STATE STREET CORPORATION 
GENERAL
As ofDecember 31, 2020 , we had consolidated total assets of$314.71 billion , consolidated total deposits of$239.80 billion , consolidated total shareholders' equity of$26.20 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 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. Included within our Investment Servicing line of business is CRD, which we acquired inOctober 2018 .The Charles River Investment Management solution is a technology offering which is designed to automate and simplify the institutional investment process across asset classes, from portfolio management and risk analytics through trading and post-trade settlement, with integrated compliance and managed data throughout. With the acquisition of CRD, we took the first step in building our front-to-back platform, State Street Alpha. Today our State Street Alpha platform combines portfolio management, trading and execution, advanced data aggregation, analytics and compliance tools, and integration with other industry platforms and providers. 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 for equity, fixed income and cash assets, 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; •allowance for credit losses; •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 underState Street Corporation
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
"Significant Accounting Estimates" in this Management's Discussion and Analysis.
Certain financial information provided in this Form 10-K, including this
Management's Discussion and Analysis, is prepared on both a U.S. GAAP, or
reported basis, and a non-GAAP basis, including certain non-GAAP measures used
in the calculation of identified regulatory ratios. We measure and compare
certain financial information on a non-GAAP basis, including information that
management uses in evaluating our business and activities. Non-GAAP financial
information should be considered in addition to, and not as a substitute for or
superior to, financial information prepared in conformity with U.S. GAAP. Any
non-GAAP financial information presented in this Form 10-K, 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 "Forward-Looking
Statements", "Risk Factors Summary" and "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."
In this Form 10-K, we reference various information and materials available on
our corporate website. 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) 2020 2019 2018
Total fee revenue(1) $ 9,499 $ 9,147 $ 9,454
Net interest income 2,200 2,566 2,671
Total other income 4 43 6
Total revenue(1) 11,703 11,756 12,131
Provision for credit losses(2) 88 10 15
Total expenses(1) 8,716 9,034 9,015
Income before income tax expense 2,899 2,712 3,101
Income tax expense 479 470 508
Net income $ 2,420 $ 2,242 $ 2,593
Adjustments to net income:
Dividends on preferred stock(3) $ (162) $ (232) $ (188)
Earnings allocated to participating securities(4) (1) (1) (1)
Net income available to common shareholders $ 2,257 $ 2,009 $ 2,404
Earnings per common share:
Basic $ 6.40 $ 5.43 $ 6.46
Diluted 6.32 5.38 6.39
Average common shares outstanding (in thousands):
Basic 352,865 369,911 371,983
Diluted 357,106 373,666 376,476
Cash dividends declared per common share $ 2.08 $ 1.98 $ 1.78
Return on average common equity 10.0 % 9.4 % 12.1 %
Pre-tax margin 24.8 23.1 25.6
(1) CRD contributed approximately $420 million and $248 million in total revenue
and total expenses, respectively, in 2020, approximately $385 million and $201
million in total revenue and total expenses, respectively, in 2019 and
approximately $119 million and $39 million in total revenue and total expenses,
respectively, in 2018, which reflects their results from October 1, 2018 , the
date of acquisition, through December 31, 2018 .
(2) We adopted ASU 2016-13, Financial Instruments-Credit Losses (ASC 326):
Measurement of Credit Losses on Financial Instruments, on January 1, 2020 .
Please refer to Note 1 to the consolidated financial statements in this Form
10-K for additional information.
(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.
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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, 2020 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, 2020 to those for the year ended December 31, 2019 , 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, 2019 to
those for the year ended December 31, 2018 is included in our Management's
Discussion and Analysis in the Annual Report on Form 10-K for the fiscal year
ended December 31, 2019 filed with the SEC on February 20, 2020 .
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 2019 period to the relevant 2020
period results.
Financial Results and Highlights
•2020 financial performance:
•EPS of $6.32 in 2020 increased 17% compared to $5.38 in 2019.
•In 2020, return on equity of 10.0% increased from 9.4% in 2019, primarily due
to an increase in net income available to common shareholders. Pre-tax margin of
24.8% in 2020 increased from 23.1% in 2019, primarily due to a decrease in total
expenses.
•Operating leverage was 3.0% points in 2020. 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.
•The impact of the COVID-19 pandemic, including the actions we took to support
our clients, the financial markets and the broader economy, is reflected in our
2020 results:
•We experienced higher levels of client deposits and record client FX trading
volume.
•We continued to onboard new clients and managed elevated transaction volumes in
the first half of the year.
•We supported our clients' liquidity needs through our participation in the
Money Market Mutual Fund Liquidity Facility (MMLF) and are custodian and
administrator for four Federal Reserve Programs: Commercial Paper Funding
Facility, Main Street Lending Program, and Primary and Secondary Markets
Corporate Credit Facilities.
•Having moved up to approximately 90% of our workforce to a remote working
environment in the first half of 2020, we developed a safe and measured
framework to reopen offices and are establishing a "Workplace of the Future"
plan, leveraging technology and a hybrid work from home model, with
approximately 80% of our employees continuing to work remotely as of December
31, 2020 .
Revenue
•Total revenue was flat in 2020 compared to 2019, as the increase in total fee
revenue was offset by a decline in NII. Total fee revenue increased 4% in 2020
compared to 2019, primarily driven by increases in servicing fees, management
fees, foreign exchange trading services and software and processing fees,
partially offset by lower securities finance revenue.
•Servicing fee revenue increased 2% in 2020 compared to 2019, primarily due to
higher average market levels and client activity, primarily in the first half of
2020, partially offset by normal pricing headwinds. FX rates impacted servicing
fees positively by 1% in 2020, relative to 2019.
•Management fee revenue increased 3% in 2020 compared to 2019, primarily due to
higher average market levels and ETF and cash net inflows, partially offset by
net institutional outflows.
•Foreign exchange trading services increased 29% in 2020 compared to 2019
primarily due to elevated market volatility and record client FX volumes.
•Securities finance revenue decreased 24% in 2020 compared to 2019, reflecting
decreases in enhanced custody balances due to client deleveraging and lower
agency lending revenues due to lower spreads.
•Software and processing fees revenue increased 2% in 2020 compared to 2019
primarily driven by higher CRD revenues.
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
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•Total revenues contributed by CRD in 2020 were approximately $420 million ,
including $406 million in software and processing fees and $14 million in
brokerage and other trading services, within foreign exchange trading services.
CRD revenue with affiliated entities, which is eliminated in our consolidated
financial statements, was $39 million and $18 million in 2020 and 2019,
respectively.
•NII decreased 14% in 2020 compared to 2019, primarily due to lower market
rates, partially offset by higher client deposits balances, higher loans and
investment portfolio growth.
Provision for Credit Losses
•We adopted ASU 2016-13, Financial Instruments - Credit Losses (ASC 326):
Measurement of Credit Losses on Financial Instruments, on January 1, 2020 , which
replaces the incurred loss methodology with an expected credit loss methodology
that is referred to as the CECL methodology. The impact of transitioning to ASC
326 on the consolidated financial statements was an increase in the allowance
for credit losses and a decrease in retained earnings of $3 million . We recorded
a provision for credit losses of $88 million in 2020, which reflects the impact
of credit migration within our loan portfolio, as well as a downward revision in
management's economic outlook reflecting the impact of the COVID-19 pandemic.
•In 2019, we recorded a provision for credit losses of $10 million under the
incurred loss methodology.
Expenses
•Total expenses decreased 4% in 2020 compared to 2019, primarily reflecting
on-going expense management initiatives and lower notable items.
•2020 notable items included:
•repositioning charges of approximately $133 million , consisting of $82 million
of compensation and employee benefits expenses and $51 million of occupancy
costs, in order to further drive automation of processes and organizational
simplification, enablement of workforce rationalization and reduction of our
real estate footprint by approximately 13% of our total square footage;
•acquisition and restructuring costs of approximately $50 million , primarily
related to CRD;
•accrual release of approximately $9 million ; and
•costs of $9 million due to the redemption of all outstanding Series C
non-cumulative perpetual preferred stock representing the difference between the
redemption value and the net carrying value of the preferred stock.
•2019 notable items included:
•repositioning charges of approximately $110 million ;
•legal and related expenses of approximately $172 million ;
•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; and
•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.
•Total expenses contributed by CRD in 2020 and 2019 were approximately $248
million and $201 million , respectively, including $183 million and $148 million
in compensation and employee benefits and $65 million and $53 million in other
expense lines, respectively. In addition, CRD-related expenses in 2020 and 2019
included $66 million and $65 million , respectively, in amortization of other
intangible assets.
AUC/A and AUM
•AUC/A increased 13% as of December 31, 2020 compared to December 31, 2019 ,
primarily due to higher period-end market levels, net new business installations
and client flows. In 2020, newly announced asset servicing mandates totaled
approximately $787 billion , with an increasing proportion incorporating State
Street Alpha. Servicing assets remaining to be installed in future periods
totaled approximately $436 billion as of December 31, 2020 .
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
•AUM increased 11% as of December 31, 2020 compared to December 31, 2019 ,
primarily due to higher period-end market levels and net inflows from ETFs and
cash, partially offset by institutional net outflows.
Capital
•In 2020, we returned a total of approximately $1.23 billion to our shareholders
in the form of common stock dividends and share purchases. On March 16, 2020 ,
we, along with the other U.S. G-SIBs, suspended common share repurchases through
the fourth quarter of 2020 in response to the COVID-19 pandemic. This suspension
was consistent with limitations imposed by the Federal Reserve beginning in the
second quarter of 2020.
?We declared aggregate common stock dividends of $2.08 per share, totaling $734
million in 2020, compared to $1.98 per share, totaling $728 million in 2019.
•In 2020, we acquired 6.5 million shares of common stock at an average per share
cost of $77.35 and an aggregate cost of approximately $500 million . 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 . These purchases were
all conducted under share purchase programs approved by our Board of Directors.
•As required by the Federal Reserve , we and other participating CCAR banks
resubmitted our capital plans by November 2, 2020 under updated scenarios
provided by the Federal Reserve due to the COVID-19 pandemic. Effective December
2020 , the Federal Reserve has authorized us to continue to pay common stock
dividends at current levels and to resume repurchasing common shares in the
first quarter of 2021, subject to certain limitations (together with common
stock dividends) based primarily on average 2020 quarterly net income. In
January 2021 , our Board authorized a share repurchase program for the purchase
of up to $475 million of our common stock through March 31, 2021 .
•Our CET1 capital ratio increased to 12.3% as of December 31, 2020 compared to
11.7% as of December 31, 2019 , primarily due to higher retained earnings,
partially offset by an increase in risk weighted assets primarily due to higher
client lending activity. Our Tier 1 leverage ratio decreased to 6.4% as of
December 31, 2020 compared to 6.9% as of
December 31, 2019 due to an increase in adjusted average assets driven by higher
deposits, partially offset by higher retained earnings. As of December 31, 2020 ,
standardized capital ratios were binding. As of December 31, 2019 , advanced
approaches capital ratios were binding.
Capital Redemptions
•We redeemed all outstanding Series C non-cumulative perpetual preferred stock
on March 15, 2020 at an aggregate redemption price of $500 million ($100,000 per
share equivalent to $25.00 per depositary share) plus accrued and unpaid
dividends.
•On January 14, 2021 , we announced that we will redeem on March 15, 2021 an
aggregate of $500 million , or 5,000 of the 7,500 outstanding shares of our
non-cumulative perpetual preferred stock, Series F, for cash at a redemption
price of $100,000 per share (equivalent to $1,000 per depositary share) plus all
declared and unpaid dividends. A cash dividend of $953.38 per share of Series F
Preferred Stock (or approximately $9.5338 per depositary share) has been
declared for the period from December 15, 2020 up to but not including March 15,
2021 (the "March Dividend"). The March Dividend will be paid separately to the
holders of record of the Series F Preferred Stock as of March 1, 2021 in the
customary manner. Accordingly, there will not be any declared and unpaid
dividends included in the redemption price.
Debt Issuances
•On January 24, 2020 , we issued $750 million aggregate principal amount of
2.400% Senior Notes due 2030.
•On March 26, 2020 , we issued $750 million aggregate principal amount of 2.825%
Fixed-to-Floating Rate Senior Notes due 2023, $500 million aggregate principal
amount of 2.901% Fixed-to-Floating Rate Senior Notes due 2026 and $500 million
aggregate principal amount of 3.152% of Fixed-to-Floating Rate Senior Notes due
2031.
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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 2020 compared
to 2019 and should be read in conjunction with the consolidated financial
statements and accompanying notes to the consolidated financial statements in
this Form 10-K.
Total Revenue
TABLE 2: TOTAL REVENUE
Years Ended December 31, % Change 2020 % Change 2019
(Dollars in millions) 2020 2019 2018 vs. 2019 vs. 2018
Fee revenue:
Servicing fees $ 5,167 $ 5,074 $ 5,421 2 % (6) %
Management fees(1) 1,880 1,824 1,899 3 (4)
Foreign exchange trading
services(1)(2) 1,363 1,058 1,153 29 (8)
Securities finance 356 471 543 (24) (13)
Software and processing
fees(2) 733 720 438 2 64
Total fee revenue(2)(3) 9,499 9,147 9,454 4 (3)
Net interest income:
Interest income 2,575 3,941 3,662 (35) 8
Interest expense 375 1,375 991 (73) 39
Net interest income 2,200 2,566 2,671 (14) (4)
Other income:
Gains (losses) related to
investment securities, net 4 (1) 9 nm nm
Other income - 44 (3) nm nm
Total other income 4 43 6 nm nm
Total revenue(2) $ 11,703 $ 11,756 $ 12,131 - (3)
(1) Certain fees associated with our GLD ETFs have been reclassified from
foreign exchange trading services to management fees to better reflect the
nature of those fees. Prior periods have been reclassified to conform to
current-period presentation. These fees were approximately $81 million ,
$53 million and $48 million in 2020, 2019 and 2018, respectively.
(2) CRD contributed approximately $420 million in total revenue in 2020,
approximately $385 million in total revenue in 2019 and approximately $119
million in total revenue in 2018, which reflects their results from October 1,
2018 , the date of acquisition, through December 31, 2018 .
(3) The impact of State Street Global Advisors Money Market Fund fee waivers on
total fee revenue was less than $10 million for 2020, 2019 and 2018.
nm Not meaningful
Fee Revenue
Table 2: Total Revenue, provides the breakout of fee revenue for the years ended
December 31, 2020 , 2019 and 2018. Servicing and management fees collectively
made up approximately 74%, 75% and 77% of the total fee revenue in 2020, 2019
and 2018, 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.
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, 2020 , we estimate that worldwide market
valuations impacted our servicing fee revenues by approximately (1)% to 5%
annually and approximately 2% and 0% in 2020 and 2019, 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.
Assuming that all other factors remain constant, including client activity and
asset flows and pricing, we estimate, using relevant information as of December
31, 2020 that a 10% increase or decrease in worldwide equity
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
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 multiple quarters, of
approximately 3%. We estimate, similarly assuming all other factors constant and
using relevant information as of December 31, 2020 , that changes in worldwide
fixed income markets, which on a weighted average basis and over time are
typically less volatile than worldwide equity markets, have a smaller impact on
our servicing fee revenues on average and over time.
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,
2020 2019 % Change 2020 2019 % Change 2020 2019 % Change
S&P 500® 3,218 2,913 10 % 3,217 2,938 9 % 3,756 3,231 16 %
MSCI EAFE® 1,854 1,892 (2) 1,841 1,903 (3) 2,148 2,037 5
MSCI® Emerging Markets 1,059 1,036 2 1,052 1,043 1 1,291 1,115 16
(1) The index names listed in the table are service marks of their respective
owners.
TABLE 4: YEAR-END DEBT INDICES(1)
As of December 31,
2020 2019 % Change
Barclays Capital U.S. Aggregate Bond Index® 2,392 2,225 8 %
Barclays Capital Global Aggregate Bond Index® 559 512 9
(1) The index names listed in the table are service marks of their respective
owners.
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, 2020 , we estimate that
client activity and asset flows, together, impacted our servicing fee revenues
by approximately (1)% to 2% annually and approximately 2% and (1)% in 2020 and
2019, respectively, with the impact for 2020 largely in the first half of the
year. 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) 2020 2019
North America - (US Domiciled) - Morningstar Direct
Market Data(1)(2)(3)
Long-Term Funds(4) $ (103.7) $ 256.5
Money Market 677.7 516.3
Exchange-Traded Fund 280.2 204.2
Total ICI Flows $ 854.2 $ 977.0
Europe -Morningstar Direct Market Data(1)(2)(5)
Long-Term Funds(4) $ 373.5 $ 373.2
Money Market 224.4 105.7
Exchange-Traded Fund 108.0 118.9
Total Broadridge Flows $ 705.9 $ 597.8
(1) Industry data is provided for illustrative purposes only. It is not intended
to reflect our activity or our clients' activity and is indicative of only
segments of the entire industry.
(2) Source: Morningstar. The data includes long-term mutual funds, ETFs and
money market funds. 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 Fund of Funds, Feeder funds and Obsolete funds were excluded from the series
to prevent double counting. Data is from the Morningstar Direct Asset Flows
database.
(3) The year ended December 31, 2020 data for North America (US domiciled)
includes Morningstar direct actuals for January 2020 through November 2020 and
Morningstar direct estimates for December 2020 .
(4) The long-term fund flows reported by Morningstar direct in North America are
composed of US domiciled market flows mainly in Equities, Allocation and
Fixed-Income asset classes. The long-term fund flows reported by Morningstar
direct in EMEA are composed of the European market flows mainly in Equities,
Allocation and Fixed-Income asset classes.
(5) The year ended December 31, 2020 data for Europe is on a rolling twelve
month basis for December 2019 through November 2020 , sourced by Morningstar.
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Net New Business
Over the five years ended December 31, 2020 , 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 0% in 2020 and 2019, respectively. Gross investment servicing mandates
were $787 billion in 2020 and $1.3 trillion per year on average over the past
five years. Over the five years ended December 31, 2020 , gross annual investment
servicing mandates ranged from $750 billion to nearly $2.0 trillion .
New business impacting servicing fees can include: custody; product 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.
Revenues associated with new mandates are not reflected in our servicing fee
revenue until the assets have been installed. Our installation timeline, in
general, can range from 6 to 36 months, with the average installation timeline
being approximately 9 to 12 months over the past 2 years. Our more complex
installations, including new State Street Alpha mandates, will generally be on
the longer end of that range.
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 ended December 31, 2020 , 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 (2)% in 2020 and (4)% in 2019.
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.
In order to offset the typical client attrition and normal pricing headwinds, we
estimate that we need at least $1.5 trillion of new AUC/A per year; although,
notwithstanding increases in AUC/A, servicing fees remain subject to several
factors, including changes in market valuations, client activity and asset
flows, the manner in which we price our services, the nature of the assets being
serviced and the type of services and the other factors described in this Form
10-K.
Historically, and based on an indicative sample of revenue, we estimate that
approximately 55%, on average, 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%, on average, of our servicing fees are impacted by the
volume of activity in the funds we serve; and the remaining approximately 30% of
our servicing fees tend not to be variable in nature nor impacted by market
fluctuations or values.
The impact of the above, client activity and asset flows, net new business and
pricing, noted drivers of our servicing fee revenue will vary depending on the
mix of products and services we provide to our clients. The full impact of
changes in market valuations and the volume of activity in the funds may not be
fully reflected in our servicing fee revenues in the periods in which the
changes occur, particularly in periods of higher volatility.
Management Fee Revenue
Management fees generally are affected by our level of AUM, which we report
based on month-end valuations. Management fees for certain components of managed
assets, such as ETFs, mutual funds and UCITS, are affected by daily average
valuations of AUM. Management fee revenue is more sensitive to market valuations
than servicing fee revenue, as a higher proportion of the underlying services
provided, and the associated management fees earned, are dependent on equity and
fixed-income security valuations. Additional factors, such as the relative mix
of assets managed, may have a significant effect on our 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. In addition, in a prolonged low-interest rate environment, such as we
are currently experiencing, we have waived and may in the future waive certain
fees for our clients for money market products.
Asset-based management fees for passively managed products, to which our AUM is
currently primarily weighted, are generally charged at a lower fee on AUM than
for actively managed products.
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
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, 2020 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 multiple quarters, of approximately 5%; and
•A 10% increase or decrease in worldwide fixed-income valuations, on a weighted
average basis, over the relevant periods for which our management fees are
calculated, would result in a corresponding change in our total management fee
revenues, on average and over multiple quarters, 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 ended December 31, 2020 , 2019 and 2018.
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, loans, resale agreements 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 the U.S. federal and state
statutory income tax rates.
NII on a FTE basis decreased in 2020 compared to 2019, primarily due to lower
market rates, partially offset by higher client deposits, core loan and
investment securities balances.
Investment securities net premium amortization, which is included in interest
income, was $575 million in 2020 compared to $434 million in 2019 and $391
million in 2018. The increase is primarily driven by higher MBS premium
amortization as a result of lower interest rates and faster prepayments. As of
December 31, 2020 , 2019 and 2018, approximately 61%, 60% and 52%, respectively,
of unamortized premiums, net of discounts, was related to mortgage-backed
securities.
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, which primarily impact mortgage-backed
securities.
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) 2020 2019 2018
Unamortized premiums, net of discounts at
period end $ 1,909 $ 1,585 $ 1,575
Net premium amortization(1) 575 434 391
Investment securities duration (years)(2) 3.0 2.7 3.1
(1) Net of discount accretion on MMLF HTM securities. (2) Excluding investment securities purchased under the MMLF program, the investment securities portfolio duration is 3.1 years in 2020.
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Money Market Mutual Fund Liquidity Facility
In March 2020 , in response to the economic impact of the COVID-19 pandemic, the
Federal Reserve established the MMLF program in order to enhance the liquidity
and functioning of crucial money markets. Through the establishment of the MMLF
program, the Federal Reserve Bank of Boston makes loans available to eligible
financial institutions secured by high-quality assets purchased by the financial
institution from money market mutual funds. The MMLF program was authorized
through December 31, 2020 . We are supporting our clients' liquidity needs
through this program, following its adoption on March 18, 2020 . As a result of
the asset purchases (including negotiable CDs, municipals and asset-backed
commercial paper), our participation in the facility was $8.2 billion on average
in 2020, and earned $16 million of NII, but was dilutive to NIM in 2020. The
purchases are match funded through Federal Reserve borrowings and the assets are
posted as collateral. The borrowing is non-recourse, meaning that the Federal
Reserve has taken on the credit risk of the assets purchased. The purchased
securities are classified as held-to-maturity and have a maturity of less than
12 months. MMLF related assets do not impact our risk-based and leverage capital
ratios.
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,
2020 , 2019 and 2018.
TABLE 7: AVERAGE BALANCES AND INTEREST RATES - FULLY TAXABLE-EQUIVALENT BASIS(1)
Years Ended December 31,
2020 2019 2018
Interest
(Dollars in millions; fully Average Interest Average Interest Average Revenue/
taxable-equivalent basis) Balance Revenue/Expense Rate Balance Revenue/Expense Rate Balance Expense Rate
Interest-bearing deposits with
banks $ 76,588 $ 76 .10 % $ 48,500 $ 416 .86 % $ 54,328 $ 387 .71 %
Securities purchased under resale
agreements(2) 3,452 126 3.64 2,506 364 14.54 2,901 335 11.55
Trading account assets 878 - - 884 1 .11 1,051 - -
Investment securities:
Investment securities available for
sale 58,036 761 1.31 51,853 1,035 1.98 47,855 1,007 2.08
Investment securities
held-to-maturity 42,956 830 1.93 39,915 974 2.44 40,215 920 2.29
Investment securities
held-to-maturity purchased under
money market liquidity facility 8,183 117 1.43 - - - - - -
Total Investment securities 109,175 1,708 1.56 91,768 2,009 2.19 88,070 1,927 2.19
Loans and leases 27,525 627 2.28 24,073 775 3.22 23,573 698 2.96
Other interest-earning assets 11,256 55 .49 14,160 395 2.79 15,714 372 2.37
Average total interest-earning
assets $ 228,874 $ 2,592 1.13 $ 181,891 $ 3,960 2.18 $ 185,637 $ 3,719 2.00
Interest-bearing deposits:
U.S. $ 87,444 $ 114 .13 % $ 67,547 $ 539 .80 % $ 54,953 $ 256 .47 %
Non-U.S. (3) 68,806 (231) (.34) 61,301 124 .20 70,623 107 .15
Total interest-bearing
deposits(3)(4) 156,250 (117) (.07) 128,848 663 .51 125,576 363 .29
Securities sold under repurchase
agreements 2,615 4 .14 1,616 31 1.90 2,048 13 .62
Short-term borrowings under money
market liquidity facility 8,207 101 1.22 - - - - - -
Other short-term borrowings 2,226 18 .78 1,524 21 1.37 1,327 17 1.28
Long-term debt 14,371 312 2.17 11,474 414 3.61 10,686 389 3.64
Other interest-bearing liabilities 3,176 57 1.82 4,103 246 6.00 4,956 209 4.20
Average total interest-bearing
liabilities $ 186,845 $ 375 .20 $ 147,565 $ 1,375 .93 $ 144,593 $ 991 .68
Interest rate spread .93 % 1.25 % 1.32 %
Net interest income, fully
taxable-equivalent basis $ 2,217 $ 2,585 $ 2,728
Net interest margin, fully
taxable-equivalent basis .97 % 1.42 % 1.47 %
Tax-equivalent adjustment (17) (19) (57)
Net interest income, GAAP basis $ 2,200 $ 2,566 $ 2,671
(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 $100.45 billion , $86.67 billion and $35.74 billion
for the years ended December 31, 2020 , 2019 and 2018, respectively. Excluding
the impact of netting, the average interest rates would be approximately 0.12%,
0.41% and 0.87% for the years ended December 31, 2020 , 2019 and 2018,
respectively.
(3) Average rate includes the impact of FX swap costs of approximately ($63)
million , $153 million and $106 million for the years ended December 31, 2020 ,
2019 and 2018, respectively. Average rates for total interest-bearing deposits
excluding the impact of FX swap costs were (0.03)%, 0.40% and 0.20% for the
years ended December 31, 2020 , 2019 and 2018, respectively.
(4) Total deposits averaged $193.22 billion compared to $158.26 billion and
$161.41 billion for 2019 and 2018, respectively.
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Changes in the components of interest-earning assets and interest-bearing
liabilities are discussed in more detail below. Additional information about the
components of interest income and interest expense is provided in Note 17 to the
consolidated financial statements in this Form 10-K.
Average total interest-earning assets were $228.87 billion in 2020 compared to
$181.89 billion in 2019. The increase is primarily due to higher
interest-bearing deposits with banks and investment securities.
Interest-bearing deposits with banks averaged $76.59 billion in 2020 compared to
$48.50 billion in 2019. 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 higher levels of average cash balances with central
banks reflect higher levels of client deposits.
Securities purchased under resale agreements averaged $3.45 billion in 2020
compared to $2.51 billion in 2019. The impact of balance sheet netting increased
to $100.45 billion on average in 2020 compared to $86.67 billion in 2019. 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 2020 compared to 2019 is primarily due to the expansion
of our FICC program and new client activity.
We have been a sponsoring member within FICC since 2005. FICC expanded the
service in 2017, and since then, we have increased our participation each year.
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 $109.18 billion in 2020 from $91.77
billion in 2019 primarily driven by the MMLF program, MBS balances and foreign
government bonds. The growth reflects our deployment of higher structural
deposit levels that resulted from the COVID-19 pandemic.
Loans averaged $27.53 billion in 2020 compared to $24.07 billion in 2019.
Average core
loans, which exclude overdrafts and highlight our efforts to grow our lending
portfolio, averaged $24.04 billion in 2020 compared to $19.95 billion in 2019.
Average other interest-earning assets, largely associated with our enhanced
custody business, decreased to $11.26 billion in 2020 from $14.16 billion in
2019, 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 $156.25 billion
in 2020 from $128.85 billion in 2019. Average U.S. interest-bearing deposits
increased as a result of the market uncertainty due to the COVID-19 pandemic,
the level of global interest rates and new deposit gathering initiatives. While
deposits levels moderated in the second half of 2020, deposits levels remained
elevated throughout 2020 and we expect deposits to remain elevated within the
current environment of low interest rates and continued expansion of the money
supply by the Federal Reserve . 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 $2.23 billion in 2020 from $1.52 billion in
2019.
Average long-term debt was $14.37 billion in 2020 compared to $11.47 billion in
2019. These amounts reflect issuances, redemptions and maturities of senior debt
during the respective periods, including the issuance of $750 million of senior
debt in January 2020 and $1.75 billion in March 2020 .
Average other interest-bearing liabilities were $3.18 billion in 2020 compared
to $4.10 billion in 2019. 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.
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
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.
Provision for Credit Losses
In January 2020 , we adopted ASU 2016-13, Financial Instruments - Credit Losses
(ASC 326): Measurement of Credit Losses on Financial Instruments, which replaced
the incurred loss methodology with an expected loss methodology that is referred
to as the CECL methodology. The impact of transitioning to ASC 326 on the
consolidated financial statements was an increase in the allowance for credit
losses and a decrease in retained earnings of $3 million as of January 1, 2020 .
In 2020, we recorded a provision of $88 million for credit losses related to
loans and financial assets held at amortized cost and off-balance sheet
commitments based on the CECL methodology, reflecting both downward credit
migration within our loan portfolio and revision in management's economic
outlook reflecting the impact of the COVID-19 pandemic. This compares to a
$10 million provision for credit losses in 2019 and $15 million in 2018, which
were under the incurred loss model.
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, 2020 , 2019 and 2018.
TABLE 8: EXPENSES
Years Ended December 31, % Change 2020 % Change 2019
(Dollars in millions) 2020 2019 2018 vs. 2019 vs. 2018
Compensation and employee
benefits(1) $ 4,450 $ 4,541 $ 4,780 (2) % (5) %
Information systems and
communications 1,550 1,465 1,324 6 11
Transaction processing
services 978 983 985 (1) -
Occupancy 489 470 500 4 (6)
Amortization of other
intangible assets(1) 234 236 226 (1) 4
Acquisition costs 54 79 31 (32) 155
Restructuring charges, net (4) (2) (7) 100 (71)
Other:
Professional services 364 321 357 13 (10)
Other 601 941 819 (36) 15
Total other 965 1,262 1,176 (24) 7
Total expenses(1) $ 8,716 $ 9,034 $ 9,015 (4) -
Number of employees at
year-end 39,439 39,103 40,142 1 (3)
(1) CRD contributed approximately $248 million in total expenses in 2020,
approximately $201 million in total expenses in 2019 and approximately $39
million in total expenses in 2018, which reflects their results from October 1,
2018 , the date of acquisition, through December 31, 2018 .
Compensation and employee benefits expenses decreased 2% in 2020 compared to
2019, primarily due to lower headcount in high cost locations, lower contractor
spend and lower repositioning charges, partially offset by higher incentive
compensation.
Total headcount increased by approximately 1% as of December 31, 2020 compared
to December 31, 2019 , primarily driven by hires in global hubs, partially offset
by a reduction in high cost locations.
Information systems and communications expenses increased 6% in 2020 compared to
2019. The increase was primarily related to higher software costs and technology
infrastructure investments.
Transaction processing services expenses decreased 1% in 2020 compared to 2019,
primarily due to higher vendor savings, partially offset by higher broker fees
and sub-custody costs.
Occupancy expenses increased 4% in 2020 compared to 2019, primarily due to
higher repositioning charges, partially offset by benefits from the advancement
of our global footprint strategy.
Amortization of other intangible assets decreased 1% in 2020 compared to 2019.
Other expenses decreased 24% in 2020 compared to 2019, primarily driven by lower
legal expenses, marketing and travel costs, partially offset by higher
professional fees.
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Acquisition Costs
We recorded approximately $54 million of acquisition costs in 2020 compared to
$79 million in 2019 and $31 million in 2018, related to our acquisition of CRD.
As we integrate CRD into our business, we expect to incur a total of
approximately $225 million of acquisition costs through 2021, after which we
will no longer distinguish certain CRD costs as acquisition costs. As of
December 31, 2020 , we have incurred $164 million of acquisition costs related to
CRD. We expect to incur any remaining significant acquisition costs related to
CRD in 2021.
Restructuring and Repositioning Charges
Repositioning Charges
Expenses for 2020 included a repositioning charge of $133 million , consisting of
$82 million of compensation and employee benefits and $51 million of occupancy
expenses. In January 2021 , we announced that we expect to eliminate
approximately 1,200 positions, mostly in middle management, which will be
partially offset by in-sourcing and critical hires, during 2021. These actions
are expected to result in savings of approximately $150 million in 2021 due to
automation of processes and organizational simplification enabling workforce
rationalization and reduction of our real estate footprint by approximately 13%
of our total square footage. Total repositioning charges were $110 million in
2019.
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 Asset and Other
(In millions) Related Costs Actions Write-offs Total
Accrual Balance at
$ 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
Accruals for Beacon (4) - - (4)
Accruals for Repositioning Charges 82 51 - 133
Payments and Other Adjustments (78) (52) (1) (131)
Accrual Balance at December 31, 2020 $ 190 $ 6 $ - $ 196
Income Tax Expense
Income tax expense was $479 million in 2020 compared to $470 million in 2019.
Our effective tax rate was 16.5% in 2020, compared to 17.3% in 2019. The
effective tax rate for 2020 included a benefit from the use of foreign tax
credits. The effective tax rate for 2019 included a benefit attributable to a
foreign legal entity restructuring which was partially offset by legal accruals
and limitations on foreign tax credit benefits.
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 Institutional 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 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.
Included within our Investment Servicing line of business is CRD, which we
acquired in October 2018 . The Charles River Investment Management solution is a
technology offering which is designed to automate and simplify the institutional
investment process across asset classes, from portfolio management and risk
analytics through trading and post-trade settlement, with integrated compliance
and managed data throughout. With the acquisition of CRD, we took the first step
in building our front-to-back platform, State Street Alpha. Today our State
Street Alpha platform combines portfolio management, trading and execution,
advanced data aggregation, analytics and compliance tools, and integration with
other industry platforms and providers.
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
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 for
equity, fixed income and cash assets, 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.
Investment Servicing
TABLE 10: INVESTMENT SERVICING LINE OF BUSINESS RESULTS
(Dollars in millions, except where otherwise Years Ended December 31, % Change 2020 % Change 2019
noted) 2020 2019 vs. 2019 2018 vs. 2018
Servicing fees $ 5,167 $ 5,074 $ 5,429 2 % (7) %
Foreign exchange trading services(1) 1,299 974 1,071 33 (9)
Securities finance 342 462 543 (26) (15)
Software and processing fees(1) 706 691 443 2 56
Total fee revenue(1) 7,514 7,201 7,486 4 (4)
Net interest income 2,211 2,590 2,691 (15) (4)
Total other income 4 43 6 nm nm
Total revenue(1) 9,729 9,834 10,183 (1) (3)
Provision for credit losses 88 10 15 780 (33)
Total expenses(1) 7,071 7,140 7,081 (1) 1
Income before income tax expense $ 2,570 $ 2,684 $ 3,087 (4) (13)
Pre-tax margin 26 % 27 % 30 % Average assets (in billions)$ 266.4 $ 220.3 $ 220.2 (1) CRD contributed approximately$420 million and$248 million in total revenue and total expenses, respectively, in 2020, approximately$385 million and$201 million in total revenue and total expenses, respectively, in 2019 and approximately$119 million and$39 million in total revenue and total expenses, respectively, in 2018, which reflects their results fromOctober 1, 2018 , the date of acquisition, throughDecember 31, 2018 . nm Not meaningful Servicing Fees Servicing fees, as presented in Table 10: Investment Servicing Line of Business Results, increased 2% in 2020 compared to 2019 primarily due to higher average market levels and client activity, primarily in the first half of 2020, partially offset by normal pricing headwinds. FX rates impacted servicing fees positively by 1% in 2020 relative to 2019 and negatively by 1% in 2019 relative to 2018. Servicing fees generated outside theU.S. were approximately 47% of total servicing fees in each of 2020, 2019 and 2018. TABLE 11: ASSETS UNDER CUSTODY AND/OR ADMINISTRATION BY PRODUCT % Change %
Change
(In billions) December 31, 2020 December 31, 2019 December 31, 2018 2020 vs. 2019 2019 vs. 2018 Collective funds $ 10,878 $ 9,796 $ 8,999 11 % 9 % Mutual funds 10,882 9,221 7,912 18 17 Insurance and other products 9,432 8,417 8,220 12 2 Pension products 7,599 6,924 6,489 10 7 Total $ 38,791 $ 34,358 $ 31,620 13 9
TABLE 12: ASSETS UNDER CUSTODY AND/OR ADMINISTRATION BY ASSET CLASS
% Change % Change
(In billions) December 31, 2020 December 31, 2019 December 31, 2018 2020 vs. 2019 2019 vs. 2018
Equities $ 21,626 $ 19,301 $ 18,041 12 % 7 %
Fixed-income 12,834 10,766 9,758 19 10
Short-term and other
investments 4,331 4,291 3,821 1 12
Total $ 38,791 $ 34,358 $ 31,620 13 9
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONSTABLE 13: ASSETS UNDER CUSTODY AND/OR ADMINISTRATION BY GEOGRAPHY(1)
% Change % Change
(In billions) December 31, 2020 December 31, 2019 December 31, 2018 2020 vs. 2019 2019 vs. 2018
Americas $ 28,245 $ 25,018 $ 23,203 13 % 8 %
Europe/Middle East/Africa 8,101 7,325 6,699 11 9
Asia/Pacific 2,445 2,015 1,718 21 17
Total $ 38,791 $ 34,358 $ 31,620 13 9
(1) Geographic mix is generally based on the domicile of the entity servicing
the funds and is not necessarily representative of the underlying asset mix.
Asset servicing mandates newly announced in 2020 totaled approximately $787
billion , with an increasing proportion incorporating State Street Alpha,
compared to $1.84 trillion in 2019. Servicing assets remaining to be installed
in future periods totaled approximately $436 billion as of December 31, 2020 ,
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.
As a result of a decision to diversify providers, one of our large asset
servicing clients has advised us it expects to move a significant portion of its
ETF assets currently with State Street to one or more other providers, pending
necessary approvals. We expect to continue as a significant service provider for
this client after this transition and for the client to continue to be
meaningful to our business. The transition is expected to begin in 2022 but will
principally occur in 2023. For the year ended December 31, 2020 , the fee revenue
associated with the transitioning assets represented approximately 1.5% of our
total fee revenue. The total revenue and income impact of this transition will
depend upon a range of factors, including potential growth in our continuing
business with the client and expense reductions associated with the transition.
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, increased 33% in 2020 compared to 2019,
primarily due to higher volumes and 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 68% and 32%, respectively,
of foreign exchange trading services revenue in 2020.
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.
State Street Corporation | 74
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
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 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 26% in 2020 compared to 2019, reflecting
decreases in enhanced custody balances due to client deleveraging and lower
agency lending revenues due to lower spreads.
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, market-related
adjustments and income associated with certain tax-advantaged investments.
State Street Corporation | 75
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Software and processing fees revenue, presented in Table 10: Investment
Servicing Line of Business Results, increased 2% in 2020 compared to 2019 and
reflects approximately $406 million from CRD in 2020. We acquired CRD 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. Approximately 50%-70%
of revenue associated with 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, with the percentage varying based on the
length of the contract and other contractual terms. The remainder of revenue for
on-premise installations is recognized over the length of the contract as
maintenance and other services are provided. Upon renewal of an on-premises
software contract, the same pattern of revenue recognition is followed with
50%-70% recognized upon renewal and the balance recognized over the term of the
contract. Revenue for a Software as a Service (SaaS) related arrangement, where
the customer does not take possession of the software, is recognized over the
term of the contract as services are provided. Upon renewal of a SaaS
arrangement, revenue continues to be recognized as services are provided under
the new contract. As a result of these differences in how portions of CRD
revenue are accounted for, CRD revenue may vary more than other business units
quarter to quarter. CRD contributed approximately $420 million in total revenue
in 2020, compared to approximately $385 million 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. The increase in
revenue is primarily driven by SaaS revenue and professional services.
Amortization of tax advantage investments negatively impacted software and
processing fees by approximately $88 million and $52 million in 2020 and 2019,
respectively.
In addition, FX and market-related adjustments, which also includes certain fair
value adjustments, impacted software and processing fees by approximately
$26 million and $16 million in 2020 and 2019, respectively.
Expenses
Total expenses for Investment Servicing decreased 1% in 2020 compared to 2019,
primarily due to on-going expense management initiatives, partially offset by
technology infrastructure and operational investments. Total expenses
contributed by CRD in 2020 were approximately $248 million , compared to
$201 million in 2019. Additional information about expenses is provided under
"Expenses" in "Consolidated Results of Operations" included in this Management's
Discussion and Analysis.
Investment Management
TABLE 14: INVESTMENT MANAGEMENT LINE OF BUSINESS RESULTS
(Dollars in millions, except where otherwise Years Ended December 31, % Change 2020 % Change 2019
noted) 2020 2019 vs. 2019 vs. 2018 2018
Management fees(1)(2) $ 1,880 $ 1,824 $ 1,899 3 % (4) %
Foreign exchange trading services(1)(3) 64 84 82 (24) 2
Securities finance 14 9 - nm nm
Software and processing fees(4) 27 29 (5) nm nm
Total fee revenue 1,985 1,946 1,976 2 (2)
Net interest income (11) (24) (20) (54) 20
Total revenue 1,974 1,922 1,956 3 (2)
Total expenses 1,471 1,535 1,544 (4) (1)
Income before income tax expense $ 503 $ 387 $ 412 30 (6)
Pre-tax margin 25 % 20 % 21 %
Average assets (in billions) $ 2.9 $ 3.0 $ 3.2
(1) Certain fees associated with our GLD ETFs have been reclassified from
Foreign exchange trading services to Management fees to better reflect the
nature of those fees. Prior periods have been reclassified to conform to
current-period presentation. These fees were approximately $81 million ,
$53 million and $48 million in 2020, 2019 and 2018, respectively.
(2) Includes revenues from SPDR® Gold Shares and SPDR® Gold MiniSharesSM Trust
AUM where we are not the investment manager but act as the marketing agent.
(3) Includes revenue for reimbursements received for certain ETFs associated
with State Street Global Advisors where we act as the distribution and marketing
agent.
(4) Includes other revenue items that are primarily driven by equity market
movements.
nm Not meaningful
Investment Management total revenue increased 3% in 2020 compared to 2019.
State Street Corporation | 76
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Management Fees
Management fees increased 3% in 2020 compared to 2019, primarily due to higher
average market levels and ETF and cash net inflows, partially offset by net
institutional outflows.
Management fees generated outside the U.S. were approximately 26% of total
management fees in 2020 compared to approximately 27% in both 2019 and 2018.
TABLE 15: ASSETS UNDER MANAGEMENT BY ASSET CLASS AND INVESTMENT APPROACH
December 31, December 31, December 31, % Change % Change
(In billions) 2020 2019 2018 2020 vs. 2019 2019 vs. 2018
Equity:
Active $ 83 $ 88 $ 80 (6) % 10 %
Passive 2,089 1,903 1,464 10 30
Total equity 2,172 1,991 1,544 9 29
Fixed-income:
Active 92 89 81 3 10
Passive 441 379 341 16 11
Total fixed-income 533 468 422 14 11
Cash(1) 359 324 287 11 13
Multi-asset-class solutions:
Active 26 24 19 8 26
Passive 164 133 113 23 18
Total multi-asset-class
solutions 190 157 132 21 19
Alternative investments(2):
Active 23 21 21 10 -
Passive 190 155 105 23 48
Total alternative investments 213 176 126 21 40
Total $ 3,467 $ 3,116 $ 2,511 11 24
(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®Gold MiniSharesSM Trust, but act as
the marketing agent.
TABLE 16: EXCHANGE-TRADED FUNDS BY ASSET CLASS(1)
% Change % Change
(In billions) December 31, 2020 December 31, 2019 December 31, 2018 2020 vs. 2019 2019 vs. 2018
Alternative Investments(2) $ 83 $ 56 $ 43 48 % 30 %
Cash 14 9 9 56 -
Equity 706 618 482 14 28
Multi Asset 1 - - 100 -
Fixed-Income 102 85 66 20 29
Total Exchange-Traded Funds $ 906 $ 768 $ 600 18 28
(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®Gold MiniSharesSM Trust, but act as
the marketing agent.
TABLE 17: GEOGRAPHIC MIX OF ASSETS UNDER MANAGEMENT(1)
December 31, December 31, December 31, % Change % Change
(In billions) 2020 2019 2018 2020 vs. 2019 2019 vs. 2018
North America $ 2,414 $ 2,115 $ 1,731 14 % 22 %
Europe/Middle East/Africa 509 493 421 3 17
Asia/Pacific 544 508 359 7 42
Total $ 3,467 $ 3,116 $ 2,511 11 24
(1) Geographic mix is based on client location or fund management location.
State Street Corporation
| 77
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONSTABLE 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
$ 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
$ 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
$ 324 $ 157 $ 176$ 3,116 Long-term institutional flows, net(3) (99) 2 (1) 10 (12)
(100)
Exchange-traded fund flows, net 13 12 4 - 15 44 Cash fund flows, net - - 32 - - 32 Total flows, net (86) 14 35 10 3 (24) Market appreciation (depreciation) 238 43 (1) 19 30 329 Foreign exchange impact 29 8 1 4 4 46 Total market/foreign exchange impact 267 51 - 23 34
375
Balance as of
$ 359 $ 190 $ 213$ 3,467 (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®Gold MiniSharesSM Trust, but act as the marketing agent. (3) Amounts represent long-term portfolios, excluding ETFs. Expenses Total expenses for Investment Management decreased 4% in 2020 compared to 2019, primarily due to savings from on-going expense management initiatives. Additional information about expenses is provided under "Expenses" in "Consolidated Results of Operations" included in this Management's Discussion and Analysis. State Street Corporation | 78
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
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) 2020 2019 2018
Assets:
Interest-bearing deposits with banks $ 76,588 $ 48,500 $ 54,328
Securities purchased under resale agreements 3,452 2,506 2,901
Trading account assets 878 884 1,051
U.S. Treasury and federal agencies:
Direct obligations 14,017 14,249 16,226
Mortgage-and asset-backed securities 46,799 42,390 32,223
State and political subdivisions 1,717 1,869 5,481
Other investments:
Asset-backed securities 11,096 9,734 13,323
Collateralized mortgage-backed securities and
obligations 682 896 1,549
Other debt investments and equity securities 26,681 22,630 19,268
Investment securities held to maturity purchased
under money market liquidity facility 8,183 - -
Total Investment securities 109,175 91,768 88,070
Loans and leases 27,525 24,073 23,573
Other interest-earning assets 11,256 14,160 15,714
Average total interest-earning assets 228,874 181,891 185,637
Cash and due from banks 3,849 3,390 3,178
Other non-interest-earning assets 36,611 38,053 34,570
Average total assets $ 269,334 $ 223,334 $ 223,385
Liabilities and shareholders' equity:
Interest-bearing deposits:
U.S. $ 87,444 $ 67,547 $ 54,953
Non-U.S. 68,806 61,301 70,623
Total interest-bearing deposits(2) 156,250 128,848 125,576
Securities sold under repurchase agreements 2,615 1,616 2,048
Short-term borrowings under money market
liquidity facility 8,207 - -
Other short-term borrowings 2,226 1,524 1,327
Long-term debt 14,371 11,474 10,686
Other interest-bearing liabilities 3,176 4,103 4,956
Average total interest-bearing liabilities 186,845 147,565 144,593
Non-interest-bearing deposits(2) 36,975 29,414 35,832
Other non-interest-bearing liabilities 20,464 21,299 19,804
Preferred shareholders' equity 2,569 3,653 3,327
Common shareholders' equity 22,481 21,403 19,829
Average total liabilities and shareholders'
equity $ 269,334 $ 223,334 $ 223,385
(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 $193.23 billion in 2020 compared to $158.26 billion
and $161.41 billion in 2019 and 2018, respectively.
State Street Corporation | 79
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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) 2020 2019 2018
Available-for-sale:
U.S. Treasury and federal agencies:
Direct obligations $ 6,575 $ 3,487 $ 1,039
Mortgage-backed securities 14,305 17,838 15,968
Total U.S. Treasury and federal agencies 20,880 21,325 17,007
Asset-backed securities:
Student loans(1) 314 531 541
Credit cards 90 89 583
Collateralized loan obligations 2,966 1,820 593
Total asset-backed securities 3,370 2,440 1,717
Non-U.S. debt securities:
Mortgage-backed securities 1,996 1,980 1,682
Asset-backed securities 2,291 2,179 1,574
Government securities 12,539 12,373 12,793
Other 12,903 8,658 6,602
Total non-U.S. debt securities 29,729 25,190 22,651
State and political subdivisions 1,548 1,783 1,918
Collateralized mortgage obligations 78 104 197
Other U.S. debt securities 3,443 2,973 1,658
Total $ 59,048 $ 53,815 $ 45,148
Held-to-maturity(2):
U.S. Treasury and federal agencies:
Direct obligations $ 6,057 $ 10,311 $ 14,794
Mortgage-backed securities 36,883 26,297 21,647
Total U.S. Treasury and federal agencies 42,940 36,608 36,441
Asset-backed securities:
Student loans(1) 4,774 3,783 3,191
Credit cards - - 193
Other - - 1
Total asset-backed securities 4,774 3,783 3,385
Non-U.S. debt securities:
Mortgage-backed securities 303 366 638
Asset-backed securities - - 223
Government securities 342 328 358
Other - - 46
Total non-U.S. debt securities 645 694 1,265
Collateralized mortgage obligations 572 697 823
Held-to-maturity under money market mutual fund
liquidity facility(3) 3,300 - -
Total $ 52,231 $ 41,782 $ 41,914
(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) Includes securities at amortized cost or fair value on the date of transfer
from AFS.
(3) Consists entirely of U.S. securities.
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 3.0 years and 2.7
years as of December 31, 2020 and December 31, 2019 , respectively. The increase
in securities duration is primarily driven by continued growth in the investment
portfolio.
Approximately 92% and 90% of the carrying value of the portfolio was rated "AAA"
or "AA" as of December 31, 2020 and December 31, 2019 , respectively.
TABLE 21: INVESTMENT PORTFOLIO BY EXTERNAL CREDIT RATING (EXCLUDING SECURITIES PURCHASED UNDER THE
MMLF PROGRAM)
December 31, 2020 December 31, 2019
AAA(1) 78 % 77 %
AA 14 13
A 4 5
BBB 4 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, 2020 and December 31, 2019 , 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, 2020 December 31, 2019
U.S. Agency 39 % 41 %
Mortgage-backed securities
Foreign sovereign 20 19
U.S. Treasuries 11 14
Asset-backed securities 11 11
Other credit(1) 19 15
100 % 100 %
(1) Includes the securities purchased under the MMLF program.
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, 2020 and
December 31, 2019 .
State Street Corporation | 80
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
TABLE 23: NON-U.S. DEBT SECURITIES
(In millions) December 31, 2020 December 31, 2019
Available-for-sale:
European(1) $ 3,275 $ 2,101
Canada 3,163 2,611
France 2,829 2,223
Australia 2,809 2,409
Germany 2,155 1,944
Spain 1,642 1,531
Belgium 1,618 977
Austria 1,544 1,398
Netherlands 1,528 1,524
Ireland 1,226 1,235
Finland 1,222 846
United Kingdom 1,209 1,608
Asian(1) 1,165 581
Italy 1,014 1,113
Japan 560 1,363
Sweden 212 156
Hong Kong 162 617
Luxembourg 83 124
Brazil 74 93
Norway 22 51
Other(2) 2,217 685
Total $ 29,729 $ 25,190
Held-to-maturity:
Singapore $ 342 $ 214
Australia 90 109
Spain 84 85
United Kingdom 84 126
Germany - 112
Other(3) 45 48
Total $ 645 $ 694
(1) Consists entirely of supranational bonds.
(2) Included approximately $2,166 million and $618 million as of December 31,
2020 and December 31, 2019 , respectively, related to supranational bonds.
(3) Included approximately $45 million and $46 million as of December 31, 2020
and December 31, 2019 , respectively, related to Italy and Portugal , all of which
were related to MBS.
Approximately 80% and 74% of the aggregate carrying value of these non-U.S. debt
securities was rated "AAA" or "AA" as of December 31, 2020 and December 31,
2019 , respectively. The majority of these securities comprised senior positions
within the security structures; these positions have a level of protection
provided through subordination and other forms of credit protection. As of
December 31, 2020 and December 31, 2019 , approximately 21% and 27%,
respectively, of the aggregate carrying value of these non-U.S. debt securities
was floating-rate.
As of December 31, 2020 , our non-U.S. debt securities had an average
market-to-book ratio of 101.5%, and an aggregate pre-tax net unrealized gain of
$439 million , composed of gross unrealized gains of $452 million and gross
unrealized losses of $13 million . These unrealized amounts included:
•a pre-tax net unrealized gain of $375 million , composed of gross unrealized
gains of $384 million and gross unrealized losses of $9 million , associated with
non-U.S. AFS debt securities; and
•a pre-tax net unrealized gain of $64 million , composed of gross unrealized
gains of $68 million and gross unrealized losses of $4 million , associated with
non-U.S. HTM debt securities.
As of December 31, 2020 , the underlying collateral for non-U.S. MBS and ABS
primarily included U.K. , Australian, Italian and Dutch mortgages. The securities
listed under "Canada" were composed of Canadian government securities and
provincial bonds, 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 $1.5 billion of municipal securities classified as
state and political subdivisions in our investment securities portfolio as of
December 31, 2020 , as shown in Table 20: Carrying Values of Investment
Securities , all of which were classified as AFS. As of December 31, 2020 , we
also provided approximately $9.4 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(2) Facilities(3) Total Exposure
December 31, 2020
State of Issuer:
Texas $ 268 $ 2,282 $ 2,550 23 %
California 113 2,174 2,287 21
New York 297 1,363 1,660 15
Massachusetts 382 927 1,309 12
Total $ 1,060 $ 6,746 $ 7,806
December 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 (1) Represented 5% or more of our aggregate municipal credit exposure of
approximately
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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 87% of the obligors rated "AAA" or "AA" as of December 31,
2020 . As of that date, approximately 26% and 74% 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 impairment 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, 2020 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):
Direct obligations$ 1,661 .91 %$ 2,771 .51 %$ 2,143 1.54 % $ - - %$ 6,575 Mortgage-backed securities 127 3.46 619 2.52 2,828 .90 10,731 3.19 14,305 TotalU.S. treasury and federal agencies 1,788 3,390 4,971 10,731 20,880 Asset-backed securities: Student loans 115 1.77 90 .68 - - 109 .35 314 Credit cards - - - - 90 .92 - - 90 Collateralized loan obligations 76 1.19 1,077 1.26 838 1.36 975 1.50 2,966 Total asset-backed securities 191 1,167 928 1,084 3,370 Non-U.S. debt securities: Mortgage-backed securities 260 .67
527 .60 116 .53 1,093 1.08 1,996
Asset-backed securities 337 .61 1,247 .39 272 .56 435 .41 2,291
Government securities 3,151 .51 8,151 1.99 939 .77 298 .91 12,539
Other 1,329 2.14 9,652 1.01 1,752 .69 170 1.93 12,903
Total non-U.S. debt securities 5,077 19,577 3,079 1,996 29,729
State and political subdivisions(2) 136 6.26 626 5.39 559 5.39 227 5.78 1,548
Collateralized mortgage obligations - - - - - - 78 3.57 78
Other U.S. debt securities 452 2.90 2,896 2.38 95 2.53 - - 3,443
Total $ 7,644 $ 27,656 $ 9,632 $ 14,116 $ 59,048
Held-to-maturity(1):Direct obligations$ 3,480 2.69 %$ 2,555 1.79 % $ - - % $ 22 .58 %$ 6,057 Mortgage-backed securities 204 2.59 423 3.04 5,036 2.13 31,220 2.55 36,883 TotalU.S. treasury and federal agencies 3,684 2,978 5,036 31,242 42,940 Asset-backed securities: Student loans 350 .50 155 .52 667 .82 3,602 1.11 4,774 Total asset-backed securities 350 155 667 3,602 4,774
Non-
Mortgage-backed securities 87 .60 23 1.02 - - 193 .18 303 Government securities 342 .43 - - - - - - 342 Total non-U.S. debt securities 429 23 - 193 645 Collateralized mortgage obligations 139 1.42 265 .94 21 1.22 147 1.32 572 Total 4,602 3,421 5,724 35,184 48,931 Held-to-maturity under money market mutual fund liquidity facility 3,300 1.39 - - - - - - 3,300 Total held-to-maturity securities$ 7,902 $ 3,421 $ 5,724 $ 35,184 $ 52,231 (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, 2020 ). State Street Corporation
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Loans and Leases
TABLE 26: U.S. AND NON- U.S. LOANS AND LEASES
As of December 31,
(In millions) 2020 2019 2018 2017 2016
Domestic(1):
Commercial and financial $ 19,036 $ 18,762 $ 19,479 $ 18,696 $ 16,412
Commercial real estate 2,096 1,766 874 98 27
Lease financing(2) - - - 267 338
Total domestic 21,132 20,528 20,353 19,061 16,777
Foreign(1):
Commercial and financial 6,793 5,781 5,436 3,837 2,476
Lease financing(2) - - - 396 504
Total foreign 6,793 5,781 5,436 4,233 2,980
Total loans and leases(3)(4) $ 27,925 $ 26,309 $ 25,789 $ 23,294 $ 19,757
Average loans and leases $ 27,525 $ 24,073 $ 23,573 $ 21,916 $ 19,013
(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 $2,982 million and $3,256 million of overdrafts as of December 31,
2020 and December 31, 2019 , respectively.
(4) As of December 31, 2020 , floating rate loans totaled $22,537 million and
fixed rate loans totaled $2,404 million .
The increase in domestic loans in the commercial and financial segment as of
December 31, 2020 compared to December 31, 2019 was primarily driven by an
increase in fund finance loans, partially offset by a decrease in securities
finance loans.
As of December 31, 2020 and December 31, 2019 , our leveraged loans totaled
approximately $4.17 billion and $4.46 billion , respectively. We sold
$353 million leveraged loans in 2020. We recorded a charge-off against the
allowance for these loans prior to the sale of these loans of $41 million in
2020.
In addition, we had binding unfunded commitments as of December 31, 2020 and
December 31, 2019 of $149 million and $176 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 leveraged 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 85% and 86% of the loans rated "BB" or "B" as of December 31, 2020
and December 31, 2019 , 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 both December 31,
2020 and December 31, 2019 .
TABLE 27: CONTRACTUAL MATURITIES FOR LOANS
As of December 31, 2020
(In millions) Under 1 year 1 to 5 years Over 5 years Total
Domestic:
Commercial and financial $ 11,783 $ 5,763 $ 1,490 $ 19,036
Commercial real estate 43 571 1,482 2,096
Total domestic 11,826 6,334 2,972 21,132
Foreign:
Commercial and financial 3,111 3,182 500 6,793
Total foreign 3,111 3,182 500 6,793
Total loans $ 14,937 $ 9,516 $ 3,472 $ 27,925 TABLE 28: CLASSIFICATION OF LOAN BALANCES DUE AFTER ONE YEAR (In millions)
As of December 31 , 2020
Loans with predetermined interest rates $
2,327
Loans with floating or adjustable interest rates 10,658
Total $ 12,985
Allowance for credit losses
TABLE 29: ALLOWANCE FOR CREDIT LOSSES
Years Ended December 31,
(In millions) 2020 2019 2018 2017 2016
Allowance for credit losses:
Beginning balance(1) $ 93 $ 83 $ 72 $ 77 $ 66
Provision for credit losses
(funded commitments)(2) 83 10 14 2 10
Provisions for credit losses
(unfunded commitments)(3) 3 3 (1) (6) 4
Provisions for credit losses
(held-to-maturity securities and
all other) 2 - - - -
Charge-offs(4) (41) (3) (1) (1) (3)
FX translation 8 (2) (1) - -
Ending balance $ 148 $ 91 $ 83 $ 72 $ 77
(1) Beginning January 1, 2020 , we adopted ASU 2016-13. Prior to 2020, we
recognized an allowance for loan losses under an incurred loss model. Upon
adoption, we increased the allowance and reduced retained earnings by
approximately $2 million . As such, the beginning balance differs from the
December 31, 2019 ending balance. Please refer to Note 1 to the consolidated
financial statements in this Form 10-K for additional information.
(2) The provision for credit losses is primarily related to commercial and
financial loans.
(3) Prior to the adoption of ASU 2016-13, the provision for unfunded commitments
was recorded within other expenses in the consolidated statement of income. Upon
adoption of ASU 2016-13 in the first quarter of 2020, the provision for all
assets within scope is recorded within the provision for credit losses in the
consolidated statement of income.
(4) The charge-offs are related to commercial and financial loans.
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
As discussed above, we adopted ASU 2016-13 in January 2020 . For additional
information on this new standard, refer to Note 1 to the consolidated financial
statements in this Form 10-K. The provision for credit losses related to loans
and financial assets held at amortized cost, including investment securities
classified as HTM and off-balance sheet commitments, was $88 million in 2020
based on the CECL methodology, compared to $10 million in 2019 (which was under
the previous incurred loss model).
As of December 31, 2020 , approximately $97 million of our allowance for credit
losses was related to leveraged loans included in the commercial and financial
segment compared to $61 million as of December 31, 2019 , reflecting changes in
reserving standards and economic outlook, as well as negative credit migration.
As our view on current and future economic scenarios change, our allowance for
credit losses related to these loans may be impacted through a change to the
provisions for credit losses, reflecting credit migration within our loan
portfolio, as well as changes in management's economic outlook as of year-end.
The remaining $51 million and $13 million as of December 31, 2020 and 2019,
respectively, was related to off-balance sheet commitments and other financial
assets held at amortized cost, including investment securities held to maturity.
An allowance for credit losses is recognized on HTM securities upon acquisition
of the security, and on AFS securities when the fair value and expected future
cash flows of the investment securities are less than their amortized cost
basis. Please refer to Note 3 to the consolidated financial statements in this
Form 10-K for additional information. Our assessment of impairment 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,
the credit-related component of impairment, in particular, could increase and
would be recorded in the provision for credit losses. Additional information
with respect to the allowance for credit losses, net impairment losses and gross
unrealized losses is provided in Note 3 to the consolidated financial statements
in this Form 10-K.
Cross-Border Outstandings
Cross-border outstandings are amounts payable to us by non-U.S. counterparties
which are denominated in U.S. dollars or other non-local currency, as well as
non-U.S. local currency claims not funded by local currency liabilities. Our
cross-border outstandings consist primarily of deposits with banks; loans and
lease financing, including short-
duration advances; investment securities; amounts related to 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 downgrade U.S. and non-U.S. financial institutions and sovereign
issuers which have been, and may in the future be, significant counterparties to
us, or whose financial instruments serve as collateral on which we rely for
credit risk mitigation purposes, and may do so again in the future. As a result,
we may be exposed to increased counterparty risk, leading to negative ratings
volatility.
The cross-border outstandings presented in Table 30: Cross-border outstandings,
represented approximately 30% and 28% of our consolidated total assets as of
December 31, 2020 and December 31, 2019 , respectively.
TABLE 30: CROSS-BORDER OUTSTANDINGS(1)
Investment
Securities and Other Derivatives and Total Cross-Border
(In millions) Assets Securities on Loan Outstandings
December 31, 2020
United Kingdom $ 18,880 $ 1,797 $ 20,677
Japan 19,537 560 20,097
Germany 18,734 2,163 20,897
Canada 5,997 3,113 9,110
Australia 5,790 2,908 8,698
Luxembourg 5,036 2,148 7,184
France 3,586 3,010 6,596
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
(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.
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
As of December 31, 2020 , aggregate cross-border outstandings in each of
Switzerland and Ireland amounted to between 0.75% and 1% of our consolidated
assets, at approximately $3.13 billion and $2.93 billion , respectively. As of
December 31, 2019 , aggregate cross-border outstandings in the Netherlands
amounted to between 0.75% and 1% of our consolidated assets, at approximately
$1.89 billion . As of December 31, 2018 , there were no countries whose aggregate
cross-border outstandings amounted to between 0.75% and 1% of our consolidated
assets.
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.
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Governance and Structure
We have an approach to risk management that involves all levels of management,
from the Board and its committees, including its E&A Committee, RC, the 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.
The responsibilities for effective review and challenge reside with senior
managers, management oversight committees, Corporate Audit and, ultimately, the
Board and its committees. While we believe that our risk management program is
effective in managing the risks in our businesses, internal and external factors
may create risks that cannot always be identified or anticipated.
Corporate-level risk committees provide focused oversight, and establish
corporate standards and policies for specific risks, including credit, sovereign
exposure, market, liquidity, operational, information technology as well as new
business products, regulatory compliance and ethics, vendor risk and model
risks. These committees have been delegated the responsibility to develop
recommendations and remediation strategies to address issues that affect or have
the potential to affect us.
We maintain a risk governance committee structure which serves as the formal
governance mechanism through which we seek to undertake the consistent
identification, management and mitigation of various risks facing us in
connection with its business activities. This governance structure is enhanced
and integrated through multi-disciplinary involvement, particularly through ERM.
The following chart presents this structure.
Management Risk Governance Committee Structure
Executive Management Committees:
Management Risk and Capital Committee Business Conduct Technology and Operational Risk Committee
(MRAC) Committee (TORC)
(BCC)
Risk Committees:
Asset-Liability Credit Risk and Fiduciary Review Operational Risk Technology Risk
Committee (ALCO) Policy Committee Committee Committee Committee
(CRPC)
Trading and Market Risk Basel Oversight New Business and Product Executive Enterprise Continuity
Committee (TMRC) Committee Approval Committee Information Steering Committee
(BOC) Security Committee
Recovery and Resolution Model Risk Compliance and Ethics Vendor Management
Planning Executive Committee Committee Lifecycle Executive
Review Board (MRC) Review Board
CCAR Steering Committee SSGA Risk Committee Legal Entity Oversight
Committee
Regulatory Conduct Standards
Country Risk Committee Reporting Oversight Committee
Committee
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Enterprise Risk Management
The goal of ERM is to ensure that risks are proactively identified,
well-understood and prudently managed in support of our business strategy. ERM
provides risk oversight, support and coordination to allow for the consistent
identification, measurement and management of risks across business units
separate from the business units' activities, and is responsible for the
formulation and maintenance of corporate-wide risk management policies and
guidelines. In addition, ERM establishes and reviews limits and, in
collaboration with business unit management, monitors key risks. Ultimately, ERM
works to validate that risk-taking occurs within the risk appetite statement
approved by the Board and conforms to associated risk policies, limits and
guidelines.
The 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 Risk Committee (RC), the
Examining and Audit Committee (E&A Committee), the Human Resources Committee
(HRC) and the Technology and Operations Committee (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,
operational and technology resiliency, data and access management and
third-party risk management.
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
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.
BCC provides oversight of our business conduct and culture risks and standards,
our commitments to clients and others with whom we do business, and our
potential reputational risks, on an enterprise-wide basis. Management considers
adherence to high ethical standards to be critical to the success of our
business and to our reputation. The BCC is co-chaired by our Chief Compliance
Officer and our General Counsel.
TORC provides oversight of, and assesses the effectiveness of, corporate-wide
technology and operational risk management programs, and reviews areas of
improvement 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 meets regularly to monitor the management of our
trading market risk activities;
•BOC provides oversight and governance over Basel related regulatory
requirements, assesses compliance with respect to Basel regulations and approves
all material methodologies and changes, policies and reporting;
•The Recovery and Resolution Planning Executive Review Board oversees the
development of recovery and resolution plans as required by banking regulators;
•MRC monitors the overall level of model risk and provides oversight of the
model governance process pertaining to financial models, including the
validation of key models and the ongoing monitoring of model performance. The
MRC may also, as appropriate, mandate remedial actions and compensating controls
to be applied to models to address modeling deficiencies as well as other issues
identified;
•The CCAR Steering Committee provides primary supervision of the stress tests
performed in conformity with the Federal Reserve's CCAR process and the
Dodd-Frank Act, and is responsible for the overall management, review, and
approval of
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
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 the alignment of State
Street Global Advisors' strategy, and risk appetite, as well as alignment with
our corporate-wide strategies and risk management standards; and
•The Country Risk Committee oversees the identification, assessment, monitoring,
reporting and mitigation, where necessary, of country risks.
•The Regulatory Reporting Oversight Committee is responsible for providing
oversight of regulatory reporting and related report governance processes and
accountabilities.
Business Conduct Committee
•The Fiduciary Review Committee reviews and assesses the fiduciary risk
management programs of those units in which we serve in a fiduciary capacity;
•The New Business and Product Approval Committee provides oversight of the
evaluation of the risk inherent in proposed new products or services and new
business, and extensions of existing products or services, evaluations including
economic justification, material risk, compliance, regulatory and legal
considerations, and capital and liquidity analyses;
•The Compliance and Ethics Committee provides review and oversight of our
compliance programs, including our culture of compliance and high standards of
ethical behavior;
•The Legal Entity Oversight Committee establishes standards with respect to the
governance of our legal entities, monitors adherence to those standards, and
oversees the ongoing evaluation of our legal entity structure, including the
formation, maintenance and dissolution of legal entities; and
•The Conduct Standards Committee provides oversight of our enforcement of
employee conduct standards.
Technology and Operational Risk Committee
•The Operational Risk Committee, along with the support of regional business or
entity-specific working groups and
committees, is responsible for oversight of our operational risk 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
•The Executive Information Security Committee provides direction for the
Enterprise Information Security posture and program, including cyber-security
protections, provides enterprise-wide oversight and assessment of the
effectiveness of all Information Security Programs to promote that controls are
measured and managed, and serves as an escalation point for cyber-security
issues.
•The Enterprise Continuity Steering Committee considers matters pertaining to
continuity and related risks, including oversight in determining the direction
of the continuity program.
•The Vendor Management Lifecycle Executive Review Board oversees the end-to-end
vendor management process to support operations in an efficient and sustainable
manner, to oversee management of vendor-related risks, and to support compliance
with regulatory standards.
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 overdrafts, 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
securities purchased under a resale agreement, 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
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of deposit placements and other cash balances, with central banks or private
sector institutions and fees receivables.
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. With respect to small and low-risk extensions of
credit to certain types of counterparties, approval authority is granted to
individuals outside of ERM;
•We seek to avoid or limit undue concentrations of risk. Counterparty (or
groups of counterparties), industry, country and product-specific concentrations
of risk are subject to frequent review and approval in accordance with our risk
appetite;
•We determine the creditworthiness of counterparties through a detailed risk
assessment, including the use of internal risk-rating methodologies;
•We review all extensions of credit and the creditworthiness of counterparties
at least annually. The nature and extent of these reviews are determined by the
size, nature and term of the extensions of credit and the creditworthiness of
the counterparty; and
•We subject all corporate policies and guidelines to annual review as an
integral part of our periodic assessment of our risk appetite.
Our corporate policies and guidelines require that the business units which
engage in activities that give rise to credit and counterparty risk comply with
procedures that promote the extension of credit for legitimate business
purposes; are consistent with the maintenance of proper credit standards; limit
credit-related losses; and are consistent with our goal of maintaining a strong
financial condition.
Structure and Organization
The Credit 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 within our company are responsible for the oversight of
credit risk and associated credit risk policies, systems and models.
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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 promotes a clear and consistent approach to the
determination of appropriate credit risk classifications for our credit
counterparties and exposures, tracking the changes in risk associated with these
counterparties and exposures over time. This capability enhances our ability to
more accurately calculate both risk
exposures and capital, enabling better strategic decision making across the
organization.
We use credit risk parameter estimates for the following purposes:
•The assessment of the creditworthiness of new counterparties and, in
conjunction with our risk appetite statement, the development of appropriate
credit limits for our products and services, including loans, foreign exchange,
securities finance, placements and repurchase agreements;
•The use of an automated process for limit approvals for certain low-risk
counterparties, as defined in our credit risk guidelines, based on the
counterparty's probability-of-default, or PD, rating class;
•The development of approval authority matrices based on PD; riskier
counterparties with higher PDs require higher levels of approval for a
comparable PD and limit size compared to less risky counterparties with lower
PDs;
•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 any potential credit losses
through the use of various types of credit risk mitigation. The Basel III final
rule permits us to reflect the application of credit risk mitigation when it
meets the standards outlined
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therein. Examples of forms of credit risk mitigation include collateral,
netting, guarantees and secured interest in non-financial assets. Where
possible, we apply the recognition of collateral, guarantees and secured
interest over non-financial assets to mitigate overall risk within our
counterparty credit portfolio. While credit default swaps are permitted under
the Basel III final rule, we do not actively use credit default swaps as a risk
mitigation tool.
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, as well as highly-rated and/or liquid securities
(i.e. 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 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 is supported
by a valid security interest that permits liquidation 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 for
certain rights and remedies upon a counterparty default, including the right to
net obligations arising under derivatives or other transactions under such
agreement. In such an event, the netting of obligations would result 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
change 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
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to us include financial guarantees, letters of credit, bankers' acceptances,
purchase undertaking agreement 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.
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.
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. 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.
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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 exam results,
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.
Allowance for Credit Losses
We maintain an allowance for credit losses to support our financial assets held
at amortized cost. We also maintain an allowance for unfunded commitments and
letters of credit to support our off-balance credit exposure. The two components
together represent the allowance for credit losses. Review and evaluation of the
adequacy of the allowance 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 and the estimated effects of our forecasts
on our counterparties. We utilize multiple economic scenarios, consisting of a
baseline, upside and downside scenarios, to develop management's forecast of
future expected losses.
The economic forecast utilized throughout 2020 reflects both downward credit
migration within our loan portfolio and revision in management's economic
outlook reflecting the impact of the COVID-19 pandemic. Allowance estimates
remain subject to continued model and economic uncertainty and management may
use qualitative adjustments. If future data and forecasts deviate relative to
the forecasts utilized to determine our allowance for credit losses as of
December 31, 2020 , or if credit risk migration is higher or lower than
forecasted for reasons independent of the economic forecast, our allowance for
credit losses will also change.
Additional information about the allowance for credit 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
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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, 2020 , the value of our Parent Company's net
liquid assets totaled $492 million , compared with $428 million as of
December 31, 2019 , which amount does not include available liquidity through
SSIF. As of December 31, 2020 , our Parent Company and State Street Bank had
approximately $1.50 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.
Liquidity Framework
Our liquidity framework contemplates areas of potential risk based on our
activities, size and other appropriate risk-related factors. In managing
liquidity risk we employ limits, maintain established metrics and early warning
indicators, and perform routine stress testing to identify potential liquidity
needs. This process involves the evaluation of a combination of internal and
external scenarios which assist us in measuring our liquidity position and in
identifying potential increases in cash needs or decreases in available sources
of cash, as well as the potential impairment of our ability to access the global
capital markets.
We manage liquidity according to several principles that are equally important
to our overall liquidity risk management framework:
•Structural liquidity management addresses liquidity by monitoring and directing
the composition of our consolidated statement of condition. Structural liquidity
is measured by metrics such as the percentage of total wholesale funds to
consolidated total assets, and the percentage of non-government investment
securities to client deposits. In addition, on a regular basis and as described
below, our structural liquidity is evaluated under various stress scenarios.
•Tactical liquidity management addresses our day-to-day funding requirements and
is largely driven by changes in our primary source of funding, which are client
deposits. Fluctuations in client deposits may be supplemented with short-term
borrowings, repurchase
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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, 2020 and
December 31, 2019 , daily average LCR for the Parent Company was 108% and 110%,
respectively. The average HQLA for the Parent Company under the LCR final rule
definition was $143.61 billion and $100.23 billion , post-prescribed haircuts,
for the quarters ended December 31, 2020 and December 31, 2019 , respectively.
The increase in average HQLA for the quarter ended December 31, 2020 , compared
to the quarter ended December 31, 2019 , was primarily a result of the increase
in MBS and supranational purchases.
We maintained average cash balances in excess of regulatory requirements
governing deposits with the Federal Reserve of approximately $75.68 billion at
the Federal Reserve , the ECB and other non-U.S. central banks for the quarter
ended December 31, 2020 , and $41.56 billion for the quarter ended December 31,
2019 . The higher levels of average cash balances with central banks reflect
higher levels of client deposits.
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, 2020 and December 31, 2019 , we had no 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, 2020 and December 31, 2019 ,
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.
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The average fair value of total unencumbered securities was $89.12 billion for
the quarter ended December 31, 2020 , compared to $76.94 billion for the quarter
ended December 31, 2019 .
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; increases in our
investment and loan portfolios; 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 $34.21 billion and $29.70 billion and standby letters of credit
totaling $3.33 billion and $3.32 billion as of December 31, 2020 and
December 31, 2019 , respectively. These amounts do not reflect the value of any
collateral. As of December 31, 2020 , approximately 73% of our unfunded
commitments to extend credit and 20% 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 December 31, 2020 ,
approximately 65% of our average total deposit balances were denominated in U.S.
dollars, approximately 15% in EUR, 10% in GBP and 10% in all other currencies.
As of December 31, 2019 , 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 $3.41 billion and $1.10 billion as of
December 31, 2020 and December 31, 2019 , respectively.
State Street Bank currently maintains a line of credit with a financial
institution of CAD $1.40 billion , or approximately $1.10 billion , as of
December 31, 2020 , 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, 2020 and December 31, 2019 , 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. The total amount remaining for issuance under the registration
statement is $7 billion as of December 31, 2020 . In addition, State Street Bank
also has current authorization from the Board to issue up to $5 billion in
unsecured senior debt.
On January 24, 2020 , we issued $750 million aggregate principal amount of 2.400%
Senior Notes due 2030 in a public offering.
On March 26, 2020 , we issued $750 million aggregate principal amount of 2.825%
Fixed-to-Floating Rate Senior Notes due 2023, $500 million aggregate principal
amount of 2.901% Fixed-to-Floating Rate Senior Notes due 2026 and $500 million
aggregate principal amount of 3.152% of Fixed-to-Floating Rate Senior Notes due
2031.
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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, 2020
Standard & Poor's Moody's Investors Fitch
Service
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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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, 2020 , except for the interest portions of long-term
debt and finance leases.
TABLE 32: LONG-TERM CONTRACTUAL CASH OBLIGATIONS
December 31, 2020 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) $ 1,505 $ 3,623 $ 4,073 $ 4,501 $ 13,702
Operating leases 186 314 205 275 980
Finance lease obligations(2) 41 72 - - 113
Tax liability - 4 43 - 47
Total contractual cash
obligations $ 1,732 $ 4,013 $ 4,321 $ 4,776 $ 14,842
(1) Long-term debt excludes finance lease obligations (presented as a separate
line item) and the effect of interest rate swaps. Interest payments were
calculated at the stated rate with the exception of floating-rate debt, for
which payments were calculated using the indexed rate in effect as of
December 31, 2020 .
(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,
2020 did not represent the amounts that may ultimately be paid under the
contracts upon settlement. Additional information about our derivative
instruments is provided in Note 10 to the consolidated financial statements in
this Form 10-K. We have obligations under pension and other post-retirement
benefit plans, with additional information provided in Note 19 to the
consolidated financial statements in this Form 10-K, which are not included in
Table 32: Long-Term Contractual Cash Obligations.
TABLE 33: OTHER COMMERCIAL COMMITMENTS
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
$ - $ -$ 440,875 Unfunded credit facilities 23,122 7,931 3,021 139 34,213 Standby letters of credit 662 1,529 1,139 - 3,330 Purchase obligations(2) 122 150 15 - 287
Total commercial commitments
$ 4,175 $ 139 $ 478,705 (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. State Street Corporation
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Operational Risk Management
Overview
Operational risk is the risk of loss resulting from inadequate or failed
internal processes, people and systems or from external events. Operational risk
encompasses fiduciary risk and legal risk. Fiduciary risk is defined as the risk
that we fail to properly exercise our fiduciary duties in our provision of
products or services to clients. Legal risk is the risk of loss resulting from
failure to comply with laws and contractual obligations.
Operational risk is inherent in the performance of investment servicing and
investment management activities on behalf of our clients. Whether it be
fiduciary risk, risk associated with execution and processing or other types of
operational risk, a consistent, transparent and effective operational risk
framework is key to identifying, monitoring and managing operational risk.
We have established an operational risk framework that is based on three major
goals:
•Strong, active governance;
•Ownership and accountability; and
•Consistency and transparency.
Governance
Our Board is responsible for the approval and oversight of our overall
operational risk framework. It does so through its 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 BCC, TORC, the Operational Risk Committee, the Executive Information
Security Steering Committee , the Enterprise Continuity Steering Committee , the
Compliance and Ethics Committee , the Vendor Management Lifecycle Executive
Review Board 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 Risk Management, 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 Committee of Sponsoring Organizations of the Treadway Commission (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
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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 Centralized Modeling and Analytics group develops and maintains
operational risk capital estimation models, and ORM's Capital Analysis group
calculates our required capital for operational risk;
•ERM's MVG independently validates the quantitative models used to measure
operational risk, and ORM performs validation checks on the output of the model;
•CIS establishes the framework, policies and related programs to measure,
monitor and report on information security risks, including the effectiveness of
cyber-security program protections. CIS defines and manages the enterprise-wide
information security program. CIS coordinates with Information Technology,
control functions and business units to support the confidentiality, integrity
and availability of corporate information assets. CIS identifies and employs a
risk-based methodology consistent with applicable regulatory cyber-security
requirements and monitors the compliance of our systems with information
security policies; and
•Corporate Audit performs separate reviews of the application of operational
risk management practices and methodologies utilized across 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
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related to operational risk. Such required capital and RWA totaled $3.53 billion
and $44.15 billion , respectively, as of December 31, 2020 , compared to $3.84
billion and $47.96 billion , respectively, as of December 31, 2019 ; 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 further subdivide the data by business unit, as
deemed appropriate. Each of these loss events are represented in a UOM which is
used to estimate a specific amount of capital required for the types of loss
events that fall into each specific category. Some UOMs are measured at the
corporate level because they are not "business specific," such as damage to
physical assets, where the cause of an event is not primarily driven by the
behavior of a single business unit. Internal losses of $500 or greater are
captured, analyzed and included in the modeling approach. Loss event data is
collected using a corporate-wide data collection tool, which stores the data in
a Loss Event Data Repository (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. 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 about the significant risks
and to estimate potential exposures for individual risks should a loss event
occur. The results of these workshops are used to make a comparison to our LDA
model results to determine that our calculation of required capital considers
relevant risk-related information; and
•Business environment and internal control factors are gathered as part of our
scenario analysis program to inform the scenario analysis workshop participants
of internal loss event data and business-relevant metrics, such as risk
assessment program results, along with industry loss event data and case studies
where appropriate. Business environment and internal 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
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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 Sarbanes-Oxley Act of 2002 (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 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 and vendor management risk;
•Business disruption and technology resiliency risk;
•Technology change management 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 information 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 technology risk 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 Enterprise Technology Risk Management (ETRM) function. 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.
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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 framework as outlined above under the direction of our Chief Information
Security Officer (CISO).
We recognize the significance of cyber-attacks and have taken steps to mitigate
the risks associated with them. We have made significant investments in building
a mature cyber-security program to leverage people, technology and processes to
protect our systems and the data in our care. We have also implemented a program
to help us better measure and manage the cyber-security risk we face when we
engage with third parties for services.
All employees are required to adhere to our cyber-security policy and standards.
Our centralized information security group provides education and training. This
training includes a required annual online training class for all employees,
multiple simulated phishing attacks and regular information security awareness
materials.
We 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.
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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, 2020, the
notional amount of these derivative contracts was $2.66 trillion, of which $2.65
trillion was composed of foreign exchange forward, swap and spot contracts. We
seek to match positions closely with the objective of mitigating related
currency and interest rate risk. All foreign exchange contracts are valued daily
at current market rates.
Governance
Our assumption of market risk in our trading activities is an integral part of
our corporate risk appetite. Our Board reviews and oversees our management of
market risk, including the approval of key market risk policies and the receipt
and review of regular market risk reporting, as well as periodic updates on
selected market risk topics.
The previously described TMRC (refer to "Risk Committees") oversees all market
risk-taking activities across our business associated with trading. The TMRC,
which reports to MRAC, is composed of members of ERM, our global markets
business and our Global Treasury group, as well as our senior executives who
manage our trading businesses and other members of management who possess
specialized knowledge and expertise. The TMRC meets regularly to monitor the
management of our trading market risk activities.
Our business units identify, actively manage and are responsible for the market
risks inherent in their businesses. A dedicated market risk management group
within ERM, and other groups within ERM, work with those business units to
assist them in the identification, assessment, monitoring, management and
control of market risk, and assist business unit managers with their market risk
management and measurement activities. ERM provides an additional line of
oversight, support and coordination designed to promote the consistent
identification, measurement and management of market risk across business
units, separate from those business units' discrete activities.
The ERM market risk management group is responsible for the management of
corporate-wide market risk, the monitoring of key market risks and the
development and maintenance of market risk management policies, guidelines and
standards aligned with our corporate risk appetite. This group also establishes
and approves market risk tolerance limits and trading authorities based on, but
not limited to, measures of notional amounts, sensitivity, VaR and stress. Such
limits and authorities are specified in our trading and market risk guidelines
which govern our management of trading market risk.
Corporate Audit separately assesses the design and operating effectiveness of
the market risk controls within our business units and ERM. Other related
responsibilities of Corporate Audit include the periodic review of ERM and
business unit compliance with market risk policies, guidelines and corporate
standards, as well as relevant regulatory requirements. We are subject to
regular monitoring, reviews and supervisory exams of our market risk function by
the Federal Reserve . In addition, we are regulated by, 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:
•A trading market risk management process led by ERM, separate from the business
units' discrete activities;
•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
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with trading activities against market risk limits;
•A defined limit structure and escalation process in the event of a market risk
limit excess;
•Use of VaR models to measure the one-day market risk exposure of trading
positions;
•Use of VaR as a ten-day-based regulatory capital measure of the market risk
exposure of trading positions;
•Use of non-VaR-based limits and other controls;
•Use of stressed-VaR models, stress-testing analysis and scenario analysis to
support the trading market risk measurement and management process by assessing
how portfolios and global business lines perform under extreme market
conditions;
•Use of back-testing as a diagnostic tool to assess the accuracy of VaR models
and other risk management techniques; and
•A new product approval process that requires market risk teams to assess
trading-related market risks and apply risk tolerance limits to proposed new
products and business activities.
We use our CAP to assess our overall capital and liquidity in relation to our
risk profile and provide a comprehensive strategy for maintaining appropriate
capital and liquidity levels. With respect to market risk associated with
trading activities, our risk management and our calculations of regulatory
capital are based primarily on our internal VaR models and stress testing
analysis. As discussed in detail under "Value-at-Risk" below, VaR is measured
daily by ERM.
The TMRC oversees our market risk exposure in relation to limits established
within our risk appetite framework. These limits define threshold levels for
VaR- and stressed VaR-based measures and are applicable to all trading positions
subject to regulatory capital requirements. These limits are designed to prevent
any undue concentration of market risk exposure, in light of the primarily
non-proprietary nature of our trading activities. The risk appetite framework
and associated limits are reviewed and approved by the Board's RC.
Covered Positions
Our trading positions are subject to regulatory market risk capital requirements
if they meet the regulatory definition of a "covered position." A covered
position is generally defined by U.S. banking regulators as an on- or
off-balance sheet position associated with the organization's trading activities
that is free of any restrictions on its tradability, but does not include
intangible assets, certain credit derivatives recognized as guarantees and
certain equity positions not publicly 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 trading and market risk guidelines,
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 trading and market risk guidelines. 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.
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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.
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
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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.
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.
Stress Testing
We have a corporate-wide stress testing program in place that incorporates an
array of techniques to measure the potential loss we could suffer in a
hypothetical scenario of adverse economic and financial conditions. We also
monitor concentrations of risk such as concentration by branch, risk component,
and currency pairs. We conduct stress testing on a daily basis based on selected
historical stress events that are relevant to our positions in order to estimate
the potential impact to our current portfolio should similar market conditions
recur, and we also perform stress testing
as part of the Federal Reserve's CCAR process. Stress testing is conducted,
analyzed and reported at the corporate, trading desk, division and risk-factor
level (for example, exchange risk, interest rate risk and volatility risk).
Stress testing results and limits are actively monitored on a daily basis by ERM
and reported to the TMRC. Limit breaches are addressed by ERM risk managers in
conjunction with the business units, escalated as appropriate, and reviewed by
the TMRC if material. In addition, we have established several action triggers
that prompt immediate review by management and the implementation of a
remediation plan.
We perform scenario analysis daily based on selected historical stress events
that are relevant to our positions in order to estimate the potential impact to
our current portfolio should similar market conditions recur. Relevant scenarios
are chosen from an inventory of historical financial stresses and applied to our
current portfolio. These historical event scenarios involve spot foreign
exchange, credit, equity, unforeseen geo-political events and natural disasters,
and government and central bank intervention scenarios. Examples of the specific
historical scenarios we incorporate in our stress testing program may include
the Asian financial crisis of 1997, the September 11, 2001 terrorist attacks in
the U.S. and the 2008 financial crisis. We continue to update our inventory of
historical stress scenarios as new stress conditions emerge in the financial
markets.
As each of the historical stress events is associated with a different time
horizon, we normalize results by scaling down the longer horizon events to a
ten-day horizon and keeping the shorter horizon events (i.e., events that are
shorter than ten days) at their original terms. We also conduct sensitivity
analysis daily to calculate the impact of a large predefined shock in a specific
risk factor or a group of risk factors on our current portfolio. These
predefined shocks include parallel and non-parallel yield curve shifts and
foreign exchange spot and volatility surface shifts. In a parallel shift
scenario, we apply a constant factor shift across all yield curve tenors. In a
non-parallel shift scenario, we apply different shock levels to different tenors
of a yield curve, rather than shifting the entire curve by a constant amount.
Non-parallel shifts include steepening, flattening and butterflies.
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Validation and Back-Testing
We perform frequent back-testing to assess the accuracy of our VaR-based model
in estimating loss at the stated confidence level. This back-testing involves
the comparison of estimated VaR model outputs to daily, actual profit-and-loss
(P&L) outcomes observed from daily market movements. We back-test our VaR model
using "clean" P&L, which excludes non-trading revenue such as fees, commissions
and NII, as well as estimated revenue from intra-day trading.
Our VaR definition of trading losses excludes items that are not specific to the
price movement of the trading assets and liabilities themselves, such as fees,
commissions, changes to reserves and gains or losses from intra-day activity.
We experienced three back-testing exceptions in 2020 and two back-testing
exceptions in 2019. At a 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 2020 back-testing exceptions were all noted
during the March 2020 market turmoil where some of the largest risk factor
shifts since the 2007/2008 financial crisis were observed.
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, 2020
and 2019, 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, 2020 Year Ended December 31, 2019
(In thousands) Year Ended Average Maximum Minimum Year Ended Average Maximum Minimum
Global Markets $ 9,321 $ 12,430 $ 33,991 $ 5,220 $ 9,954 $ 10,372 $ 26,419 $ 4,201
Global Treasury 4,015 2,899 8,874 112 987 726 3,988 123
Diversification (4,068) (2,253) (9,062) (121) (1,082) (757) (6,046) (73)
Total VaR $ 9,268 $ 13,076 $ 33,803 $ 5,211 $ 9,859 $ 10,341 $ 24,361 $ 4,251
TABLE 35: TEN-DAY STRESSED VALUE-AT-RISK ASSOCIATED WITH TRADING ACTIVITIES FOR COVERED POSITIONS
Year Ended December 31, 2020 Year Ended December 31, 2019
(In thousands) Year Ended Average Maximum Minimum Year Ended Average Maximum Minimum
Global Markets $ 35,999 $ 35,031 $ 84,755 $ 15,399 $ 48,089 $ 32,339 $ 55,751 $ 15,052
Global Treasury 8,555 7,895 23,533 587 5,898 4,671 10,840 842
Diversification (1,106) (6,330) (23,570) 1,620 (8,289) (4,857) (8,426) (599)
Total Stressed VaR $ 43,448 $ 36,596 $ 84,718 $ 17,606 $ 45,698 $ 32,153 $ 58,165 $ 15,295
The average of our stressed VaR-based measure was approximately $37 million for
the year ended December 31, 2020, compared to an average of approximately $32
million for the year ended December 31, 2019.
The stressed VaR-based measure as of December 31, 2020 was relatively unchanged
compared to December 31, 2019. Our average stressed VaR-based measure increased
as of December 31, 2020 compared to December 31, 2019, primarily due to larger
FX and interest rate 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
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
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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, 2020 and 2019, 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, 2020(2) As of December 31, 2019
Foreign
Foreign Exchange Interest Rate Exchange Interest
(In thousands) Risk Risk Volatility Risk Risk Rate Risk Volatility Risk
By component:
Global Markets $ 2,977 $ 8,880 $ 179 $ 5,447 $ 6,266 $ 126
Global Treasury 33 4,257 - 24 966 -
Diversification (42) (2,246) - (23) (995) -
Total VaR $ 2,968 $ 10,891 $ 179 $ 5,448 $ 6,237 $ 126
TABLE 37: TEN-DAY STRESSED VaR ASSOCIATED WITH TRADING ACTIVITIES BY RISK FACTOR(1)
As of December 31,
As of December 31, 2020(2) 2019
Foreign
Foreign Exchange Interest Rate Exchange Interest Rate
(In thousands) Risk Risk Volatility Risk Risk Risk Volatility Risk
By component:
Global Markets $ 5,102 $ 39,615 $ 265 $ 8,427 $ 61,792 $ 266
Global Treasury 83 8,465 - 59 6,258 -
Diversification (51) (8,102) - (61) (8,681) -
Total Stressed VaR $ 5,134 $ 39,978 $ 265 $ 8,425 $ 59,369 $ 266
(1) For purposes of risk attribution by component, foreign exchange refers only
to the risk from market movements in period-end rates. Forwards, futures,
options and swaps with maturities greater than period-end have embedded interest
rate risk that is captured by the measures used for interest rate risk.
Accordingly, the interest rate risk embedded in these foreign exchange
instruments is included in the interest rate risk component.
Asset and Liability Management Activities
The primary objective of asset and liability management is to provide
sustainable NII under varying economic conditions, while protecting the economic
value of the assets and liabilities carried 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, 2020 and December 31, 2019. Our December 31, 2020
baseline forecast assumes no changes by the Federal Reserve over the next 12
months.
TABLE 38: KEY INTEREST RATES FOR BASELINE FORECASTS
December 31, 2020 December 31, 2019
Fed Funds Target 10-Year Treasury Fed Funds Target 10-Year Treasury
Spot rates 0.25 % 0.93 % 1.75 % 1.92 %
12-month forward rates 0.25 1.12 1.50 1.95
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
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assumptions change, our modeling approach in both the December 31, 2020 and
December 31, 2019 reporting periods was to keep our balance sheet consistent
with our baseline outlook in both higher and lower rate scenarios. Beginning
with the December 31, 2020 reporting period, we have enhanced our NII
sensitivity methodology so that the full impact of the shock is realized for all
currencies even if the result is negative interest rates. Prior to the December
31, 2020 reporting period, our results in lower rate scenarios were impacted by
an assumed floor at zero for certain currencies including U.S. dollar. Given the
higher level of market interest rates during the December 31, 2019 reporting
period, our prior year's reported NII sensitivity results would not materially
change using the new flooring methodology.
TABLE 39: NET INTEREST INCOME SENSITIVITY
December 31, 2020 December 31, 2019
All Other All Other
(In millions) U.S. Dollar Currencies Total U.S. Dollar Currencies Total
Rate change: Benefit (Exposure) Benefit (Exposure)
Parallel shifts:
+100 bps shock $ 410 $ 172 $ 582 $ 67 $ 175 $ 242
-100 bps shock 591 196 787 (214) 81 (133)
Steeper yield curve:
'+100 bps shift in
long-end rates(1) 135 3 138 176 6 182
'-100 bps shift in
short-end rates(1) 743 199 942 (16) 86 70
Flatter yield curve:
'+100 bps shift in
short-end rates(1) 282 168 450 (97) 170 73
'-100 bps shift in
long-end rates(1) (141) (3) (144) (184) (6) (190)
(1) The short end is 0-3 months. The long end is 5 years and above. Interim term points are interpolated.
As of December 31, 2020, NII is expected to benefit from both parallel increases and decreases in interest rates. Compared to December 31, 2019, our NII is more sensitive to parallel rate increases primarily driven by higher levels of deposits and assumptions for lower deposit betas. Our positioning to parallel rate decreases has shifted to benefit NII due to passing through negative rates on higher deposit balances with higher betas.U.S. dollar NII as of December 31, 2020 is positioned to benefit from both parallel increases and decreases in interest rates. Compared to December 31, 2019, ourU.S. dollar NII benefit to higher rates has increased primarily due to higher levels of deposits and assumptions for lower deposit betas. Compared to December 31, 2019, ourU.S. dollar NII sensitivity to lower rates changed from NII exposure to a benefit as a result of passing through negative rates on higher deposit balances with higher betas. NII is 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, 2019, our non-U.S. benefit from higher rates is largely unchanged while the benefit from lower rates has increased. The increased benefit from lower rates is mainly driven by passing through negative rates on higher deposit balances with higher betas. 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) 2020 2019 Rate change: Benefit (Exposure) +200 bps shock $ (1,603) $ (1,966) -200 bps shock 5,538 1,292 As of December 31, 2020, EVE sensitivity remains exposed to upward shifts in interest rates. Compared to December 31, 2019, the change in the up 200 bps instantaneous shock scenario was primarily driven by the benefit from increased liability duration from deposit modeling updates and hedging activity. Compared to December 31, 2019, the change in the down 200 bps scenario was primarily driven by decreased liability duration from higher deposit betas, combined with a full realization of the shock. State Street Corporation
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
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Both NII sensitivity and EVE sensitivity are routinely monitored as market
conditions change. For additional information about our Asset and Liability
Management Activities, refer to Management's Discussion and Analysis of
Financial Condition and Results of Operations, "Risk Management".
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.
The MRM Framework, highlighted above, also provides insight and guidance into
addressing key model risks that arise. In 2020, MRM required enhanced
communication, prioritization of reviews due to model changes, greater
documentation related to overlays, and enhanced on-going monitoring to mitigate
the increased model risk brought on by volatility due to the COVID-19 pandemic.
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. All regulatory capital calculation models, including any artificial
intelligence and machine learning models, must comply with the model risk
governance framework and corresponding policies. 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
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
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 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.
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Capital Adequacy Process (CAP)
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 for State Street Bank to
be "well-capitalized" under the PCA guidelines established by the FDIC . Our
capital management activities are conducted as part of our corporate-wide CAP
and associated Capital Policy and Guidelines.
We consider capital adequacy to be a key element of our financial well-being,
which affects our ability to attract and maintain client relationships; operate
effectively in the global capital markets; and satisfy regulatory, security
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. In addition, we maintain an inventory of
capital contingency actions designed to conserve or generate capital to support
the unique risks in our business model, our client and investor demands and
regulatory requirements.
Stress Testing
We administer a robust business-wide stress-testing program that executes 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.
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. Over the past few years, stress scenarios have included a deep recession
in the U.S. , including impacts from the COVID-19 pandemic, 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.
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 process provides us important insights
for capital planning, risk management and strategic decision-making.
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONSGovernance
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 GlobalTreasury 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. Global Systemically Important Bank We have been identified by the Financial Stability Board and the Basel Committee on Banking Supervision as a G-SIB. 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 currentBasel 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 theU.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 byU.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 enacted in 2010, and the Stress Capital Buffer (SCB) rule enacted in 2020, we and State Street Bank, as advanced approaches banking organizations, are subject to a "capital floor," also referred to as the Collins Amendment, in the assessment of our regulatory capital adequacy, including the capital conservation buffer (CCB) and the SCB, for the advanced approach and standardized approach, respectively, and a countercyclical capital buffer. The countercyclical buffer is currently set to zero by theU.S. federal banking agencies. In addition, we are subject to a G-SIB surcharge. 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 SCB replaced, under the standardized approach, the capital conservation buffer with a buffer calculated as the difference between the institution's starting and lowest projected CET1 ratio under the CCAR severely adverse scenario plus planned common stock dividend payments (as a percentage of RWA) from the fourth through seventh quarter of the CCAR planning horizon. The SCB requirement, which became effective October 1, 2020, can be no less than 2.5% of RWA. Breaching the SCB or other regulatory buffer or surcharge will limit a banking organization's ability to make capital distributions and discretionary bonus payments to executive officers. The countercyclical capital buffer is currently set at zero byU.S. banking regulators.State Street Corporation
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
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.
TABLE 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 Approach December 31, Approaches December Approach December 31, Approaches December Approach December 31, Approaches December Approach December 31,
(Dollars in millions) 31, 2020 2020 31, 2019 2019 31, 2020 2020 31, 2019 2019
Common shareholders' equity:
Common stock and related surplus $ 10,709 $ 10,709 $ 10,636 $ 10,636 $ 12,893 $ 12,893 $ 12,893 $ 12,893
Retained earnings 23,442 23,442 21,918 21,918 12,939 12,939 13,218 13,218
Accumulated other comprehensive income (loss) 187 187 (870) (870) 371 371 (654) (654)
Treasury stock, at cost (10,609) (10,609) (10,209) (10,209) - - - -
Total 23,729 23,729 21,475 21,475 26,203 26,203 25,457 25,457
Regulatory capital adjustments: Goodwill and other intangible assets, net of associated deferred tax liabilities
(9,019) (9,019) (9,112) (9,112) (8,745) (8,745) (8,839) (8,839)
Other adjustments(1) (333) (333) (150) (150) (152) (152) (1) (1)
Common equity tier 1 capital 14,377 14,377 12,213 12,213 17,306 17,306 16,617 16,617
Preferred stock 2,471 2,471 2,962 2,962 - - - -
Tier 1 capital 16,848 16,848 15,175 15,175 17,306 17,306 16,617 16,617
Qualifying subordinated long-term debt 961 961 1,095 1,095 966 966 1,099 1,099
Allowance for credit losses 1 148 5 90 10 148 3 90
Total capital $ 17,810 $ 17,957 $ 16,275 $ 16,360 $ 18,282 $ 18,420 $ 17,719 $ 17,806
Risk-weighted assets:
Credit risk(2) $ 63,367 $ 114,892 $ 54,763 $ 102,367 $ 58,960 $ 110,797 $ 51,610 $ 98,979
Operational risk(3) 44,150 NA 47,963 NA 43,663 NA 44,138 NA
Market risk 2,188 2,188 1,638 1,638 2,188 2,188 1,638 1,638
Total risk-weighted assets $ 109,705 $ 117,080 $ 104,364 $ 104,005 $ 104,811 $ 112,985 $ 97,386 $ 100,617
Adjusted quarterly average assets $ 263,490 $ 263,490 $ 219,624 $ 219,624 $ 260,489 $ 260,489 $ 216,397 $ 216,397
2020 Minimum 2019 Minimum
Capital Ratios: Requirements(4) Requirements(5)
Common equity tier 1
capital 8.0 % 8.5 % 13.1 % 12.3 % 11.7 % 11.7 % 16.5 % 15.3 % 17.1 % 16.5 %
Tier 1 capital 9.5 10.0 15.4 14.4 14.5 14.6 16.5 15.3 17.1 16.5
Total capital 11.5 12.0 16.2 15.3 15.6 15.7 17.4 16.3 18.2 17.7
(1) 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.
(2) 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.
(3) Under the current advanced approaches rules and regulatory guidance
concerning operational risk models, RWA attributable to operational risk can
vary substantially from period-to-period, without direct correlation to the
effects of a particular loss event on our results of operations and financial
condition and impacting dates and periods that may differ from the dates and
periods as of and during which the loss event is reflected in our financial
statements, with the timing and categorization dependent on the processes for
model updates and, if applicable, model revalidation and regulatory review and
related supervisory processes. An individual loss event can have a significant
effect on the output of our operational RWA under the advanced approaches
depending on the severity of the loss event and its categorization among the
seven Basel -defined UOMs.
(4) Minimum requirements include a capital conservation buffer of 2.5% and a
stress capital buffer of 2.5% for advanced and standardized, respectively, a
G-SIB surcharge of 1.0% and a countercyclical buffer of 0%.
(5) Minimum requirements include a capital conservation buffer of 2.5%, a G-SIB
surcharge of 1.5% and a countercyclical buffer of 0%.
NA Not applicable
Our CET1 capital increased $2.16 billion as of December 31, 2020 compared to
December 31, 2019, primarily driven by net income and accumulated other
comprehensive income in the year ended December 31, 2020, partially offset by
capital distributions from common and preferred stock dividends and first
quarter 2020 common stock repurchases.
Our Tier 1 capital increased $1.67 billion as of December 31, 2020 compared to
December 31, 2019 under both the advanced approaches and standardized approach
due to increase in CET1 capital, partially offset by the redemption of all
outstanding Series C preferred stock. Total capital increased under the advanced
approaches and standardized approach by $1.54 billion and $1.60 billion,
respectively, due to an increase in our Tier 1 capital, partially offset by a
decrease in Tier 2 capital.
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONSThe table below presents a roll-forward of CET1 capital, Tier 1 capital and total capital for the years ended December 31, 2020 and 2019. TABLE 42: CAPITAL ROLL-FORWARD
Basel III Advanced Basel III Basel III Advanced Basel III
Approaches Standardized Approach Approaches Standardized Approach
(In millions) December 31, 2020 December, 31, 2020 December 31, 2019 December 31, 2019
Common equity tier 1 capital:
Common equity tier 1 capital balance,
beginning of period $ 12,213 $ 12,213 $ 11,580 $ 11,580
Net income 2,420 2,420 2,242 2,242
Changes in treasury stock, at cost (400) (400) (1,494) (1,494)
Dividends declared (886) (886) (939) (939)
Goodwill and other intangible assets, net
of associated deferred tax liabilities 93 93 238 238
Effect of certain items in accumulated
other comprehensive income (loss) 1,057 1,057 462 462
Other adjustments (120) (120) 124 124
Changes in common equity tier 1 capital 2,164 2,164 633 633
Common equity tier 1 capital balance, end
of period 14,377 14,377 12,213 12,213
Additional tier 1 capital:
Tier 1 capital balance, beginning of period 15,175 15,175 15,270 15,270
Change in common equity tier 1 capital 2,164 2,164 633 633
Net issuance of preferred stock (491) (491) (728) (728)
Changes in tier 1 capital 1,673 1,673 (95) (95)
Tier 1 capital balance, end of period 16,848 16,848 15,175 15,175
Tier 2 capital:
Tier 2 capital balance, beginning of period 1,100 1,185 792 861
Net issuance and changes in long-term debt
qualifying as tier 2 (134) (134) 317 317
Changes in allowance for credit losses(1) (4) 58 (9) 7
Changes in tier 2 capital (138) (76) 308 324
Tier 2 capital balance, end of period 962 1,109 1,100 1,185
Total capital:
Total capital balance, beginning of period 16,275 16,360 16,062 16,131
Changes in tier 1 capital 1,673 1,673 (95) (95)
Changes in tier 2 capital (138) (76) 308 324Total capital balance, end of period $ 17,810 $
17,957 $ 16,275 $ 16,360
(1) We adopted ASU 2016-13, Financial Instruments - Credit Losses (ASC 326):
Measurement of Credit Losses on Financial Instruments, on January 1, 2020.
Please refer to Note 1 to the consolidated financial statements in this Form
10-K for additional information.
The following table presents a roll-forward of the Basel III advanced approaches
and standardized approach RWA for the years ended December 31, 2020 and 2019.
TABLE 43: ADVANCED & STANDARDIZED APPROACHES RISK-WEIGHTED ASSETS ROLL-FORWARD
Basel III Basel III Basel III Basel III
Advanced Advanced Standardized Standardized
Approaches Approaches Approach December Approach December
(In millions) December 31, 2020 December 31, 2019 31, 2020 31, 2019
Total risk-weighted assets, beginning of
period $ 104,364 $ 95,315 $ 104,005 $ 98,820
Changes in credit risk-weighted assets:
Net increase (decrease) in investment
securities-wholesale 3,008 3,470 1,762 3,882
Net increase (decrease) in loans 2,973 2,586 3,638 809
Net increase (decrease) in securitization
exposures 578 (140) 351 (140)
Net increase (decrease) in repo-style
transaction exposures 1,763 (45) 3,895 365
Net increase (decrease) in
over-the-counter derivatives exposures(1) 780 26 457 (1,124)
Net increase (decrease) in all other(2)(3) (498) 1,128 2,422 1,272
Net increase (decrease) in credit
risk-weighted assets 8,604 7,025 12,525 5,064
Net increase (decrease) in market
risk-weighted assets 550 121 550 121
Net increase (decrease) in operational
risk-weighted assets (3,813) 1,903 N/A N/A
Total risk-weighted assets, end of period $ 109,705 $ 104,364 $ 117,080 $ 104,005
(1) Under the advanced approaches, includes CVA RWA.
(2)Includes assets not in a definable category, non-material portfolio, cleared
transactions, other wholesale, cash and due from banks, interest-bearing
deposits with banks and equity exposures.
(3) December 2019 includes a 6% credit risk supervisory charge.
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
As of December 31, 2020, total advanced approaches RWA increased $5.34 billion
compared to December 31, 2019, primarily due to an increase in credit risk RWA,
partially offset by a decrease in operational RWA. The increase in credit risk
RWA was primarily driven by an increase in investment securities - wholesale
RWA, loans RWA, and repo-style transactions RWA.
As of December 31, 2020, total standardized approach RWA increased $13.08
billion compared to December 31, 2019, primarily due to higher credit risk RWA.
The increase in credit risk RWA was primarily driven by an increase in
repo-style transactions RWA, loans RWA, and all other RWA.
The regulatory capital ratios as of December 31, 2020, 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, 2020, 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
We are subject to a minimum Tier 1 leverage ratio and a supplementary leverage
ratio. The Tier 1 leverage ratio is based on Tier 1 capital and adjusted
quarterly average on-balance sheet assets. The Tier 1 leverage ratio differs
from the SLR primarily in that the denominator of the Tier 1 leverage ratio is a
quarterly average of on-balance sheet assets, while the SLR additionally
includes off-balance sheet exposures. We must maintain a minimum Tier 1 leverage
ratio of 4%.
We are also subject to a minimum SLR of 3%, and as a U.S. G-SIB, we must
maintain a 2% SLR buffer in order to avoid any limitations on distributions to
shareholders and discretionary bonus payments to certain executives. If we do
not maintain this buffer, limitations on these distributions and discretionary
bonus payments would be increasingly stringent based upon the extent of the
shortfall.
TABLE 44: TIER 1 AND SUPPLEMENTARY LEVERAGE RATIOS
(Dollars in millions) December 31, 2020 December 31, 2019
State Street:
Tier 1 capital $ 16,848 $ 15,175
Average assets 277,055 228,886
Less: adjustments for deductions from tier 1
capital and other (13,565) (9,262)
Adjusted average assets for Tier 1 leverage
ratio 263,490 219,624
Derivatives and repo-style transactions and
off-balance sheet exposures 34,379 28,238
Adjustments for deductions of qualifying central
bank deposits (90,322) -
Total assets for SLR $ 207,547 $ 247,862
Tier 1 leverage ratio(1) 6.4 % 6.9 %
Supplementary leverage ratio 8.1 6.1
State Street Bank(2):
Tier 1 capital $ 17,306 $ 16,617
Average assets 273,599 225,234
Less: adjustments for deductions from tier 1
capital and other (13,110) (8,837)
Adjusted average assets for Tier 1 leverage
ratio 260,489 216,397
Off-balance sheet exposures 38,591 28,266
Adjustments for deductions of qualifying central
bank deposits (80,935) -
Total assets for SLR $ 218,145 $ 244,663
Tier 1 leverage ratio (1) 6.6 % 7.7 %
Supplementary leverage ratio 7.9 6.8
(1) Tier 1 leverage ratios were calculated in conformity with the Basel III
rule.
(2) 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, State Street Bank is subject to a
well-capitalized Tier 1 leverage ratio requirement of 5.0%.
Total Loss-Absorbing Capacity (TLAC)
In 2016, the Federal Reserve released its final rule on TLAC, LTD and clean
holding company requirements for U.S. domiciled G-SIBs, such as us, that is
intended to improve the resiliency and resolvability of certain U.S. banking
organizations through enhanced prudential standards. Among other things, the
TLAC final rule requires us to comply with minimum requirements for external
TLAC and external LTD effective January 1, 2019. Specifically, we must hold:
Amount equal to:
Greater of:
•21.5% of total RWA (18.0% minimum plus 2.5% plus a G-SIB
surcharge calculated for these purposes under Method 1 of
Combined eligible tier 1 regulatory 1.0% plus any applicable counter- cyclical buffer, which is
capital and LTD currently 0%); and
•9.5% of total leverage exposure (7.5% minimum plus the SLR
buffer of 2.0%), as defined by the SLR final rule.
Greater of:
•7.0% of RWA (6.0% minimum plus a G-SIB surcharge
Qualifying external LTD calculated for these purposes under method 2 of 1.0%); and
•4.5% of total leverage exposure, as defined by the SLR
final rule.
As of April 1, 2020, the TLAC and LTD requirements calibrated to the SLR
denominator reflect the deduction of certain central bank balances as prescribed
by the regulatory relief implemented under the EGRRCPA.
The following table presents external LTD and external TLAC as of December 31,
2020.
TABLE 45: TOTAL LOSS-ABSORBING CAPACITY
As of December 31, 2020
(Dollars in millions) Actual Requirement
Total loss-absorbing capacity (eligible
Tier 1 regulatory capacity and long term
debt):
Risk-weighted assets $ 29,045 24.8 % $ 25,172 21.5 %
Supplemental leverage ratio 29,045 14.0 19,717 9.5
Long term debt:
Risk-weighted assets 12,197 10.4 8,196 7.0
Supplemental leverage ratio 12,197 5.9 9,340 4.5
Additional information about TLAC is provided under "Total Loss-Absorbing Capacity" in "Supervision and Regulation" in Business in this Form 10-K.
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Regulatory Developments
In April 2018, the Federal Reserve 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. At this point in time,
it is unclear whether this proposal will be implemented as proposed.
In November 2019, the Federal Reserve and other U.S. federal banking agencies
issued a final rule to implement the Standardized Approach for Counterparty
Credit Risk (SA-CCR) as a replacement of the Current Exposure Method for
calculating exposure-at-default of derivatives exposures. Mandatory compliance
with the final rule is required by January 1, 2022.
On March 4, 2020, U.S. federal banking agencies issued the SCB final rule that
replaces, under the standardized approach, the capital conservation buffer
(2.5%) with a SCB calculated as the difference between an institution's starting
and lowest projected CET1 ratio under the CCAR severely adverse scenario plus
planned common stock dividend payments (as a percentage of RWA) from the fourth
through seventh quarter of the CCAR planning horizon. The SCB requirement, which
became effective October 1, 2020, can be no less than 2.5% of RWA.
The Federal Reserve and other U.S. federal banking agencies issued an interim
final rule effective in March 2020 and later finalized on a permanent basis on
August 26, 2020, which revised the definition of eligible retained income for
all U.S. banking organizations. The revised definition of eligible retained
income makes any automatic limitations on capital distributions, where a banking
organization's regulatory ratios were to decline below the respective minimum
requirements, take effect on a more gradual basis.
Following the launch of the MMLF program, which we participate in, the Federal
Reserve issued an interim final rule on March 19, 2020 (followed by a final rule
on September 29, 2020), allowing Bank Holding Companies (BHCs) to exclude assets
purchased with the MMLF program from their RWA, total leverage exposure and
average total consolidated assets. For the quarter ended December 31, 2020, we
deducted $4.2 billion of MMLF program average HTM securities.
On March 27, 2020, the BCBS announced the deferral of the implementation of the
revisions to the Basel III framework to January 1, 2023. As of now, the U.S.
federal banking agencies have not formally proposed the implementation of the
BCBS revisions.
Effective April 1, 2020, the Federal Reserve and other U.S. federal banking
agencies adopted a final rule as part of EGRRCPA that establishes a deduction
for qualifying 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. For the quarter ended December 31, 2020, we deducted
$76.7 billion of average balances held on deposit at central banks from the
denominator used in the calculation of our SLR, based on this custodial banking
deduction.
In addition to the regulatory relief granted to custodial banks under the
EGRRCPA, an SLR interim final rule released on April 1, 2020 allows all BHCs to
deduct their deposits at Federal Reserve Banks and their investments in U.S.
Treasuries from their total leverage exposure on a temporary basis, from the
second quarter of 2020 through the first quarter of 2021. The temporary
deduction of our investment in U.S. Treasuries is incremental to the existing
central bank placement deduction granted to custodian banks under EGRRCPA. For
the quarter ended December 31, 2020, we deducted $13.6 billion invested in U.S.
Treasuries from our total leverage exposure.
On May 15, 2020, the U.S. federal banking agencies released an interim final
rule that also permits insured depository institution subsidiaries of BHCs to
temporarily exclude deposits at Federal Reserve Banks and investments in U.S.
Treasuries from their total leverage exposure, subject to certain conditions.
State Street Bank has elected not to apply such exclusions as of December 31,
2020.
On June 25, 2020, we were notified by the Federal Reserve of the results from
the 2020 DFAST stress test, including our preliminary SCB of 2.5%. Additionally,
included in this notification and in light of the considerable economic
uncertainty created by the COVID-19 pandemic, all participating CCAR banking
organizations were required to resubmit their capital plans by November 2, 2020,
based on updated scenarios provided by the Federal Reserve on September 17,
2020.
In line with the decision to administer a new stress test, the Federal Reserve
decided to limit the ability of all CCAR banking organizations to make capital
distributions in the third and fourth quarters of 2020, although banking
organizations were permitted to pay common stock dividends at previous levels
provided such distributions did not exceed an amount determined by a formula
based on the banking organization's recent income. As a result, CCAR banking
organizations, including us, were not permitted to return capital to
shareholders in the form of common share repurchases during the third quarter
and fourth quarter of 2020.
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
On August 10, 2020, the Federal Reserve confirmed that our SCB is 2.5% for the
period starting on October 1, 2020 and ending on September 30, 2021.
On October 20, 2020, the Federal Reserve and other U.S. federal banking agencies
issued a final rule that will require us and State Street Bank to make certain
deductions from regulatory capital for investments in certain unsecured debt
instruments, including eligible LTD under the TLAC rule, issued by the Parent
Company and other U.S. and foreign G-SIBs. The final rule will become effective
on April 1, 2021.
On December 18, 2020, following the release of a second round of stress test
results for 2020, the Federal Reserve decided to modify the applicable
restrictions on capital distributions for the first quarter of 2021. Provided
that we do not increase the amount of our common stock dividends to be larger
than the level paid in the second quarter of 2020, common stock dividends and
share repurchases in the first quarter of 2021 will be limited to the average of
our net income for the four preceding quarters plus a number of shares equal to
the share issuances in the quarter related to expensed employee compensation. We
also may redeem and make scheduled payments on additional Tier 1 and Tier 2
capital instruments in the first quarter of 2021. As of now, our capital
distributions in the first quarter of 2021 and beyond will be governed by our
minimum capital requirements inclusive of the SCB that will not be recalibrated
based on the stress test results.
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, 2020:
TABLE 46: PREFERRED STOCK ISSUED AND OUTSTANDING
Carrying
Value as of
Ownership Liquidation December 31,
Amount outstanding Interest Per Liquidation Preference Per Per Annum Dividend Dividend Payment 2020
Preferred Stock(2): Issuance Date Depositary Shares Issued (in millions) Depositary Share Preference Per Share Depositary Share Rate Frequency (In millions) Redemption Date(1)
5.90% to but
excluding March 15, Quarterly: March,
Series D February 2014 30,000,000 750 1/4,000th 100,000 25 2024, then a June, September and $ 742 March 15, 2024
floating rate equal December
to the three-month
LIBOR plus 3.108%
5.25% to but
excluding September
15, 2020, then a
floating rate equal Quarterly: March,
Series F(3) May 2015 750,000 750 1/100th 100,000 1,000 to the three-month June, September and 742 September 15, 2020
LIBOR plus 3.597%, December
or 3.81350%
effective December
15, 2020
5.35% to but
excluding March 15, Quarterly: March,
Series G April 2016 20,000,000 500 1/4,000th 100,000 25 2026, then a June, September and 493 March 15, 2026
floating rate equal December
to the three-month
LIBOR plus 3.709%
5.625% to but
excluding December
Series H September 2018 500,000 500 1/100th 100,000 1,000 15, 2023, then a Semi-annually: June 494 December 15, 2023
floating rate equal and December
to the 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.
(3) Series F preferred stock is redeemable on September 15, 2020 and on each
succeeding dividend payment date. We did not elect redemption on September 15,
2020 or December 15, 2020.
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
We redeemed all outstanding Series C non-cumulative perpetual preferred stock on
March 15, 2020 at a redemption price of $500 million ($100,000 per share
equivalent to $25.00 per depositary share) plus accrued and unpaid dividends.
The difference of $9 million between the redemption value and the net carrying
value resulted in an EPS impact of approximately ($0.03) per share in the first
quarter of 2020.
On January 14, 2021, we announced that we will redeem on March 15, 2021 an
aggregate of $500 million, or 5,000 of the 7,500 outstanding shares of our
non-cumulative perpetual preferred stock, Series F, for cash at a redemption
price of $100,000 per share (equivalent to $1,000 per depositary share) plus all
declared and unpaid dividends. A cash dividend of $953.38 per share of Series F
Preferred Stock (or approximately $9.5338 per depositary share) has been
declared for the period from December 15, 2020 up to but not including March 15,
2021 (the "March Dividend"). The March Dividend will be paid separately to the
holders of record of the Series F Preferred Stock as of March 1, 2021 in the
customary manner. Accordingly, there will not be any declared and unpaid
dividends included in the Redemption Price.
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,
2020 2019(Dollars in millions, Dividends Dividends Declared
Dividends Dividends Declared
except per share Declared per per Depositary Declared per per Depositary
amounts) Share Share Total Share Share Total
Preferred Stock:
Series C $ 1,313 $ 0.33 $ 6 $ 5,250 $ 1.32 $ 26
Series D 5,900 1.48 44 5,900 1.48 44
Series E - - - 6,000 1.52 45
Series F 6,223 62.23 47 5,250 52.50 40
Series G 5,352 1.32 27 5,352 1.32 27
Series H 5,625 56.25 28 5,625 56.25 28
Total $ 152 $ 210
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 and the first quarter of
2020 under the 2019 Program. On March 16, 2020, we, along with the other U.S.
G-SIBs, suspended common share repurchases and maintained this suspension
through the fourth quarter of 2020 in response to the COVID-19 pandemic. This
suspension was consistent with limitations imposed by the Federal Reserve
beginning in the second quarter of 2020. As a result, we had no repurchases of
our common stock in the second, third or fourth quarters of 2020. In December
2020, the Federal Reserve issued results of 2020 resubmission stress tests and
authorized us to continue to pay common stock dividends at current levels and to
resume repurchasing common shares in the first quarter of 2021. In January 2021,
our Board authorized a common share repurchase program for the purchase of up to
$475 million of our common stock through March 31, 2021.
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
for the period indicated:
TABLE 48: SHARES REPURCHASED
Year Ended December 31, 2020
Shares Acquired Total Acquired
(In millions) Average Cost per Share (In millions)
2019 Program 6.5 $ 77.35 $ 500
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The table below presents the dividends declared on common stock for the periods
indicated:
TABLE 49: COMMON STOCK DIVIDENDS
Years Ended December 31,
2020 2019
Dividends Declared per Total
Dividends Declared Total
Share (In millions) per Share (In millions)
Common Stock $ 2.08 $ 734 $ 1.98 $ 728
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
$440.88 billion and $367.90 billion as of December 31, 2020 and December 31,
2019, 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
$463.27 billion and $385.43 billion as collateral for indemnified securities on
loan as of December 31, 2020 and December 31, 2019, 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 $463.27 billion and
$385.43 billion, referenced above, $54.43 billion and $45.66 billion was
invested in indemnified repurchase agreements as of December 31, 2020 and
December 31, 2019, respectively. We or our agents held $58.09 billion and $48.89
billion as collateral for indemnified investments in repurchase agreements as of
December 31, 2020 and December 31, 2019, 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
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
assumptions, the more significant accounting policies applied by us have been
identified by management as those associated with recurring fair value
measurements, allowance for credit losses, impairment of goodwill and other
intangible assets, and contingencies. These accounting policies require the most
subjective or complex judgments, and underlying estimates and assumptions could
be most subject to revision as new information becomes available. An
understanding of the judgments, estimates and assumptions underlying these
accounting policies is essential in order to understand our reported
consolidated results of operations and financial condition.
The following is a discussion of the above-mentioned significant accounting
estimates. Management has discussed these significant accounting estimates with
the E&A Committee of the Board.
Fair Value Measurements
We carry certain of our financial assets and liabilities at fair value in our
consolidated financial statements on a recurring basis, including trading
account assets 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 evaluate the fair value impact of the
credit risk of our counterparties. We consider 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.
Allowance for Credit Losses
In January 2020, we adopted ASC 326, which replaces the incurred loss
methodology with an expected loss methodology. We maintain an allowance for
credit losses to support our on-balance sheet credit exposures, including
financial assets held at amortized cost. We also maintain an allowance for
unfunded commitments and letters of credit to support our off-balance credit
exposure. The two components together represent the allowance for credit losses.
Determining the appropriateness of the allowance is complex and requires
judgment by management about the effect of matters that are inherently
uncertain. In future periods, factors and forecasts then prevailing may result
in significant changes in the allowance for credit losses in those future
periods. We estimate credit losses over the contractual life of the financial
asset while factoring in prepayment activity where supported by data over a
three year reasonable and supportable forecast period. We utilize a baseline,
upside and downside scenario which are applied based on a probability weighting,
in order to better reflect management's expectation of expected credit losses
given existing market conditions and the changes in the economic environment.
The multiple scenarios are based on a three year horizon (or less depending on
contractual maturity) and then revert linearly over a two year period to a
ten-year historical average thereafter. The contractual term excludes expected
extensions,
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
renewals and modifications, but includes prepayment assumptions where
applicable.
Additional information about our allowance for credit losses is provided in Note
4 to the consolidated financial statements in this Form 10-K.
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 2020, we assessed goodwill for impairment using a qualitative assessment.
Based on our evaluation of the qualitative factors noted above, we determined
that it was more likely than not that the fair value of each of the reporting
units exceeded its respective carrying amount. We determined there was no
goodwill impairment in 2020.
Other intangible assets are supported by the future cash flows that are directly
associated with and expected to arise as a direct result of the use of the
intangible asset, less any costs associated with the
intangible asset's eventual disposition. We evaluate other intangible assets for
impairment at the lowest level 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 2020.
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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