:
• Internal loss event data is collected from across our business in
conformity with our operating loss policy that establishes the
requirements for collecting and reporting individual loss events. We
categorize the data into seven Basel -defined event types and furthersubdivide the data by business unit, as deemed appropriate. Each of these
loss events are represented in a UOM which is used to estimate a specific
amount of capital required for the types of loss events that fall into
each specific category. Some UOMs are measured at the corporate level
because they are not "business specific," such as damage to physical
assets, where the cause of an event is not primarily driven by the
behavior of a single business unit. Internal losses of
captured, analyzed and included in the modeling approach. Loss event data
is collected using a corporate-wide data collection tool, which stores the
data in a Loss Event Data Repository (LEDR) to support processes related
to analysis, management reporting and the calculation of required capital.
Internal loss event data provides our frequency and severity information
to our capital calculation process for historical loss events experienced
by us.
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Internal loss event data may be incorporated into our LDA model in a future
quarter following the realization of the losses, with the timing and
categorization dependent on the processes for model updates and, if applicable,
model revalidation and regulatory review and related supervisory processes. An
individual loss event can have a significant effect on the output of our LDA
model and our operational risk RWA under the advanced approaches depending on
the severity of the loss event, its categorization among the seven Basel -defined
UOMs and the stability of the distributional approach for a particular UOM;
• External loss event data provides information with respect to loss event
severity from other financial institutions to inform our capital
estimation process of events in similar business units at other banking
organizations. This information supplements the data pool available for
use in our LDA model. Assessments of the sufficiency of internal data and
the relevance of external data are completed before pooling the two data
sources for use in our LDA model;
• Scenario analysis workshops are conducted across our business to inform
management of the less frequent but most severe, or "tail," risks that the
organization faces. The workshops are attended by senior business unit
managers, other support and control partners and business-aligned risk
management staff. The workshops are designed to capture information aboutthe significant risks and to estimate potential exposures for individual
risks should a loss event occur. The results of these workshops are used
to make a comparison to our LDA model results to determine that our
calculation of required capital considers relevant risk-related
information; and
• Business environment and internal control factors are gathered as part of
our scenario analysis program to inform the scenario analysis workshop
participants of internal loss event data and business-relevant metrics,
such as risk assessment program results, along with industry loss event
data and case studies where appropriate. Business environment and internal
control factors are those characteristics of a bank's internal and
external operating environment that bear an exposure to operational risk.
The use of this information indirectly influences our calculation of
required capital by providing additional relevant data to workshop
participants when reviewing specific UOM risks.
Monitoring, Reporting and Analytics
The objective of risk monitoring is to proactively monitor the changing business
environment and corresponding operational risk exposure. It is achieved through
a series of quantitative and qualitative monitoring tools that are designed to
allow us to understand changes in the business environment, internal control
factors, risk metrics, risk assessments, exposures and operating effectiveness,
as well as details of loss events and progress on risk initiatives implemented
to mitigate potential risk exposures.
Operational risk reporting is intended to provide transparency, thereby enabling
management to manage risk, provide oversight and escalate issues in a timely
manner. It is designed to allow the business units, executive management, and
the Board's control functions and committees to gain insight into activities
that may result in risks and potential exposures. Reports are intended to
identify business activities that are experiencing processing issues, whether or
not they result in actual loss events. Reporting includes results of monitoring
activities, internal and external examinations, regulatory reviews and control
assessments. These elements combine in a manner designed to provide a view of
potential and emerging risks facing us and information that details its progress
on managing risks.
Effectiveness and Testing
The objective of effectiveness and testing is to verify that internal controls
are designed appropriately, are consistent with corporate and regulatory
standards, and are operating effectively. It is achieved through a series of
assessments by both internal and external parties, including Corporate Audit,
independent registered public accounting firms, business self-assessments and
other control function reviews, such as a SOX testing program.
Consistent with our standard model validation process, the operational risk LDA
model is subject to a detailed review, overseen by the MRC. In addition, the
model is subject to a rigorous internal governance process. All changes to the
model or input parameters, and the deployment of model updates, are reviewed and
approved by the Operational Risk Committee, which has oversight responsibility
for the model, with technical input from the MRC.
Documentation and Guidelines
Documentation and guidelines allow for consistency and repeatability of the
various processes that support the operational risk framework across our
business.
Operational risk guidelines document our practices and describe the key elements
in a business unit's operational risk management program. The purpose of the
guidelines is to set forth and define key
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operational risk terms, provide further detail on our operational risk programs,
and detail the business units' responsibilities to identify, assess, measure,
monitor and report operational risk. The guideline supports our operational risk
policy.
Data standards have been established to maintain consistent data repositories
and systems that are controlled, accurate and available on a timely basis to
support operational risk management.
Information Technology Risk Management
Overview and Principles
We define technology risk as the risk associated with the use, ownership,
operation, involvement, influence and adoption of information technology.
Technology risk includes risks potentially triggered by technology
non-compliance with regulatory obligations, information security and privacy
incidents, business disruption, technology internal control and process gaps,
technology operational events and adoption of new business technologies.
The principal technology risks within our technology risk policy and risk
appetite framework include:
• Third party vendor risk;
• Business disruption and technology resiliency risk;
• Cyber and information security risk;
• Technology asset and configuration risk; and
• Technology obsolescence risk.
Governance
Our Board is responsible for the approval and oversight of our overall
technology risk framework and program. It does so through its TOPS, which
reviews and approves our technology risk policy and appetite framework annually.
Our technology risk policy establishes our approach to our management of
technology risk across our business. The policy identifies the responsibilities
of individuals and committees charged with oversight of the management of
technology risk and articulates a broad mandate that supports implementation of
the technology risk framework.
Risk control functions in the business are responsible for adopting and
executing the Enterprise Technology Risk Management (ETRM), technology risk
framework and reporting requirements. They do this, in part, by developing and
maintaining an inventory of critical applications and supporting infrastructure,
as well as identifying, assessing and measuring technology risk utilizing the
ETRM framework. They are also responsible for monitoring and evaluating risk on
a continual basis using key risk indicators, risk reporting and adopting
appropriate risk responses to risk issues.
The Chief Technology Risk Officer, a member of the CRO's executive management
team, leads the ETRM. ETRM is the separate risk function responsible for the
technology risk strategy and appetite, and technology risk framework development
and execution. ETRM also performs overall technology risk monitoring and
reporting to the Board, and provides a separate view of the technology risk
posture to executive leadership.
We manage technology risks by:
• Coordinating various risk assessment and risk management activities,
including ERM operational risk programs;
• Establishing, through TORC and TOPS of the Board, the enterprise level
technology risk and cyber risk appetite and limits;
• Producing enterprise level risk reporting, aggregation, dashboards,
profiles and risk appetite statements;
• Validating appropriateness of reporting of information technology risks
and risk acceptance to senior management risk committees and the Board;
• Promoting a strong technology risk culture through communication;
• Serving as an escalation and challenge point for technology risk policy
guidance, expectations and clarifications;
• Assessing effectiveness of key enterprise information technology risk and
internal control remediation programs; and
• Providing risk oversight, challenge and monitoring for the Global
Continuity and Third Party Vendor Management Program, including the
collection of risk appetite, metrics and KRIs, and reviewing issue
management processes and consistent program adoption.
Cyber-Security Risk Management
Cyber-security risk is managed as part of our overall Information Technology
Risk Management as outlined above.
We recognize the significance of cyber-attacks and have taken steps to mitigate
the risks associated with them. We have made significant investments in building
a mature cyber-security program to leverage people, technology and processes to
protect our systems and the data in our care. We have also implemented a program
to help us better measure and manage the cyber-security risk we face when we
engage with third parties for services.
All employees are required to adhere to our cyber-security policy and standards.
Our centralized information security group provides education and training. This
training includes a required annual online
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training class for all employees, multiple simulated phishing attacks and
regular information security awareness materials.
Our business lines employ Information Security Officers to help the business
better understand and manage their information security risks, as well as to
work with the centralized Information Security team to drive awareness and
compliance throughout the business.
We use independent third parties to perform ethical hacks of key systems to help
us better understand the effectiveness of our controls and to better implement
more effective controls, and we engage with third parties to conduct reviews of
our overall program to help us better align our cyber-security program with what
is required of a large financial services organization.
We have an incident response program in place that is designed to enable a
well-coordinated response to mitigate the impact of cyber-attacks, recover from
the attack and to drive the appropriate level of communication to internal and
external stakeholders.
The TORC assesses and manages the effectiveness of our cyber-security program,
which is overseen by the TOPS of our Board. The TOPS receives regular
cyber-security updates throughout the year and is responsible for reviewing and
approving the program on an annual basis.
Market Risk Management
Market risk is defined by U.S. banking regulators as the risk of loss that could
result from broad market movements, such as changes in the general level of
interest rates, credit spreads, foreign exchange rates or commodity prices. We
are exposed to market risk in both our trading and certain of our non-trading,
or asset-and-liability management, activities.
Information about the market risk associated with our trading activities is
provided below under "Trading Activities." Information about the market risk
associated with our non-trading activities, which consists primarily of interest
rate risk, is provided below under "Asset-and-Liability Management Activities."
Trading Activities
In the conduct of our trading activities, we assume market risk, the level of
which is a function of our overall risk appetite, business objectives and
liquidity needs, our clients' requirements and market volatility and our
execution against those factors.
We engage in trading activities primarily to support our clients' needs and to
contribute to our overall corporate earnings and liquidity. In connection with
certain of these trading activities, we enter into a variety of derivative
financial instruments to support our clients' needs and to manage our interest
rate and currency risk. These activities are generally intended to generate
foreign exchange trading services revenue and to manage potential earnings
volatility. In addition, we provide services related to derivatives in our role
as both a manager and a servicer of financial assets.
Our clients use derivatives to manage the financial risks associated with their
investment goals and business activities. With the growth of cross-border
investing, our clients often enter into foreign exchange forward contracts to
convert currency for international investments and to manage the currency risk
in their international investment portfolios. As an active participant in the
foreign exchange markets, we provide foreign exchange forward and option
contracts in support of these client needs, and also act as a dealer in the
currency markets.
As part of our trading activities, we assume positions in the foreign exchange
and interest rate markets by buying and selling cash instruments and entering
into derivative instruments, including foreign exchange forward contracts,
foreign exchange and interest rate options and interest rate swaps, interest
rate forward contracts and interest rate futures. As of December 31, 2019 , the
notional amount of these derivative contracts was $2.41 trillion , of which $2.38
trillion was composed of foreign exchange forward, swap and spot contracts. We
seek to match positions closely with the objective of minimizing related
currency and interest rate risk. All foreign exchange contracts are valued daily
at current market rates.
Governance
Our assumption of market risk in our trading activities is an integral part of
our corporate risk appetite. Our Board reviews and oversees our management of
market risk, including the approval of key market risk policies and the receipt
and review of regular market risk reporting, as well as periodic updates on
selected market risk topics.
The previously described TMRC (refer to "Risk Committees") oversees all market
risk-taking activities across our business associated with trading. The TMRC,
which reports to MRAC, is composed of members of ERM, our global markets
business and our Global Treasury group, as well as our senior executives who
manage our trading businesses and other members of management who possess
specialized knowledge and expertise. The TMRC meets regularly to monitor the
management of our trading market risk activities.
Our business units identify, actively manage and are responsible for the market
risks inherent in their businesses. A dedicated market risk management group
within ERM, and other groups within ERM, work with those business units to
assist them in the identification, assessment, monitoring, management and
control of market risk, and assist business unit managers with their market risk
management and
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measurement activities. ERM provides an additional line of oversight, support
and coordination designed to promote the consistent identification, measurement
and management of market risk across business units, separate from those
business units' discrete activities.
The ERM market risk management group is responsible for the management of
corporate-wide market risk, the monitoring of key market risks and the
development and maintenance of market risk management policies, guidelines and
standards aligned with our corporate risk appetite. This group also establishes
and approves market risk tolerance limits and trading authorities based on, but
not limited to, measures of notional amounts, sensitivity, VaR and stress. Such
limits and authorities are specified in our trading and market risk guidelines
which govern our management of trading market risk.
Corporate Audit separately assesses the design and operating effectiveness of
the market risk controls within our business units and ERM. Other related
responsibilities of Corporate Audit include the periodic review of ERM and
business unit compliance with market risk policies, guidelines and corporate
standards, as well as relevant regulatory requirements. We are subject to
regular monitoring, reviews and supervisory exams of our market risk function by
the Federal Reserve . In addition, we are regulated by, among others, the SEC ,
the Financial Industry Regulatory Authority and the U.S. Commodities Futures
Trading Commission .
Risk Appetite
Our corporate market risk appetite is specified in policy statements that
outline the governance, responsibilities and requirements surrounding the
identification, measurement, analysis, management and communication of market
risk arising from our trading activities. These policy statements also set forth
the market risk control framework to monitor, support, manage and control this
portion of our risk appetite. All groups involved in the management and control
of market risk associated with trading activities are required to comply with
the qualitative and quantitative elements of these policy statements. Our
trading market risk control framework is composed of the following components:
• A trading market risk management process led by ERM, separate from the
business units' discrete activities;
• Clearly defined responsibilities and authorities for the primary groups
involved in trading market risk management;
• A trading market risk measurement methodology that captures correlation
effects and allows aggregation of market risk across risk types, markets
and business lines;
• Daily monitoring, analysis and reporting of market risk exposures
associated with trading activities against market risk limits;
• A defined limit structure and escalation process in the event of a market
risk limit excess;
• Use of VaR models to measure the one-day market risk exposure of trading
positions;
• Use of VaR as a ten-day-based regulatory capital measure of the market
risk exposure of trading positions;
• Use of non-VaR-based limits and other controls;
• Use of stressed-VaR models, stress-testing analysis and scenario analysis
to support the trading market risk measurement and management process by
assessing how portfolios and global business lines perform under extreme
market conditions;
• Use of back-testing as a diagnostic tool to assess the accuracy of VaR
models and other risk management techniques; and
• A new product approval process that requires market risk teams to assess
trading-related market risks and apply risk tolerance limits to proposed
new products and business activities.
We use our CAP to assess our overall capital and liquidity in relation to our risk profile and provide a comprehensive strategy for maintaining appropriate capital and liquidity levels. With respect to market risk associated with trading activities, our risk management and our calculations of regulatory capital are based primarily on our internal VaR models and stress testing analysis. As discussed in detail under "Value-at-Risk" below, VaR is measured daily by ERM. The TMRC oversees our market risk exposure in relation to limits established within our risk appetite framework. These limits define threshold levels for VaR- and stressed VaR-based measures and are applicable to all trading positions subject to regulatory capital requirements. These limits are designed to prevent any undue concentration of market risk exposure, in light of the primarily non-proprietary nature of our trading activities. The risk appetite framework and associated limits are reviewed and approved by the Board's RC. Covered Positions Our trading positions are subject to regulatory market risk capital requirements if they meet the regulatory definition of a "covered position." A covered position is generally defined byU.S. banking regulators as an on- or off-balance sheet position associated with the organization's trading activities that is free of any restrictions on its tradability, but does not include intangible assets, certain credit derivatives recognized as guarantees and certain equity positions not publiclyState Street Corporation
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traded. All FX and commodity positions are considered covered positions,
regardless of the accounting treatment they receive. The identification of
covered positions for inclusion in our market risk capital framework is governed
by our covered positions policy, which outlines the standards we use to
determine whether a trading position is a covered position.
Our covered positions consist primarily of the trading portfolios held by our
global markets business. They also arise from certain positions held by our
Global Treasury group. These trading positions include products such as foreign
exchange spot, foreign exchange forwards, non-deliverable forwards, foreign
exchange options, foreign exchange funding swaps, currency futures, financial
futures and interest rate futures. New activities are analyzed to determine if
the positions arising from such new activities meet the definition of a covered
position and conform to our covered positions policy. This documented analysis,
including any decisions with respect to market risk treatments, must receive
approval from the TMRC.
We use spot rates, forward points, yield curves and discount factors imported
from third-party sources to measure the value of our covered positions, and we
use such values to mark our covered positions to market on a daily basis. These
values are subject to separate validation by us in order to evaluate
reasonableness and consistency with market experience. The mark-to-market gain
or loss on spot transactions is calculated by applying the spot rate to the
foreign currency principal and comparing the resultant base currency amount to
the original transaction principal. The mark-to-market gain or loss on a forward
foreign exchange contract or forward cash flow contract is determined as the
difference between the life-to-date (historical) value of the cash flow and the
value of the cash flow at the inception of the transaction. The mark-to-market
gain or loss on interest rate swaps is determined by discounting the future cash
flows from each leg of the swap transaction.
Value-at-Risk and Stressed VaR
We use a variety of risk measurement tools and methodologies, including VaR,
which is an estimate of potential loss for a given period within a stated
statistical confidence interval. We use a risk measurement methodology to
measure trading-related VaR daily. We have adopted standards for measuring
trading-related VaR, and we maintain regulatory capital for market risk
associated with our trading activities in conformity with currently applicable
bank regulatory market risk requirements.
We utilize an internal VaR model to calculate our regulatory market risk capital
requirements. We use a historical simulation model to calculate daily VaR- and
stressed VaR-based measures for our covered positions in conformity with
regulatory requirements.
Our VaR model seeks to capture identified material risk factors associated with
our covered positions, including risks arising from market movements such as
changes in foreign exchange rates, interest rates and option-implied
volatilities.
We have adopted standards and guidelines to value our covered positions which
govern our VaR- and stressed VaR-based measures. Our regulatory VaR-based
measure is calculated based on historical volatilities of market risk factors
during a two-year observation period calibrated to a one-tail, 99% confidence
interval and a ten-business-day holding period. We also use the same platform to
calculate a one-tail, 99% confidence interval, one-business-day VaR for internal
risk management purposes. A 99% one-tail confidence interval implies that daily
trading losses are not expected to exceed the estimated VaR more than 1% of the
time, or less than three business days out of a year.
Our market risk models, including our VaR model, are subject to change in
connection with the governance, validation and back-testing processes described
below. These models can change as a result of changes in our business
activities, our historical experiences, market forces and events, regulations
and regulatory interpretations and other factors. In addition, the models are
subject to continuing regulatory review and approval. Changes in our models may
result in changes in our measurements of our market risk exposures, including
VaR, and related measures, including regulatory capital. These changes could
result in material changes in those risk measurements and related measures as
calculated and compared from period to period.
We calculate a stressed VaR-based measure using the same model we use to
calculate VaR, but with model inputs calibrated to historical data from a range
of continuous twelve-month periods that reflect significant financial stress.
The stressed VaR model is designed to identify the second-worst outcome
occurring in the worst continuous one-year rolling period since July 2007. This
stressed VaR meets the regulatory requirement as the rolling ten-day period with
an outcome that is worse than 99% of other outcomes during that twelve-month
period of financial stress. For each portfolio, the stress period is determined
algorithmically by seeking the one-year time horizon that produces the largest
ten-business-day VaR from within the available historical data. This historical
data set includes the financial crisis of 2008, the highly volatile period
surrounding the Eurozone sovereign debt crisis and the Standard & Poor's
downgrade of U.S. Treasury debt in August 2011. As the historical data set used
to determine the stress period expands over time, future market stress events
will be incorporated.
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Value-at-Risk Measures
VaR measures are based on the most recent two years of historical price
movements for instruments and related risk factors to which we have exposure.
The instruments in question are limited to foreign exchange spot, forward and
options contracts and interest rate contracts, including futures and interest
rate swaps. Historically, these instruments have exhibited a higher degree of
liquidity relative to other available capital markets instruments. As a result,
the VaR measures shown reflect our ability to rapidly adjust exposures in highly
dynamic markets. For this reason, risk inventory, in the form of net open
positions, across all currencies is typically limited. In addition, long and
short positions in major, as well as minor, currencies provide risk offsets that
limit our potential downside exposure.
Our VaR methodology uses a historical simulation approach based on
market-observed changes in foreign exchange rates, U.S. and non-U.S. interest
rates and implied volatilities, and incorporates the resulting diversification
benefits provided from the mix of our trading positions. Our VaR model
incorporates approximately 5,000 risk factors and includes correlations among
currency, interest rates and other market rates.
All VaR measures are subject to limitations and must be interpreted accordingly.
Some, but not all, of the limitations of our VaR methodology include the
following:
• Compared to a shorter observation period, a two-year observation period is
slower to reflect increases in market volatility (although temporary
increases in market volatility will affect the calculation of VaR for a
longer period); consequently, in periods of sudden increases in volatility
or increasing volatility, in each case relative to the prior two-year
period, the calculation of VaR may understate current risk;
• Compared to a longer observation period, a two-year observation period may
not reflect as many past periods of volatility in the markets, because
such past volatility is no longer in the observation period; consequently,
historical market scenarios of high volatility, even if similar to current
or likely future market circumstances, may fall outside the two-year
observation period, resulting in a potential understatement of current
risk;
• The VaR-based measure is calibrated to a specified level of confidence and
does not indicate the potential magnitude of losses beyond this confidence
level;
• In certain cases, VaR-based measures approximate the impact of changes in
risk factors on the values of positions and portfolios; this may happen
because the number of inputs
included in the VaR model is necessarily limited; for example, yield curve risk factors do not exist for all future dates; • The use of historical market information may not be predictive of future
events, particularly those that are extreme in nature; this
"backward-looking" limitation can cause VaR to understate or overstate
risk;
• The effect of extreme and rare market movements is difficult to estimate;
this may result from non-linear risk sensitivities as well as the
potential for actual volatility and correlation levels to differ from
assumptions implicit in the VaR calculations; and
• Intra-day risk is not captured.
Stress Testing We have a corporate-wide stress testing program in place that incorporates an array of techniques to measure the potential loss we could suffer in a hypothetical scenario of adverse economic and financial conditions. We also monitor concentrations of risk such as concentration by branch, risk component, and currency pairs. We conduct stress testing on a daily basis based on selected historical stress events that are relevant to our positions in order to estimate the potential impact to our current portfolio should similar market conditions recur, and we also perform stress testing as part of theFederal Reserve's CCAR process. Stress testing is conducted, analyzed and reported at the corporate, trading desk, division and risk-factor level (for example, exchange risk, interest rate risk and volatility risk). Stress testing results and limits are actively monitored on a daily basis by ERM and reported to the TMRC. Limit breaches are addressed by ERM risk managers in conjunction with the business units, escalated as appropriate, and reviewed by the TMRC if material. In addition, we have established several action triggers that prompt immediate review by management and the implementation of a remediation plan. We perform scenario analysis daily based on selected historical stress events that are relevant to our positions in order to estimate the potential impact to our current portfolio should similar market conditions recur. Relevant scenarios are chosen from an inventory of historical financial stresses and applied to our current portfolio. These historical event scenarios involve spot foreign exchange, credit, equity, unforeseen geo-political events and natural disasters, and government and central bank intervention scenarios. Examples of the specific historical scenarios we incorporate in our stress testing program may include the Asian financial crisis of 1997, the September 11, 2001 terrorist attacks in theU.S. and the 2008 financial crisis. We continue to update our inventory of historical stress scenarios as new stress conditions emerge in the financial markets.State Street Corporation | 101
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As each of the historical stress events is associated with a different time
horizon, we normalize results by scaling down the longer horizon events to a
ten-day horizon and keeping the shorter horizon events (i.e., events that are
shorter than ten days) at their original terms. We also conduct sensitivity
analysis daily to calculate the impact of a large predefined shock in a specific
risk factor or a group of risk factors on our current portfolio. These
predefined shocks include parallel and non-parallel yield curve shifts and
foreign exchange spot and volatility surface shifts. In a parallel shift
scenario, we apply a constant factor shift across all yield curve tenors. In a
non-parallel shift scenario, we apply different shock levels to different tenors
of a yield curve, rather than shifting the entire curve by a constant amount.
Non-parallel shifts include steepening, flattening and butterflies.
Validation and Back-Testing
We perform frequent back-testing to assess the accuracy of our VaR-based model
in estimating loss at the stated confidence level. This back-testing involves
the comparison of estimated VaR model outputs to daily, actual profit-and-loss
(P&L) outcomes observed from daily market movements. We back-test our VaR model
using "clean" P&L, which excludes non-trading revenue such as fees, commissions
and NII, as well as estimated revenue from intra-day trading.
Our VaR definition of trading losses excludes items that are not specific to the
price movement of the trading assets and liabilities themselves, such as fees,
commissions, changes to reserves and gains or losses from intra-day activity.
We experienced two back-testing exceptions in 2019 and four back-testing
exceptions in 2018. At 99% confidence interval, the statistical expectation for
a VaR model is to witness one exception every hundred trading days (or two to
three exceptions per year). The 2019 back-testing exceptions are therefore
within statistical expectation. In 2018 heightened volatility followed a longer
period of relatively benign market conditions that saw the Volatility Index
routinely register as little as 10% or less. Following such periods, it is quite
common for VaR models calibrated to the most recent two years of data to
underestimate the trading gains or losses that are experienced as volatility
trends above levels that were seen more recently.
Our model validation process also evaluates the integrity of our VaR models
through the use of regular outcome analysis. This outcome analysis includes
back-testing, which compares the VaR model's predictions to actual outcomes
using out-of-sample information. Consistent with regulatory guidance, the
back-testing compared "clean" P&L, defined above, with the one-day VaR produced
by the model. The back-testing was performed for a time period not used for
model development. The number of occurrences where "clean" trading-book P&L
exceeded the one-day VaR was within our expected VaR tolerance level.
Market Risk Reporting
Our ERM market risk management group is responsible for market risk monitoring
and reporting. We use a variety of systems and controlled market feeds from
third-party services to compile data for several daily, weekly and monthly
management reports.
The following tables present VaR and stressed VaR associated with our trading
activities for covered positions held during the years ended December 31, 2019
and 2018, respectively, as measured by our VaR methodology. Diversification
effect in the tables below represents the difference between total VaR and the
sum of the VaRs for each trading activity. This effect arises because the risks
present in our trading activities are not perfectly correlated.
TABLE 34: TEN-DAY VALUE-AT-RISK ASSOCIATED WITH TRADING ACTIVITIES FOR COVERED POSITIONS
Year Ended December 31, 2019 Year Ended December 31, 2018
(In thousands) Year Ended Average Maximum Minimum
Year Ended Average Maximum Minimum Global Markets $ 9,954 $ 10,235 $ 26,419 $ 5,880 $ 10,588 $ 7,354 $ 19,160 $ 2,967 Global Treasury
987 733 2,326 123 1,354 750 3,579 91
Diversification (1,082 ) (864 ) (4,812 ) (67 ) (1,435 ) (634 ) (3,348 ) 205 Total VaR
$ 9,859 $ 10,104 $ 23,933 $ 5,936 $ 10,507 $ 7,470 $ 19,391 $ 3,263
TABLE 35: TEN-DAY STRESSED VALUE-AT-RISK ASSOCIATED WITH TRADING ACTIVITIES FOR COVERED POSITIONS
Year Ended December 31, 2019 Year Ended December 31, 2018
(In thousands) Year Ended Average Maximum Minimum
Year Ended Average Maximum Minimum Global Markets $ 48,089 $ 34,574 $ 55,751 $ 17,492 $ 26,512 $ 32,744 $ 58,221 $ 14,811 Global Treasury
5,898 3,454 8,376 842 7,683 3,659 10,177 342 Diversification
(8,289 ) (3,459 ) (5,962 ) (1,734 ) (7,919 ) (4,101 ) (10,179 ) (325 ) Total Stressed VaR $ 45,698 $ 34,569 $ 58,165 $ 16,600 $ 26,276 $ 32,302 $ 58,219 $ 14,828
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The average of our stressed VaR-based measure was approximately $35 million for
the year ended December 31, 2019, compared to an average of approximately $32
million for the year ended December 31, 2018.
The average stressed VaR-based measure as of December 31, 2019 was relatively
unchanged compared to December 31, 2018. Our stressed VaR-based measure
increased as of December 31, 2019 compared to December 31, 2018, primarily due
to larger FX net open positions.
The VaR-based measures presented in the preceding tables are primarily a
reflection of the overall level of market volatility and our appetite for taking
market risk in our trading activities. Overall levels of volatility have been
low both on an absolute basis and relative to the historical information
observed at the beginning of the period used for the calculations. Both the
ten-day VaR-based measures and the stressed VaR-based measures are based on
historical changes observed during rolling ten-day periods for the portfolios as
of the close of business each day over the past one-year period.
We may in the future modify and adjust our models and methodologies used to
calculate VaR and stressed VaR, subject to regulatory review and approval, and
these modifications and adjustments may result in changes in our VaR-based and
stressed VaR-based measures.
The following tables present the VaR and stressed-VaR associated with our
trading activities attributable to foreign exchange risk, interest rate risk and
volatility risk as of December 31, 2019 and 2018, respectively. The totals of
the VaR-based and stressed VaR-based measures for the three attributes in total
exceeded the related total VaR and total stressed VaR presented in the foregoing
tables as of each period-end, primarily due to the benefits of diversification
across risk types. Diversification effect in the tables below represents the
difference between total VaR and the sum of the VaRs for each trading activity.
This effect arises because the risks present in our trading activities are not
perfectly correlated.
TABLE 36: TEN-DAY VaR ASSOCIATED WITH TRADING ACTIVITIES BY RISK FACTOR(1)
As of December 31, 2019(2) As of December 31, 2018
(In thousands) Foreign Exchange Risk Interest Rate Risk Foreign Exchange Risk Interest Rate Risk
By component:
Global Markets $ 5,447 $ 6,266 $ 2,679 $ 11,850
Global Treasury 24 966 53 1,377
Diversification (23 ) (995 ) (39 ) (1,436 )
Total VaR $ 5,448 $ 6,237 $ 2,693 $ 11,791
TABLE 37: TEN-DAY STRESSED VaR ASSOCIATED WITH TRADING ACTIVITIES BY RISK FACTOR(1)
As of December 31, 2019(2) As of December 31, 2018
(In thousands) Foreign Exchange Risk Interest Rate Risk Foreign Exchange Risk Interest Rate Risk
By component:
Global Markets $ 8,427 $ 61,792 $ 10,465 $ 23,324
Global Treasury 59 6,258 74 8,202
Diversification (61 ) (8,681 ) (132 ) (7,835 )
Total Stressed VaR $ 8,425 $ 59,369 $ 10,407 $ 23,691
(1) For purposes of risk attribution by component, foreign exchange refers only
to the risk from market movements in period-end rates. Forwards, futures,
options and swaps with maturities greater than period-end have embedded interest
rate risk that is captured by the measures used for interest rate risk.
Accordingly, the interest rate risk embedded in these foreign exchange
instruments is included in the interest rate risk component.
(2) As of December 31, 2019, we had no ten-day VaR or ten-day stressed VaR
associated with volatility risk.
Asset and Liability Management Activities
The primary objective of asset and liability management is to provide
sustainable NII under varying economic conditions, while protecting the economic
value of the assets and liabilities carried on our consolidated statement of
condition from the adverse effects of changes in interest rates. While many
market factors affect the level of NII and the economic value of our assets and
liabilities, one of the most significant factors is our exposure to movements in
interest rates. Most of our NII is earned from the investment of client deposits
generated by our businesses. We invest these client deposits in assets that
conform generally to the characteristics of our balance sheet liabilities,
including the currency composition of our significant non-U.S. dollar
denominated client liabilities.
We quantify NII sensitivity using an earnings simulation model that includes our
expectations for new business growth, changes in balance sheet mix and
investment portfolio positioning. This measure compares our baseline view of NII
over a twelve-month horizon, based on our internal forecast of interest rates,
to a wide range of rate shocks. Table 38, Key Interest Rates for Baseline
Forecasts, presents the spot and 12-month forward rates used in our baseline
forecasts at December 31, 2019 and December 31, 2018. Our December 31, 2019
baseline forecast includes the expectation of one rate cut by the Federal
Reserve over the next 12 months.
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONSTABLE 38: KEY INTEREST RATES FOR BASELINE FORECASTS
December 31, 2019 December 31, 2018
Fed Funds Target 10-Year Treasury Fed Funds Target 10-Year Treasury
Spot rates 1.75 % 1.92 % 2.50 % 2.68 %
12-month forward rates 1.50 1.95 3.00 2.99
In Table 39: Net Interest Income Sensitivity, we report the expected change in
NII over the next twelve months from instantaneous shocks to various tenors on
the yield curve, including the impacts from U.S. and non-U.S. rates. Each
scenario assumes no management action is taken to mitigate the adverse effects
of interest rate changes on our financial performance. While investment
securities balances can fluctuate with the level of rates as prepayment
assumptions change, our deposit balances remain consistent with the baseline.
TABLE 39: NET INTEREST INCOME SENSITIVITY
December 31, 2019 December 31, 2018
(In millions) U.S. Dollar All Other Currencies Total U.S. Dollar All Other Currencies Total
Rate change: Benefit (Exposure) Benefit (Exposure)
Parallel shifts:
+100 bps shock $ 67 $ 175 $ 242 $ 136 $ 235 $ 371
-100 bps shock (214 ) 81 (133 ) (210 ) 27 (183 )
Steeper yield curve:
+100 bps shift in
long-end rates 176 6 182 108 19 127
-100 bps shift in
short-end rates (16 ) 86 70 (68 ) 44 (24 )
Flatter yield curve:
+100 bps shift in
short-end rates (97 ) 170 73 31 218 249
-100 bps shift in
long-end rates (184 ) (6 ) (190 ) (135 ) (18 ) (153 )
As of December 31, 2019, NII remains positioned to benefit from a parallel rise
in interest rates and is exposed to a parallel decline in interest rates.
Compared to December 31, 2018, our NII is less sensitive to parallel rate
increases and decreases, driven by changes to the composition of U.S. deposits
and derivative hedging activity intended to reduce the impact of lower rates in
the U.S.
U.S dollar NII sensitivity as of December 31, 2019 similarly remains poised to
benefit from a parallel rise in interest rates and is exposed to a parallel
decline in U.S. interest rates. Compared to December 31, 2018, our U.S. dollar
NII benefit to higher rates has declined, largely driven by the composition of
U.S. deposits, higher deposit betas and derivative hedging activity. NII
exposure to lower U.S. rates has remained stable since December 31, 2018 as
reduced sensitivities to short-end rates is offset by increased exposure to
long-end rates. The reduced NII sensitivity to lower short-end U.S. rates is
driven by changes to the composition of U.S. deposits and cash flow hedging
activity, while increased NII exposure to lower long-end U.S. rates is driven by
higher levels of mortgage-backed securities in the investment portfolio.
We are still positioned to benefit from changes in non-U.S. interest rates, with
the majority of our sensitivity derived from the short-end of the curve given
deposit pricing expectations. Compared to December 31, 2018, our non-U.S.
benefit to higher rates has decreased, while the benefit to lower rates has
increased. The decreased NII benefit to higher rates is driven by Euro deposit
pricing actions, in addition to the impact of changes to the treatment of excess
reserves by the European Central Bank and Swiss National Bank. The increased
benefit to lower rates is largely a result of the aforementioned change in
treatment for excess reserves.
EVE sensitivity is a discounted cash flow model designed to estimate the fair
value of assets and liabilities under a series of interest rate shocks over a
long-term horizon. In the following table, we report our EVE sensitivity to 200
bps instantaneous rate shocks, relative to spot interest rates. Management
compares the change in EVE sensitivity against our aggregate tier 1 and tier 2
risk-based capital, calculated in conformity with current applicable regulatory
requirements. EVE sensitivity is dependent on the timing of interest and
principal cash flows. Also, the measure only evaluates the spot balance sheet
and does not include the impact of new business assumptions.
TABLE 40: ECONOMIC VALUE OF EQUITY SENSITIVITY
As of December 31,
(In millions) 2019 2018
Rate change: Benefit (Exposure)
+200 bps shock $ (1,966 ) $ (1,603 )
-200 bps shock 1,292 796
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
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As of December 31, 2019, EVE sensitivity remains exposed to upward shifts in
interest rates. Compared to December 31, 2018, the change in the up and down 200
bps instantaneous shocks was primarily driven by purchases of fixed-rate
investment portfolio securities, partially offset by lower long-end U.S. rates.
Both NII sensitivity and EVE sensitivity are routinely monitored as market
conditions change.
Model Risk Management
The use of models is widespread throughout the financial services industry, with
large and complex organizations relying on sophisticated models to support
numerous aspects of their financial decision making. The models
contemporaneously represent both a significant advancement in financial
management and a source of risk. In large banking organizations like us, model
results influence business decisions, and model failure could have a harmful
effect on our financial performance. As a result, the MRM Framework seeks to
mitigate our model risk.
Our MRM program has three principal components:
• A model risk governance program that defines roles and responsibilities,
including the authority to restrict model usage, provides policies and
guidance, monitors compliance and reports regularly to the Board on the
overall degree of model risk across the corporation;
• A model development process that focuses on sound design and computational
accuracy, and includes activities designed to test for robustness,
stability and sensitivity to assumptions; and
• An independent model validation function designed to verify that models
are conceptually sound, computationally accurate, are performing as
expected, and are in line with their design objectives.
Governance
Models used in the regulatory capital calculation can only be deployed for use
after undergoing a model validation by ERM's MRM group. The model validation
results and/or a decision by the Model Risk Committee must permit model usage or
the model may not be used.
ERM's MRM group is responsible for defining the corporate-wide model risk
governance framework, maintaining policies that achieve the framework's
objectives. The team is responsible for overall model risk governance
capabilities, with particular emphasis in the areas of model validation, model
risk reporting, model performance monitoring, tracking of new model development
status and committee-level review and challenge.
MRC, which is composed of senior managers responsible for representing
functional areas and
business units with key models across the organization, reports to MRAC, and
provides guidance and oversight to the MRM function.
Model Development and Usage
Models are developed under standards governing data sourcing, methodology
selection and model integrity testing. Model development includes a statement of
purpose to align development with intended use. It also includes a comparison of
alternative approaches to promote a sound modeling approach.
Model developers conduct an assessment of data quality and relevance. The
development teams conduct a variety of tests of the accuracy, robustness and
stability of each model.
Model owners submit models to the MVG for validation on a regular basis, as per
the existing policy.
Model Validation
MVG is part of MRM within ERM and performs model validations and reviews. MVG is
independent, as contemplated by applicable bank regulatory requirements, of both
the developers and users of the models. MVG validates models through an
evaluation process that assesses the appropriateness, accuracy, and suitability
of data inputs, methodologies, documentation, assumptions, and processing code.
Model validation also encompasses an assessment of model performance,
sensitivity, and robustness, as well as a model's potential limitations given
its particular assumptions or deficiencies. Based on the results of its review,
MVG issues a model use decision and may require remedial actions and/or
compensating controls on model use. MVG also maintains a model risk rating
system, which assigns a risk rating to each model based on an assessment of a
model's inherent and residual risks. These ratings aid in the understanding and
reporting of model risk across the model portfolio, and enable the triaging of
needs for remediation.
Although model validation is the primary method of subjecting models to
independent review and challenge, in practice, a multi-step governance process
provides the opportunity for challenge by multiple parties. First, MVG conducts
a model validation and issues a model use decision. MVG communicates their
result as one of the following three outcomes: "Approved", "Approved with
conditions", or "Not Approved". There are two ways in which a model can be
deemed "Not approved for Use" given a validation: 1) the aggregation of the
model scoring within MRM's Model Risk Rating System (MRRS) model is poor enough
to result in a "high" rating, or 2) the scoring of one or more MRRS model
element(s) is deemed "critical" resulting in an automatic "high" rating
irrespective of the other elements as the "critical" element(s) undermines the
model. Second, these
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
decisions may be reviewed, challenged, and confirmed by the MRC. Finally, model
use decisions, risk ratings, and overall levels of model risk may be reported to
and reviewed by MRAC. MRM also reports regularly on model risk issues to the
Board.
Strategic Risk Management
We define strategic risk as the current or prospective impact on earnings or
capital arising from adverse business decisions, improper implementation of
strategic initiatives, or lack of responsiveness to industry-wide changes.
Strategic risks are influenced by changes in the competitive environment;
decline in market performance or changes in our business activities; and the
potential secondary impacts of reputational risks, not already captured as
market, interest rate, credit, operational, model or liquidity risks. We
incorporate strategic risk into our assessment of our business plans and risk
and capital management processes. Active management of strategic risk is an
integral component of all aspects of our business.
Separating the effects of a potential material adverse event into operational
and strategic risk is sometimes difficult. For instance, the direct financial
impact of an unfavorable event in the form of fines or penalties would be
classified as an operational risk loss, while the impact on our reputation and
consequently the potential loss of clients and corresponding decline in revenue
would be classified as a strategic risk loss. An additional example of strategic
risk is the integration of a major acquisition. Failure to successfully
integrate the operations of an acquired business, and the resultant inability to
retain clients and the associated revenue, would be classified as a loss due to
strategic risk.
Strategic risk is managed with a long-term focus. Techniques for its assessment
and management include the development of business plans, which are subject to
robust review and challenge from senior management and the Board of Directors,
as well as a formal review and approval process for all new business and product
proposals. The potential impact of the various elements of strategic risk is
difficult to quantify with any degree of precision. We use a combination of
historical earnings volatility, scenario analysis, stress-testing and management
judgment to help assess the potential effect on us attributable to strategic
risk. Management and control of strategic risks are generally the responsibility
of the business units, with oversight from the control functions, as part of
their overall strategic planning and internal risk management processes.
Capital
Managing our capital involves evaluating whether our actual and projected levels
of capital are commensurate with our risk profile, are in compliance with all
applicable regulatory requirements and are
sufficient to provide us with the financial flexibility to undertake future
strategic business initiatives. We assess capital adequacy based on relevant
regulatory capital requirements, as well as our own internal capital goals,
targets and other relevant metrics.
Framework
Our objective with respect to management of our capital is to maintain a strong
capital base in order to provide financial flexibility for our business needs,
including funding corporate growth and supporting clients' cash management
needs, and to provide protection against loss to depositors and creditors. We
strive to maintain an appropriate level of capital, commensurate with our risk
profile, on which an attractive return to shareholders is expected to be
realized over both the short and long-term, while protecting our obligations to
depositors and creditors and complying with regulatory capital requirements.
Our capital management focuses on our risk exposures, the regulatory
requirements applicable to us with respect to multiple capital measures, the
evaluations and resulting credit ratings of the major independent rating
agencies, our return on capital at both the consolidated and line-of-business
level and our capital position relative to our peers.
Assessment of our overall capital adequacy includes the comparison of capital
sources with capital uses, as well as the consideration of the quality and
quantity of the various components of capital. The assessment seeks to determine
the optimal level of capital and composition of capital instruments to satisfy
all constituents of capital, with the lowest overall cost to shareholders. Other
factors considered in our assessment of capital adequacy are strategic and
contingency planning, stress testing and planned capital actions.
Capital Adequacy Process
Our primary federal banking regulator is the Federal Reserve . Both we and State
Street Bank are subject to the minimum regulatory capital requirements
established by the Federal Reserve and defined in the Federal Deposit Insurance
Corporation Improvement Act. State Street Bank must exceed the regulatory
capital thresholds for "well capitalized" in order for our Parent Company to
maintain its status as a financial holding company. Accordingly, one of our
primary objectives with respect to capital management is to exceed all
applicable minimum regulatory capital requirements and to be "well-capitalized"
under the PCA guidelines established by the FDIC . Our capital management
activities are conducted as part of our corporate-wide CAP and associated
Capital Policy and Guidelines.
We consider capital adequacy to be a key element of our financial well-being,
which affects our ability to attract and maintain client relationships; operate
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AND RESULTS OF OPERATIONS
effectively in the global capital markets; and satisfy regulatory, security
holders and shareholder needs. Capital is one of several elements that affect
our credit ratings and the ratings of our principal subsidiaries.
In conformity with our Capital Policy and Guidelines, we strive to achieve and
maintain specific internal capital levels, not just at a point in time, but over
time and during periods of stress, to account for changes in our strategic
direction, evolving economic conditions, and financial and market volatility. We
have developed and implemented a corporate-wide CAP to assess our overall
capital in relation to our risk profile and to provide a comprehensive strategy
for maintaining appropriate capital levels. The CAP considers material risks
under multiple scenarios, with an emphasis on stress scenarios, and encompasses
existing processes and systems used to measure our capital adequacy.
Capital Contingency Planning
Contingency planning is an integral component of capital management. The
objective of contingency planning is to monitor current and forecast levels of
select capital, liquidity and other measures that serve as early indicators of a
potentially adverse capital or liquidity adequacy situation. These measures are
one of the inputs used to set our internal capital adequacy level. We review
these measures annually for appropriateness and relevance in relation to our
financial budget and capital plan.
Stress Testing
We administer a robust business-wide stress-testing program that executes
multiple stress tests each year to assess the institution's capital adequacy
and/or future performance under adverse conditions. Our stress testing program
is structured around what we determine to be the key risks inherent in our
business, as assessed through a recurring material risk identification process.
The material risk identification process represents a bottom-up approach to
identifying the institution's most significant risk exposures across all on- and
off-balance sheet risk-taking activities, including credit, market, liquidity,
interest rate, operational, fiduciary, business, reputation and regulatory
risks. These key risks serve as an organizing principle for much of our risk
management framework, as well as reporting, including the "risk dashboard"
provided to the Board. Over the past few years, stress scenarios have included a
deep recession in the U.S. , a break-up of the Eurozone , a severe recession in
China and an oil shock precipitated by turmoil in the Middle East /North Africa
region.
In connection with the focus on our key risks, each stress test incorporates
idiosyncratic loss events tailored to our unique risk profile and business
activities. Due to the nature of our business model and our
consolidated statement of condition, our risks differ from those of a
traditional commercial bank.
The Federal Reserve requires bank holding companies with total consolidated
assets of $50 billion or more, which includes us, to submit a capital plan on an
annual basis. The Federal Reserve uses its annual CCAR process, which
incorporates hypothetical financial and economic stress scenarios, to review
those capital plans and assess whether banking organizations have capital
planning processes that account for idiosyncratic risks and provide for
sufficient capital to continue operations throughout times of economic and
financial stress. As part of its CCAR process, the Federal Reserve assesses each
organization's capital adequacy, capital planning process and plans to
distribute capital, such as dividend payments or stock purchase programs.
Management and Board risk committees review, challenge and approve CCAR results
and assumptions before submission to the Federal Reserve .
Through the evaluation of our capital adequacy and/or future performance under
adverse conditions, the stress testing processes provide important insights for
capital planning, risk management and strategic decision-making for us.
Governance
In order to support integrated decision making, we have identified three
management elements to aid in the compatibility and coordination of our CAP:
• Risk Management - identification, measurement, monitoring and forecasting
of different types of risk and their combined impact on capital adequacy;
• Capital management - determination of optimal capital levels; and
• Business Management - strategic planning, budgeting, forecasting and
performance management.
We have a hierarchical structure supporting appropriate committee review of
relevant risk and capital information. The ongoing responsibility for capital
management rests with our Treasurer. The Capital Management group within Global
Treasury is responsible for the Capital Policy and Guidelines, development of
the Capital Plan, the oversight of global capital management and optimization.
The MRAC provides oversight of our capital management, our capital adequacy, our
internal targets and the expectations of the major independent credit rating
agencies. In addition, MRAC approves our balance sheet strategy and related
activities. The Board's RC assists the Board in fulfilling its oversight
responsibilities related to the assessment and management of risk and capital.
Our Capital Policy is reviewed and approved annually by the Board's RC.
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Global Systemically Important Bank
We are one among a group of 30 institutions worldwide that have been identified
by the Financial Stability Board and the Basel Committee on Banking Supervision
as G-SIBs. Our designation as a G-SIB is based on a number of factors, as
evaluated by banking regulators, and requires us to maintain an additional
capital surcharge above the minimum capital ratios set forth in the Basel III
rule.
We and our depositary institution subsidiaries are subject to the current Basel
III minimum risk-based capital and leverage ratio guidelines.
Additional information about G-SIBs is provided under "Regulatory Capital
Adequacy and Liquidity Standards" in "Supervision and Regulation" in Business in
this Form 10-K.
Regulatory Capital
We and State Street Bank, as advanced approaches banking organizations, are
subject to the U.S. Basel III framework. Provisions of the Basel III rule became
effective with full implementation on January 1, 2019. We are also subject to
the final market risk capital rule issued by U.S. banking regulators effective
as of January 2013.
The Basel III rule provides for two frameworks for monitoring capital adequacy:
the "standardized" approach and the "advanced" approaches, applicable to
advanced approaches banking organizations, like us. The standardized approach
prescribes standardized calculations for credit RWA, including specified risk
weights for certain on- and off-balance sheet exposures.
The advanced approaches consist of the Advanced Internal Ratings-Based Approach
used for the calculation of RWA related to credit risk, and the Advanced
Measurement Approach used for the calculation of RWA related to operational
risk.
The market risk capital rule requires us to use internal models to calculate
daily measures of VaR, which reflect general market risk for certain of our
trading positions defined by the rule as "covered positions," as well as
stressed-VaR measures to supplement the VaR measures. The rule also requires a
public disclosure composed of qualitative and quantitative information about the
market risk associated with our trading activities and our related VaR and
stressed-VaR measures. The qualitative and quantitative information required by
the rule is provided under "Market Risk" included in this Management's
Discussion and Analysis.
As required by the Dodd-Frank Act, we and State Street Bank, as advanced
approaches banking
organizations, are subject to a permanent "capital floor," also referred to as
the Collins Amendment, in the assessment of our regulatory capital adequacy,
including the capital conservation buffer and countercyclical capital buffer.
Our risk-based capital ratios for regulatory assessment purposes are the lower
of each ratio calculated under the standardized approach and the advanced
approaches.
The requirement for the capital conservation buffer became effective with full
implementation on January 1, 2019. Specifically, the rule limits a banking
organization's ability to make capital distributions and discretionary bonus
payments to executive officers if it fails to maintain a CET1 capital
conservation buffer of more than 2.5% of total RWA and, if deployed during
periods of excessive credit growth, a CET1 countercyclical capital buffer of up
to 2.5% of total RWA, above each of the minimum CET1, tier 1, and total
risk-based capital ratios. The countercyclical capital buffer is currently set
at zero by U.S. banking regulators. To maintain the status of the Parent Company
as a financial holding company, we and our insured depository institution
subsidiaries are required, among other requirements, to be "well capitalized" as
defined by the Prompt Corrective Action Framework.
The specific calculation of our and State Street Bank's risk-based capital
ratios changed as the provisions of the Basel III rule related to the numerator
(capital) and denominator (RWA) were phased in, and as our RWA calculated using
the advanced approaches changed due to changes in methodology. These
methodological changes resulted in differences in our reported capital ratios
from one reporting period to the next that are independent of applicable changes
to our capital base, our asset composition, our off-balance sheet exposures or
our risk profile.
The following table presents the regulatory capital structure and related
regulatory capital ratios for us and State Street Bank as of the dates
indicated. We are subject to the more stringent of the risk-based capital ratios
calculated under the standardized approach and those calculated under the
advanced approaches in the assessment of our capital adequacy under applicable
bank regulatory standards.
As a result of changes in the methodologies used to calculate our regulatory
capital ratios from period to period, as the provisions of the Basel III rule
were phased in, the ratios presented in the table for each period are not
directly comparable. Refer to the footnotes following the table.
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONSTABLE 41: REGULATORY CAPITAL STRUCTURE AND RELATED REGULATORY CAPITAL RATIOS
State Street Corporation State Street Bank
Basel III Advanced Basel III Standardized Basel III Advanced Basel III Standardized Basel III Advanced Basel III Standardized Basel III Advanced Basel III Standardized
Approaches December 31, Approach December 31, Approaches December Approach December 31, Approaches December 31, Approach December 31, Approaches December Approach December 31,
(Dollars in millions) 2019(1) 2019(1) 31, 2018(1) 2018(1) 2019(1) 2019(1) 31, 2018(1) 2018(1)
Common shareholders' equity: Common stock and related surplus $ 10,636 $ 10,636 $ 10,565 $ 10,565 $ 12,893 $ 12,893 $ 12,894 $ 12,894 Retained earnings 21,918 21,918 20,606 20,606 13,218 13,218 14,261 14,261 Accumulated other comprehensive income (loss) (870 ) (870 ) (1,332 ) (1,332 ) (654 ) (654 ) (1,112 ) (1,112 )Treasury stock, at cost (10,209 ) (10,209 ) (8,715 ) (8,715 ) - - - - Total 21,475 21,475 21,124 21,124 25,457 25,457 26,043 26,043 Regulatory capital adjustments:Goodwill and other intangible assets, net of associated deferred tax liabilities (9,112 ) (9,112 ) (9,350 ) (9,350 ) (8,839 ) (8,839 ) (9,073 ) (9,073 ) Other adjustments(2) (150 ) (150 ) (194 ) (194 ) (1 ) (1 ) (29 ) (29 ) Common equity tier 1 capital 12,213 12,213 11,580 11,580 16,617 16,617 16,941 16,941 Preferred stock 2,962 2,962 3,690 3,690 - - - - Tier 1 capital 15,175 15,175 15,270 15,270 16,617 16,617 16,941 16,941 Qualifying subordinated long-term debt 1,095 1,095 778 778 1,099 1,099 776 776 Allowance for loan losses 5 90 14 83 3 90 11 83 Total capital $ 16,275 $ 16,360 $ 16,062 $ 16,131 $ 17,719 $ 17,806 $ 17,728 $ 17,800 Risk-weighted assets: Credit risk(3) $ 54,763 $ 102,367 $ 47,738 $ 97,303 $ 51,610 $ 98,979 $ 45,565 $ 94,776 Operational risk(4) 47,963 NA 46,060 NA 44,138 NA 44,494 NA Market risk 1,638 1,638 1,517 1,517 1,638 1,638 1,517 1,517 Total risk-weighted assets $ 104,364 $
104,005 $ 95,315 $ 98,820 $
97,386 $ 100,617 $ 91,576 $
96,293
Adjusted quarterly average assets $ 219,624 $
219,624 $ 211,924 $ 211,924 $ 216,397 $ 216,397 $ 209,413 $ 209,413
Minimum
Requirement Minimum
2019 (including Requirement 2018Capital G-SIB and (including G-SIB Ratios: CCB)(5) and CCB)(6) Common equity tier 1 capital 8.5 % 7.5 % 11.7 % 11.7 % 12.1 % 11.7 % 17.1 % 16.5 % 18.5 % 17.6 % Tier 1 capital 10.0 9.0 14.5 14.6 16.0 15.5 17.1 16.5 18.5 17.6 Total capital 12.0 11.0 15.6 15.7 16.9 16.3 18.2 17.7 19.4 18.5 (1) Under the applicable bank regulatory rules, we are not required to and, accordingly, did not revise previously-filed reported capital metrics and ratios following the change in accounting for low Income housing tax credits (LIHTC). (2) Other adjustments within CET1 capital primarily include the overfunded portion of our defined benefit pension plan obligation net of associated deferred tax liabilities, disallowed deferred tax assets, and other required credit risk based deductions. (3) Includes a CVA which reflects the risk of potential fair value adjustments for credit risk reflected in our valuation of over-the-counter (OTC) derivative contracts. We used a simple CVA approach in conformity with the Basel III advanced approaches. (4) Under the current advanced approaches rules and regulatory guidance concerning operational risk models, RWA attributable to operational risk can vary substantially from period-to-period, without direct correlation to the effects of a particular loss event on our results of operations and financial condition and impacting dates and periods that may differ from the dates and periods as of and during which the loss event is reflected in our financial statements, with the timing and categorization dependent on the processes for model updates and, if applicable, model revalidation and regulatory review and related supervisory processes. An individual loss event can have a significant effect on the output of our operational RWA under the advanced approaches depending on the severity of the loss event and its categorization among the sevenBasel -defined UOMs. (5) 2019 Minimum Requirements including Capital Conservation Buffer and G-SIB Surcharge. (6) 2018 Minimum Requirements including Capital Conservation Buffer and G-SIB Surcharge. NA Not applicable State Street Corporation | 109
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Our CET1 capital increased $0.63 billion as of December 31, 2019 compared to
December 31, 2018, primarily driven by net income and accumulated other
comprehensive income in the year ended December 31, 2019, partially offset by
common stock repurchases and capital distributions from common and preferred
stock dividends.
Our tier 1 capital decreased $0.10 billion as of December 31, 2019 compared to
December 31, 2018 under both the advanced approaches and standardized approach
due to the redemption of all outstanding Series E preferred stock and changes in
our CET1 capital. Total capital increased under the advanced approaches and
standardized approach by $0.21 billion and $0.23 billion, respectively, due to
the changes in our tier 1 and tier 2 capital.
The table below presents a roll-forward of CET1 capital, tier 1 capital and
total capital for the years ended December 31, 2019 and 2018.
TABLE 42: CAPITAL ROLL-FORWARD
Basel III Basel III Advanced Basel III
Basel III Advanced Standardized Approaches Standardized
Approaches December Approach December, December 31, Approach December
(In millions) 31, 2019 31, 2019 2018(1) 31, 2018(1)
Common equity tier 1 capital:
Common equity tier 1 capital balance,
beginning of period $ 11,580 $ 11,580 $ 12,204 $ 12,204
Net income 2,242 2,242 2,599 2,599
Changes in treasury stock, at cost (1,494 ) (1,494 ) 314 314
Dividends declared (939 ) (939 ) (853 ) (853 )
Goodwill and other intangible assets,
net of associated deferred tax
liabilities 238 238 (2,473 ) (2,473 )
Effect of certain items in accumulated
other comprehensive income (loss) 462 462 (360 ) (360 )
Other adjustments 124 124 149 149
Changes in common equity tier 1
capital 633 633 (624 ) (624 )
Common equity tier 1 capital balance,
end of period 12,213 12,213 11,580 11,580
Additional tier 1 capital:
Tier 1 capital balance, beginning of
period 15,270 15,270 15,382 15,382
Change in common equity tier 1 capital 633 633 (624 ) (624 )
Net issuance of preferred stock (728 ) (728 ) 494 494
Other adjustments - - 18 18
Changes in tier 1 capital (95 ) (95 ) (112 ) (112 )
Tier 1 capital balance, end of period 15,175 15,175 15,270 15,270
Tier 2 capital:
Tier 2 capital balance, beginning of
period 792 861 985 1,053
Net issuance and changes in long-term
debt qualifying as tier 2 317 317 (202 ) (202 )
Changes in Allowance for loan losses
and other (9 ) 7 10 11
Change in other adjustments - - (1 ) (1 )
Changes in tier 2 capital 308 324 (193 ) (192 )
Tier 2 capital balance, end of period 1,100 1,185 792 861
Total capital:
Total capital balance, beginning of
period 16,062 16,131 16,367 16,435
Changes in tier 1 capital (95 ) (95 ) (112 ) (112 )
Changes in tier 2 capital 308 324 (193 ) (192 )
Total capital balance, end of period $ 16,275 $ 16,360 $ 16,062 $ 16,131
(1) Under the applicable bank regulatory rules, we are not required to and, accordingly, did not revise previously-filed reported capital metrics and ratios following the change in accounting for LIHTC.
State Street Corporation
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The following table presents a roll-forward of the Basel III advanced approaches
and standardized approach RWA for the years ended December 31, 2019 and 2018.
TABLE 43: ADVANCED & STANDARDIZED APPROACHES RISK-WEIGHTED ASSETS ROLL-FORWARD
Basel III Basel III Basel III Standardized Basel III Standardized
Advanced Approaches Advanced Approaches Approach December 31, Approach December 31,
(In millions) December 31, 2019 December 31, 2018 2019 2018
Total risk-weighted assets,
beginning of period(1) $ 95,315 $ 99,156 $ 98,820 $ 102,683
Changes in credit risk-weighted
assets:
Net increase (decrease) in
investment securities-wholesale 3,470 (940 ) 3,882 (2,887 )
Net increase (decrease) in loans 2,586 (12 ) 809 3,104
Net increase (decrease) in
securitization exposures (140 ) (3,666 ) (140 ) (3,666 )
Net increase (decrease) in
repo-style transaction exposures (45 ) (19 ) 365 (3,156 )
Net increase (decrease) in
over-the-counter derivatives
exposures 26 (1,170 ) (1,124 ) (46 )
Net increase (decrease) in all
other(2)(3) 1,128 1,545 1,272 2,605
Net increase (decrease) in
credit risk-weighted assets 7,025 (4,262 ) 5,064 (4,046 )
Net increase (decrease) in
market risk-weighted assets 121 183 121 183
Net increase (decrease) in
operational risk-weighted assets 1,903 238 N/A N/A
Total risk-weighted assets, end
of period $ 104,364 $ 95,315 $ 104,005 $ 98,820
(1) Standardized approach RWA as of the periods noted above were calculated
using our estimates, based on our then current interpretation of the Basel III
rule.
(2) Includes assets not in a definable category, cleared transactions,
non-material portfolio, other wholesale, cash and due from, and interest-bearing
deposits with banks, equity exposures and 6% credit risk supervisory charge.
(3) Includes assets not in a definable category, cleared transactions, other
wholesale, cash and due from, and interest-bearing deposits with banks and
equity exposures.
As of December 31, 2019, total advanced approaches RWA increased $9.05 billion
compared to December 31, 2018, primarily due to increases in both credit RWA and
operational risk RWA. The increase in credit RWA was primarily driven by an
increase in investment securities RWA, primarily due to higher exposures to
agency MBS and corporates. Additionally, loans RWA increased primarily due to
higher lending activity.
As of December 31, 2019, total standardized approach RWA increased $5.19 billion
compared to December 31, 2018, primarily due to higher credit RWA. The main
drivers of the credit RWA change were increased investment securities RWA, other
RWA and loans RWA, partially offset by a reduction in derivative exposure RWA.
The regulatory capital ratios as of December 31, 2019, presented in Table 41:
Regulatory Capital Structure and Related Regulatory Capital Ratios, are
calculated under the standardized approach and advanced approaches in conformity
with the Basel III rule. The advanced approaches based ratios reflect
calculations and determinations with respect to our capital and related matters
as of December 31, 2019, based on our and external data, quantitative formulae,
statistical models, historical correlations and assumptions, collectively
referred to as "advanced systems," in effect and used by us for those purposes
as of the time we first reported such ratios in a quarterly report on Form 10-Q
or an annual report on Form 10-K. Significant components of these advanced
systems involve the exercise of judgment by us and our regulators, and our
advanced systems may not, individually or collectively, precisely represent or
calculate the scenarios, circumstances, outputs or other results for which they
are designed or intended.
Our advanced systems are subject to update and periodic revalidation in response
to changes in our business activities and our historical experiences, forces and
events experienced by the market broadly or by individual financial
institutions, changes in regulations and regulatory interpretations and other
factors, and are also subject to continuing regulatory review and approval. For
example, a significant operational loss experienced by another financial
institution, even if we do not experience a related loss, could result in a
material change in the output of our advanced systems and a corresponding
material change in our risk exposures, our total RWA and our capital ratios
compared to prior periods. An operational loss that we experience could also
result in a material change in our capital requirements for operational risk
under the advanced approaches, depending on the severity of the loss event, its
characterization among the seven Basel -defined UOM, and the stability of the
distributional approach for a particular UOM, and without direct correlation to
the effects of the loss event, or the timing of such effects, on our results of
operations.
Due to the influence of changes in these advanced systems, whether resulting
from changes in data inputs, regulation or regulatory supervision or
interpretation, specific to us or market activities or experiences or other
updates or factors, we expect that our advanced systems and our capital ratios
calculated in conformity with the Basel III rule will change and may be volatile
over time, and that those latter changes or volatility could be material as
calculated and measured from period to period. The full effects of the Basel III
rule on us and State Street Bank are therefore subject to further evaluation and
also to further regulatory guidance, action or rule-making.
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Tier 1 and Supplementary Leverage Ratios
The SLR rule requires that, as of January 1, 2018, (i) State Street Bank
maintains an SLR of at least 6.0% to be well capitalized under the U.S. banking
regulators' Prompt Corrective Action Framework and (ii) we maintain an SLR of at
least 5.0% to avoid limitations on capital distributions and discretionary bonus
payments. In addition to the SLR, we are subject to a well capitalized tier 1
leverage ratio requirement of 5.0%.
TABLE 44: TIER 1 AND SUPPLEMENTARY LEVERAGE RATIOS
(Dollars in millions) December 31, 2019 December 31, 2018
State Street:
Tier 1 capital $ 15,175 $ 15,270
Average assets 228,886 221,350
Less: adjustments for deductions from
tier 1 capital (9,262 ) (9,426 )
Adjusted average assets 219,624 211,924
Off-balance sheet exposures 28,238 29,279
Total assets for SLR $ 247,862 $ 241,203
Tier 1 leverage ratio(1) 6.9 % 7.2 %
Supplementary leverage ratio 6.1 6.3
State Street Bank:
Tier 1 capital $ 16,617 $ 16,941
Average assets 225,234 218,402
Less: adjustments for deductions from
tier 1 capital (8,837 ) (8,989 )
Adjusted average assets 216,397 209,413
Off-balance sheet exposures 28,266 29,368
Total assets for SLR $ 244,663 $ 238,781
Tier 1 leverage ratio (1) 7.7 % 8.1 %
Supplementary leverage ratio 6.8 7.1
(1) Tier 1 leverage ratios were calculated in conformity with the Basel III
rule.
Total Loss-Absorbing Capacity (TLAC)
We requested and received from the Federal Reserve , a one-year extension from
January 1, 2019 to January 1, 2020, for compliance with the LTD SLR requirements
of the TLAC final rule. In granting the extension request, the Federal Reserve
noted that the Economic Growth, Regulatory Relief and Consumer Protection Act
(EGRRCPA) was signed into law in May 2018. Under this legislation, the Federal
Reserve and the other U.S. federal banking agencies must promulgate rules to
exclude certain central bank placements from the calculation of SLR for
custodial banks such as us. The Federal Reserve and the other U.S. federal
banking agencies adopted that final rule in November 2019; the rule becomes
effective on April 1, 2020. Accordingly, we requested and received an
additional three-month extension from January 1, 2020 to April 1, 2020, for
compliance with the LTD SLR requirements of the rule. This regulatory change is
expected to reduce the LTD we are required to hold as calculated under the
current requirements, and we estimate that, had those reduced LTD requirements
been in effect, we would have been in compliance with the LTD SLR at December
31, 2019.
The following table presents external LTD and external TLAC as of December 31,
2019. On January 24, 2020 we issued $750 million aggregate principal amount of
2.400% Senior Notes due in 2030.
TABLE 45: TOTAL LOSS-ABSORBING CAPACITY
As of December 31, 2019
(Dollars in millions) Actual Requirement(1)
Total loss-absorbing capacity (eligible Tier 1 regulatory capacity and long term debt): Risk-weighted assets $ 25,857 24.8 % $ 22,438 21.5 % Supplemental leverage ratio 25,857 10.4 23,547 9.5 Long term debt: Risk-weighted assets 9,936 9.5 7,827 7.5 Supplemental leverage ratio 9,936 4.0 11,154 4.5 (1) We requested and received from theFederal Reserve , an extension from January 1, 2019 to April 1, 2020, for compliance with the LTD SLR requirements of the rule. Additional information about TLAC is provided under "Total Loss-Absorbing Capacity" in "Supervision and Regulation" in Business in this Form 10-K. Regulatory Developments In April 2018, theFederal Reserve Board (FRB) issued a proposed rule which would replace the current 2.0% SLR buffer for G-SIBs, with a buffer equal to 50% of their G-SIB surcharge. This proposal would also make conforming modifications to our TLAC and eligible LTD requirements applicable to G-SIBs. In addition, the FRB has issued a separate proposed rule replacing the current 2.5% capital conservation buffer with a firm specific buffer (referred to as the Stress Capital Buffer (SCB)), updated annually and tailored to reflect the results of the most recentFederal Reserve's CCAR supervisory severely adverse scenario stress test. The proposal also introduces a Stress Leverage Buffer (SLB) applicable to the tier 1 leverage ratio. Changes to the final rules, if and when proposed, may be material and the application of the proposed rule involves estimates which cannot reasonably be made at the present time. Consequently, we have not estimated the impact of the proposed rule. State Street Corporation
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
In November 2019, the Federal Reserve and the other U.S. federal banking
agencies adopted a final rule that establishes a deduction for central bank
deposits from a custodial banking organization's total leverage exposure equal
to the lesser of (i) the total amount of funds the custodial banking
organization and its consolidated subsidiaries have on deposit at qualifying
central banks and (ii) the total amount of client funds on deposit at the
custodial banking organization that are linked to fiduciary or custodial and
safekeeping accounts. The rule becomes effective on April 1, 2020. In the
quarter ended December 31, 2019, we estimated $48.87 billion of average balances
held on deposit at central banks will be excluded from the SLR denominator under
our interpretation of the rule, which would impact the SLR by approximately 150
bps. The TLAC and LTD that State Street is required to hold as calculated under
the current requirements will also be reduced as a consequence of the rule.
Also in November 2019, the Federal Reserve and other US federal banking agencies
issued a final rule for the Standardized Approach to Counterparty Credit Risk.
This change would replace the current exposure method for calculating EAD for
over-the-counter derivatives with a new approach. Our over-the-counter
derivatives exposures would be subject to this new methodology. We have not
estimated the impact of the final rule as its expected effective date is in 2022
and is expected to be accompanied by other revisions to the Basel III regime.
For additional information about regulatory developments, refer to the
"Regulatory Capital Adequacy and Liquidity Standards" section of "Supervision
and Regulation" in Business in this Form 10-K.
Capital Actions
Preferred Stock
The following table summarizes selected terms of each of the series of the
preferred stock issued and outstanding as of December 31, 2019:
TABLE 46: PREFERRED STOCK ISSUED AND OUTSTANDING
Ownership Carrying
Interest Liquidation Value as of
Depositary Per Liquidation Preference Per Dividend December 31,
Preferred Shares Amount outstanding Depositary Preference Per Depositary Per Annum Payment 2019 Stock(2): Issuance Date Issued (in millions) Share
Share Share Dividend Rate Frequency (Inmillions) Redemption Date(1)
Quarterly:
Series C August 2012 20,000,000 $ 500 1/4,000th $ 100,000 $ 25 5.25% March, June, $ 491 September 15, 2017
September and
December
5.90% to but
excluding
March 15, Quarterly:
2024, then a March, June,
Series D February 2014 30,000,000 750 1/4,000th 100,000 25 floating rate September and 742 March 15, 2024
equal to the December
three-month
LIBOR plus
3.108%
5.25% to but
excluding
September 15,
2020, then a Semi-annually:
Series F May 2015 750,000 750 1/100th 100,000 1,000 floating rate March and 742 September 15, 2020
equal to the September
three-month
LIBOR plus
3.597%
5.35% to but
excluding
March 15, Quarterly:
2026, then a March, June,
Series G April 2016 20,000,000 500 1/4,000th 100,000 25 floating rate September and 493 March 15, 2026
equal to the December
three-month
LIBOR plus
3.709%
5.625% to but
excluding
December 15,
2023, then a Semi-annually:
Series H September 2018 500,000 500 1/100th 100,000 1,000 floating rate June and
494 December 15, 2023
equal to the December
three-month
LIBOR plus
2.539%
(1) On the redemption date, or any dividend payment date thereafter, the
preferred stock and corresponding depositary shares may be redeemed by us, in
whole or in part, at the liquidation price per share and liquidation price per
depositary share plus any declared and unpaid dividends, without accumulation of
any undeclared dividends.
(2) The preferred stock and corresponding depositary shares may be redeemed at
our option in whole, but not in part, prior to the redemption date upon the
occurrence of a regulatory capital treatment event, as defined in the
certificate of designation, at a redemption price equal to the liquidation price
per share and liquidation price per depositary share plus any declared and
unpaid dividends, without accumulation of any undeclared dividends.
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
In the fourth quarter of 2019, we requested and received approval from the
Federal Reserve to redeem our outstanding Series E non-cumulative perpetual
preferred stock. We redeemed all outstanding shares as of December 15, 2019 at a
redemption price of $750 million ($100,000 per share equivalent to $25.00 per
depositary share) plus accrued and unpaid dividends. The difference between the
redemption value and the net carrying value of $22 million resulted in an EPS
impact of approximately ($0.06) per share in 2019.
On February 12, 2020, we announced that we will redeem all 5,000 of our
outstanding shares of our non-cumulative perpetual preferred stock, Series C,
for cash at a redemption price of $100,000 per share (equivalent to $25.00 per
depositary share) plus all declared and unpaid dividends. The redemption price
will be payable on March 16, 2020, and this redemption will be reflected in our
first quarter 2020 results of operations.
The following tables present the dividends declared for each of the series of
preferred stock issued and outstanding for the periods indicated:
TABLE 47: PREFERRED STOCK DIVIDENDS
Years Ended December 31,
2019 2018
(Dollars in Dividends Dividends
millions, except Dividends Declared per Dividends Declared per
per share Declared per Depositary Declared per Depositary
amounts) Share Share Total Share Share Total
Preferred Stock:
Series C $ 5,250 $ 1.32 $ 26 $ 5,250 $ 1.32 $ 26
Series D 5,900 1.48 44 5,900 1.48 44
Series E 6,000 1.52 45 6,000 1.52 45
Series F 5,250 52.50 40 5,250 52.50 40
Series G 5,352 1.32 27 5,352 1.32 27
Series H 5,625 56.25 28 1,219 12.18 6
Total $ 210 $ 188
Common Stock
In June 2019, the Federal Reserve issued a non-objection to our capital plan
submitted as part of the 2019 CCAR submission; and in connection with that
capital plan, our Board approved a common stock purchase program authorizing the
purchase of up to $2.0 billion of our common stock from July 1, 2019 through
June 30, 2020 (the 2019 Program). We repurchased $500 million of our common
stock in each of the third and fourth quarters of 2019 under the 2019 Program.
In June 2018, the Federal Reserve issued a conditional non-objection to our 2018
capital plan; and in connection with that capital plan, our Board approved a
common stock purchase program authorizing the purchase of up to $1.2 billion of
our common stock through June 30, 2019 (the 2018 Program), under which we
repurchased $300 million of our common stock in each of the first and second
quarters of 2019.
The table below presents the activity under our common stock purchase program
during the year ended December 31, 2019:
TABLE 48: SHARES REPURCHASED
Year Ended December 31, 2019
Shares Acquired Total Acquired
(In millions) Average Cost per Share (In millions)
2018 Program 8.8 $ 67.97 $ 600
2019 Program 16.1 62.28 1,000
Total 24.9 64.30 $ 1,600
The table below presents the dividends declared on common stock for the periods
indicated:
TABLE 49: COMMON STOCK DIVIDENDS
Years Ended December 31,
2019 2018
Dividends Declared per Total Dividends Declared Total
Share (In millions) per Share (In millions)
Common Stock $ 1.98 $ 728 $ 1.78 $ 665
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Federal and state banking regulations place certain restrictions on dividends
paid by subsidiary banks to the parent holding company. In addition, banking
regulators have the authority to prohibit bank holding companies from paying
dividends. For information concerning limitations on dividends from our
subsidiary banks, refer to "Related Stockholder Matters" included under Item 5,
Market for Registrant's Common Equity, Related Stockholder Matters and Issuer
Purchases of Equity Securities, and to Note 15 to the consolidated financial
statements in this Form 10-K. Our common stock and preferred stock dividends,
including the declaration, timing and amount thereof, are subject to
consideration and approval by the Board at the relevant times.
Stock purchases may be made using various types of mechanisms, including open
market purchases, accelerated share repurchases or transactions off market and
may be made under Rule 10b5-1 trading programs. The timing of stock purchases,
types of transactions and number of shares purchased will depend on several
factors, including, market conditions and our capital positions, financial
performance and investment opportunities. The common stock purchase program does
not have specific price targets and may be suspended at any time.
OFF-BALANCE SHEET ARRANGEMENTS
On behalf of clients enrolled in our securities lending program, we lend
securities to banks, broker/dealers and other institutions. In most
circumstances, we indemnify our clients for the fair market value of those
securities against a failure of the borrower to return such securities. Though
these transactions are collateralized, the substantial volume of these
activities necessitates detailed credit-based underwriting and monitoring
processes. The aggregate amount of indemnified securities on loan totaled
$367.90 billion and $342.34 billion as of December 31, 2019 and December 31,
2018, respectively. We require the borrower to provide collateral in an amount
in excess of 100% of the fair market value of the securities borrowed. We hold
the collateral received in connection with these securities lending services as
agent, and the collateral is not recorded in our consolidated statement of
condition. We revalue the securities on loan and the collateral daily to
determine if additional collateral is necessary or if excess collateral is
required to be returned to the borrower. We held, as agent, cash and securities
totaling $385.43 billion and $357.89 billion as collateral for indemnified
securities on loan as of December 31, 2019 and December 31, 2018, respectively.
The cash collateral held by us as agent is invested on behalf of our clients. In
certain cases, the cash collateral is invested in third-party repurchase
agreements, for which we indemnify the client against
loss of the principal invested. We require the counterparty to the indemnified
repurchase agreement to provide collateral in an amount in excess of 100% of the
amount of the repurchase agreement. In our role as agent, the indemnified
repurchase agreements and the related collateral held by us are not recorded in
our consolidated statement of condition. Of the collateral of $385.43 billion
and $357.89 billion, referenced above, $45.66 billion and $42.61 billion was
invested in indemnified repurchase agreements as of December 31, 2019 and
December 31, 2018, respectively. We or our agents held $48.89 billion and $45.06
billion as collateral for indemnified investments in repurchase agreements as of
December 31, 2019 and December 31, 2018, respectively.
Additional information about our securities finance activities and other
off-balance sheet arrangements is provided in Notes 10, 12 and 14 to the
consolidated financial statements in this Form 10-K.
SIGNIFICANT ACCOUNTING ESTIMATES
Our consolidated financial statements are prepared in conformity with U.S. GAAP,
and we apply accounting policies that affect the determination of amounts
reported in the consolidated financial statements. Additional information on our
significant accounting policies, including references to applicable footnotes,
is provided in Note 1 to the consolidated financial statements in this Form
10-K.
Certain of our accounting policies, by their nature, require management to make
judgments, involving significant estimates and assumptions, about the effects of
matters that are inherently uncertain. These estimates and assumptions are based
on information available as of the date of the consolidated financial
statements, and changes in this information over time could materially affect
the amounts of assets, liabilities, equity, revenue and expenses reported in
subsequent consolidated financial statements.
Based on the sensitivity of reported financial statement amounts to the
underlying estimates and assumptions, the more significant accounting policies
applied by us have been identified by management as those associated with
recurring fair value measurements, impairment of goodwill and other intangible
assets, and contingencies. These accounting policies require the most subjective
or complex judgments, and underlying estimates and assumptions could be most
subject to revision as new information becomes available. An understanding of
the judgments, estimates and assumptions underlying these accounting policies is
essential in order to understand our reported consolidated results of operations
and financial condition.
The following is a discussion of the above-mentioned significant accounting
estimates.
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Management has discussed these significant accounting estimates with the E&A
Committee of the Board.
Fair Value Measurements
We carry certain of our financial assets and liabilities at fair value in our
consolidated financial statements on a recurring basis, including trading
account assets and liabilities, AFS debt securities, certain equity securities
and various types of derivative financial instruments.
Changes in the fair value of these financial assets and liabilities are recorded
either as components of our consolidated statement of income or as components of
other comprehensive income within shareholders' equity in our consolidated
statement of condition. In addition to those financial assets and liabilities
that we carry at fair value in our consolidated financial statements on a
recurring basis, we estimate the fair values of other financial assets and
liabilities that we carry at amortized cost in our consolidated statement of
condition, and we disclose these fair value estimates in the notes to our
consolidated financial statements. We estimate the fair values of these
financial assets and liabilities using the definition of fair value described
below. Additional information with respect to the assets and liabilities carried
by us at fair value on a recurring basis is provided in Note 2 to the
consolidated financial statements in this Form 10-K.
U.S. GAAP defines fair value as the price that would be received to sell an
asset or paid to transfer a liability in the principal or most advantageous
market for an asset or liability in an orderly transaction between market
participants on the measurement date. When we measure fair value for our
financial assets and liabilities, we consider the principal or the most
advantageous market in which we would transact; we also consider assumptions
that market participants would use when pricing the asset or liability. When
possible, we look to active and observable markets to measure the fair value of
identical, or similar, financial assets and liabilities. When identical
financial assets and liabilities are not traded in active markets, we look to
market-observable data for similar assets and liabilities. In some instances,
certain assets and liabilities are not actively traded in observable markets; as
a result, we use alternate valuation techniques to measure their fair value.
We categorize the financial assets and liabilities that we carry at fair value
in our consolidated statement of condition on a recurring basis based on U.S.
GAAP's prescribed three-level valuation hierarchy. The hierarchy gives the
highest priority to quoted prices in active markets for identical assets or
liabilities (level 1) and the lowest priority to valuation methods using
significant unobservable inputs (level 3).
With respect to derivative instruments, we evaluated the fair value impact of
the credit risk of our counterparties. We considered such factors as the
market-based probability of default by our counterparties, and our current and
expected potential future net exposures by remaining maturities, in determining
the appropriate measurements of fair value.
Goodwill and Other Intangible Assets
Goodwill represents the excess of the cost of an acquisition over the fair value
of the net tangible and other intangible assets acquired at the acquisition
date. Other intangible assets represent purchased long-lived intangible assets,
primarily client relationships, core deposit intangible assets and technology
that can be distinguished from goodwill because of contractual rights or because
the asset can be exchanged on its own or in combination with a related contract,
asset or liability. Other intangible assets are initially measured at their
acquisition date fair value, the determination of which requires management
judgment. Goodwill is not amortized, while other intangible assets are amortized
over their estimated useful lives.
Management reviews goodwill for impairment annually or more frequently if
circumstances arise or events occur that indicate an impairment of the carrying
amount may exist. We begin our review by first assessing qualitative factors to
determine whether it is more likely than not that the fair value of a reporting
unit is less than its carrying amount. Events that may indicate impairment
include: significant or adverse changes in the business, economic or political
climate; an adverse action or assessment by a regulator; unanticipated
competition; and a more-likely-than-not expectation that we will sell or
otherwise dispose of a business to which the goodwill or other intangible assets
relate. If we conclude from the qualitative assessment of goodwill impairment
that it is more likely than not that a reporting unit's fair value is greater
than its carrying amount, quantitative tests are not required. However, if we
determine it is more likely than not that a reporting unit's fair value is less
than its carrying amount, then we complete a quantitative assessment to
determine if there is goodwill impairment. We may elect to bypass the
qualitative assessment and complete a quantitative assessment in any given year.
In 2019, due to the passage of time since the last quantitative test, we elected
to bypass the qualitative assessment and we assessed goodwill for impairment
using a quantitative approach. We determined there was no goodwill impairment
in 2019.
Other intangible assets are supported by the future cash flows that are directly
associated with and expected to arise as a direct result of the use of the
intangible asset, less any costs associated with the intangible asset's eventual
disposition. We evaluate
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
other intangible assets for impairment at the lowest level for which there are
identifiable cash flows that are largely independent of the cash flows from
other groups of assets using the following process. First, we routinely assess
whether impairment indicators are present. When impairment indicators are
identified as being present, we compare the estimated future net undiscounted
cash flows of the intangible asset with its carrying value. If the future net
undiscounted cash flows are greater than the carrying value, then there is no
impairment, but if the intangible asset's net undiscounted cash flows are less
than its carrying value, we are required to calculate impairment. An impairment
is recognized by writing the intangible asset down to its fair value. We
evaluate intangible assets for indicators of impairment on a quarterly basis.
There were no impairments taken on other intangible assets in 2019.
Additional information about goodwill and other intangible assets, including
information by line of business, is provided in Note 5 to the consolidated
financial statements in this Form 10-K.
Contingencies
Information on significant estimates and judgments related with establishing
litigation reserves is discussed in Note 13 of the consolidated financial
statements in this Form 10-K.
RECENT ACCOUNTING DEVELOPMENTS
Information with respect to recent accounting developments is provided in Note 1
to the consolidated financial statements in this Form 10-K.
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