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STATE STREET CORP - 10-K - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

February 21, 2014

GENERAL

State Street Corporation, or the parent company, is a financial holding company headquartered in Boston, Massachusetts. Unless otherwise indicated or unless the context requires otherwise, all references in this Management's Discussion and Analysis to "State Street," "we," "us," "our" or similar terms mean State Street Corporation and its subsidiaries on a consolidated basis. Our principal banking subsidiary is State Street Bank and Trust Company, or State Street Bank. As of December 31, 2013, we had consolidated total assets of $243.29 billion, consolidated total deposits of $182.27 billion, consolidated total shareholders' equity of $20.38 billion and 29,430 employees. With $27.43 trillion of assets under custody and administration and $2.35 trillion of assets under management as of December 31, 2013, we are a leading specialist in meeting the needs of institutional investors worldwide. We have two lines of business: Investment Servicing provides services for mutual funds, collective investment funds and other investment pools, corporate and public retirement plans, insurance companies, foundations and endowments worldwide. Products include custody; product- and participant-level accounting; daily pricing and administration; master trust and master custody; record-keeping; cash management; foreign exchange, brokerage and other trading services; securities finance; deposit and short-term investment facilities; loans and lease financing; investment manager and alternative investment manager operations outsourcing; and performance, risk and compliance analytics to support institutional investors. Investment Management, through State Street Global Advisors, or SSgA, provides a broad array of investment management, investment research and investment advisory services to corporations, public funds and other sophisticated investors. SSgA offers strategies for managing financial assets, including passive and active, such as enhanced indexing, using quantitative and fundamental methods for both U.S. and global equities and fixed-income securities. SSgA also offers exchange-traded funds, or ETFs, such as the SPDR® ETF brand. For financial and other information about our lines of business, refer to "Line of Business Information" included in this Management's Discussion and Analysis and in note 25 to the consolidated financial statements included under Item 8 of 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 included under Item 8 of this Form 10-K. Certain previously reported amounts presented have been reclassified to conform to current-year presentation. We prepare our consolidated financial statements in conformity with accounting principles generally accepted in the U.S., referred to as GAAP. The preparation of financial statements in conformity with 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 estimates and assumptions that are difficult, subjective or complex about matters that are uncertain and may change in subsequent periods are accounting for fair value measurements; other-than-temporary impairment of investment securities; and impairment of goodwill and other intangible assets. 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. An understanding of the judgments, estimates and assumptions underlying these significant accounting policies is essential in order to understand our reported consolidated results of operations and financial condition. Certain financial information provided in this Management's Discussion and Analysis is prepared on both a GAAP, or reported basis, and a non-GAAP, or operating basis, including certain non-GAAP measures used in the calculation of identified regulatory capital ratios. We measure and compare certain financial information on an operating basis, as we believe that this presentation supports meaningful comparisons from period to period and the analysis of comparable financial trends with respect to State Street's normal ongoing business operations. We believe that operating-basis financial information, which reports non-taxable revenue, such as interest revenue associated with tax-exempt investment securities, on a fully taxable-equivalent basis, facilitates an investor's understanding and analysis of State Street's underlying financial performance and trends in addition to financial information prepared and reported in conformity with GAAP. 50



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AND RESULTS OF OPERATIONS (Continued) We also believe that the use of certain non-GAAP measures in the calculation of identified regulatory capital ratios is useful in understanding State Street's capital position and is of interest to investors. Operating-basis financial information should be considered in addition to, not as a substitute for or superior to, financial information prepared in conformity with GAAP. Any non-GAAP, or operating-basis, financial information presented in this Management's Discussion and Analysis is reconciled to its most directly comparable GAAP-basis measure. 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 are based on our current expectations about financial performance, capital, market growth, acquisitions, joint ventures and divestitures, new technologies, services and opportunities and earnings, management's confidence in our strategies and other matters that do not relate strictly to historical facts. These forward-looking statements involve certain risks and uncertainties which could cause actual results to differ materially. We undertake no obligation to revise the forward-looking statements contained in this Management's Discussion and Analysis to reflect events after the time we file this Form 10-K with the SEC. Additional information about forward-looking statements and related risks and uncertainties is provided in "Risk Factors" included under Item 1A of this Form 10-K. OVERVIEW OF FINANCIAL RESULTS Years Ended December 31, 2013 2012



2011

(Dollars in millions, except per share amounts) Total fee revenue $ 7,590$ 7,088$ 7,194 Net interest revenue 2,303 2,538



2,333

Gains (losses) related to investment securities, net (9 ) 23

67 Total revenue 9,884 9,649 9,594 Provision for loan losses 6 (3 ) - Total expenses 7,192 6,886 7,058 Income before income tax expense 2,686 2,766 2,536 Income tax expense(1) 550 705 616 Net income $ 2,136$ 2,061$ 1,920 Adjustments to net income: Dividends on preferred stock (26 ) (29 ) (20 ) Earnings allocated to participating securities (8 ) (13 ) (18 ) Net income available to common shareholders $ 2,102$ 2,019$ 1,882 Earnings per common share: Basic $ 4.71$ 4.25$ 3.82 Diluted 4.62 4.20 3.79 Average common shares outstanding (in thousands): Basic 446,245 474,458



492,598

Diluted 455,155 481,129



496,072

Cash dividends declared per common share $ 1.04$ .96$ .72 Return on average common equity 10.5 % 10.3 % 10.0 % (1) Amount for 2013 included an out-of-period income tax benefit of $71 million to adjust deferred taxes. Additional information about this out-of-period benefit is provided under "Income Tax Expense" in this Management's Discussion and Analysis and in note 23 to the consolidated financial statements included under Item 8 of this Form 10-K. Amounts for 2012 and 2011 reflected the net effects of certain tax matters ($7 million benefit and $55 million expense, respectively) associated with the 2010 Intesa acquisition. Amount for 2011 reflected a discrete income tax benefit of $103 million attributable to costs incurred in terminating former conduit asset structures. The following "Highlights" and "Financial Results" sections provide information related to significant events, as well as highlights of our consolidated financial results for 2013 presented in the table above. More detailed information about our consolidated financial results, including comparisons of our results for 2013 to those for 2012, is provided under "Consolidated Results of Operations," which follows these sections. 51



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Highlights

In March 2013, following the Federal Reserve's review of our 2013 capital plan, with respect to which the Federal Reserve did not object to the capital actions we proposed, our Board of Directors approved a new common stock purchase program authorizing the purchase by us of up to $2.10 billion of our common stock through March 31, 2014. In connection with this and a prior Board-approved program, we undertook the following activities in 2013: • From April 1, 2013 through December 31, 2013, under the above-described



March 2013 program, we purchased approximately 24.7 million shares of our

common stock at an average price of $68.05 per share and an aggregate cost

of $1.68 billion.

• In the first quarter of 2013, in completion of a separate program approved

by the Board in March 2012, we purchased an aggregate of 6.5 million

shares of our common stock at an average price of $54.95 per share and an

aggregate cost of $360 million.

• In 2013, under both programs combined, we purchased approximately 31.2

million shares of our common stock at an average price of $65.30 per share

and an aggregate cost of approximately $2.04 billion.

As of December 31, 2013, approximately $420 million remained available for purchases of our common stock under the March 2013 program. In 2012, under the March 2012 program, we purchased an aggregate of 33.4 million shares of our common stock, at an aggregate cost of $1.44 billion. In February 2013, we declared a quarterly common stock dividend of $0.26 per share. This dividend represented an 8% increase over the quarterly common stock dividend of $0.24 per share declared by us in December 2012. In all of 2013, we declared aggregate quarterly common stock dividends of $1.04 per share, totaling approximately $463 million, compared to declarations of aggregate quarterly common stock dividends of $0.96 per share, totaling approximately $456 million, in 2012. The Federal Reserve is currently conducting a review of 2014 capital plans submitted in January 2014 by us and other large bank holding companies. The levels at which we will be able to declare dividends and purchase shares of our common stock after March 2014 will depend on the Federal Reserve's assessment of our capital plan and our projected performance under the stress scenarios. While we anticipate that the Federal Reserve will not object to the continued return of capital to our shareholders through dividends and/or common stock purchases in 2014, we cannot provide assurance with respect to the Federal Reserve's assessment of our capital plan, or that we will be able to continue to return capital to our shareholders at any specific level. Additional information about our common stock purchase program and our common stock dividends is provided under "Financial Condition - Capital" in this Management's Discussion and Analysis. In addition, information about dividends from our subsidiary banks is provided in "Related Stockholder Matters" included under Item 5, and in note 15 to the consolidated financial statements included under Item 8, of this Form 10-K. InNovember 2013, we issued $1.0 billion of 3.70% senior notes due November 20, 2023. In addition, in May 2013, we issued $1.50 billion of senior and subordinated debt, composed of $500 million of 1.35% senior notes due May 15, 2018 and $1.0 billion of 3.10% subordinated notes due May 15, 2023. Additional information about these debt issuances is provided in note 10 to the consolidated financial statements included under Item 8 of this Form 10-K. In 2013, in connection with our continued implementation of our Business Operations and Information Technology Transformation program, we achieved incremental pre-tax expense savings of approximately $220 million, and as previously reported, we achieved incremental pre-tax expense savings of approximately $112 million in 2012 and $86 million in 2011, in each case compared to our 2010 expenses from operations, all else being equal. These pre-tax expense savings relate only to the Business Operations and Information Technology Transformation program and are based on projected improvement from our total 2010 expenses from operations. Our actual total expenses have increased since 2010, and may in the future increase or decrease, due to other factors. Additional information with respect to the program is provided under "Consolidated Results of Operations - Expenses" in this Management's Discussion and Analysis. In January 2014, we entered into a settlement agreement with the U.K. Financial Conduct Authority as a result of our having charged six clients of our U.K. transition management business amounts in excess of the contractual terms in 2010 and 2011. We agreed to and paid a fine of approximately $38 million in January 2014, which we had accrued as of December 31, 2013. We incurred aggregate pre-tax costs in 2013 in connection with this matter of approximately $69 million, composed of the following: 52



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• Revenue rebates to affected clients of approximately $4 million, recorded

as a reduction of other trading, transition management and brokerage

revenue, a component of brokerage and other trading services revenue;

• Securities processing costs of approximately $27 million, recorded in

securities processing costs (recoveries), a component of other expenses;

and

•The above-described regulatory fine of approximately $38 million, recorded in other expenses. In addition to the above, we recorded approximately $15 million of revenue rebates in 2011 and approximately $17 million of revenue rebates and other costs in 2012 related to this matter. The securities processing costs described above reflected probable and estimable costs as of December 31, 2013 related to an operating loss. We resolved this in February 2014 at an additional cost of approximately $12 million. We have incurred total costs associated with this matter, since it arose in 2010, of approximately $113 million, excluding legal and professional fees. Additional information about this transition management matter is provided under "Legal and Regulatory Matters" in note 11 to the consolidated financial statements included under Item 8 of this Form 10-K. Financial Results Total revenue for 2013 increased 2% compared to 2012, as a combined 10% increase in aggregate servicing fee and management fee revenue and a 5% increase in trading services revenue were partly offset by declines in net interest revenue and securities finance revenue of 9% and 11%, respectively. Servicing fee revenue for 2013 increased 9% compared to 2012, mainly the result of stronger global equity markets, the impact of net new business installed, and the addition of revenue from the Goldman Sachs Administration Services, or GSAS, business, acquired in October 2012. Servicing fees generated outside the U.S. in both 2013 and 2012 were approximately 42% of total servicing fees for those periods. Management fee revenue increased 11% compared to 2012, primarily the result of stronger equity markets and the impact of net new business installed. Management fees generated outside the U.S. in 2013 and 2012 were approximately 36% and 37%, respectively, of total management fees for those periods. Trading services revenue for 2013, composed of revenue generated by foreign exchange trading and brokerage and other trading services, increased 5% compared to 2012. Revenue from foreign exchange trading was up 15%, with estimated indirect foreign exchange revenue up 15% and direct sales and trading foreign exchange revenue up 16%, from the prior year, with both increases mainly the result of higher client volumes, currency volatility and spreads. Brokerage and other trading services revenue declined 5% compared to 2012, primarily reflective of the impact of lower distribution fees associated with the SPDR® Gold ETF, which resulted from lower average gold prices and net outflows from the SPDR® Gold ETF. Securities finance revenue declined 11% for 2013 compared to 2012, generally the result of lower spreads and slightly lower lending volumes. Net interest revenue for 2013 declined 9% compared to 2012, generally the result of lower yields on earning assets related to lower global interest rates, partly offset by lower funding costs. The decline in net interest revenue also reflected the continued impact of the reinvestment of pay-downs on existing investment securities in lower-yielding investment securities. Net interest revenue for 2013 and 2012 included $137 million and $215 million, respectively, of discount accretion related to investment securities added to our consolidated statement of condition in connection with our consolidation of the commercial paper conduits in 2009. Net interest margin, calculated on fully taxable-equivalent net interest revenue, declined 22 basis points to 1.37% in 2013 from 1.59% in 2012. Continued elevated levels of client deposits, amid continued market uncertainty, increased our average interest-earning assets, but negatively affected our net interest margin, as we generally placed a portion of these deposits with U.S. and non-U.S. central banks and earned the relatively low interest rates paid by the central banks on these balances. Discount accretion, fully taxable-equivalent net interest revenue and net interest margin are discussed in more detail under "Consolidated Results of Operations - Net Interest Revenue" in this Management's Discussion and Analysis. Total expenses for 2013 increased 4% compared to 2012. Total expenses for 2013 reflected aggregate credits of $85 million, recorded in other expenses, related to gains and recoveries associated with Lehman Brothers-related assets. Total expenses for 2012 reflected a credit of $362 million, composed of recoveries associated with the 2008 Lehman Brothers bankruptcy, and aggregate credits of $30 million related to litigation and other settlement recoveries associated with Lehman Brothers-related matters. Excluding all of the Lehman Brothers-related credits recorded in 2013 and 2012, total expenses were essentially flat in the 2013-to-2012 comparison, at $7.28 billion for 2013 ($7.19 billion plus $85 million) compared to $7.28 billion for 2012 ($6.89 billion plus $362 million and $30 million). 53



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AND RESULTS OF OPERATIONS (Continued) Compensation and employee benefits expenses were down 1% in 2013 compared to 2012, primarily due to savings associated with the implementation of our Business Operations and Information Technology Transformation program and lower benefit costs, partly offset by an increase in costs to support new business and higher incentive compensation. Information systems and communications expenses increased 11% compared to 2012, primarily from the planned transition of certain functions to third-party service providers in connection with the implementation of our Business Operations and Information Technology Transformation program and costs to support new business. Transaction processing services expenses were higher by 4%, the result of higher equity market values and higher transaction volumes in the asset servicing business. Finally, other expenses declined 1%, mainly the result of the above-described 2013 gains and recoveries associated with Lehman Brothers-related assets. Additional information with respect to our expenses is provided under "Consolidated Results of Operations - Expenses" in this Management's Discussion and Analysis. In 2013, our global services business secured mandates for approximately $1.02 trillion of new business in assets to be serviced; of the total, $858 billion was installed prior to December 31, 2013, with the remaining $158 billion expected to be installed in 2014. The new business not installed by December 31, 2013 was not included in our assets under custody and administration as of that date, and had no impact on our servicing fee revenue for 2013, as the assets are not included until their installation is complete and we begin to service them. Once installed, the assets generate servicing fee revenue in subsequent periods in which the assets are serviced. The $1.02 trillion of new asset servicing business represents gross new business, and is not net of transfers of assets by us to subcustodians. We will provide one or more of various services for these new assets to be serviced, including accounting, bank loan servicing, compliance reporting and monitoring, custody, depository banking services, foreign exchange, fund administration, hedge fund servicing, middle-office outsourcing, performance and analytics, private equity administration, real estate administration, securities finance, transfer agency, and wealth management services. In 2013, SSgA had approximately $5 billion of net lost business in assets to be managed, generally composed of $34 billion of net outflows from alternative investments, partly offset by net inflows of $13 billion into managed cash, net inflows of $6 billion into equities, net inflows of $4 billion into multi-asset-class solutions and net inflows of $3 billion each into fixed-income and securities lending funds. An additional $13 billion of new business awarded to SSgA but not installed by December 31, 2013 was not included in our assets under management as of that date, and had no impact on our management fee revenue for 2013, as the assets are not included until their installation is complete and we begin to manage them. Once installed, the assets generate management fee revenue in subsequent periods in which the assets are managed. CONSOLIDATED RESULTS OF OPERATIONS This section discusses our consolidated results of operations for 2013 compared to 2012, and should be read in conjunction with the consolidated financial statements and accompanying notes included under Item 8 of this Form 10-K. A comparison of consolidated results of operations for 2012 with those for 2011 is provided later in this Management's Discussion and Analysis under "Consolidated Results of Operations - Comparison of 2012 and 2011." TOTAL REVENUE % Change 2013 vs. Years Ended December 31, 2013 2012 2011 2012 (Dollars in millions) Fee revenue: Servicing fees $ 4,819$ 4,414$ 4,382 9 % Management fees 1,106 993 917 11 Trading services: Foreign exchange trading 589 511 683 15 Brokerage and other trading services 472 499 537 (5 ) Total trading services 1,061 1,010 1,220 5 Securities finance 359 405 378 (11 ) Processing fees and other 245 266 297 (8 ) Total fee revenue 7,590 7,088 7,194 7 Net interest revenue: Interest revenue 2,714 3,014 2,946 (10 ) Interest expense 411 476 613 (14 ) Net interest revenue 2,303 2,538 2,333 (9 ) Gains (losses) related to investment securities, net (9 ) 23 67 Total revenue $ 9,884$ 9,649$ 9,594 2 Our broad range of services generates fee revenue and net interest revenue. Fee revenue generated by our investment servicing and investment management businesses is augmented by trading services, securities finance and processing fees and other revenue. We earn net interest revenue from client deposits and short-term investment activities by providing deposit services and short-term investment vehicles, such as repurchase agreements and corporate commercial paper, to meet clients' needs for high-grade liquid investments, and investing these sources of funds and additional borrowings in assets yielding a higher rate. Fee Revenue Servicing and management fees collectively composed approximately 78% of our total fee revenue for 2013, compared to 76% for 2012. The level of these fees is influenced by several factors, including the mix and volume of our assets under custody and administration and our assets under management, the value and type of securities positions held (with respect to assets under custody) and the volume of portfolio transactions, and the types of products and services used by our clients, and is generally affected by changes in worldwide equity and fixed-income security valuations and trends in market asset class preferences. Generally, servicing fees are affected by changes in daily average valuations of assets under custody and administration. Additional factors, such as the relative mix of assets serviced, the level of transaction volumes, changes in service level, the nature of services provided, balance credits, client minimum balances, pricing concessions and other factors, may have a significant effect on our servicing fee revenue. Generally, management fees are affected by changes in month-end valuations of assets under management. Management fees for certain components of managed assets, such as ETFs, are affected by daily average valuations of assets under management. Management fee revenue is relatively more sensitive to market valuations than servicing fee revenue, since 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, changes in service level and other factors, may have a significant effect on our management fee revenue. While certain management fees are directly determined by the values of assets under management and the investment strategies employed, management fees reflect other factors as well, including our relationship pricing for clients using multiple services. Management fees for actively managed products are generally earned at higher rates than those for passive products. Actively-managed products may also involve performance fee arrangements. Performance fees are generated when the performance of certain managed funds exceeds benchmarks specified in the management 54



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AND RESULTS OF OPERATIONS (Continued) agreements. Generally, we experience more volatility with performance fees than with more traditional management fees. In light of the above, we estimate, using relevant information as of December 31, 2013 and assuming that all other factors remain constant, that: (1) a 10% increase or decrease, over the relevant periods on and for which our servicing and management fees are calculated, in worldwide equity valuations would result in a corresponding change in our total revenue of approximately 2%; and (2) a 10% increase or decrease, over the relevant periods on and for which our servicing and management fees are calculated, in worldwide fixed-income security valuations would result in a corresponding change of approximately 1% in our total revenue. The following table presents selected equity market 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 can therefore differ from the performance of the indices presented. Daily averages and the averages of month-end indices demonstrate worldwide changes in equity markets that affect our servicing and management fee revenue. Year-end indices affect the values of assets under custody and administration and assets under management as of those dates. The index names listed in the table are service marks of their respective owners. INDEX Daily Averages of Indices Averages of Month-End Indices Year-End Indices 2013 2012 % Change 2013 2012 % Change 2013 2012 % Change S&P 500® 1,644 1,379 19 % 1,652 1,387 19 % 1,848 1,426 30 % NASDAQ® 3,541 2,966 19 3,575 2,984 20 4,177 3,020 38 MSCI EAFE® 1,746 1,489 17 1,754 1,499 17 1,916 1,604 19 FEE REVENUE % Change 2013 vs. Years Ended December 31, 2013 2012 2011 2012 (Dollars in millions) Servicing fees $ 4,819$ 4,414$ 4,382 9 % Management fees 1,106 993 917 11 Trading services: Foreign exchange trading 589 511 683 15 Brokerage and other trading services 472 499 537 (5 ) Total trading services 1,061 1,010 1,220 5 Securities finance 359 405 378 (11 ) Processing fees and other 245 266 297 (8 ) Total fee revenue $ 7,590$ 7,088$ 7,194 7 Servicing Fees Servicing fees include fee revenue from U.S. mutual funds, collective investment funds worldwide, corporate and public retirement plans, insurance companies, foundations, endowments, and other investment pools. Products and services include custody; product- and participant-level accounting; daily pricing and administration; master trust and master custody; record-keeping; cash management; investment manager and alternative investment manager operations outsourcing; and performance, risk and compliance analytics. The 9% increase in servicing fees for 2013 compared to 2012 primarily resulted from stronger global equity markets, the impact of net new business installed on current-period revenue and the addition of revenue from the October 2012 GSAS acquisition. The combined daily averages of equity market indices, individually presented in the foregoing "INDEX" table, increased approximately 19% for 2013 compared to 2012. For both 2013 and 2012, servicing fees generated outside the U.S. were approximately 42% of total servicing fees. The following tables present the components, financial instrument mix and geographic mix of assets under custody and administration, as of the dates indicated: 55



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COMPONENTS OF ASSETS UNDER CUSTODY AND ADMINISTRATION

2012-2013 2009-2013 Annual Compound Growth Annual As of December 31, 2013 2012 2011 2010 2009 Rate Growth Rate (Dollars in billions) Mutual funds $ 6,811$ 5,852$ 5,265$ 5,540$ 4,734 16 % 10 % Collective funds 6,428 5,363 4,437 4,350 3,580 20 16 Pension products 5,851 5,339 4,837 4,726 4,395 10 7 Insurance and other products 8,337 7,817 7,268 6,911 6,086 7 8 Total $ 27,427$ 24,371$ 21,807$ 21,527$ 18,795 13 10



FINANCIAL INSTRUMENT MIX OF ASSETS UNDER CUSTODY AND ADMINISTRATION

2012-2013 2009-2013 Annual Compound Growth Annual As of December 31, 2013 2012 2011 2010 2009 Rate Growth Rate (Dollars in billions) Equities $ 15,050$ 12,276$ 10,849$ 11,000$ 8,828 23 % 14 % Fixed-income 9,072 8,885 8,317 7,875 7,236 2 6 Short-term and other investments 3,305 3,210 2,641 2,652 2,731 3 5 Total $ 27,427$ 24,371$ 21,807$ 21,527$ 18,795 13 10 GEOGRAPHIC MIX OF ASSETS UNDER CUSTODY AND ADMINISTRATION(1) As of December 31, 2013 2012 2011 2010 2009 (In billions) North America $ 20,764$ 18,463$ 16,368$ 16,486$ 15,191 Europe/Middle East/Africa 5,511 4,801 4,400 4,069 2,773 Asia/Pacific 1,152 1,107 1,039 972 831 Total Assets Under Custody and Administration $ 27,427$ 24,371$ 21,807$ 21,527$ 18,795 (1) Geographic mix is based on the location at which the assets are serviced. The increase in total assets under custody and administration from year-end 2012 to year-end 2013 primarily resulted from stronger global equity markets and net client cash inflows, as well as net new business installations. Asset levels as of December 31, 2013 did not reflect $158 billion of new business in assets to be serviced awarded to us in 2013 but not installed prior to December 31, 2013. This new business will be reflected in assets under custody and administration in future periods after installation, and will generate servicing fee revenue in subsequent periods. The value of assets under custody and administration is a broad measure of the relative size of various markets served. Changes in the values of assets under custody and administration from period to period do not necessarily result in proportional changes in our servicing fee revenue. Management Fees Through SSgA, we provide a broad range of investment management strategies, specialized investment management advisory services and other financial services for corporations, public funds, and other sophisticated investors. SSgA offers a broad array of investment management strategies, including passive and active, such as enhanced indexing, using quantitative and fundamental methods for both U.S. and global equity and fixed-income securities. SSgA also offers ETFs, such as the SPDR® ETF brand. While certain management fees are directly determined by the values of assets under management and the investment strategies employed, management fees reflect other factors as well, including our relationship pricing for clients who use multiple services, and the benchmarks specified in the respective management agreements related to performance fees. 56



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AND RESULTS OF OPERATIONS (Continued) The 11% increase in management fees for 2013 compared to 2012 primarily resulted from stronger equity markets and the impact of net new business installed on current-period revenue. Combined average daily and average month-end equity market indices, individually presented in the foregoing "INDEX" table, increased approximately 19% compared to 2012. Management fees generated outside the U.S. were approximately 36% of total management fees for 2013 compared to 37% for 2012. The following tables present assets under management by asset class and investment approach, ETFs by asset class, and the geographic mix of assets under management, as of the dates indicated: ASSETS UNDER MANAGEMENT BY ASSET CLASS AND INVESTMENT APPROACH(1) 2009-2013 2012-2013 Compound Annual Annual Growth As of December 31, 2013 2012 2011 2010 2009 Growth Rate Rate (Dollars in billions) Equity: Active $ 42$ 45$ 46$ 54$ 68 (7 )% (11 )% Passive 1,334 1,047 893 912 695 27 18 Total Equity 1,376 1,092 939 966 763 26 16 Fixed-Income: Active 16 17 16 14 21 (6 ) (7 ) Passive 311 325 271 373 433 (4 ) (8 ) Total Fixed-Income 327 342 287 387 454 (4 ) (8 ) Cash(2) 385 369 380 422 508 4 (7 ) Multi-Asset-Class Solutions: Active 23 23 15 16 11 - 20 Passive 110 94 70 70 93 17 4 Total Multi-Asset-Class Solutions 133 117 85 86 104 14 6 Alternative Investments(3): Active 14 18 17 12 11 (22 ) 6 Passive 110 148 137 137 111 (26 ) - Total Alternative Investments 124 166 154 149 122 (25 ) - Total Assets Under Management $ 2,345$ 2,086$ 1,845$ 2,010$ 1,951 12 5 (1) As of December 31, 2013, the presentation has been changed to align with the reporting of core businesses. Amounts previously reported have been adjusted for comparative purposes. (2) Includes both floating- and constant-net-asset-value portfolios held in commingled structures or separate accounts. (3) Includes real estate investment trusts, currency and commodities, including SPDR® Gold Fund for which State Street is not the investment manager, but acts as distribution agent. The decline in this asset class as of December 31, 2013 compared to December 31, 2012 mainly resulted from net outflows from the SPDR® Gold Fund related to lower average gold prices. EXCHANGE-TRADED FUNDS BY ASSET CLASS(1) 2009-2013 2012-2013 Compound Annual Annual Growth

As of December 31, 2013 2012 2011 2010 2009 Growth Rate Rate (Dollars in billions) Alternative Investments $ 39$ 79$ 68$ 61$ 43 (51 )% (2 )% Cash 1 1 2 1 1 - - Equity 325 227 184 175 152 43 21 Fixed-Income 34 30 20 15 9 13 39



Total Exchange-Traded Funds $ 399$ 337$ 274$ 252 $

205 18 18



(1) Exchange-traded funds are a component of assets under management presented above.

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AND RESULTS OF OPERATIONS (Continued) GEOGRAPHIC MIX OF ASSETS UNDER MANAGEMENT(1) As of December 31, 2013 2012 2011 2010 2009 (In billions) North America $ 1,456$ 1,288$ 1,190$ 1,332$ 1,272 Europe/Middle East/Africa 560 480 428 452 479 Asia/Pacific 329 318 227 226 200



Total Assets Under Management $ 2,345$ 2,086$ 1,845$ 2,010$ 1,951

(1) Geographic mix is based on client location or fund management location. The increase in total assets under management from year-end 2012 to year-end 2013 resulted from stronger global equity market valuations, partly offset by net lost business of $5 billion. The net lost business of approximately $5 billion was generally composed of $34 billion of net outflows from alternative investments, partly offset by net inflows of $13 billion into managed cash, net inflows of $6 billion into equities, net inflows of $4 billion into multi-asset-class solutions and net inflows of $3 billion each into fixed-income and securities lending funds. The following table presents activity in assets under management for the years ended December 31: ASSETS UNDER MANAGEMENT Years Ended December 31, 2013 2012 2011 (In billions) Balance at beginning of year $ 2,086$ 1,845$ 2,010 Net new (lost) business (5 ) 112 (30 ) Sales of U.S. Treasury portfolio of asset-backed securities(1) - (31



) (125 ) Assets added from Bank of Ireland Asset Management acquisition

- - 23 Market appreciation (depreciation) 264 160 (33 ) Balance at end of year $ 2,345$ 2,086$ 1,845 (1) Amounts were associated with the U.S. Treasury's winding down of its portfolio of agency-guaranteed mortgage-backed securities. The net lost business of $5 billion for 2013 presented in the table did not include $13 billion of new asset management business awarded to SSgA in 2013 but not installed prior to December 31, 2013. This new business will be reflected in assets under management in future periods after installation, and will generate management fee revenue in subsequent periods. Total assets under management as of December 31, 2013 included managed assets lost but not yet liquidated. Lost business occurs from time to time and it is difficult to predict the timing of client behavior in transitioning these assets. This timing can vary significantly. Trading Services The following table summarizes the components of trading services revenue for the years ended December 31: % Change Years Ended December 31, 2013 2012 2011 2013 vs. 2012 (Dollars in millions) Foreign exchange trading: Direct sales and trading $ 304$ 263$ 352 16 % Indirect foreign exchange trading 285 248 331 15 Total foreign exchange trading 589 511 683 15



Brokerage and other trading services:

Electronic foreign exchange trading 233 210 249 11 Other trading, transition management and brokerage 239 289 288 (17 ) Total brokerage and other trading services 472 499 537 (5 ) Total trading services revenue $ 1,061$ 1,010$ 1,220 5 58



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AND RESULTS OF OPERATIONS (Continued) Trading services revenue is composed of revenue generated by foreign exchange, or FX, trading, as well as revenue generated by brokerage and other trading services. We earn FX trading revenue by acting as a principal market maker. We offer a range of FX products, services and execution models. Most of our FX products and execution services can be grouped into three broad categories, which are further explained below: "direct sales and trading FX," "indirect FX" and "electronic FX trading." With respect to electronic FX trading, we provide an execution venue but do not act as agent or principal. We also offer a range of brokerage and other trading products tailored specifically to meet the needs of the global pension community, including transition management and commission recapture. In addition, we act as distribution agent for the SPDR® Gold ETF. These products and services are differentiated by our position as an agent of the institutional investor. Revenue earned from these brokerage and other trading products and services is recorded in other trading, transition management and brokerage within brokerage and other trading services revenue. FX trading revenue is influenced by three principal factors: the volume and type of client FX transactions; currency volatility; and the management of market risk associated with currencies and interest rates. Revenue earned from direct sales and trading FX and indirect FX is recorded in FX trading revenue. Revenue earned from electronic FX trading is recorded in brokerage and other trading services revenue. The 5% increase in total trading services revenue for 2013 compared to 2012, composed of separate changes related to FX trading and brokerage and other trading services, is explained below. Total FX trading revenue increased 15% compared to 2012, primarily the result of higher client volumes, currency volatility and spreads. We enter into FX transactions with clients and investment managers that contact our trading desk directly. These trades are all executed at negotiated rates. We refer to this activity, and our principal market-making activities, as "direct sales and trading FX." Alternatively, clients or their investment managers may elect to route FX transactions to our FX desk through our asset-servicing operation; we refer to this activity as "indirect FX." We execute indirect FX trades as a principal at rates disclosed to our clients. We calculate revenue for indirect FX using an attribution methodology based on estimated effective mark-ups/downs and observed client volumes. All other FX trading revenue, other than this indirect FX revenue estimate, is considered by us to be direct sales and trading FX revenue. Our clients that utilize indirect FX can, in addition to executing their FX transactions through dealers not affiliated with us, transition from indirect FX to either direct sales and trading FX execution, including our "Street FX" service that enables our clients to define their FX execution strategy and automate the FX trade execution process, in which State Street continues to act as a principal market maker, or to one of our electronic trading platforms. For 2013 compared to 2012, our estimated indirect FX revenue increased 15%, while our direct sales and trading FX revenue increased 16%. The increases in both comparisons mainly resulted from higher client volumes, currency volatility and spreads. We continue to expect that some clients may choose, over time, to reduce their level of indirect FX transactions in favor of other execution methods, including either direct FX transactions or electronic FX trading which we provide. To the extent that clients shift to other execution methods that we provide, our FX trading revenue may decrease, even if volumes remain consistent. Total brokerage and other trading services revenue declined 5% for 2013 compared to 2012. Our clients may choose to execute FX transactions through one of our electronic trading platforms. This service generates revenue through a "click" fee. For 2013 compared to 2012, our revenue from such electronic FX trading increased 11%, mainly due to increases in client volumes. Our revenue for 2013 from other trading, transition management and brokerage revenue declined 17% compared to 2012. The decrease mainly resulted from a decline in distribution fees associated with the SPDR® Gold ETF, which resulted from lower average gold prices and net outflows from the SPDR® Gold ETF, and a decline in transition management revenue. With respect to the SPDR® Gold ETF, fees earned by us as distribution agent are recorded in other trading, transition management and brokerage revenue within brokerage and other trading services revenue, and not in management fee revenue. Our revenue from transition management, recorded in brokerage and other trading services revenue, and related expenses in 2013 and 2012 were adversely affected by compliance issues in our U.K. business, the reputational and regulatory impact of which may continue to adversely affect our transition management revenue in future periods. 59



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AND RESULTS OF OPERATIONS (Continued) Securities Finance Our agency securities finance business consists of two principal components: an agency lending program for SSgA-managed investment funds with a broad range of investment objectives, which we refer to as the SSgA lending funds, and an agency lending program for third-party investment managers and asset owners, which we refer to as the agency lending funds. Our securities finance business provides liquidity to the financial markets, as well as an effective means for clients to earn incremental revenue on their securities portfolios. By acting as a lending agent and coordinating loans between lenders and borrowers, we lend securities and provide liquidity to clients worldwide. Borrowers provide collateral in the form of cash or securities to State Street in return for loaned securities. Borrowers are generally required to provide collateral equal to a contractually-agreed percentage equal to or in excess of the fair value of the loaned securities. As the fair value of the loaned securities changes, additional collateral is provided by the borrower or collateral is returned to the borrower. Such movements are typically referred to as daily mark-to-market collateral adjustments. We also participate in securities lending transactions as a principal. As principal, we borrow securities from the lending client and then lend such securities to the subsequent borrower, either a State Street client or a broker/dealer. Our involvement as principal is utilized when the lending client is unable to, or elects not to, transact directly with the market and requires us to execute the transaction and furnish the securities. In our role as principal, we provide support to the transaction through our credit rating, and we have the ability to source securities through our assets under custody and administration. For cash collateral, our clients pay a usage fee to the provider of the cash collateral, and we invest the cash collateral in certain investment vehicles or managed accounts as directed by the owner of the loaned securities. In some cases, the investment vehicles or managed accounts may be managed by SSgA. The spread between the yield on the investment vehicle and the usage fee paid to the provider of the collateral is split between the lender of the securities and State Street as agent. For non-cash collateral, the borrower pays a fee for the loaned securities, and the fee is split between the lender of the securities and State Street. 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. Securities finance revenue for 2013 compared to 2012 declined 11%. The decline was mainly due to lower spreads and a slight decline in average lending volumes. Average spreads declined 17% for 2013 compared to 2012. Securities on loan averaged approximately $319 billion for 2013 compared to approximately $323 billion for 2012, a 1% decline. 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, proposed or anticipated regulatory changes may affect the volume of our securities lending activity and related revenue and profitability in future periods. Processing Fees and Other Processing fees and other revenue includes diverse types of fees and revenue, including fees from our structured products business, fees from software licensing and maintenance, equity income from our joint venture investments, gains and losses on sales of leased equipment and other assets, and amortization of our tax-advantaged investments. Processing fees and other revenue for 2013 compared to 2012 declined 8%. The decline was primarily due to the absence of both the fair-value adjustments related to our withdrawal from our fixed-income trading initiative and the gain from the sale of a Lehman Brothers-related asset, both recorded in 2012, as well as hedge ineffectiveness recorded in 2013. The decline in processing fees and other revenue was partly offset by an increase in revenue associated with our investment in bank-owned life insurance for 2013 compared to 2012. 60



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AND RESULTS OF OPERATIONS (Continued) NET INTEREST REVENUE Net interest revenue is defined as interest revenue 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, repurchase agreements, loans and leases and other liquid assets, are financed primarily by client deposits, short-term borrowings and long-term debt. Net interest margin represents the relationship between fully taxable-equivalent net interest revenue and average total interest-earning assets for the period. Revenue that is exempt from income taxes, mainly that earned from certain investment securities (state and political subdivisions), is adjusted to a fully taxable-equivalent basis using a federal statutory income tax rate of 35%, adjusted for applicable state income taxes, net of the related federal tax benefit. The following table presents the components of average interest-earning assets and average interest-bearing liabilities, related interest revenue and interest expense, and rates earned and paid, for the years indicated: Years Ended December 31, 2013 2012 2011 Interest Interest Interest Average Revenue/ Average Revenue/ Average Revenue/ Balance Expense Rate Balance Expense Rate Balance Expense Rate (Dollars in millions; fully taxable-equivalent basis) Interest-bearing deposits with banks $ 28,946$ 125 .43 % $ 26,823 $



141 .53 % $ 20,241$ 149 .74 % Securities purchased under resale agreements 5,766

45 .77 7,243 51 .71 4,686 28 .61 Trading account assets 748 - - 651 - - 2,013 - -



Investment securities 117,696 2,429 2.06 113,910

2,690 2.36 103,075 2,615 2.54 Loans and leases

13,781 253 1.84 11,610



253 2.19 12,180 280 2.30 Other interest-earning assets

11,164 4 .04 7,378 3 .04 5,462 2 .03 Average total interest-earning assets $ 178,101$ 2,856 1.60 $ 167,615$ 3,138 1.88 $ 147,657$ 3,074 2.08 Interest-bearing deposits: U.S. $ 8,862$ 10 .12 % $ 9,333$ 19 .20 % $ 4,049$ 11 .27 % Non-U.S. 100,391 83 .08 89,059



147 .16 84,011 209 .25 Securities sold under repurchase agreements 8,436

1 .01 7,697 1 .01 9,040 10 .11 Federal funds purchased 298 - - 784 1 .09 845 - - Other short-term borrowings 3,785 59 1.57 4,676 71 1.52 5,134 86 1.67 Long-term debt 8,415 232 2.75 7,008 222 3.17 8,966 289 3.22 Other interest-bearing liabilities 6,457 26 .40 5,898 15 .26 3,535 8 .24 Average total interest-bearing liabilities $ 136,644$ 411 .30 $ 124,455 $

476 .39 $ 115,580$ 613 .53 Interest-rate spread 1.30 % 1.49 % 1.55 % Net interest revenue-fully taxable-equivalent basis $ 2,445$ 2,662$ 2,461 Net interest margin-fully taxable-equivalent basis 1.37 % 1.59 % 1.67 % Tax-equivalent adjustment (142 ) (124 ) (128 ) Net interest revenue-GAAP basis $ 2,303$ 2,538$ 2,333 For 2013 compared to 2012, average total interest-earning assets increased, mainly the result of the investment of higher levels of client deposits in purchases of investment securities as well as in interest-bearing deposits with banks. During the past year, our clients have continued to place elevated levels of deposits with us, as low global interest rates have made deposits attractive relative to other investment options. Those client deposits determined to be transient in nature have been placed with various central banks globally, whereas deposits determined to be more stable have been invested in our investment securities portfolio or elsewhere to support growth in other client-related activities. Average loans and leases were higher for 2013 compared to 2012 due primarily to growth in mutual fund lending. Higher levels of cash collateral provided in connection with our role as principal in certain securities finance activities drove other interest-earning assets higher as this business grew. While these securities finance activities support our overall profitability by generating securities finance revenue, they put downward pressure on our net interest margin. Net interest revenue for 2013 declined 9%, and on a fully taxable-equivalent basis declined 8%, compared to 2012. The decreases were primarily due to the impact of lower yields on interest-earning assets related to lower global interest rates, partly offset by lower funding costs. The decrease also reflected the continued impact of the reinvestment of pay-downs on existing investment securities in lower-yielding investment securities. These decreases in net interest revenue were partly offset by the impact of growth in the investment portfolio on an average basis year over year. Subsequent to the commercial paper conduit consolidation in 2009, we have recorded aggregate discount accretion in interest revenue of $1.91 billion ($621 million in 2009, $712 million in 2010, $220 million in 2011, $215 million in 2012 and $137 million in 2013). The timing and ultimate recognition of any applicable discount accretion depends, in part, on factors that are outside of our control, including anticipated prepayment speeds and credit quality. The impact of these factors is uncertain and can be significantly influenced by general economic and financial market conditions. The timing and recognition of any applicable discount accretion can also be influenced by our ongoing management of the risks and other characteristics associated with our investment securities portfolio, including sales of securities which would otherwise generate accretion. Depending on the factors discussed above, among others, we anticipate that, until the former conduit securities remaining in our investment portfolio mature or are sold, discount accretion will continue to contribute, though in declining amounts, to our net interest revenue. Assuming that we hold the remaining former conduit securities to maturity, all else being equal, we expect the remaining former conduit securities carried in our investment portfolio as of December 31, 2013 to generate aggregate discount accretion in future periods of approximately $572 million over their remaining terms, with approximately half of this aggregate discount accretion to be recorded over the next four years. Changes in the components of interest-earning assets and interest-bearing liabilities are discussed in more detail below. Additional detail about the components of interest revenue and interest expense is provided in note 18 to the consolidated financial statements included under Item 8 of this Form 10-K. Interest-bearing deposits with banks, which include cash balances maintained at the Federal Reserve, the European Central Bank and other non-U.S. central banks to satisfy reserve requirements, averaged $28.95 billion for the year ended December 31, 2013, compared to $26.82 billion for the year ended December 31, 2012, reflecting the impact of the placement of elevated levels of client deposits. Certain client deposits were determined to be transient in nature and were placed with various central banks globally. In 2013, we diversified our investment of these elevated client deposits, in part, through purchases of investment securities. If client deposits remain at or close to current elevated levels, we expect to continue to invest client deposits in either money market assets, including central bank deposits, or in investment securities, depending on our assessment of the underlying characteristics of the deposits. AAverage investment securities increased to $117.70 billion for the year ended December 31, 2013 from $113.91 billion for the year ended December 31, 2012. The increase was generally the result of ongoing purchases of securities, partly offset by maturities, sales and pay-downs. Period-end portfolio balances are more significantly influenced by the timing of purchases, sales and runoff; as a result, average portfolio balances are a more effective indication of trends in portfolio activity. Detail with respect to the investment portfolio as of December 31, 2013 and 2012 is provided in note 4 to the consolidated financial statements included under Item 8 of this Form 10-K. As of December 31, 2013, investment securities rated "AAA" and "AA" represented approximately 89% of our investment portfolio, consistent with the composition of our portfolio as of December 31, 2012. Loans and leases averaged $13.78 billion for the year ended December 31, 2013, compared to $11.61 billion for the year ended December 31, 2012. The increase was mainly related to mutual fund lending, which averaged $7.61 billion for the year ended December 31, 2013 compared to $5.59 billion for the year ended December 31, 2012. The proportion of average short-duration liquidity to our average loan-and-lease portfolio declined to approximately 27% for the year ended December 31, 2013 from approximately 29% for the year ended December 31, 2012. Short-duration advances provide liquidity to clients in support of their investment activities related to securities settlement. 61



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AND RESULTS OF OPERATIONS (Continued) The following table presents average U.S. and non-U.S. short-duration advances for the years ended December 31: Years Ended December 31, (In millions) 2013 2012 2011



Average U.S. short-duration advances $ 2,356$ 1,972$ 1,994 Average non-U.S. short-duration advances 1,393 1,393 1,585 Average total short-duration advances $ 3,749$ 3,365$ 3,579

Although average short-duration advances for the year ended December 31, 2013 increased compared to the year ended December 31, 2012, such average advances remained low relative to historical levels, mainly the result of clients continuing to hold higher levels of liquidity. Average other interest-earning assets increased to $11.16 billion for the year ended December 31, 2013 from $7.38 billion for the year ended December 31, 2012. The increased levels were primarily the result of higher levels of cash collateral provided in connection with our participation in principal securities finance transactions. Aggregate average interest-bearing deposits increased to $109.25 billion for the year ended December 31, 2013 from $98.39 billion for the year ended December 31, 2012. This increase was mainly due to higher levels of non-U.S. transaction accounts associated with the growth of new and existing business in assets under custody and administration. Future transaction account levels will be influenced by the underlying asset servicing business, as well as market conditions, including the general levels of U.S. and non-U.S. interest rates. Average other short-term borrowings declined to $3.79 billion for the year ended December 31, 2013 from $4.68 billion for the year ended December 31, 2012, as higher levels of client deposits provided additional liquidity. Average long-term debt increased to $8.42 billion for the year ended December 31, 2013 from $7.01 billion for the year ended December 31, 2012. The increase primarily reflected the issuance of $1.0 billion of extendible notes by State Street Bank in December 2012, the issuance of $1.5 billion of senior and subordinated debt in May 2013, and the issuance of $1.0 billion of senior debt in November 2013. This increase was partly offset by maturities of $1.75 billion of senior debt in the second quarter of 2012. Average other interest-bearing liabilities increased to $6.46 billion for the year ended December 31, 2013 from $5.90 billion for the year ended December 31, 2012, primarily the result of higher levels of cash collateral received from clients in connection with our participation in principal securities finance transactions. Several factors could affect future levels of our net interest revenue and margin, including the mix of client liabilities; actions of various central banks; changes in U.S. and non-U.S. interest rates; changes in the various yield curves around the world; revised or proposed regulatory capital or liquidity standards, or interpretations of those standards; the amount of discount accretion generated by the former conduit securities that remain in our investment securities portfolio; and the yields earned on securities purchased compared to the yields earned on securities sold or matured. Based on market conditions and other factors, we continue to reinvest the majority of the proceeds from pay-downs and maturities of investment securities in highly-rated securities, such as U.S. Treasury and agency securities, federal agency mortgage-backed securities and U.S. and non-U.S. mortgage- and asset-backed securities. The pace at which we continue to reinvest and the types of investment securities purchased will depend on the impact of market conditions and other factors over time. We expect these factors and the levels of global interest rates to dictate what effect our reinvestment program will have on future levels of our net interest revenue and net interest margin. Gains (Losses) Related to Investment Securities, Net The following table presents net realized gains from sales of available-for-sale securities and the components of net impairment losses, included in net gains and losses related to investment securities, for the years indicated: 62



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AND RESULTS OF OPERATIONS (Continued) Years Ended December 31, 2013



2012

(In millions) Net realized gains from sales of available-for-sale securities

$ 14$ 55 Losses from other-than-temporary impairment (21 ) (53 ) Losses reclassified (from) to other comprehensive income (2 )



21

Net impairment losses recognized in consolidated statement of income

(23 ) (32 ) Gains (losses) related to investment securities, net $ (9 )$ 23 Impairment associated with expected credit losses $ (11 )



$ (16 ) Impairment associated with management's intent to sell impaired securities prior to recovery in value

(6 )



-

Impairment associated with adverse changes in timing of expected future cash flows

(6 )



(16 ) Net impairment losses recognized in consolidated statement of income

$ (23 )



$ (32 )

From time to time, in connection with our ongoing management of our investment securities portfolio, we sell available-for-sale securities to manage risk, to take advantage of favorable market conditions, or for other reasons. In 2013 and 2012, we sold approximately $10.26 billion and $5.35 billion, respectively, of such investment securities and recorded net realized gains of $14 million and $55 million, respectively, as presented in the table above. The net realized gains recorded in 2012 reflected a realized loss of $46 million from the second-quarter sale of all of our Greek investment securities, which had an aggregate carrying value of approximately $91 million. These securities, which were previously classified as held to maturity, were sold as a result of the effect of significant deterioration in the creditworthiness of the underlying collateral, including significant downgrades of the securities' external credit ratings. We regularly review our investment securities portfolio to identify other-than-temporary impairment of individual securities. Additional information about investment securities, the gross gains and losses that compose the net gains from sales of securities and other-than-temporary impairment is provided in note 4 to the consolidated financial statements included under Item 8 of this Form 10-K. PROVISION FOR LOAN LOSSES We recorded a provision for loan losses of $6 million in 2013, compared to a negative provision of $3 million in 2012. The 2013 provision resulted from our exposure to non-investment-grade borrowers composed of senior secured bank loans, which we purchased in connection with our participation in loan syndications in the non-investment-grade lending market beginning in 2013. Additional information about these senior secured bank loans is provided under "Financial Condition - Loans and Leases" in this Management's Discussion and Analysis, and in note 5 to the consolidated financial statements included under Item 8 of this Form 10-K. 63



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AND RESULTS OF OPERATIONS (Continued)



EXPENSES

The following table presents the components of expenses for the years indicated: % Change Years Ended December 31, 2013 2012 2011 2013 vs. 2012 (Dollars in millions) Compensation and employee benefits $ 3,800$ 3,837$ 3,820 (1 )% Information systems and communications 935 844 776



11

Transaction processing services 733 702 732 4 Occupancy 467 470 455 (1 ) Claims resolution - (362 ) - Acquisition costs 76 26 16 Restructuring charges, net 28 199 253 Other: Professional services 392 381 347 3



Amortization of other intangible assets 214 198 200

8

Securities processing costs (recoveries) 52 24 (6 ) Regulatory fees and assessments

72 61 53 Other 423 506 412 (16 ) Total other 1,153 1,170 1,006 (1 ) Total expenses $ 7,192$ 6,886$ 7,058 4 Number of employees at year-end 29,430 29,660 29,740



Expenses

Total expenses for 2013 increased 4% compared to 2012. Expenses for both years included credits related to gains and recoveries associated with Lehman Brothers matters, as follows: • Aggregate credits of $85 million recorded in other expenses for 2013,



presented in "other" in the table above, related to gains and recoveries

associated with Lehman Brothers-related assets;

• Credit of $362 million for 2012, presented separately in the table above,

composed of recoveries associated with the 2008 Lehman Brothers bankruptcy; and



• Aggregate credits of $30 million recorded in other expenses for 2012,

composed of $16 million presented in "securities processing costs

(recoveries)" and $14 million presented in "other" in the table above,

related to litigation and other settlement recoveries associated with Lehman Brothers-related matters. Excluding the credits described above, total expenses for 2013 of $7.28 billion ($7.19 billion plus $85 million) were essentially flat compared to expenses for 2012 of $7.28 billion ($6.89 billion plus $362 million and $30 million). The 1% decline in compensation and employee benefits expenses for 2013 compared to 2012 primarily resulted from lower staffing levels, including savings related to the implementation of our Business Operations and Information Technology Transformation program, and lower benefit costs, partly offset by expenses to support new business and acquisitions and higher incentive compensation. Compensation and employee benefits expenses for 2013 included approximately $84 million of costs related to the implementation of our Business Operations and Information Technology Transformation program, compared to approximately $90 million for 2012. These costs are not expected to recur subsequent to full implementation of the program. The 11% increase in information systems and communications expenses for 2013 compared to 2012 was primarily the result of the planned transition of certain functions to third-party service providers associated with components of our technology infrastructure and application maintenance and support, as part of the Business Operations and Information Technology Transformation program, as well as costs to support new business. Additional information with respect to the impact of the Business Operations and Information Technology Transformation program on future compensation and employee benefits and information systems and communications expenses is provided in the following "Restructuring Charges" section. The 4% increase in transaction processing services expenses for 2013 compared to 2012 generally reflected higher equity market values and higher transaction volumes in the asset servicing business. 64



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AND RESULTS OF OPERATIONS (Continued) The decline in aggregate other expenses (professional services, amortization of other intangible assets, securities processing costs (recoveries), regulatory fees and assessments and other) for 2013 compared to 2012 was mainly the result of the above-described credits of $85 million related to gains and recoveries associated with Lehman Brothers-related assets. Excluding these credits from other expenses for 2013, and excluding the above-described credits of $14 million from other expenses for 2012, other expenses for 2013 of $1.24 billion ($1.15 billion plus $85 million) increased 5% compared to other expenses of $1.18 billion ($1.17 billion plus $14 million) for 2012. The "other" category of other expenses was down 2% for 2013 to $508 million ($423 million plus $85 million) from $520 million ($506 million plus $14 million) in 2012. The 5% increase in aggregate other expenses to $1.24 billion in 2013 from $1.18 billion in 2012 was primarily related to the addition of amortization of other intangible assets associated with the GSAS acquisition, completed in October 2012, and securities processing costs and fines associated with regulatory matters in our U.K. transition management business. Additional information about this transition management matter is provided under "Legal and Regulatory Matters" in note 11 to the consolidated financial statements included under Item 8 of this Form 10-K. Claims Resolution As a result of the 2008 Lehman Brothers bankruptcy, we had various claims against Lehman Brothers entities in bankruptcy proceedings in the U.S. and the U.K. We also had amounts asserted as owed, or return obligations, to Lehman Brothers entities. The various claims and amounts owed arose from transactions that existed at the time Lehman Brothers entered bankruptcy, including prime brokerage arrangements, foreign exchange transactions, securities lending arrangements and repurchase agreements. In 2011, we reached an agreement with certain Lehman Brothers estates in the U.S. to resolve the value of deficiency claims arising out of indemnified repurchase transactions in the U.S., and the bankruptcy court allowed those claims in the amount of $400 million. In September 2012, we reached an agreement to settle the claims against the Lehman Brothers estate in the U.K. related to the close-out of securities lending and repurchase arrangements. This settlement resulted in a return obligation for us and a certified claim against the Lehman Brothers estate, and resolved the contingent nature of our rights and obligations with the Lehman Brothers estate. In connection with our resolution of the indemnified repurchase and securities lending claims in the U.S. and the U.K., we recognized a credit of approximately $362 million in our consolidated statement of income in 2012. Both certified claims retained as part of the settlement agreements were subsequently sold at their respective fair values, resulting in an additional gain of approximately $10 million, which was also recorded in our consolidated statement of income in 2012. In 2013, we received aggregate distributions totaling approximately $186 million from the Lehman Brothers estates. Of the aggregate distributions received, $101 million was applied to reduce remaining Lehman Brothers-related assets, primarily prime brokerage claim-related receivables, recorded in our consolidated statement of condition; the remaining $85 million was recorded as an aggregate credit to other expenses in our consolidated statement of income, as described earlier in this "Expenses" section. Acquisition Costs In 2013, we recorded acquisition costs of $76 million, compared to $66 million in 2012, with both amounts related to previously disclosed acquisitions, mainly the 2012 GSAS and 2010 Intesa acquisitions. The 2012 acquisition costs were partly offset by an indemnification benefit of $40 million for the assumption of an income tax liability related to the 2010 Intesa acquisition. Restructuring Charges Information with respect to our Business Operations and Information Technology Transformation program and our 2011 and 2012 expense control measures, including charges, employee reductions and aggregate activity in the related accruals, is provided in the following sections. Business Operations and Information Technology Transformation Program In November 2010, we announced a global multi-year Business Operations and Information Technology Transformation program. The program includes operational, information technology and targeted cost initiatives, including plans related to reductions in both staff and occupancy costs. With respect to our business operations, we are standardizing certain core business processes, primarily through our execution of the State Street Lean methodology, and driving automation of these business processes. We are currently creating a new technology platform, including transferring certain core software applications to a private cloud, and have expanded our use of third-party service providers associated with components of our 65



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AND RESULTS OF OPERATIONS (Continued) information technology infrastructure and application maintenance and support. We transferred the majority of our core software applications to a private cloud in 2013, and we expect to transfer the remaining core applications in 2014. To implement this program, we expect to incur aggregate pre-tax restructuring charges of approximately $400 million to $450 million over the four-year period ending December 31, 2014. To date, we have recorded aggregate restructuring charges of $381 million in our consolidated statement of income, as presented in the following table by type of cost: Employee-Related Real Estate Information (In millions) Costs Consolidation Technology Costs Total 2010 $ 105 $ 51 $ - $ 156 2011 85 7 41 133 2012 27 20 20 67 2013 13 13 (1 ) 25 Total $ 230 $ 91 $ 60 $ 381 Employee-related costs included severance, benefits and outplacement services. Real estate consolidation costs resulted from actions taken to reduce our occupancy costs through the consolidation of leases and properties. Information technology costs included transition fees related to the above-described expansion of our use of third-party service providers. In 2010, in connection with the program, we initiated the involuntary termination of 1,400 employees, or approximately 5% of our global workforce, which we completed by the end of 2011. In addition, in connection with our announcement in 2011 of the expansion of our use of third-party service providers associated with our information technology infrastructure and application maintenance and support, as well as the continued execution of the business operations transformation component of the program, we identified 1,340 additional involuntary terminations and role eliminations, including 376 in 2013. As of December 31, 2013, we eliminated 1,278 of these positions. In connection with the continuing implementation of the program, we achieved incremental pre-tax expense savings of approximately $220 million in 2013, and as previously reported, we achieved incremental pre-tax expense savings of approximately $112 million in 2012 and $86 million in 2011, in each case compared to our 2010 expenses from operations, all else being equal. Incremental pre-tax expense savings to be achieved in 2014 are expected to be approximately $130 million. These pre-tax expense savings relate only to the Business Operations and Information Technology Transformation program and are based on projected improvement from our total 2010 expenses from operations, all else being equal. Our actual total expenses have increased since 2010, and may in the future increase or decrease, due to other factors. The majority of the annual savings will affect compensation and employee benefits expenses. These savings will be modestly offset by increases in information systems and communications expenses as we implement the program. Excluding the expected aggregate restructuring charges of $400 million to $450 million described earlier, we expect the program to reduce our pre-tax expenses from operations, on an annualized basis, by approximately $575 million to $625 million by the end of 2014 compared to 2010, all else being equal, with the full effect to be realized in 2015. We expect the business operations transformation component of the program to result in approximately $450 million of these savings and the information technology transformation component of the program to result in approximately $150 million of these savings. As of December 31, 2013, we have achieved the majority of these savings. 2011 Expense Control Measures In the fourth quarter of 2011, in connection with expense control measures designed to calibrate our expenses to our outlook for our capital markets-facing businesses in 2012, we took two actions. First, we withdrew from our fixed-income trading initiative, in which we traded in fixed-income securities and derivatives as principal with our custody clients and other third parties that trade in these securities and derivatives. Second, we undertook other targeted staff reductions. As a result of these actions, we recorded aggregate pre-tax restructuring charges and credits of $119 million in our consolidated statement of income, as presented in the following table by type of cost: 66



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(In millions) Costs Fixed-Income Trading Portfolio Write-Offs Total 2011 $ 62 $ 38 $ 20 $ 120 2012 3 (9 ) 5 (1 ) Total $ 65 $ 29 $ 25 $ 119 Employee-related costs included severance, benefits and outplacement services. We identified 442 employees to be involuntarily terminated as their roles were eliminated. As of December 31, 2013, we completed these reductions. Costs for the fixed-income trading portfolio resulted primarily from fair-value adjustments to the initiative's trading portfolio related to our decision to withdraw from the initiative. In connection with our withdrawal in 2012, we wound down that initiative's remaining trading portfolio. Costs for asset and other write-offs were related to asset write-downs and contract terminations. 2012 Expense Control Measures In the fourth quarter of 2012, in connection with expense control measures designed to better align our expenses to our business strategy and related outlook for 2013, we identified additional targeted staff reductions. As a result of these actions, we have recorded aggregate pre-tax restructuring charges of $136 million in our consolidated statement of income, as presented in the following table by type of cost: Employee-Related (In millions) Costs Asset and Other Write-Offs Total 2012 $ 129 $ 4 $ 133 2013 (4 ) 7 3 Total $ 125 $ 11 $ 136 Employee-related costs included severance, benefits and outplacement services. Costs for asset and other write-offs were primarily related to contract terminations. We originally identified involuntary terminations and role eliminations of 960 employees (630 positions after replacements). As of December 31, 2013, 782 positions were eliminated through voluntary and involuntary terminations. Aggregate Restructuring-Related Accrual Activity The following table presents aggregate activity associated with accruals that resulted from the charges associated with the Business Operations and Information Technology Transformation program and the 2011 and 2012 expense control measures: 67



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Table of Contents MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued) Employee- Related Real Estate Information Technology Fixed-Income Trading (In millions) Costs Consolidation Costs Portfolio Asset and Other Write-Offs Total Initial accrual $ 105 $ 51 $ - $ - $ - $ 156 Payments (15 ) (4 ) - - - (19 ) Balance as of December 31, 2010 90 47 - - - 137 Additional accruals for Business Operations and Information Technology Transformation program 85 7 41 - - 133 Accruals for 2011 expense control measures 62 - - 38 20



120

Payments and adjustments (75 ) (15 ) (8 ) - (5 ) (103 ) Balance as of December 31, 2011 162 39 33 38 15 287 Additional accruals for Business Operations and Information Technology Transformation program 27 20 20 - - 67 Additional accruals for 2011 expense control measures 3 - - (9 ) 5 (1 ) Accruals for 2012 expense control measures 129 - - - 4



133

Payments and adjustments (126 ) (10 ) (48 ) (29 ) (11 ) (224 ) Balance as of December 31, 2012 195 49 5 - 13 262 Additional accruals for Business Operations and Information Technology Transformation program 13 13 (1 ) - - 25 Additional accruals for 2012 expense control measures (4 ) - - - 7 3 Payments and adjustments (154 ) (13 ) (4 ) - (13 ) (184 ) Balance as of December 31, 2013 $ 50 $ 49 $ - $ - $ 7 $ 106 Income Tax Expense Income tax expense was $550 million in 2013 compared to $705 million in 2012. Our effective tax rate for 2013 was 20.5%, compared to 25.5% for 2012. The decline in the effective tax rate compared to 2012 was mainly the result of the out-of-period income tax benefit described below, as well as our expansion of our tax-exempt investment securities portfolio and an increase in renewable energy investments. In the fourth quarter of 2013, we completed a multi-year tax data enhancement process, the final stages of which identified a reconciliation difference in our deferred tax accounts, and we determined that our deferred tax liabilities were overstated by $50 million and our deferred tax assets were understated by $21 million. We evaluated the qualitative and quantitative effects of the resulting overstatement of income tax expense, and concluded that such overstatement did not have a material effect on any prior full-year or quarterly consolidated financial statements. Accordingly, in the fourth quarter of 2013, we recorded an adjustment in our consolidated statement of income to correct this difference, which resulted in an out-of-period income tax benefit of $71 million. Excluding the impact of this $71 million income tax benefit, income tax expense in 2013 would have been $621 million, compared to $705 million in 2012, and our effective tax rate for 2013 would have been 23.2%, compared to 25.5% for 2012. LINE OF BUSINESS INFORMATION We have two lines of business: Investment Servicing and Investment Management. Given our services and management organization, 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. Information about our two lines of business, as well as the revenues, expenses and capital allocation methodologies associated with them, is provided in note 25 to the consolidated financial statements included under Item 8 of this Form 10-K. The following table provides a summary of our line of business results for the periods indicated. The "Other" column for 2013 included net acquisition and restructuring costs of $104 million; certain provisions for litigation exposure and other costs of $65 million; and severance costs associated with reorganization of certain non-U.S. operations of $11 million. The "Other" column for 2012 included the net realized loss from the sale of all of our Greek investment securities of $46 million; a benefit related to claims associated with the 2008 Lehman Brothers bankruptcy of $362 million; certain provisions for litigation exposure and other costs of $118 million; and net acquisition and restructuring costs of $225 million. The "Other" column for 2011 included acquisition and restructuring costs of $269 million. The amounts in the "Other" columns were not allocated to State Street's business lines. Results for 2012 reflect reclassifications, for comparative purposes, related to management changes in methodologies associated with allocations of capital and expenses reflected in results for 2013. Results for 2011 were not adjusted for these reclassifications. Investment Investment Servicing Management Other Total % Change % Change Years Ended 2013 vs. 2013 vs. December 31, 2013 2012 2011 2012 2013

2012 2011 2012 2013 2012 2011 2013 2012 2011 (Dollars in millions, except where otherwise noted) Fee revenue: Servicing fees $ 4,819$ 4,414$ 4,382 9 % $ - $ - $ - $ - $ - $ - $ 4,819$ 4,414$ 4,382 Management fees - - - 1,106 993 917 11 % - - - 1,106 993 917 Trading services 994 912 1,131 9 67 98 89 (32 ) - - - 1,061 1,010 1,220 Securities finance 324 363 333 (11 ) 35 42 45 (17 ) - - - 359 405 378 Processing fees and other 238 259 284 (8 ) 7 7 13 - - - - 245 266 297 Total fee revenue 6,375 5,948 6,130 7 1,215 1,140 1,064 7 - - - 7,590 7,088 7,194 Net interest revenue 2,221 2,464 2,231 (10 ) 82 74 102 11 - - - 2,303 2,538 2,333 Gains (losses) related to investment securities, net (9 ) 69 67 - - - - (46 ) - (9 ) 23 67 Total revenue 8,587 8,481 8,428 1 1,297 1,214 1,166 7 - (46 ) - 9,884 9,649 9,594 Provision for loan losses 6 (3 ) - - - - - - - 6 (3 ) - Total expenses 6,176 6,041 5,890 2 836



864 899 (3 ) 180 (19 ) 269 7,192

6,886 7,058 Income before income tax expense $ 2,405$ 2,443$ 2,538 (2 ) $ 461$ 350$ 267 32 $ (180 )$ (27 )$ (269 )$ 2,686$ 2,766$ 2,536 Pre-tax margin 28 % 29 % 30 % 36 % 29 % 23 % 27 % 29 % 26 % Average assets (in billions) $ 203.24$ 190.09$ 170.45$ 3.76$ 3.72$ 4.36$ 207.00$ 193.81$ 174.81 Investment Servicing Total revenue and total fee revenue in 2013 for our Investment Servicing line of business, as presented in the preceding table, increased 1% and 7%, respectively, compared to 2012. The 7% increase in total fee revenue mainly resulted from increases in servicing fees and trading services revenue, partly offset by declines in securities finance revenue and processing fees and other revenue. Servicing fees in 2013 increased 9% compared to 2012, primarily the result of stronger global equity markets, the impact of net new business installed on current-period revenue and the addition of revenue from the October 2012 GSAS acquisition. Trading services revenue in 2013 increased 9% compared to 2012, mainly due to higher foreign exchange trading revenue associated with higher client volumes, currency volatility and spreads. Securities finance revenue in 2013 decreased 11% compared to 2012, primarily the result of lower spreads and slightly lower average lending volumes. Processing fees and other revenue in 2013 decreased 8% compared to 2012, primarily due to the absence of the fair-value adjustment related to our withdrawal from our fixed-income trading initiative and the gain from the sale of a Lehman Brothers-related asset, both recorded in 2012, as well as hedge ineffectiveness recorded in 2013. This decline was partly offset by an increase in revenue associated with our investment in bank-owned life insurance for 2013 compared to 2012. Servicing fees and gains (losses) related to investment securities, net, for our Investment Servicing business line are identical to the respective consolidated results. Refer to "Servicing Fees," and "Gains (Losses) Related to Investment Securities, Net" under "Total Revenue" in this Management's Discussion and Analysis for a more in-depth discussion. A discussion of trading services revenue, securities finance revenue and processing fees and other revenue is provided under "Trading Services," "Securities Finance" and "Processing Fees and Other" in "Total Revenue." 68



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AND RESULTS OF OPERATIONS (Continued) Net interest revenue in 2013 decreased 10% compared to 2012 primarily due to the impact of lower yields on interest-earning assets related to lower global interest rates, partly offset by lower funding costs. The decrease also reflected the continued impact of the reinvestment of pay-downs on existing investment securities in lower-yielding investment securities. A discussion of net interest revenue is provided under "Net Interest Revenue" in "Total Revenue." Total expenses in 2013 increased 2% compared to 2012. Information systems and communications expenses increased, primarily the result of the planned transition of certain functions to third-party service providers associated with components of our technology infrastructure and application maintenance and support as part of the Business Operations and Information Technology Transformation program, as well as costs to support new business. Transaction processing services expenses increased in 2013 compared to 2012, mainly due to higher equity market values and higher transaction volumes in the asset servicing business. Other expenses increased, primarily due to increased donations, higher securities processing costs, the addition of amortization of other intangible assets associated with the GSAS acquisition completed in October 2012, and higher regulatory fees and assessments. These expense increases were partly offset by declines in compensation and employee benefits expenses, primarily driven by savings associated with the implementation of our Business Operations and Information Technology Transformation program, partly offset by an increase in costs to support new business and higher incentive compensation. A more detailed discussion of expenses is provided under "Expenses" in "Consolidated Results of Operations." Investment Management Total revenue and total fee revenue in 2013 for our Investment Management line of business, as presented in the preceding table, both increased 7% compared to 2012. The increase in total fee revenue was generally reflective of an increase in management fees, partly offset by a decline in trading services revenue. Management fees in 2013 increased 11% compared to 2012, primarily the result of stronger equity market valuations and the impact of net new business installed on current-period revenue. Trading services revenue decreased 32% in 2013 compared to 2012, mainly due to the impact of lower distribution fees associated with the SPDR® Gold ETF, which resulted from lower average gold prices and net outflows from the SPDR® Gold ETF. Management fees for the Investment Management business line are identical to the respective consolidated results. Refer to "Management Fees" in "Total Revenue" in this Management's Discussion and Analysis for a more in-depth discussion. A discussion of trading services revenue is provided under "Trading Services" in "Total Revenue." Total expenses in 2013 decreased 3% compared to 2012, mainly reflective of credits associated with Lehman Brothers-related assets, partly offset by higher incentive compensation. 69



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CONSOLIDATED RESULTS OF OPERATIONS - COMPARISON OF 2012 AND 2011 OVERVIEW OF CONSOLIDATED RESULTS OF OPERATIONS

% Change 2012 Years Ended December 31, 2012 2011 vs. 2011 (Dollars in millions, except per share amounts) Total fee revenue $ 7,088$ 7,194 (1 )% Net interest revenue 2,538 2,333 9 Gains (losses) related to investment securities, net 23 67 Total revenue 9,649 9,594 1 Provision for loan losses (3 ) - Total expenses 6,886 7,058 (2 ) Income before income tax expense 2,766 2,536 Income tax expense(1) 705 616 Net income $ 2,061$ 1,920 7 Adjustments to net income: Dividends on preferred stock(2) (29 ) (20 ) Earnings allocated to participating securities(3) (13 ) (18 ) Net income available to common shareholders $ 2,019$ 1,882 7 Earnings per common share: Basic $ 4.25$ 3.82 Diluted 4.20 3.79 Average common shares outstanding (in thousands): Basic 474,458



492,598

Diluted 481,129



496,072

Return on average common equity 10.3 % 10.0 % (1) Amounts for 2012 and 2011 reflected the net effects of certain tax matters ($7 million benefit and $55 million expense, respectively) associated with the 2010 Intesa acquisition. Amount for 2011 reflected a discrete income tax benefit of $103 million attributable to costs incurred in terminating former conduit asset structures. (2) Amount for 2012 included $8 million related to Series C Preferred stock and $21 million related to Series A Preferred stock; amount for 2011 related to Series A Preferred stock. (3) Refer to note 24 to the consolidated financial statements included under Item 8 of this Form 10-K. 70



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TOTAL REVENUE Years Ended December 31, 2012 2011 % Change 2012 vs. 2011 (Dollars in millions) Fee revenue: Servicing fees $ 4,414$ 4,382 1 % Management fees 993 917 8 Trading services revenue: Foreign exchange trading 511 683 (25 ) Brokerage and other trading services 499 537 (7 ) Total trading services revenue 1,010 1,220 (17 ) Securities finance 405 378 7 Processing fees and other 266 297 (10 ) Total fee revenue 7,088 7,194 (1 ) Net interest revenue: Interest revenue 3,014 2,946 2 Interest expense 476 613 (22 ) Net interest revenue 2,538 2,333 9 Gains related to investment securities, net 23 67 (66 ) Total revenue $ 9,649$ 9,594 1 Total revenue for 2012 increased 1% compared to 2011, primarily the result of increased servicing fee revenue and management fee revenue, as well as a higher level of net interest revenue, partly offset by declines in trading service revenue and processing fees and other revenue. Servicing fees for 2012 increased 1% from 2011, mainly due to stronger equity markets, the impact of net new business and revenue added from acquired businesses, partly offset by the impacts of the weaker euro and client de-risking. In both 2012 and 2011, servicing fees generated outside the U.S. were approximately 42% of total servicing fees. Management fees for 2012 increased 8% from 2011, primarily due to the impact of stronger equity markets, net new business and higher performance fees. Management fees generated outside the U.S. in 2012 were approximately 37% of total management fees, compared to 41% in 2011, with the decline mainly the result of higher levels of management fees generated in the U.S. Trading services revenue for 2012 declined 17% compared to 2011, mainly the result of a decline in revenue from foreign exchange trading, due to lower currency volatility, and changes in product mix, partly offset by higher client volumes. Securities finance revenue for 2012 increased 7% from 2011 as a result of higher spreads across all lending programs, partly offset by lower lending volumes. Net interest revenue for 2012 increased 9% compared to 2011. The overall increase generally resulted from higher levels of interest-earning assets, growth in the investment portfolio and lower funding costs. These increases were partly offset by the impact of generally lower rates on interest-earning assets. Net interest revenue for 2012 and 2011 included $215 million and $220 million, respectively, of discount accretion related to investment securities added to our consolidated statement of condition in connection with the commercial paper conduit consolidation in 2009. We recorded net gains related to investment securities of $23 million for 2012, composed of net realized gains of $55 million from sales of available-for-sale investment securities, net of $32 million of net impairment losses. The net realized gains from sales of available-for-sale securities in 2012 reflected a loss of $46 million from the sale of all of our Greek investment securities, which were previously classified as held to maturity. The sale was undertaken as a result of the effect of significant deterioration in the creditworthiness of the underlying collateral, including significant downgrades of the securities' external credit ratings. For 2011, we recorded net gains related to investment securities of $67 million, composed of net realized gains of $140 million from sales of available-for-sale investment securities, net of $73 million of net impairment losses. The aggregate unrealized loss on securities for which other-than-temporary impairment was recorded in 2012 was $53 million. Of this total, $21 million related to factors other than credit, and was recognized, net of taxes, as a component of other comprehensive income in our consolidated statement of condition. We recorded losses from 71



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other-than-temporary impairment related to credit of the remaining $32 million in our 2012 consolidated statement of income, compared to $73 million in 2011.

EXPENSES Years Ended December 31, 2012 2011 % Change 2012 vs. 2011 (Dollars in millions) Compensation and employee benefits $ 3,837$ 3,820 Information systems and communications 844 776 9 % Transaction processing services 702 732 (4 ) Occupancy 470 455 3 Claims resolution (362 ) - Acquisition costs, net 26 16 Restructuring charges, net 199 253 Other: Professional services 381 347 10 Amortization of other intangible assets 198 200



(1 ) Securities processing (recoveries) costs 24 (6 ) Regulatory fees and assessments

61 53 15 Other 506 412 23 Total other 1,170 1,006 16 Total expenses $ 6,886$ 7,058 (2 ) Number of employees at year-end 29,660 29,740



Expenses

Compensation and employee benefits expenses were relatively flat in 2012 compared to 2011, as costs added from merit increases and acquisitions in 2012 were almost completely offset by the expense savings associated with the 2011 expense control measures and the implementation of our Business Operations and Information Technology Transformation program. Information systems and communications expenses were higher primarily as a result of the impact of our implementation of the Business Operations and Information Technology Transformation program, as we expanded our use of service providers associated with components of our technology infrastructure and application maintenance and support, as well as additional costs to support business growth. Transaction processing services expenses declined primarily as a result of lower sub-custodian and external contract services costs related to declines in transaction volumes in trading services and our withdrawal from the fixed-income trading initiative. In 2012, we recorded acquisition costs of $66 million, mainly related to integration costs incurred in connection with the 2012 GSAS and 2010 Intesa acquisitions. These acquisition costs were partly offset by an indemnification benefit of $40 million for the assumption of an income tax liability related to the Intesa acquisition. In 2012, we recorded aggregate restructuring charges of approximately $199 million, primarily including $67 million related to the continuing implementation of our Business Operations and Information Technology Transformation program. The remaining net restructuring charges of $132 million for 2012 were composed of charges of $133 million related to expense control measures initiated by us in 2012 and a net credit adjustment of $(1) million related to expense control measures we initiated in 2011. The charges for the Business Operations and Information Technology Transformation program consisted mainly of costs related to employee severance and information technology. Charges associated with the expense control measures included employee-related costs, principally costs related to severance, benefits and outplacement services; fixed-income trading portfolio-related costs, which resulted from fair-value adjustments to the initiative's trading portfolio related to our decision to withdraw from the initiative; and costs for asset write-downs and contract terminations. As a result of the withdrawal from the fixed-income trading initiative in 2012, we wound down that initiative's remaining derivatives portfolio. 72



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AND RESULTS OF OPERATIONS (Continued) The increase in aggregate other expenses (professional services, amortization of other intangible assets, securities processing costs (recoveries), regulatory fees and assessments and other costs) for 2012 compared to 2011 resulted primarily from the impact of litigation and consulting costs on professional fees, higher levels of securities processing costs and higher levels of regulatory fees and assessments. Income Tax Expense We recorded income tax expense of $705 million for 2012, compared to $616 million for 2011, and our effective tax rate for 2012 was 25.5%, compared to 24.3% for 2011. The increases in both comparisons were primarily associated with the impact of a discrete tax benefit of $103 million recorded in 2011 attributable to costs incurred in terminating former conduit asset structures. In addition, income tax expense for 2012 and 2011 included a net benefit of $7 million and expense of $55 million, respectively, related to the net effects of certain tax matters associated with the 2010 Intesa acquisition. 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 generated by client activities are invested in assets that generally match the liquidity and interest-rate characteristics of the liabilities, although the weighted-average maturities of our assets are significantly longer than the contractual maturities of our liabilities. Our assets consist primarily of securities held in our available-for-sale or held-to-maturity 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. The following table presents the components of our average total interest-earning and noninterest-earning assets, average total interest-bearing and noninterest-bearing liabilities, and average preferred and common shareholders' equity for the years ended December 31. Additional information about our average statement of condition, primarily our interest-earning assets and interest-bearing liabilities, is included under "Consolidated Results of Operations - Total Revenue - Net Interest Revenue" in this Management's Discussion and Analysis. 73



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Years Ended December 31, 2013 2012 (In millions) Average Balance Average Balance Assets:



Interest-bearing deposits with banks $ 28,946 $

26,823

Securities purchased under resale agreements 5,766 7,243 Trading account assets 748 651 Investment securities 117,696 113,910 Loans and leases 13,781 11,610 Other interest-earning assets 11,164 7,378 Total interest-earning assets 178,101 167,615 Cash and due from banks 3,747 3,811 Other noninterest-earning assets 25,182



22,384

Total assets $ 207,030 $



193,810

Liabilities and shareholders' equity: Interest-bearing deposits: U.S. $ 8,862 $ 9,333 Non-U.S. 100,391 89,059 Total interest-bearing deposits 109,253



98,392

Securities sold under repurchase agreements 8,436 7,697 Federal funds purchased 298 784 Other short-term borrowings 3,785 4,676 Long-term debt 8,415 7,008 Other interest-bearing liabilities 6,457



5,898

Total interest-bearing liabilities 136,644



124,455

Noninterest-bearing deposits 36,294



36,512

Other noninterest-bearing liabilities 13,561



12,660

Preferred shareholders' equity 490



515

Common shareholders' equity 20,041



19,668

Total liabilities and shareholders' equity $ 207,030 $ 193,810

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AND RESULTS OF OPERATIONS (Continued) Investment Securities The following table presents the carrying values of investment securities by type as of December 31: (In millions) 2013 2012 2011 Available for sale: U.S. Treasury and federal agencies: Direct obligations $ 709$ 841$ 2,836 Mortgage-backed securities 23,563 32,212 30,021 Asset-backed securities: Student loans(1) 14,542 16,421 16,545 Credit cards 8,210 9,986 10,487 Sub-prime 1,203 1,399 1,404 Other 5,064 4,677 3,465 Total asset-backed securities 29,019 32,483 31,901 Non-U.S. debt securities: Mortgage-backed securities 11,029 11,405 10,875 Asset-backed securities 5,390 6,218 4,303 Government securities 3,761 3,199 1,671 Other 4,727 4,306 2,825



Total non-U.S. debt securities 24,907 25,128 19,674 State and political subdivisions 10,263 7,551 7,047 Collateralized mortgage obligations 5,269 4,954 3,980 Other U.S. debt securities

4,980 5,298 3,615 U.S. equity securities 34 31 27 Non-U.S. equity securities 1 1 3 U.S. money-market mutual funds 422 1,062 613



Non-U.S. money-market mutual funds 7 121 115 Total

$ 99,174$ 109,682$ 99,832 Held to Maturity: U.S. Treasury and federal agencies: Direct obligations $ 5,041$ 5,000 $ - Mortgage-backed securities 91 153 265 Asset-backed securities: Student loans(1) 1,627 - - Credit cards 762 - - Other 782 16 31 Total asset-backed securities 3,171 16 31 Non-U.S. debt securities: Mortgage-backed securities 4,211 3,122 4,973 Asset-backed securities 2,202 434 436 Government securities 2 3 3 Other 192 167 172



Total non-U.S. debt securities 6,607 3,726 5,584 State and political subdivisions 24

74 107



Collateralized mortgage obligations 2,806 2,410 3,334 Total

$ 17,740$ 11,379$ 9,321 (1) Substantially composed of securities guaranteed by the federal government with respect to at least 97% of defaulted principal and accrued interest on the underlying loans. 75



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AND RESULTS OF OPERATIONS (Continued) The increase in municipal securities as of December 31, 2013 compared to December 31, 2012, classified as state and political subdivisions in the table above, generally resulted from the diversification of our investment portfolio exposure by asset class, as we reduced our exposure to mortgage-backed securities. Additional information about our investment securities portfolio is provided in note 4 to the consolidated financial statements included under Item 8 of 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. Our portfolio is concentrated in securities with high credit quality, with approximately 89% of the carrying value of the portfolio rated "AAA" or "AA" as of December 31, 2013. The following table presents the percentages of the carrying value of the portfolio, by external credit rating, as of December 31: 2013 2012 AAA(1) 70 % 69 % AA 19 19 A 6 7 BBB 3 3 Below BBB 2 2 100 % 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. As of December 31, 2013, the investment portfolio of approximately 10,510 securities was diversified with respect to asset class. Approximately 74% of the aggregate carrying value of the portfolio as of that date was composed of mortgage-backed and asset-backed securities, compared to approximately 77% as of December 31, 2012. The asset-backed portfolio, of which approximately 97% of the carrying value was floating-rate, consisted primarily of student loan-backed and credit card-backed securities. Mortgage-backed securities were composed of securities issued by the Federal National Mortgage Association and Federal Home Loan Mortgage Corporation, as well as U.S. and non-U.S. large-issuer collateralized mortgage obligations. In December 2013, U.S. regulators issued final regulations to implement the so-called "Volcker rule," one of many provisions of the Dodd-Frank Act. The Volcker rule will, among other things, require banking organizations covered by the rule to either restructure or divest of certain investments in and relationships with "covered funds," as defined in the final Volcker rule regulations. The classification of certain types of investment securities or structures, such as collateralized loan obligations, or CLOs, as "covered funds" remains subject to market, and ultimately regulatory, interpretation, based on the specific terms and other characteristics relevant to such investment securities and structures. As of December 31, 2013, we held an aggregate of approximately $5.77 billion of investments in CLOs. As of the same date, these investments had an aggregate pre-tax net unrealized gain of approximately $122 million, composed of gross unrealized gains of $141 million and gross unrealized losses of $19 million. In the event that we or our banking regulators conclude that such investments in CLOs, or other investments, are "covered funds," we may be required to divest of such investments. If other banking entities reach similar conclusions with respect to similar investments held by them, the prices of such investments could decline significantly, and we may be required to divest of such investments at a significant discount compared to the investments' book value. This could result in a material adverse effect on our consolidated results of operations in the period in which such a divestment occurs or on our consolidated financial condition. Our investment securities portfolio represented approximately 48% and 54% of our consolidated total assets as of December 31, 2013 and December 31, 2012, respectively, and the gross interest revenue generated by our investment securities portfolio represented approximately 22% of our consolidated total gross revenue for 2013, compared to approximately 25% of our consolidated total gross revenue for 2012. Our investment securities portfolio represents a greater proportion of our consolidated statement of condition as described above, and our loan-and-lease portfolio represents a smaller proportion (approximately 6% of our consolidated total assets as of both December 31, 2013 and December 31, 2012), in comparison to many other major banking organizations. In some respects, the accounting and regulatory treatment of our investment 76



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AND RESULTS OF OPERATIONS (Continued) securities portfolio may be less favorable to us than a more traditional held-for-investment lending portfolio or a portfolio of U.S. Treasury securities. For example, under the July 2013 Basel III final rule, after-tax unrealized gains and losses on investment securities classified as available for sale will be included in tier 1 capital. Since loans held for investment are not subject to a fair-value accounting framework, changes in the fair value of loans (other than incurred credit losses) are not similarly included in the determination of tier 1 capital under the Basel III final rule. As a result of this differing treatment, we may experience increased variability in our tier 1 capital relative to other major banking institutions whose loan-and-lease portfolios represent a larger proportion of their consolidated total assets than ours. Non-U.S. Debt Securities Approximately 27% of the aggregate carrying value of our investment securities portfolio as of December 31, 2013 was composed of non-U.S. debt securities, compared to approximately 24% as of December 31, 2012. The following table presents our non-U.S. debt securities available for sale and held to maturity, included in the preceding table of investment securities carrying values, by significant country of issuer or location of collateral, as of December 31: (In millions) 2013 2012 Available for Sale: United Kingdom $ 9,357$ 10,263 Australia 3,551 4,035 Netherlands 3,471 3,006 Canada 2,549 2,274 France 1,581 1,364 Germany 1,410 1,836 Japan 971 1,173 South Korea 744 257 Finland 397 259 Norway 369 210 Sweden 142 72 Austria 83 - Spain 65 67 Mexico 55 70 Other 162 242 Total $ 24,907$ 25,128 Held to Maturity: Australia $ 2,216$ 2,189 United Kingdom 1,474 920 Germany 1,263 - Netherlands 934 - Italy 270 276 Spain 206 209 Other 244 132 Total $ 6,607$ 3,726 Approximately 89% and 87% of the aggregate carrying value of these non-U.S. debt securities was rated "AAA" or "AA" as of December 31, 2013 and 2012, respectively. The majority of these securities comprise senior positions within the security structures; these positions have a level of protection provided through subordination and other forms of credit protection. Approximately 72% of the aggregate carrying value of these non-U.S. debt securities was floating-rate, and accordingly, the securities are considered to have minimal interest-rate risk. As of December 31, 2013, these non-U.S. debt securities had an average market-to-book ratio of 101.3%, and an aggregate pre-tax net unrealized gain of approximately $413 million, composed of gross unrealized gains of $483 million and gross unrealized losses of $70 million. These unrealized amounts included a pre-tax net unrealized gain of $292 million, composed of gross unrealized gains of $314 million and gross unrealized losses of $22 million, associated with non-U.S. debt securities available for sale. 77



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AND RESULTS OF OPERATIONS (Continued) As of December 31, 2013, the underlying collateral for these mortgage- and asset-backed securities primarily included U.K. prime mortgages, Australian and Dutch mortgages and German automobile loans. The securities listed under "Canada" were composed of Canadian government securities and corporate debt. The securities listed under "France" were composed of automobile loans and corporate debt. The securities listed under "Japan" were substantially composed of Japanese government securities. The securities listed under "South Korea" were composed of South Korean government securities. The "other" category of available-for-sale securities included approximately $68 million and $105 million of securities as of December 31, 2013 and 2012, respectively, related to Portugal and Ireland, all of which were mortgage-backed securities. The "other" category of held-to-maturity securities included approximately $130 million of securities as of both December 31, 2013 and 2012 related to Portugal and Ireland, all of which were mortgage-backed securities. Our aggregate exposure to Spain, Italy, Ireland and Portugal as of December 31, 2013 did not include any direct sovereign debt exposure to any of these countries. Our indirect exposure to these countries totaled approximately $740 million, which included approximately $574 million of mortgage- and asset-backed securities with an aggregate pre-tax net unrealized gain of approximately $69 million as of December 31, 2013, composed of gross unrealized gains of $84 million and gross unrealized losses of $15 million. We recorded other-than-temporary impairment of $6 million on certain of these mortgage- and asset-backed securities in our consolidated statement of income in 2013, all of which was associated with management's intent to sell an impaired security prior to its recovery in value. In 2012, we recorded other-than-temporary impairment of $6 million on certain of these mortgage- and asset-backed securities, all of which was associated with expected credit losses. We recorded no other-than-temporary impairment on these mortgage- and asset-backed securities in 2011. Eurozone crisis tensions appeared to ease to an extent in 2013, following renewed volatility at the end of the first quarter of 2013. Economic performance remains weak in Spain, Italy, Ireland and Portugal. Throughout the sovereign debt crisis, the major independent credit rating agencies have downgraded, and may in the future do so again, 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. As a result, we may be exposed to increased counterparty risk, leading to negative ratings volatility. Country risks with respect to Spain, Italy, Ireland and Portugal are identified, assessed and monitored by our Country Risk Committee. Country limits are defined in our credit and counterparty risk guidelines, in conformity with our credit and counterparty risk policy. These limits are monitored on a daily basis by Enterprise Risk Management. These country exposures are subject to ongoing surveillance and stress test analysis, conducted by the investment portfolio management team. The stress tests performed reflect the structure and nature of the exposure, its past and projected future performance based on macroeconomic and environmental analysis, with key underlying assumptions varied under a range of scenarios, reflecting downward pressure on collateral performance. The results of the stress tests are presented to senior management and Enterprise Risk Management as part of the surveillance process. In addition, Enterprise Risk Management conducts separate stress-test analyses and evaluates the structured asset exposures in these countries for the assessment of other-than-temporary impairment. The assumptions used in these evaluations reflect expected downward pressure on collateral performance. Stress scenarios are subject to regular review, and are updated to reflect changes in the economic environment, measures taken in response to the sovereign debt crisis and collateral performance, with particular attention to these specific country exposures. Municipal Securities We carried an aggregate of approximately $10.29 billion of municipal securities, classified as state and political subdivisions in the preceding table of investment securities carrying values, in our investment securities portfolio as of December 31, 2013. Substantially all of these securities were classified as available for sale, with the remainder classified as held to maturity. As of the same date, we also provided approximately $8.16 billion of credit and liquidity facilities to municipal issuers as a form of credit enhancement. The following tables present our combined credit exposure to state and municipal obligors that represented 5% or more of our aggregate municipal credit exposure of approximately $18.45 billion and $16.12 billion across our businesses as of December 31, 2013 and 2012, respectively, grouped by state to display geographic dispersion: 78



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Table of Contents MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued) Total Municipal Credit and % of Total Municipal December 31, 2013 Securities Liquidity Facilities Total Exposure (Dollars in millions) State of Issuer: Texas $ 1,233 $ 1,628 $ 2,861 16 % New York 919 1,000 1,919 10 Massachusetts 967 759 1,726 9 California 373 1,266 1,639 9 Maryland 327 643 970 5 Total $ 3,819 $ 5,296 $ 9,115 Total Municipal Credit and % of Total Municipal December 31, 2012 Securities Liquidity Facilities Total Exposure (Dollars in millions) State of Issuer: Texas $ 1,091 $ 1,957 $ 3,048 19 % New York 486 973 1,459 9 Massachusetts 869 508 1,377 9 California 190 1,158 1,348 8 New Jersey 867 - 867 5 Florida 148 680 828 5 Total $ 3,651 $ 5,276 $ 8,927 Our aggregate municipal securities exposure presented in the foregoing table was concentrated primarily with highly-rated counterparties, with approximately 84% of the obligors rated "AAA" or "AA" as of December 31, 2013. As of that date, approximately 64% and 34% of our aggregate exposure was associated with general obligation and revenue bonds, respectively. In addition, we had no exposures associated with healthcare, industrial development or land development bonds. The portfolios are also diversified geographically; the states that represent our largest exposure are widely dispersed across the U.S. Additional information with respect to our assessment of other-than-temporary impairment of our municipal securities is provided in note 4 to the consolidated financial statements included under Item 8 of this Form 10-K. 79



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AND RESULTS OF OPERATIONS (Continued)



The following table presents the carrying amounts, by contractual maturity, of debt securities available for sale and held to maturity, and the related weighted-average contractual yields, as of December 31, 2013:

Under 1 Year 1 to 5 Years 6 to 10 Years Over 10 Years (Dollars in millions) Amount Yield Amount Yield Amount Yield Amount Yield Available for sale(1): U.S. Treasury and federal agencies: Direct obligations $ 1 3.74 % $ 36 3.50 % $ 46 3.05 % $ 626 2.05 % Mortgage-backed securities 272 1.90 2,267 3.22 5,331 3.08 15,693 3.06 Asset-backed securities: Student loans 927 .45 6,400 .57 4,546 .60 2,669 .75 Credit cards 2,629 .53 3,366 .65 2,215 1.14 - - Sub-prime 33 1.43 20 2.41 2 2.62 1,148 .69 Other 304 .67 1,603 .62 1,438 1.04 1,719 1.40 Total asset-backed 3,893 11,389 8,201 5,536 Non-U.S. debt securities: Mortgage-backed securities 883 1.75 5,791 1.68 150 2.36 4,205 2.61 Asset-backed securities 432 1.06 4,235 1.11 592 1.53 131 1.62 Government securities 2,727 .71 1,034 .46 - - - - Other 1,201 2.69 2,871 2.31 655 1.40 - - Total non-U.S. debt securities 5,243 13,931 1,397 4,336 State and political subdivisions(2) 690 4.62 3,152 4.59 3,884 5.34 2,537 5.65 Collateralized mortgage obligations 421 4.76 1,633 3.29 1,240 2.28 1,975 2.87 Other U.S. debt securities 299 4.39 3,919 3.95 729 4.29 33 .79 Total $ 10,819$ 36,327$ 20,828$ 30,736 Held to maturity(1): U.S. Treasury and federal agencies: Direct Obligations $ - - % $ - - % $ 5,000 2.09 % $ 41 .59 % Mortgage-backed securities - - 22 5.00 18 5.00 51 5.36 Asset-backed securities Student loans 18 .37 152 .60 221 .87 1,236 .74 Credit cards - - 278 .66 484 .57 - - Other - - 493 .48 284 .59 5 .59 Total asset-backed 18 923 989 1,241 Non-U.S. debt securities: Mortgage-backed securities - - 1,141 1.31 179 3.67 2,891 1.68 Asset-backed securities 140 .58 1,828 .95 234 .71 - - Government securities 2 .31 - - - - - - Other 165 1.11 25 .82 - - 2 2.94 Total non-U.S. debt securities 307 2,994 413 2,893 State and political subdivisions(2) 15 5.53 9 5.51 - - - - Collateralized mortgage obligations 187 3.12 1,065 3.04 495 1.48 1,059 2.47 Total $ 527$ 5,013 $

6,915 $ 5,285 (1) The maturities of mortgage-backed securities, asset-backed securities and collateralized mortgage obligations are based on expected principal payments. (2) Yields were calculated on a fully taxable-equivalent basis, using applicable federal and state income tax rates. Impairment Impairment exists when the fair value of an individual security is below its amortized cost basis. Impairment of a security is further assessed to determine whether such impairment is other-than-temporary. When the impairment is deemed to be other-than-temporary, we record the loss in our consolidated statement of income. In addition, for debt securities available for sale and held to maturity, we record impairment in our consolidated statement of income when management intends to sell (or may be required to sell) the securities before they recover in value, or 80



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AND RESULTS OF OPERATIONS (Continued) when management expects the present value of cash flows expected to be collected from the securities to be less than the amortized cost of the impaired security (a credit loss). The following table presents the amortized cost and fair value, and associated net unrealized gains and losses, of investment securities available for sale and held to maturity as of December 31: 2013(1) 2012(1) Net Unrealized Amortized Net Unrealized (In millions) Amortized Cost Gains(Losses) Fair Value Cost Gains(Losses) Fair Value Available for sale(2) $ 99,159 $ 15 $ 99,174$ 108,563 $ 1,119 $ 109,682 Held to maturity(2) 17,740 (180 ) 17,560 11,379 282 11,661 Total investment securities 116,899 (165 ) 116,734 119,942 1,401 121,343 Net after-tax unrealized gain (loss) $ (96 ) $ 885 (1) Amounts excluded the remaining net unrealized losses primarily related to reclassifications of securities available for sale to securities held to maturity in 2008, recorded in accumulated other comprehensive income, or AOCI, within shareholders' equity in our consolidated statement of condition. Additional information is provided in note 13 to the consolidated financial statements included under Item 8 of this Form 10-K. (2) Securities available for sale are carried at fair value, with after-tax net unrealized gains and losses recorded in AOCI. Securities held to maturity are carried at cost, and unrealized gains and losses are not recorded in our consolidated financial statements. The aggregate decline to a net unrealized loss as of December 31, 2013 from a net unrealized gain as of December 31, 2012 presented above was primarily attributable to changes in interest rates in 2013. We conduct periodic reviews of individual securities to assess whether other-than-temporary impairment exists. Our assessment of other-than-temporary 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, other-than-temporary impairment could increase, in particular the credit-related component that would be recorded in our consolidated statement of income. In the aggregate, we recorded net losses from other-than-temporary impairment of $23 million and $32 million in the years ended December 31, 2013 and December 31, 2012, respectively. Additional information with respect to this other-than-temporary impairment and net impairment losses, as well as information about our assessment of impairment, is provided in note 4 to the consolidated financial statements included under Item 8 of this Form 10-K. Given the exposure of our investment securities portfolio, particularly mortgage- and asset-backed securities, to residential mortgage and other consumer credit risks, the performance of the U.S. housing market continues to be a factor in the portfolio's credit performance. As such, our assessment of other-than-temporary impairment relies, in part, on our estimates of trends in national housing prices in addition to trends in unemployment rates, interest rates and the timing of defaults. Generally, indices that measure trends in national housing prices are published in arrears. As of September 30, 2013, national housing prices, according to the Case-Shiller National Home Price Index, had declined by approximately 21% peak-to-current. Overall, our evaluation of other-than-temporary impairment as of December 31, 2013 included an expectation of a U.S. housing recovery characterized by relatively modest growth in national housing prices over the next few years. In connection with our assessment of other-than-temporary impairment with respect to relevant securities in our investment portfolio in future periods, we will consider trends in national housing prices that we observe at those times, including the Case-Shiller National Home Price Index, in addition to trends in unemployment rates, interest rates and the timing of defaults. The other-than-temporary impairment of our investment securities portfolio continues to be sensitive to our estimates of future cumulative losses. However, given our recent more positive outlook for U.S. national housing prices, our sensitivity analysis indicates, as of December 31, 2013, that our investment securities portfolio is currently less exposed to the overall housing price outlook relative to other factors, including unemployment rates and interest rates, than it was as of December 31, 2012. The residential mortgage servicing environment remains challenging, and the time line to liquidate distressed loans continues to extend. The rate at which distressed residential mortgages are liquidated may affect, among other things, our investment securities portfolio. Such effects could include the timing of cash flows or the credit quality associated with the mortgages collateralizing certain of our residential mortgage-backed securities, which, accordingly, could result in the recognition of additional other-than-temporary impairment in future periods. 81



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AND RESULTS OF OPERATIONS (Continued) Our evaluation of potential other-than-temporary impairment of mortgage-backed securities with collateral located in Spain, Italy, Ireland and Portugal takes into account government intervention in the corresponding mortgage markets and assumes a negative baseline macroeconomic environment for this region, due to a combination of slow economic growth and government austerity measures. Our baseline view assumes a recessionary period characterized by high unemployment and by additional declines in housing prices of between 12% and 19% across these four countries. Our evaluation of other-than-temporary impairment in our base case does not assume a disorderly sovereign debt restructuring or a break-up of the Eurozone. In addition, we perform stress testing and sensitivity analysis in order to assess the impact of more severe assumptions on potential other-than-temporary impairment. We estimate, for example, that in more stressful scenarios in which unemployment, gross domestic product and housing prices in these four countries deteriorate more than we expected as of December 31, 2013, other-than-temporary impairment could increase by a range of approximately $11 million to $40 million. This sensitivity estimate is based on a number of factors, including, but not limited to, the level of housing prices and the timing of defaults. To the extent that such factors differ significantly from management's current expectations, resulting loss estimates may differ materially from those stated. Excluding other-than-temporary impairment recorded in 2013, management considers the aggregate decline in fair value of the remaining investment securities and the resulting gross unrealized losses as of December 31, 2013 to be temporary and not the result of any material changes in the credit characteristics of the securities. Additional information about these gross unrealized losses is provided in note 4 to the consolidated financial statements included under Item 8 of this Form 10-K. Loans and Leases The following table presents our U.S. and non-U.S. loans and leases, by segment, as of and for the years ended December 31 (excluding the allowance for loan losses): (In millions) 2013 2012 2011 2010 2009 Institutional: U.S. $ 10,623$ 9,645$ 7,115$ 7,001$ 6,637 Non-U.S. 2,654 2,251 2,478 4,192 3,571 Commercial real estate: U.S. 209 411 460 764



600

Total loans and leases $ 13,486$ 12,307$ 10,053$ 11,957$ 10,808 Average loans and leases $ 13,781$ 11,610$ 12,180$ 12,094$ 9,703

The increase in loans in the institutional segment presented in the table above was mainly related to an increase in mutual fund lending and our investment in the non-investment-grade lending market through participations in loan syndications, specifically senior secured bank loans. Senior secured bank loans are more fully described below, and additional information about all of our loan-and-lease segments, as well as underlying classes, is provided in note 5 to the consolidated financial statements included under Item 8 of this Form 10-K. The institutional segment is composed of the following classes: investment funds, commercial and financial, purchased receivables and lease financing. The investment funds class includes lending to mutual and other collective investment funds and short-duration advances to fund clients to provide liquidity in support of their transaction flows associated with securities settlement activities. The commercial-and-financial class includes lending to corporate borrowers, including broker/dealers, as well as purchased loans composed of senior secured bank loans. The purchased receivables class represent undivided interests in securitized pools of underlying third-party receivables added in connection with the 2009 conduit consolidation. Lease financing includes our investment in leveraged lease financing. In 2013, we diversified our loan-and-lease exposure by investing in the non-investment-grade lending market through participations in loan syndications. These senior secured bank loans totaled approximately $724 million as of December 31, 2013. In addition, as of the same date, we had binding unfunded commitments totaling an additional $211 million to participate in such syndications. We expect to increase our level of participation in these loan syndications in future periods. We had no investment in senior secured bank loans as of December 31, 2012 or in any prior years. These loans, which we have rated "speculative" under our internal risk-rating framework (refer to note 5 to the consolidated financial statements included under Item 8 of this Form 10-K), are externally rated "BBB," "BB" or "B," with approximately 94% of the loans rated "BB" or "B." These loans present more significant exposure to potential 82



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AND RESULTS OF OPERATIONS (Continued) credit losses than higher-rated loans. However, we seek to mitigate such exposure, in part through the limitation of our investment to larger, more liquid credits underwritten by major global financial institutions, the application of our internal credit analysis process to each potential investment, and diversification by counterparty and industry segment. As of December 31, 2013, our allowance for loan losses included approximately $6 million related to these commercial-and-financial loans. Aggregate short-duration advances to our clients included in the investment funds and commercial-and-financial classes of the institutional segment were $2.45 billion and $3.30 billion as of December 31, 2013 and 2012, respectively. As of December 31, 2013 and 2012, unearned income deducted from our investment in leveraged lease financing was $121 million and $131 million, respectively, for U.S. leases and $298 million and $334 million, respectively, for non-U.S. leases. The commercial real estate, or CRE, segment is composed of the loans acquired in 2008 pursuant to indemnified repurchase agreements with an affiliate of Lehman as a result of the Lehman Brothers bankruptcy. These loans, which are primarily collateralized by direct and indirect interests in commercial real estate, were recorded at their then-current fair value, based on management's expectations with respect to future cash flows from the loans using appropriate market discount rates as of the date of acquisition. As of December 31, 2013 and 2012, we held an aggregate of approximately $130 million and $197 million, respectively, of CRE loans which were modified in troubled debt restructurings. No impairment loss was recognized upon restructuring of the loans, as the discounted cash flows of the modified loans exceeded the carrying amount of the original loans as of the modification date. No loans were modified in troubled debt restructurings in 2013 or 2012. No institutional loans were 90 days or more contractually past due as of December 31, 2013, 2012, 2011, 2010 or 2009. As of December 31, 2013 and 2012, no CRE loans were 90 days or more contractually past due. Although a portion of the CRE loans was 90 days or more contractually past due as of December 31, 2011, 2010 and 2009, we did not report them as past-due loans, because in conformity with GAAP, the interest earned on these loans is based on an accretable yield resulting from management's expectations with respect to the future cash flows for each loan relative to both the timing and collection of principal and interest as of the reporting date, not the loans' contractual payment terms. These cash-flow estimates are updated quarterly to reflect changes in management's expectations, which consider market conditions. We generally place loans on non-accrual status once principal or interest payments are 60 days past due, or earlier if management determines that full collection is not probable. Loans 60 days past due, but considered both well-secured and in the process of collection, may be excluded from non-accrual status. For loans placed on non-accrual status, revenue recognition is discontinued. As of December 31, 2013 and 2012, no CRE loans were on non-accrual status. 83



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AND RESULTS OF OPERATIONS (Continued) The following table presents contractual maturities for loan and lease balances as of December 31, 2013: (In millions) Total Under 1 Year 1 to 5 Years Over 5 Years Institutional: Investment funds: U.S. $ 8,695$ 7,313$ 1,378 $ 4 Non-U.S. 1,718 1,455 263 - Commercial and financial: U.S. 1,372 447 447 478 Non-U.S. 154 77 51 26 Purchased receivables: U.S. 217 83 - 134 Non-U.S. 26 2 24 - Lease financing: U.S. 339 - 7 332 Non-U.S. 756 - 265 491 Total institutional 13,277 9,377 2,435 1,465 Commercial real estate: U.S. 209 - 209 - Total loans and leases $ 13,486$ 9,377$ 2,644$ 1,465 The following table presents the classification of loan and lease balances due after one year according to sensitivity to changes in interest rates as of December 31, 2013: (In millions) Loans and leases with predetermined interest rates $ 3,151 Loans and leases with floating or adjustable interest rates 958 Total $ 4,109



As of December 31, 2013 and 2012, the allowance for loan losses was $28 million and $22 million, respectively. The following table presents activity in the allowance for loan losses for the years ended December 31: (In millions)

2013 2012 2011 2010 2009 Allowance for loan losses: Beginning balance $ 22$ 22$ 100$ 79$ 18 Provision for loan losses: Commercial real estate - (3 ) 9 22 124 Institutional 6 - (9 ) 3 25 Charge-offs: Commercial real estate - - (78 ) (4 ) (72 ) Institutional - - - - (19 ) Recoveries: Commercial real estate - 3 - - 3 Ending balance $ 28$ 22$ 22$ 100$ 79 The provision in 2013, which was related to the institutional loans segment, resulted from our exposure to non-investment-grade borrowers composed of senior secured bank loans, more fully described above. These loans were purchased in connection with our participation in loan syndications in the non-investment-grade lending market beginning in 2013, in connection with the diversification of our loan-and-lease exposure. Loans and leases are reviewed on a regular basis, and any provisions for loan losses that are recorded reflect management's estimate of the amount necessary to maintain the allowance for loan losses at a level considered appropriate to absorb estimated incurred credit losses in the loan and lease portfolio. With respect to CRE loans, management considers its expectations with respect to future cash flows from those loans and the value of 84



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AND RESULTS OF OPERATIONS (Continued) available collateral. These expectations are based, among other things, on an assessment of economic conditions, including conditions in the commercial real estate market and other factors. 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 foreign exchange 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, foreign exchange needed by borrowers to repay their obligations. We place deposits with non-U.S. counterparties that have strong internal State Street risk ratings. Counterparties are approved and monitored by our Country Risk Committee. This process includes financial analysis of non-U.S. counterparties and the use of an internal risk-rating system. Each counterparty is reviewed at least annually and potentially more frequently based on deteriorating credit fundamentals or general market conditions. We also utilize risk mitigation and other facilities that may reduce our exposure through the use of cash collateral and/or balance sheet netting. In addition, the Country Risk Committee performs a country-risk analysis and monitors limits on country exposure. The following table presents our cross-border outstandings in countries in which we do business, and which amounted to at least 1% of our consolidated total assets as of the dates indicated. The aggregate of the total cross-border outstandings presented in the table represented approximately 19%, 22% and 16% of our consolidated total assets as of December 31, 2013, 2012 and 2011, respectively. Investment Securities and Other Derivatives and Total Cross-Border (In millions) Assets Securities on Loan Outstandings 2013 United Kingdom $ 15,422 $ 1,697 $ 17,119 Australia 7,309 672 7,981 Netherlands 4,542 277 4,819 Canada 3,675 620 4,295 Germany 4,062 147 4,209 France 2,887 735 3,622 Japan 2,445 605 3,050 2012 United Kingdom $ 18,046 $ 1,033 $ 19,079 Australia 7,585 328 7,913 Japan 6,625 1,041 7,666 Germany 7,426 220 7,646 Netherlands 3,130 188 3,318 Canada 2,730 500 3,230 2011 United Kingdom $ 13,336 $ 1,510 $ 14,846 Australia 6,786 263 7,049 Germany 6,321 578 6,899 Netherlands 3,626 197 3,823 Canada 2,235 496 2,731 As of December 31, 2013, aggregate cross-border outstandings in countries which amounted to between 0.75% and 1% of our consolidated total assets totaled approximately $1.85 billion to China. As of December 31, 2012 and 2011, aggregate cross-border outstandings in countries which amounted to between 0.75% and 1% of our 85



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AND RESULTS OF OPERATIONS (Continued) consolidated total assets totaled approximately $1.81 billion and $1.70 billion, to France and Luxembourg, respectively. Several European countries, particularly Spain, Italy, Ireland and Portugal, have experienced credit deterioration associated with weaknesses in their economic and fiscal situations. With respect to this ongoing uncertainty, we are closely monitoring our exposure to these countries. We had no direct sovereign debt exposure to these countries in our investment securities portfolio. We had aggregate indirect exposure in the portfolio of approximately $740 million, including $574 million of mortgage- and asset-backed securities, composed of $271 million in Spain, $105 million in Italy, $120 million in Ireland and $78 million in Portugal, as of December 31, 2013. The following table presents our cross-border outstandings in each of these countries as of December 31: Investment Derivatives and Securities and Securities on Total Cross-Border (In millions) Other Assets Loan Outstandings 2013 Ireland $ 369 $ 304 $ 673 Italy 763 2 765 Spain 271 11 282 Portugal 78 - 78 2012 Italy $ 937 $ 1 $ 938 Ireland 342 277 619 Spain 277 16 293 Portugal 76 - 76 2011 Italy $ 1,049 $ 11 $ 1,060 Ireland 299 267 566 Spain 434 53 487 Portugal 176 - 176 Greece 99 - 99 As of December 31, 2013, none of the exposures in these countries was individually greater than 0.75% of our consolidated total assets. The aggregate exposures consisted primarily of interest-bearing deposits, investment securities, loans, including short-duration advances, and foreign exchange contracts. We had not recorded any provisions for loan losses with respect to any of our exposure in these countries as of December 31, 2013. 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. State Street's risk management framework focuses on material risks, which include the following: • credit and counterparty risk;



• liquidity risk, funding and liquidity management;

• operational risk, including execution, technology, business practice and

fiduciary risks;

• market risk, including market risk associated with our trading activities

and market risk associated with our non-trading, or asset-and-liability

management, activities, which is primarily composed of interest-rate risk;

• model risk; and



• business risk, including reputational risk.

These material risks, as well as certain of the factors underlying each of these risks that could affect our businesses, our consolidated results of operations and our consolidated financial condition, are discussed in detail in "Risk Factors," included under Item 1A of 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 current losses to State Street as well as erosion of our capital and damage to our reputation. Our systematic approach 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 operations are subject to significant oversight from regulators domestically and overseas. Our objective is to optimize our return and to operate 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 principles: ? A culture of risk awareness that extends across all of our business activities;



? The identification, classification and quantification of State Street's

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; and



? The overall flexibility to adapt to the ever-changing business and market

conditions. Our Risk Appetite Statement 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. The Risk Appetite Statement is established by management with the guidance of Enterprise Risk Management, or ERM, a corporate risk oversight group, in conjunction with the Board of Directors, who formally reviews and approves our Risk Appetite Statement annually. The Risk Appetite Statement describes the level and types of risk that we are willing to experience 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 Statement, 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. The following table provides a reference to the disclosures about our management of significant risks provided herein. Form 10-K Page Number Risk Governance and Structure 86 Credit Risk Management 89 Liquidity Risk Management 91 Operational Risk Management 96 Market Risk Management 98 Model Risk Management 105 Business Risk Management 105 Risk Governance and Structure We have a disciplined approach to risk management that involves all levels of management, from the Board and the Board's Risk and Capital Committee, or RCC, and its Examining & Audit, or E&A, Committee, 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; ERM, which provides separate oversight, monitoring and control; 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, oversight committees, Corporate Audit, the Board's RCC and, ultimately, the Board. While we believe that our risk management program is effective in managing the risks in our businesses, 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, new business products, regulatory compliance and ethics, as 86



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AND RESULTS OF OPERATIONS (Continued) well as operational, market, liquidity 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 State Street. We maintain a risk governance committee structure which serves as the formal governance mechanism through which we seek to undertake the consistent identification, discussion and mitigation of various risks facing State Street in connection with our business activities. This governance structure is enhanced and integrated through multi-disciplinary involvement, particularly through ERM. The following chart presents this structure. RISK GOVERNANCE COMMITTEE STRUCTURE Risk and Capital Committee of the Board Examining & Audit Committee of the Board Board Oversight of Directors (RCC) of Directors (E&A) Senior Management Oversight Management Risk and Capital Committee Technology and Operational Risk Committee (MRAC) (TORC) Risk Committees Asset, Trading Liability and Securities Model Basel Recovery Operational Technology and Credit Risk Country Risk Markets Finance Assessment ICAAP CCAR and Fiduciary Risk Risk Capital and Policy Committee Risk Risk Committee Oversight Steering Resolution Review Committee Governance Committee Committee Committee Committee (MAC) Committee Committee(1) Planning Committee (ORC) Committee (ALCCO) (TMRC) (BIOC) Committee



Mandate Oversight of Oversight of Oversight of Senior risk Oversight of Provides Oversight of Oversight of Oversight of Oversight of

Oversight of Oversight of

interest credit and country risk and committee Securities

oversight for Basel II and CCAR stress process for corporate-wide

corporate-wide corporate-wide

rate risk, counterparty international governing Finance and model Basel III testing development fiduciary risk operational risk technology

liquidity risk exposure all global collateral deployment program program of recovery risk risk and markets reinvestment and capital trading activities resolution adequacy activities plans (1) Oversees the submission of capital plans in connection with the Federal Reserve's Comprehensive Capital Analysis and Review, or CCAR, process. 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 enterprise-wide risk management policies and guidelines. In addition, ERM establishes and reviews approved limits and, in collaboration with business unit management, monitors key risks. Ultimately, ERM works to validate that risk-taking falls within our risk appetite approved by the Board and conforms to associated risk policies, limits and guidelines. The Chief Risk Officer, or CRO, who is responsible for State Street's risk management globally, leads ERM and has a dual reporting line to State Street's Chief Executive Officer and the Board's RCC. ERM discharges its responsibilities globally through a three-dimensional organization structure: ? "Vertical" business unit-aligned risk groups that assist 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 adds important regional

and legal entity perspectives to global vertical and horizontal risk

management.

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 enterprise-level risk appetite framework and associated limits and policies, and for dynamic risk assessment across State Street. 87



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AND RESULTS OF OPERATIONS (Continued) The Board's RCC is responsible for oversight related to our assessment and management of risk, including credit, liquidity, operational, fiduciary, market, interest-rate and business risks and related policies. In addition, the RCC provides oversight on strategic capital governance principles and controls, and monitors capital adequacy in relation to risk. The RCC is also responsible for discharging the duties and obligations of the Board under the applicable Basel requirements. The Chief Financial Officer, together with the CRO, attend meetings of the RCC. The RCC receives regular and comprehensive reports on risk methodologies and our risk profile, including key issues affecting each business unit. The E&A Committee oversees the operation of our system of internal controls covering the integrity of our consolidated financial statements and reports, compliance with laws, regulations and corporate policies, and the qualifications, performance and independence of our independent registered public accounting firm. 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 Management Risk and Capital Committee, or MRAC, is the senior management decision-making body for risk and capital issues, and is responsible for ensuring that our strategy, budget, risk appetite and capital adequacy are properly aligned. The main responsibilities of MRAC are as follows: • The review of our risk appetite framework and top-level risk limits and



policies;

• The monitoring and assessment of our capital adequacy based on regulatory

requirements and internal policies; and

• The review of business performance in the context of risk and capital

allocation.

The committee is co-chaired by our CRO and Chief Financial Officer. In addition, MRAC regularly presents a report to the Board's RCC outlining developments in the risk environment and performance trends in our key business areas. The Technology and Operational Risk Committee, or TORC, oversees and assesses the effectiveness of corporate-wide technology and operational risk management programs, to manage and control technology and operational risk consistently across the organization. The TORC may meet jointly with the MRAC periodically to review or approve common areas of interest such as risk frameworks and policies. The TORC is co-chaired by our CRO and Head of Global Operations, Technology and Product Development. Risk Committees Our Asset, Liability and Capital Committee, or ALCCO, is a risk committee that oversees the management of our consolidated statement of condition, the management of our global liquidity and our interest-rate risk positions, our regulatory and economic capital, the determination of the framework for capital allocation and strategies for capital structure, and issuances of debt and equity securities. ALCCO's roles and responsibilities are designed to work complementary to, and be coordinated with, the MRAC which approves State Street's balance sheet strategy and related activities. ALCCO is chaired by our Treasurer and directly reports into the MRAC. The following other risk committees have focused responsibilities for oversight of specific areas of risk management: • The Credit Risk and Policy Committee is responsible for cross-business unit review and oversight of credit and counterparty risk; ? The Country Risk Committee oversees the identification, assessment,



monitoring, reporting and mitigation, where necessary, of country risks;

? The Trading and Markets Risk Committee, or TMRC, reviews the effectiveness

of, and approves, the market risk framework at least annually; it is the

most senior oversight and decision making committee for risk management

within State Street Global Markets and the trading-and-clearing business

of State Street Global Exchange;

? The Securities Finance Risk Management Committee provides oversight of the

risks in our securities finance business, including collateral and margin

policies; ? The Model Assessment Committee, or MAC, provides recommendations concerning technical modeling issues and validates financial models utilized by our business units; 88



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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued) ? The Basel / ICAAP Oversight Committee, or BIOC, reviews and assesses



compliance with regulatory capital rules, and oversees initiatives related

to the development and enhancement of relevant reporting capabilities;

? The CCAR Steering Committee provides primary supervision of the stress

tests performed in conformity with CCAR and the Dodd-Frank Wall Street

Reform and Consumer Protection Act, or Dodd-Frank Act, and is responsible

for the overall management, review, and approval of all material assumptions, methodologies, and results of each stress scenario;



? The Recovery and Resolution Planning Committee oversees the development of

recovery and resolution plans as required by regulation;

? The Fiduciary Review Committee reviews and assesses the risk management

programs of those units in which State Street serves in a fiduciary capacity; ? The Operational Risk Committee provides cross-business oversight of



operational risk to identify, measure, manage and control operational risk

in an effective and consistent manner across State Street; and

? The Technology Risk Governance Committee provides regular reporting to the

TORC and escalate technology risk issues to the TORC, as appropriate.

Credit Risk Management Core Policies and Principles Credit and counterparty risk is defined as the risk of financial loss if a counterparty, borrower or obligor, referred to collectively as counterparties, is either unable or unwilling to repay borrowings or settle a transaction in accordance with underlying contractual terms. We assume credit and counterparty risk in our traditional non-trading lending activities (such as loans and contingent commitments), in our investment securities portfolio (where recourse to a counterparty exists), and in our direct or indemnified agency trading activities (such as securities lending and foreign exchange). We also assume credit and counterparty risk in our day-to-day treasury and securities and other settlement operations, in the form of deposit placements and other cash balances with central banks or private sector institutions. We distinguish between three kinds of credit and counterparty risk: ? Default risk is the risk that a counterparty fails to meet its contractual



payment obligations;

? Country risk is 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 is the risk that the settlement of clearance of transactions will fail, and arises whenever the exchange of cash, securities and/or other assets is not simultaneous. The extension of credit and the acceptance of counterparty risk are governed by corporate guidelines based on a counterparty's risk profile, the markets served, counterparty and country concentrations, and regulatory compliance. These guidelines include reference to a number of core policies and principles: ? All credit risks to each counterparty, or group of counterparties, are



measured and consolidated in accordance with a 'one obligor' principle

that aggregates all risks types across all business areas;

? We seek to avoid or minimize 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 State Street's prevailing risk appetite;



? All extensions of credit, or material changes to extensions of credit

(such as its tenor, collateral structure or covenants), are approved by ERM in conformity with assigned credit-approval authorities;



? We assign credit approval authorities to individuals according to their

qualifications, experience and training, and review these authorities

periodically; our largest exposures require approval by the Credit Committee; for certain small and low-risk extensions of credit, for certain counterparty types, approval authority has been granted to individuals outside of ERM; ? The creditworthiness of all counterparties is determined by way of a



detailed risk assessment, including the use of comprehensive internal

rating methodologies; all rating methodologies in use at State Street are

authorized for use within the advanced internal-ratings-based approach

under applicable Basel requirements; and ? A review of the creditworthiness of all counterparties, as well as all extensions of credit, is undertaken at least annually; the nature and



extent of these reviews is determined by the size, nature and tenor of the

extensions of credit, as well as the creditworthiness of the counterparty.

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AND RESULTS OF OPERATIONS (Continued) All core policies and principles are subject to annual review, as an integral part of State Street's periodic assessment of its risk appetite. Governance The Credit Risk Management group is an integral part of ERM and is responsible for assessing, approving and monitoring all types of credit risk across State Street. It has responsibility for all requisite policies and procedures, and for State Street's advanced internal credit-rating systems and methodologies. Additionally, Credit Risk Management, in conjunction with the appropriate business units, establishes appropriate measurements and limits to control the amount of credit risk accepted across its various business activities, both at a portfolio level and for each individual obligor, or group of obligors. A number of local committees within State Street are responsible for overseeing credit risk. The Credit Risk and Policy Committee is responsible for approving policies and procedures, determining risk appetite and for routine monitoring of State Street's credit-risk portfolio. The Credit Committee has primary responsibility for the largest and higher-risk extensions of credit to individual obligors, or groups of obligors. Both committees provide periodic updates to the MRAC and the RCC. Credit Limits Central to our philosophy for managing credit risk are the approval and imposition of credit limits, which reflect our credit risk appetite relative to the borrower or counterparty, its domicile, the nature of the risk and the country of risk. The extent of our ongoing analysis, approval and monitoring of credit limits and exposure is determined by the type of borrower or counterparty, its prevailing credit-worthiness and the nature of the risk. These processes are outlined in formal guidelines. Credit limits on a singular and aggregated basis are regularly reassessed and periodically revised based on prevailing and anticipated market conditions, changes in counterparty, industry or country-specific characteristics and outlook and State Street's risk appetite. Global Counterparty Review State Street's Global Counterparty Review, or GCR, team provides separate oversight of our counterparty credit risk management practices and provides senior management, as well as our auditors and regulators, with reporting needed to monitor and assess the effectiveness of prevailing practices. Specific activities include, but are not limited to: • Separate and objective assessments of our credit and counterparty exposures to determine the nature and extent of risk undertaken by the business units;



• Periodic business unit reviews, focusing on the assessment of credit

analysis, policy compliance, prudent transaction structure and

underwriting standards, administration and documentation, risk rating

integrity, and relevant trends;

• Identification and monitoring of developing trends to minimize risk of

loss and protect capital;

• Maintenance of risk-rating system integrity and assurance of counterparty

risk-rating transparency through testing of ratings;

• Providing resources for specialized risk assessments (on an as-needed basis);

• Opining on the adequacy of the allowance for loan losses; and

• Serving as liaison with auditors and banking regulators with respect to

risk rating, reporting and measurement.

Ongoing active monitoring and management of credit risk is an integral part of our credit risk management activities. A robust surveillance and credit review process is followed by both our business units and by ERM. Credit Risk Mitigation Techniques used to mitigate counterparty credit risk include collateralizing our exposures, securing our exposures with a third-party guarantee, exercising our legal right of offset, or buying some form of credit insurance to offset our risk. We primarily accept cash, equities, and government securities as collateral. Although we do not provide credit risk protection or trade in credit default swaps, we have purchased a small number of credit default swaps for hedging purposes. Due to the immaterial notional amount of these swaps, we do not formally recognize the benefits of these credit derivatives. Reserve for Credit Losses 90



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AND RESULTS OF OPERATIONS (Continued) We maintain an allowance for loan losses to support our on-balance sheet credit exposures. We also maintain a reserve for unfunded commitments and letters of credit to support our off-balance credit exposure. The two components together represent the reserve for credit losses. Review and evaluation of the adequacy of the reserve for credit losses is ongoing throughout the year, but occurs at least quarterly, and is based, among other factors, on our evaluation of the level of risk in the portfolio, the volume of adversely classified loans, previous loss experience, current trends, and expected economic conditions and their effect on our counterparties. Additional information about the allowance for loan losses is provided in note 5 to the consolidated financial statements included under Item 8 of this Form 10-K. Liquidity Risk Management Liquidity risk is defined as the potential that our financial condition or overall viability could be adversely affected by an actual or perceived inability to meet cash and collateral obligations. The goal of liquidity risk management is to maintain, even in the event of stress, our ability to meet our cash and collateral obligations. Liquidity is managed to meet our financial obligations in a timely and cost-effective manner, as well as maintain sufficient flexibility to fund strategic corporate initiatives as they arise. Our effective management of liquidity involves the assessment of the potential mismatch between the future cash needs of our clients and our available sources of cash under both normal and adverse economic and business conditions. We generally manage our liquidity on a global, consolidated basis. We also manage liquidity on a stand-alone basis at the 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. Our parent company is managed to a more conservative liquidity profile, reflecting narrower market access. Our parent company typically holds enough cash, primarily in the form of interest-bearing deposits with its banking subsidiaries, to meet its current debt maturities and cash needs, as well as those projected over the next one-year period. As of December 31, 2013, the value of the parent company's net liquid assets totaled $4.42 billion, compared with $3.80 billion as of December 31, 2012. Our parent company's liquid assets generally consist of overnight placements with its banking subsidiaries. Based on our level of consolidated liquid assets and our ability to access the capital markets for additional funding when necessary, including our ability to issue debt and equity securities under our current universal shelf registration, management considers State Street's overall liquidity as of December 31, 2013 to be sufficient to meet its current commitments and business needs, including accommodating the transaction and cash management needs of its clients. 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, and routine management reporting to ALCCO and the RCC. 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. Specific committees responsible for liquidity risk oversight and governance include ALCCO and the RCC. 91



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AND RESULTS OF OPERATIONS (Continued) 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 further 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 is client deposits. Fluctuations in client deposits may be

supplemented with short-term borrowings, which generally include commercial paper 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 unlikely but plausible scenarios at

the parent company and at significant subsidiaries, including State Street

Bank. These tests contemplate severe market and State Street-specific

events 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 State Street-specific assumptions. 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.

Contingency Funding Plans, or "CFPs", are designed to assist senior management with decision-making associated with any contingency funding response to a crisis scenario. The CFPs define roles, responsibilities and management actions to be undertaken in the event of deterioration of our liquidity profile caused by either a State Street-specific event 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 routine liquidity management include measures of our fungible cash position, purchased wholesale funds, unencumbered liquid assets, deposits, and the total investment securities and loans as a percentage of total client deposits. Asset Liquidity Central to the management of our liquidity is asset liquidity, which generally consists of unencumbered highly liquid securities, cash and cash equivalents carried in our consolidated statement of condition. We restrict the eligibility of securities for asset liquidity to U.S. Government and federal agency securities (including mortgage-backed securities) and selected non-U.S. Government and supranational securities, which generally are more liquid than other types of assets. The following table presents the components of our asset liquidity balance as of the dates and for the years indicated: 92



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AND RESULTS OF OPERATIONS (Continued) (In millions) December 31, 2013 December 31, 2012 Asset Liquidity: Highly liquid short-term investments(1) $ 64,257 $ 50,763 Investment securities 22,321 27,429 Total $ 86,578 $ 78,192



Average Asset Liquidity:

Highly liquid short-term investments(1) $ 28,946 $ 26,823 Investment securities 22,032 28,031 Total $ 50,978 $ 54,854 (1) Composed of interest-bearing deposits with banks. Due to the continued elevated level of client deposits as of December 31, 2013, we maintained cash balances in excess of regulatory requirements of approximately $51.03 billion at the Federal Reserve, the ECB and other non-U.S. central banks, compared to $41.11 billion as of December 31, 2012. Liquid securities included in our asset liquidity include securities pledged without corresponding advances from the Federal Reserve Bank of Boston, or FRB, the Federal Home Loan Bank of Boston, or 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 of depository institutions. 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, 2013 and December 31, 2012, State Street Bank had no outstanding primary credit borrowings from the FRB discount window or any other central bank facility, and as of the same dates, no FHLB advances were outstanding. In addition to the securities included in our asset liquidity, we have significant amounts of other high-quality investment securities, corporate securities and loans. The aggregate fair value of those assets was $66.16 billion as of December 31, 2013, compared to $65.70 billion as of December 31, 2012. These securities are available sources of liquidity, although not as rapidly deployed as those included in our asset liquidity. Uses of Liquidity Significant uses of our liquidity could result from the following: withdrawals of unsecured client deposits; draw-downs of unfunded commitments to extend credit or to purchase securities, generally provided through lines of credit; and short-duration advance facilities. Such circumstances would generally arise under stress conditions including deterioration in credit ratings. We had unfunded commitments to extend credit with gross contractual amounts totaling $21.30 billion and $17.86 billion as of December 31, 2013 and 2012, respectively. These amounts do not reflect the value of any collateral. Approximately 75% of our unfunded commitments to extend credit expire within one year from the date of issuance. 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. Funding Deposits: Our Investment Servicing line of business provides products and services including custody, accounting, administration, daily pricing, foreign exchange services, cash management, financial asset management, securities lending 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 State Street entities in various currencies. These client deposits are invested in a combination of investment securities and short-duration financial instruments whose mix is determined by the characteristics of the deposits. We typically experience higher client deposit inflows toward the end of the quarter or the end of the year. As a result, average client deposit balances are deemed to be more meaningful than period-end balances. The following table presents client deposit balances as of the dates and for the years indicated: 93



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Table of Contents MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued) Average Balance Year Ended (In millions) December 31, December 31, 2013 2012 2013 2012 Client deposits(1) $ 182,268$ 150,617 $

143,043 $ 127,658 (1) Balance as of December 31, 2012 excluded term wholesale certificates of deposit, or CDs, of $13.56 billion; average balances for the years ended December 31, 2013 and December 31, 2012 excluded average CDs of $2.50 billion and $7.25 billion, respectively. Short-Term Funding: In managing our liquidity, from time to time we utilize short-term funding, including term wholesale certificates of deposit, or CDs, corporate commercial paper and other borrowed funds, generally with maturities of one year or less. As described above, usage is evaluated as part of our liquidity framework. As of December 31, 2013, no CDs were outstanding, compared to $13.56 billion as of December 31, 2012, as client deposits remained stable. Our corporate commercial paper program, under which we can issue up to $3 billion of commercial paper with original maturities of up to 270 days from the date of issuance, had $1.82 billion of commercial paper outstanding as of December 31, 2013, compared to $2.32 billion as of December 31, 2012. 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 at reasonable rates of interest from wholesale investors. As discussed earlier under "Asset Liquidity," State Street Bank's membership in the FHLB allows for advances of liquidity in 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. The balances associated with this activity are generally stable, as they represent a collateralized cash investment option for our investment servicing clients. These balances were $7.95 billion and $8.01 billion as of December 31, 2013 and December 31, 2012, respectively. State Street Bank currently maintains a line of credit with a financial institution of CAD $800 million, or approximately $753 million as of December 31, 2013, to support its Canadian securities processing operations. The line of credit has no stated termination date and is cancelable by either party with prior notice. As of December 31, 2013, there was no balance outstanding on this line of credit. Long-Term Funding: As of December 31, 2013, State Street Bank had Board authority to issue unsecured senior debt securities from time to time, provided that the aggregate principal amount of such unsecured senior debt outstanding at any one time does not exceed $5 billion. As of December 31, 2013, $4.1 billion was available for issuance pursuant to this authority. As of December 31, 2013, State Street Bank had Board authority to issue up to $1.5 billion of subordinated debt, incremental to subordinated debt outstanding as of the same date. As of December 31, 2013, $500 million was available for issuance pursuant to this authority. Additional information about debt securities issued by State Street Bank is provided in note 10 to the consolidated financial statements included under Item 8 of this Form 10-K. We maintain an effective universal shelf registration that allows for the public offering and sale of debt securities, capital securities, common stock, depositary shares and preferred stock, and warrants to purchase such securities, including any shares into which the preferred stock and depositary shares may be convertible, or any combination thereof. We have issued in the past, and we may issue in the future, securities pursuant to our shelf registration. The issuance of debt or equity securities will depend on future market conditions, funding needs and other factors. Additional information about debt and equity securities issued pursuant to this shelf registration is provided in notes 10 and 13 to the consolidated financial statements included under Item 8 of this Form 10-K. 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 current or future regulatory developments. High ratings minimize borrowing costs and enhance 94



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AND RESULTS OF OPERATIONS (Continued) our liquidity by providing assurance for unsecured funding and depositors, increasing the potential market for our debt and improving our ability to offer products, serve markets, and engage 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, increasing the related cost of funds, causing the sudden and large-scale withdrawal of unsecured deposits by our clients, leading to draw-downs of unfunded commitments to extend credit or triggering 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 or termination payments that would be required assuming a downgrade by all rating agencies. The table below presents the additional collateral or termination payments related to our net derivative liabilities under these arrangements that could have been called as of the dates indicated by counterparties in the event of a one-notch and two-notch downgrade in our credit ratings. Other funding sources, such as secured financing transactions and other margin requirements, for which there are no explicit triggers, could also be adversely affected. (In millions) December 31, 2013



December 31, 2012 Additional collateral or termination payments for a one- or two-notch downgrade

$ 7 $ 13



The following table presents information about State Street's and State Street Bank's credit ratings as of February 21, 2014:

Dominion Moody's Bond Standard & Investors Rating Poor's Service Fitch Service State Street: Short-term commercial paper R1 A-1 P-1 F1+ (Middle) Senior debt A+ A1 A+ AA (Low) Subordinated debt A A2 A A (High) Trust preferred capital securities BBB+ A3 BBB A (High) Preferred stock BBB+ Baa2 BBB- A (Low) Outlook Negative Stable Positive Stable State Street Bank: Short-term deposits R-1 A-1+ P-1 F1+ (High) Short-term letters of credit - P-1 -



-

Long-term deposits AA- Aa3 AA-



AA

Long-term letters of credit - Aa3 -



-

Senior debt AA- Aa3 A+



AA

Long-term counterparty/issuer AA- Aa3 A+ - Subordinated debt A+ A1 A AA (Low) Financial strength - B- - - Outlook Stable Stable Positive Stable Proposed Liquidity Framework In October 2013, U.S. banking regulators issued a Notice of Proposed Rulemaking, or NPR, intended to implement the Basel Committee's Liquidity Coverage Ratio, or LCR, in the U.S. The LCR is intended to promote the short-term resilience of the liquidity risk profile of internationally active banking organizations, improve the banking industry's ability to absorb shocks arising from financial and economic stress, and improve the measurement and management of liquidity risk. The proposed LCR would require a covered banking organization to maintain an amount of high-quality liquid assets, or HQLA, equal to or greater than 100% of the banking organization's total net cash outflows over a 30-calendar-day period of significant liquidity stress, as defined. The October 2013NPR would be phased in beginning on January 1, 2015 at 80% with full implementation by January 1, 2017. As an internationally active banking organization, we expect to be subject to the LCR standard in the U.S., as well as in other jurisdictions in which we operate. The NPR is generally consistent with the Basel Committee's LCR. However, it includes certain more stringent requirements, including an accelerated implementation time line and modifications to the definition of high-quality liquid assets and expected outflow assumptions. We continue to analyze the proposed rules and analyze their impact as well as develop strategies for compliance. The principles of the LCR are consistent with our liquidity management framework; however, the specific calibrations of various elements within the final LCR rule, such as the eligibility of assets as HQLA, operational deposit requirements and net outflow requirements could have a material effect on our liquidity, funding and business activities, including the management and composition of our investment securities portfolio and our ability to extend committed contingent credit facilities to our clients. In January 2014, the Basel Committee released a revised proposal with respect to the Net Stable Funding Ratio, or NSFR, which will establish a one-year liquidity standard representing the proportion of long-term assets funded by long-term stable funding, scheduled for global implementation in 2018. The revised NSFR has made some favorable changes regarding the treatment of operationally linked deposits and a reduction in the funding required for certain securities. However, we continue to review the specifics of the Basel Committee's release and will be evaluating the U.S. implementation of this standard to analyze the impact and develop strategies for compliance. U.S. banking regulators have not yet issued a proposal to implement the NSFR. Contractual Cash Obligations and Other Commitments The following table presents our long-term contractual cash obligations, in total and by period due as of December 31, 2013. These obligations were recorded in our consolidated statement of condition as of that date, except for operating leases and the interest portions of long-term debt and capital leases. CONTRACTUAL CASH OBLIGATIONS PAYMENTS DUE BY PERIOD As of December 31, 2013 Less than 1 1-3 4-5 Over 5 (In millions) Total year years years years Long-term debt(1) $ 10,630$ 1,015$ 2,979$ 2,260$ 4,376 Operating leases 923 208 286 209 220 Capital lease obligations 1,051 99 185



169 598 Total contractual cash obligations $ 12,604$ 1,322$ 3,450$ 2,638$ 5,194

(1) Long-term debt excludes capital lease obligations (presented as a separate line item) and the effect of interest-rate swaps. Interest payments were calculated at the stated rate with the exception of floating-rate debt, for which payments were calculated using the indexed rate in effect as of December 31, 2013. The table above does 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 notes 8 and 9 to the consolidated financial statements included under Item 8 of this Form 10-K. The table does not include obligations related to derivative instruments because the derivative-related amounts recorded in our consolidated statement of condition as of December 31, 2013 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 16 to the consolidated financial statements included under Item 8 of this Form 10-K. We have obligations under pension and other post-retirement benefit plans, more fully described in note 19 to the consolidated financial statements included under Item 8 of this Form 10-K, which are not included in the above table. Additional information about contractual cash obligations related to long-term debt and operating and capital leases is provided in notes 10 and 20 to the consolidated financial statements included under Item 8 of this Form 10-K. Our consolidated statement of cash flows, also included under Item 8 of this Form 10-K, provides additional liquidity information. The following table presents our commitments, other than the contractual cash obligations presented above, in total and by duration as of December 31, 2013. These commitments were not recorded in our consolidated statement of condition as of that date. 95



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OTHER COMMERCIAL COMMITMENTS

DURATION OF COMMITMENT Total As of December 31, 2013 amounts Less than 1-3 4-5 Over 5 (In millions) committed(1) 1 year years years years Indemnified securities financing $ 320,078$ 320,078 $ - $ - $ - Unfunded commitments to extend credit 21,296 15,981 2,517 2,449 349 Asset purchase agreements 4,685 1,892 2,296 497 - Standby letters of credit 4,512 1,651 2,006 855 - Purchase obligations(2) 361 82 102 44 133



Total commercial commitments $ 350,932$ 339,684$ 6,921$ 3,845$ 482

(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 the table above, except for purchase obligations, is provided in note 11 to the consolidated financial statements included under Item 8 of this Form 10-K. Operational Risk Management We define operational risk as the risk of loss resulting from inadequate or failed internal processes and systems, human error, or from external events. At State Street, this definition encompasses legal risk and fiduciary risk. We define legal risk as the risk of loss resulting from failure to comply with laws and contractual obligations as well as prudent ethical standards, in addition to exposure to litigation from all aspects of our activities. Fiduciary risk arises if, in acting on behalf of our clients, we fail to properly exercise discretion or we do not properly monitor or control the exercise of discretion by a third party. In the conduct of our investment servicing and investment management activities, we assume operational risk. The products and services we provide to our clients, such as custody; product- and participant-level accounting; daily pricing and administration; master trust and master custody; record-keeping; cash management; foreign exchange, and the management of financial assets using passive and active strategies, can result in execution risk, business practice risk, fiduciary risk and other types of operational risk. Because operational risk is process-oriented, compared to other risks, for example credit risk and market risk, which are transaction-oriented, our ability to influence and manage risk-taking rests at the process level, and requires a broad set of process controls. Whereas operational risk represents the potential, an operational risk event is the actual occurrence of the risk. An operational risk event that gives rise to a direct financial impact is referred to as an operational risk loss or gain. If there is no financial impact, the event is termed a "near-miss." Framework We have developed a comprehensive approach to operational risk management that is consistently applied across State Street. This approach, referred to as our operational risk framework, takes a holistic view and integrates the different methods and tools used to manage operational risk. The framework, which was developed by our Operational Risk Management group and utilizes aspects of the framework of the Committee of Sponsoring Organizations of the Treadway Commission, or the COSO framework, and industry/peer leading practices, is designed to comply with Basel requirements. Our operational risk framework seeks to provide a number of important benefits, including: ? The alignment of business priorities with risk management objectives;



? The active management of risk and the avoidance of surprises;

? The clarification of responsibilities for the management of operational risk;

? A common understanding of operational risk management and its supporting

processes; and ? The consistent application of policies and collection of data for risk management and measurement. The framework is composed of two mutually reinforcing areas, foundational elements and framework components. The three foundational elements used to consistently implement the framework across the diverse groups within State Street are governance, documentation, and communication/awareness. The framework also contains five components that provide overarching structure that integrates distinct risk programs into a continuous 96



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AND RESULTS OF OPERATIONS (Continued) process focused on managing and measuring operational risk in a coordinated and consistent manner. The individual components and the objectives of each component are: ? Identify, assess and measure risk - understand business unit strategy,



risk profile and potential exposure;

? Monitor risk - proactively monitor the business environment and associated

operational risk exposure;

? Evaluate and test controls - verify that internal controls are designed

appropriately, are consistent with corporate and regulatory standards, and

are operating effectively;

? Provide integrated management reporting - facilitate management's ability

to maintain control, provide oversight and escalate issues in a timely

manner; and

? Support risk-based decision making - make conscious risk-based decisions

and understand the trade-off between risk and return.

We maintain an operational risk policy, under which we endeavor to effectively manage operational risk in order to support the achievement of our corporate objectives and fully comply with any related regulatory requirements. We achieve these policy objectives through the implementation of our operational risk framework, which describes the integrated set of processes and tools that assist us in managing and measuring operational risk. Our operational risk policy is approved annually by the RCC. The purpose of the policy is to set forth our approach to the management of operational risk, to identify the responsibilities of individuals and committees charged with overseeing the management of operational risk, and to provide a broad mandate that supports implementation of the operational risk framework. Guidelines As part of our operational risk framework, we have also developed operational risk guidelines which document in greater detail our practices and describe the key elements that should be present 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 State Street's operational risk programs, and detail business unit responsibilities for the identification, assessment, measurement, monitoring and reporting of operational risk. The guidelines support the operational risk policy and document our practices used to manage and measure operational risk in an effective and consistent manner across State Street. We have a number of operational risk tools and processes in use that are corporate-wide in application or coverage. These tools include a series of risk assessments and diagnostics, at the business unit level, across the risk spectrum aimed at the identification of risks that occur routinely through normal operations, strategic risks that may arise over a longer-term horizon and risks that occur very infrequently but which could materially affect State Street. Further, these assessments allow management to define risk mitigation strategies and set action plans for implementation. State Street monitors the level and trend of its operational risk profile through a series of management reports, risk assessment outcomes, risk mitigation initiative process and risk metrics. Together, this data allows us to understand our risk profile, our progress on managing risk and changes in the environment both internal and external which may affect our risk profile. In addition, we use scenario analysis to provide a forward-looking assessment of large operational risk events that we may not have experienced yet. In order for these tools and programs to meet framework objectives, we have implemented comprehensive data collection practices and consistent risk classification standards that facilitate the analysis of risks across the company. In addition, we have established standards for operational risk data for the purpose of maintaining data repositories and systems that are controlled, accurate and available on a timely basis to support operational risk management. Governance The roles and responsibilities with respect to the management of operational risk at State Street reflect the following four key principles: ? Board oversight of our operational risk framework is primarily the responsibility of the RCC, which annually reviews and approves our operational risk policy and delegates day-to-day oversight to ERM; ? Senior business unit managers are responsible for the management of operational risk;



? ERM and other corporate groups provide separate oversight, validation and

verification of the management and measurement of operational risk; and ? Executive management provides oversight through participation on risk-management committees and direct management of risk in business activities. 97



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AND RESULTS OF OPERATIONS (Continued) The key responsibilities of these groups with respect to operational risk are described below: ? The RCC approves our operational risk policy, delegates the implementation



and monitoring of the operational risk guidelines, framework and related

programs to ERM, and reviews periodic reporting of management information

related to operational risk.

? Senior business unit management is responsible for the direct management

of operational risk arising from our business activities, as well as operational risk oversight through representation on the MRAC, the TORC and the local Operational Risk and Fiduciary Review Committees.



A number of corporate groups have responsibility for developing, implementing, and assessing various aspects of State Street's operational risk framework: ? ERM's Corporate Operational Risk Management group is responsible for the

development and implementation of State Street's operational risk

guidelines, framework and supporting tools. It also reviews and analyzes

operational key risk information, metrics and indicators at the business

line and corporate level for purposes of reporting and escalating operational risk events.



? ERM's Corporate Risk Analytics group develops and maintains operational

risk capital estimation models and regularly calculates State Street's

operational risk regulatory capital requirements;

? ERM's Model Governance group separately validates the quantitative models

used to measure operational risk; and ? Corporate Audit performs separate reviews of the application of



operational risk management practices and methodologies utilized across

State Street.

Operational risk management at State Street includes both the corporate Operational Risk Management group, led by the global head of Operational Risk, who is a member of the CRO's executive management team, and a distributed risk management infrastructure that is aligned with our business units. The risk management groups aligned with the business units report directly to the CRO, and have operational risk managers who are responsible for the implementation of the operational risk framework at the business unit level. 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. State Street is exposed to market risk in both its trading and certain of its non-trading, or asset-and-liability management, activities. The market risk management processes related to these activities, discussed in further detail below, apply to both on- and off-balance sheet exposures. In the conduct of our trading and investment activities, we assume market risk. The level of market risk that we assume 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. Market risk associated with our trading activities is discussed below under "Trading Activities." In addition, supplemental qualitative and quantitative information with respect to market risk associated with our trading activities is provided on the "Investor Relations" section of our website. Market risk associated with our non-trading activities, which consists primarily of interest-rate risk, is discussed under "Asset-and-Liability Management Activities." Trading Activities 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 trading services revenue and to manage potential earnings volatility. In addition, we provide services related to derivatives in our role as both a manager and a servicer of financial assets. Our clients use derivatives to manage the financial risks associated with their investment goals and business activities. With the growth of cross-border investing, our clients often enter into foreign exchange forward contracts to convert currency for international investments and to manage the currency risk in their international investment portfolios. As an active participant in the foreign exchange markets, we provide foreign exchange forward and option contracts in support of these client needs, and also act as a dealer in the currency markets. As part of our trading activities, we assume positions in the foreign exchange and interest-rate markets by buying and selling cash instruments and entering into derivative instruments, including foreign exchange forward contracts, foreign exchange and interest-rate options and interest-rate swaps, interest-rate forward contracts, and 98



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AND RESULTS OF OPERATIONS (Continued) interest-rate futures. As of December 31, 2013, the aggregate notional amount of these derivative contracts was $1.13 trillion, of which $1.12 trillion was composed of foreign exchange forward, swap and spot contracts. In the aggregate, we seek to match positions closely with the objective of minimizing related currency and interest-rate risk. All foreign exchange contracts are valued daily at current market rates. Additional information about derivative instruments entered into in connection with our trading activities is provided in note 16 to the consolidated financial statements under Item 8 of this Form 10-K. Governance Our assumption of market risk in our trading activities is an integral part of our corporate risk appetite. The 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 Trading and Markets Risk Committee, or TMRC, oversees all market risk-taking activities across State Street associated with trading. The TMRC is composed of members of ERM, our Global Markets business, our Global Treasury group, our senior executives who manage our trading businesses, and other members of management who possess specialized knowledge and expertise. Under authority delegated by the MRAC, the TMRC is responsible for the formulation of guidelines, strategies and work flows with respect to the measurement, monitoring and control of our trading market risk, and also approves market risk tolerance limits and dealing authorities. 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 market risk management group also establishes and approves market risk tolerance limits and dealing authorities based on, but not limited to, notional amount measures, sensitivity measures, Value-at-Risk, or VaR, measures and stress measures. Such limits and authorities are specified in our trading and market risk guidelines which govern our management of trading market risk. Our management of market risk associated with trading activities and our calculation of required regulatory capital are based primarily on our internal VaR models and stress-testing analysis. As discussed in the "Value-at-Risk" section below, VaR is measured daily by ERM. Market risk exposure is established 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. Covered Positions Our trading positions are subject to regulatory market risk capital requirements if they meet the regulatory definition of a "covered position." The identification of covered positions for inclusion in our market risk capital framework is governed by our covered positions policy. This policy outlines the standards we use to determine whether a trading position is a covered position. Our covered positions consist primarily of those arising from the trading portfolios held by our Global Markets business. These trading portfolios include products such as spot foreign exchange, foreign exchange forwards, non-deliverable forwards, foreign exchange options, foreign exchange funding swaps, currency futures, financial futures, and interest rate futures. Covered positions also arise from certain portfolios held by our Global Treasury group. Any new activities are analyzed to determine if the positions arising from such new activities meet the definition of a covered position and conform to our covered positions policy. This documented analysis, including any decisions with respect to market risk treatments, must receive approval from the TMRC. Value-at-Risk, Stress Testing and Stressed VaR As noted above, 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 99



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AND RESULTS OF OPERATIONS (Continued) 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 guidelines. 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 that became effective beginning on January 1, 2013. 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 a one-tail, 99% confidence interval and a ten-business-day holding period, using a historical observation period of two years. 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. Value-at-Risk: VaR measures are based on 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. 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 around 5,000 risk factors and captures correlations among currency, interest rates, and other market rates. Stress Testing and Stressed VaR: 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). 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 sixty-day moving average of our stressed VaR-based measure was approximately $28 million for the twelve months ended December 31, 2013, compared to a sixty-day moving average of approximately $27 million for the twelve months ended September 30, 2013, approximately $19 million for the twelve months ended June 30, 2013, and approximately $16 million for the twelve months ended March 31, 2013. The increase in the sixty-day moving average for the twelve months ended December 31, 2013 and September 30, 2013 compared to the twelve months ended June 30, 2013 was associated with the model changes described below following the VaR and stressed-VaR tables. 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. Validation and Back-Testing We perform daily 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 actual profit-and-loss, or 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 net interest revenue, as well as estimated revenue from intra-day trading. We experienced one back-testing exception on September 18, 2013. The trading 100



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AND RESULTS OF OPERATIONS (Continued) P&L that day exceeded the VaR based on the prior day's closing positions, following larger-than-usual moves in several emerging market currencies and U.S. interest rates. The moves occurred in reaction to the Federal Reserve's announcement that they would postpone the start of their withdrawal of monetary stimulus (tapering of quantitative easing). Our market risk models are governed by our model risk governance guidelines, in accordance with our model risk governance policy, which outline the standards we use to assess the conceptual soundness and effectiveness of our models. Our market risk models are subject to regular review and validation by our Model Validation group within ERM and overseen by the MAC. The MAC, chaired by a senior executive in ERM, was established for the purpose of providing recommendations on technical modeling issues to the corporate oversight committees. The MAC includes members with expertise in modeling methodologies and has representation from the various business units throughout State Street. Additional information is provided below under "Model Risk Management." Our model validation process also evaluates the integrity of our VaR models through the use of regular outcome analysis. Such outcome analysis includes back-testing, which compares the VaR model's predictions to actual outcomes using out-of-sample information. The Model Validation Group examined back-testing results for the market risk regulatory capital model used for 2012. 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. The following tables present VaR associated with our trading activities for covered positions held during the year ended December 31, 2013, and as of December 31, 2013, September 30, 2013, June 30, 2013 and March 31, 2013, as measured by our VaR methodology. Comparative information for 2012 is not presented, as we did not measure VaR for those periods under the regulatory requirements which were effective beginning on January 1, 2013. VaR - COVERED PORTFOLIOS (TEN-DAY As of December As of September As of June As of March VaR) Year Ended December 31, 2013 31, 2013 30, 2013 30, 2013 31, 2013 (In thousands) Average Maximum Minimum VaR VaR VaR VaR Foreign exchange $ 6,386$ 22,835$ 1,626$ 5,463$ 11,549$ 5,696$ 9,283 Money market/Global Treasury 97 559 24 58 102 53 365 Total VaR $ 6,361$ 22,834$ 1,641$ 5,441$ 11,496$ 5,657$ 9,017 STRESSED VaR - COVERED PORTFOLIOS As of December As of September As of June As of March (TEN-DAY VaR) Year Ended December 31, 2013 31, 2013 30, 2013 30, 2013 31, 2013 (In thousands) Average Maximum Minimum VaR VaR VaR VaR



Foreign exchange $ 22,907$ 47,531$ 4,933$ 30,338$ 32,905$ 15,275$ 26,141 Money market/Global Treasury

291 1,075 56 280 290 186 900



Total Stressed VaR $ 22,815$ 47,514$ 4,889$ 30,403$ 32,521$ 15,157$ 25,673

The VaR-based measures presented above are primarily a reflection of the overall level of market volatility and our appetite for trading market risk. Overall levels of volatility have been low both on an absolute basis and relative to the historical information observed at the beginning of the period used for the calculations. Both the ten-day VaR-based measures and the stressed VaR-based measures are based on historical changes observed during rolling ten-day periods for the portfolios as of the close of business each day over the past one-year period. The decrease in the VaR measure for foreign exchange as of December 31, 2013 compared to September 30, 2013 was the result of the advancing two-year window for historical price movements and related risk factors, which as of December 31, 2013 no longer included the third and fourth quarters of 2011, when the financial markets reacted to the Eurozone crisis and to the downgrade of the U.S. government's credit rating by Standard & Poor's. The increase in the VaR and stressed-VaR measures for foreign exchange as of September 30, 2013 compared to June 30, 2013 resulted from the model changes described below, and not from any changes in the overall composition of exposure within our portfolio of covered positions. Beginning on July 1, 2013, we implemented two significant changes to our regulatory VaR and stressed-VaR models. The net effect of the two changes resulted in an increase in our daily VaR-based measure and a more significant increase in our stressed VaR-based measure, both calculated based on a 99% confidence interval. The changes involved the introduction of off-shore yield curves for non-deliverable forward contracts in our portfolios of 101



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AND RESULTS OF OPERATIONS (Continued) covered positions and the use of absolute changes in place of relative or percentage changes for interest-rate risk factors (both base curves and spread curves). We may in the future further modify and adjust our models and methodologies used to calculate VaR, subject to regulatory review and approval, and these modifications and adjustments may result in changes in in our VaR measures, some of which may be significant. The following table presents VaR associated with our trading activities attributable to foreign exchange rates, interest rates and volatility as of December 31, 2013, September 30, 2013, June 30, 2013 and March 31, 2013. The totals of the VaR amounts attributable to foreign exchange rates, interest rates and volatility for each VaR component exceeded the component VaR measures presented in the foregoing table as of each period-end, primarily due to the benefits of diversification across risk types. Comparative information for 2012 is not presented, as we did not measure VaR under the regulatory requirements which were effective beginning on January 1, 2013. VaR - COVERED PORTFOLIOS (TEN-DAY VaR) As of December 31, 2013 As of September 30, 2013 As of June 30, 2013 As of March 31,



2013

(In thousands) Foreign Exchange Interest Rate Volatility Foreign Exchange Interest Rate Volatility Foreign Exchange

Interest Rate Volatility Foreign Exchange Interest Rate Volatility By component: Foreign exchange/Global Markets $ 3,492 $ 4,561 $ 306$ 9,704 $ 3,194 $ 454 $ 5,531 $ 1,808 $ 650 $ 9,543 $ 2,265 $ 492 Money market/Global Treasury 46 52 - 49 72 - 50 33 - 376 33 - Total VaR $ 3,457 $ 4,577 $ 306$ 9,648 $ 3,175 $ 454 $ 5,483 $ 1,808 $ 650 $ 9,288 $ 2,263 $ 492 Asset-and-Liability Management Activities The primary objective of asset-and-liability management is to provide sustainable and growing net interest revenue, or NIR, under varying economic environments, while protecting the economic value of the assets and liabilities carried in our consolidated statement of condition from the adverse effects of changes in interest rates. While many market factors affect the level of NIR 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 NIR 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, but we manage our overall interest-rate risk position in the context of current and anticipated market conditions and within internally-approved risk guidelines. Our overall interest-rate risk position is maintained within a series of policies approved by the Board and guidelines established and monitored by ALCCO. Our Global Treasury group has responsibility for managing our day-to-day interest-rate risk. To effectively manage our consolidated statement of condition and related NIR, Global Treasury has the authority to assume a limited amount of interest-rate risk based on market conditions and its views about the direction of global interest rates over both short-term and long-term time horizons. Global Treasury manages our exposure to changes in interest rates on a consolidated basis organized into three regional treasury units, North America, Europe and Asia/Pacific, to reflect the growing, global nature of our exposures and to capture the impact of changes in regional market environments on our total risk position. The economic value of our consolidated statement of condition is a metric designed to estimate the fair value of assets and liabilities which could be garnered if those assets and liabilities were sold today. The economic values represent discounted cash flows from all financial instruments; therefore, changes in the yield curves, which are used to discount the cash flows, affect the values of these instruments. Our investment activities and our use of derivative financial instruments are the primary tools used in managing interest-rate risk. We invest in financial instruments with currency, repricing, and maturity characteristics we consider appropriate to manage our overall interest-rate risk position. In addition, we use certain derivative instruments, primarily interest-rate swaps, to alter the interest-rate characteristics of specific balance sheet assets or liabilities. Additional information about our measurement of fair value and our use of derivatives is provided in notes 3 and 16, respectively, to the consolidated financial statements included under Item 8 of this Form 10-K. Because no one individual measure can accurately assess all of our exposures to changes in interest rates, we use several quantitative measures in our assessment of current and potential future exposures to changes in interest rates and their impact on NIR and balance sheet values. NIR simulation is the primary tool used in our 102



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AND RESULTS OF OPERATIONS (Continued) evaluation of the potential range of possible NIR results that could occur under a variety of interest-rate environments. We also use market valuation and duration analysis to assess changes in the economic value of balance sheet assets and liabilities caused by assumed changes in interest rates. To measure, monitor, and report on our interest-rate risk position, we use NIR simulation, or NIR-at-risk, and economic value of equity, or EVE, sensitivity. NIR-at-risk measures the impact on NIR over the next twelve months to immediate, or "rate shock," and gradual, or "rate ramp," changes in market interest rates. EVE sensitivity is a total return view of interest-rate risk, which measures the impact on the present value of all NIR-related principal and interest cash flows of an immediate change in interest rates, and is generally used in the context of economic capital discussed under "Economic Capital" in "Financial Condition - Capital" in this Management's Discussion and Analysis. Although NIR-at-risk and EVE sensitivity measure interest-rate risk over different time horizons, both utilize consistent assumptions when modeling the positions currently held by State Street; however, NIR-at-risk also incorporates future actions planned by management over the time horizons being modeled. In calculating our NIR-at-risk, we start with a base amount of NIR that is projected over the next twelve months, assuming our forecast yield curve over the period. Our existing balance sheet assets and liabilities are adjusted by the amount and timing of transactions that are forecast to occur over the next twelve months. That yield curve is then "shocked," or moved immediately, +/-100 basis points in a parallel fashion, or at all points along the yield curve. Two new twelve-month NIR projections are then developed using the same balance sheet and forecast transactions, but with the new yield curves, and compared to the base scenario. We also perform the calculations using interest-rate ramps, which are +/-100-basis-point changes in interest rates that are assumed to occur gradually over the next twelve months, rather than immediately as we do with interest-rate shocks. EVE is based on the change in the present value of all NIR-related principal and interest cash flows for changes in market rates of interest. The present value of existing cash flows with a then-current yield curve serves as the base case. We then apply an immediate parallel shock to that yield curve of ±200 basis points and recalculate the cash flows and related present values. A large shock is used to better capture the embedded option risk in our mortgage-backed securities that results from borrowers' prepayment opportunities. Key assumptions used in the models, described in more detail below, along with changes in market conditions, are inherently uncertain. Actual results necessarily differ from model results as market conditions differ from assumptions. As such, management performs back-testing, stress testing, and model integrity analyses to validate that the modeled results produce predictive NIR-at-risk and EVE sensitivity estimates which can be used in our management of interest-rate risk. Primary factors affecting the actual results are changes in our balance sheet size and mix; the timing, magnitude and frequency of changes in interest rates, including the slope and the relationship between the interest-rate level of U.S. dollar and non-U.S. dollar yield curves; changes in market conditions; and management actions taken in response to the preceding conditions. Both NIR-at-risk and EVE sensitivity results are managed against ALCCO-approved limits and guidelines and are monitored regularly, along with other relevant simulations, scenario analyses and stress tests, by both Global Treasury and ALCCO. Our ALCCO-approved guidelines are, we believe, in line with industry standards and are periodically examined by the Federal Reserve. Based on our current balance sheet composition where fixed-rate assets exceed fixed-rate liabilities, reported results of NIR-at-risk could depict an increase in NIR from a rate increase while EVE presents a loss. A change in this balance sheet profile may result in different outcomes under both NIR-at-risk and EVE. NIR-at-risk depicts the change in the nominal (undiscounted) dollar net interest flows which are generated from the forecast statement of condition over the next twelve months. As interest rates increase, the interest expense associated with our client deposit liabilities is assumed to increase at a slower pace than the investment returns derived from our current balance sheet or the associated reinvestment of our interest-earning assets, resulting in an overall increase to NIR. EVE, on the other hand, measures the present value change of both principal and interest cash flows based on the current period-end balance sheet. As a result, EVE does not contemplate reinvestment of our assets associated with a change in the interest-rate environment. Although NIR in both NIR-at-risk and EVE sensitivity is higher in response to increased interest rates, the future principal flows from fixed-rate investments are discounted at higher rates for EVE, which results in lower asset values and a corresponding reduction or loss in EVE. As noted above, NIR-at-risk does not analyze changes in the value of principal cash flows and therefore does not experience the same reduction experienced by EVE sensitivity associated with discounting principal cash flows at higher rates. Net Interest Revenue at Risk 103



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AND RESULTS OF OPERATIONS (Continued) NIR-at-risk is designed to measure the potential impact of changes in global market interest rates on NIR in the short term. The impact of changes in market rates on NIR is measured against a baseline NIR which encompasses management's expectations regarding the evolving balance sheet volumes and interest rates in the near-term. The goal is to achieve an acceptable level of NIR under various interest-rate environments. Assumptions regarding levels of client deposits and our ability to price these deposits under various rate environments have a significant impact on the results of the NIR simulations. Similarly, the timing of cash flows from our investment portfolio, especially option-embedded financial instruments like mortgage-backed securities, and our ability to replace these cash flows in line with management's expectations, can affect the results of NIR simulations. The following table presents the estimated exposure of NIR for the next twelve months, calculated as of the dates indicated, due to an immediate +/-100-basis-point shift to our internal forecast of global interest rates. We manage NIR sensitivity not to decline more than 15% from the baseline NIR +/-100 basis point shocks. Estimated incremental exposures presented below are dependent on management's assumptions, and do not reflect any additional actions management may undertake in order to mitigate some of the adverse effects of changes in interest rates on our financial performance. Estimated Exposure to Net Interest Revenue December 31, December 31, (Dollars in millions) 2013 2012 Rate change: Exposure % of Base NIR Exposure % of Base NIR +100 bps shock $ 334 14.0 % $ 156 6.5 % -100 bps shock (261 ) (10.9 ) (200 ) (8.3 ) +100 bps ramp 126 5.3 39 1.6 -100 bps ramp (124 ) (5.2 ) (96 ) (4.0 ) As of December 31, 2013, NIR sensitivity to an upward-100-basis-point shock in global market rates was higher compared to December 31, 2012, due to a higher level of forecast client deposits. The benefit to NIR for an upward-100-basis-point ramp is less significant than a shock, since market rates are assumed to increase gradually. A downward-100-basis-point shock in global market rates places pressure on NIR, as deposit rates reach their implicit floors due to the exceptionally low global interest-rate environment, and provide little funding relief on the liability side, while assets reset into the lower-rate environment. NIR sensitivity to a downward-100-basis-point shock in market rates as of December 31, 2013 was similar to December 31, 2012, as higher levels of forecast noninterest-bearing deposits, which improve base NIR, provide no relief as rates fall. Other important factors which affect the levels of NIR are the size and mix of assets carried in our consolidated statement of condition; interest-rate spreads; the slope and interest-rate level of U.S. and non-U.S. dollar yield curves and the relationship between them; the pace of change in global market interest rates; and management actions taken in response to the preceding conditions. Economic Value of Equity EVE sensitivity measures changes in the market value of equity to quantify potential losses to shareholders due to an immediate +/-200-basis-point rate shock compared to current interest-rate levels if the balance sheet were liquidated immediately. Management compares the change in EVE sensitivity against State Street's aggregate tier 1 and tier 2 risk-based capital, to evaluate whether the magnitude of the exposure to interest rates is acceptable. Generally, a change resulting from a +/-200-basis-point rate shock that is less than 20% of aggregate tier 1 and tier 2 capital is an exposure that management deems acceptable. To the extent that we manage changes in EVE sensitivity within the 20% threshold, we would seek to take action to remain below the threshold if the magnitude of our exposure to interest rates approached that limit. Similar to NIR-at-risk measures, the timing of cash flows affects EVE sensitivity, as changes in asset and liability values under different rate scenarios are dependent on when interest and principal payments are received. In contrast to NIR simulations, however, EVE sensitivity does not incorporate assumptions regarding reinvestment of these cash flows. In addition, our ability to price client deposits has a much smaller impact on EVE sensitivity, as EVE sensitivity does not consider the ongoing benefit of investing client deposits. The following table presents estimated EVE exposures, calculated as of the dates indicated, assuming an immediate and prolonged shift in global interest rates, the impact of which would be spread over a number of years. 104



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Table of Contents MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued) Estimated Sensitivity of Economic Value of Equity December 31, December 31, (Dollars in millions) 2013 2012 % of Tier % of Tier 1/Tier 2 1/Tier 2 Rate change: Exposure Capital Exposure Capital +200 bps shock $ 2,359 (14.9 )% $ (2,542 ) (17.0 )% -200 bps shock 1,149 7.2 41 0.3 Exposure to upward- and downward-200-basis-point shocks as of December 31, 2013 improved compared to December 31, 2012. A lower concentration of fixed-rate securities in the investment portfolio and hedging activity in 2013 reduced EVE sensitivity to changes in market rates. Model Risk Management The use of financial models is widespread throughout the banking and financial services industry, with larger and more complex organizations employing dozens of sophisticated models on a daily basis to measure risk exposures, determine economic and regulatory capital levels, and guide investment decisions, among other things. However, even as models represent a significant advancement in financial management, the models themselves represent a new source of risk, i.e., the potential for adverse consequences or financial loss from decisions based on incorrect, misused or misinterpreted model outputs and reports. In large banking organizations like State Street, where financial models and their outputs exert significant influence on business decisions, and where model failure could have a particularly harmful effect on our financial strength and performance, model risk is managed within an extensive and rigorous risk management framework. This framework is documented in our Model Risk Governance Policy Statement and accompanying Model Risk Governance Guidelines. Our model risk management program has three principal components: ? A model risk governance program supports risk management by defining roles



and responsibilities, by providing policies and guidance that define

relevant model risk management activities, and by describing procedures

that implement those policies; ? A model development process facilitates the appropriate design and



accuracy of models; the development process also includes ongoing model

integrity activities designed to test for robustness and stability and to

evaluate a model's limitations and assumptions; and

? A set of model validation processes and activities is designed to validate

that models are theoretically sound, are performing as expected, and are

in line with their design objectives; model validation also checks that a

model's key assumptions and limitations are identified and clearly

communicated to the model's end users and to senior management.

The MAC, chaired by the head of the Model Validation Group, was established to provide recommendations on technical modeling issues to the corporate oversight committees. The MAC includes members with expertise in modeling methodologies, and has representation from the various business units throughout State Street. Business Risk Management We define business risk as the risk of adverse changes in our earnings related to business factors, including changes in the competitive environment, changes in the operational economics of our business activities and the potential effect of strategic and reputation risks, not already captured as trading market, interest-rate, credit, operational or liquidity risks. We incorporate business risk into our assessment of our strategic plans and economic capital needs. Active management of business risk is an integral component of all aspects of our business, and responsibility for the management of business risk lies with every employee at State Street. Separating the effects of a potential material adverse event into operational and business 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 business risk loss. An additional example of business risk is the integration of a major acquisition. Failure to successfully integrate the operations of an acquired 105



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AND RESULTS OF OPERATIONS (Continued) business, and the resultant inability to retain clients and the associated revenue, would be classified as a loss due to business risk. Business risk is managed with a long-term focus. Techniques for its assessment and management include the development of business plans and appropriate management oversight. The potential impact of the various elements of business 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 State Street attributable to business risk. Management and control of business risks are generally the responsibility of the business units as part of their overall strategic planning and internal risk management processes. Capital The management of both our regulatory and economic capital involves key metrics evaluated by management to assess whether our actual level of capital is commensurate with our risk profile, is in compliance with all applicable regulatory requirements, and is sufficient to provide us with the financial flexibility to undertake future strategic business initiatives. We assess capital based on relevant regulatory capital adequacy requirements, as well as our own internal capital targets. Framework Our objective with respect to management of 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 adequacy requirements. Our capital management process focuses on our risk exposures, the regulatory requirements applicable to us with respect to capital adequacy, the evaluations and resulting credit ratings of the major independent credit rating agencies, our return on capital at both the consolidated and line-of-business level, and our capital position relative to our peers. Our evaluation of capital 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, as two of several inputs in our overall assessment of our capital adequacy. The goals of the capital evaluation process are 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 capital evaluation process are strategic and contingency planning, stress testing and planned capital actions. Internal Capital Adequacy Assessment Our primary banking regulator is the Federal Reserve. Both State Street 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, or FDIC, Improvement Act of 1991. 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, our primary goal with respect to capital adequacy is to exceed all applicable minimum regulatory capital requirements and to be "well-capitalized" under the Prompt Corrective Action guidelines established by the FDIC. Our capital adequacy program includes our Internal Capital Adequacy Assessment Process, or ICAAP, and associated capital policies. We consider capital adequacy to be a key element of our financial well-being, which affects our ability to attract and maintain client relationships; operate effectively in the global capital markets; and satisfy regulatory, security holder and shareholder needs. Capital is one of several elements that affect State Street's debt ratings and the ratings of our principal subsidiaries. In conformity with our capital policies, we strive to maintain adequate capital, 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 ICAAP to assess our overall capital and liquidity in relation to our risk profile and to provide a comprehensive strategy for maintaining appropriate capital and liquidity levels. The ICAAP considers material risks under multiple scenarios, with an emphasis on stress scenarios. The ICAAP builds on and leverages existing processes and systems used to measure our capital adequacy. Our ICAAP policy is reviewed and approved by the Board's RCC. Capital Contingency Planning 106



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AND RESULTS OF OPERATIONS (Continued) Contingency planning is an integral component of our capital management program. The objective of our contingency planning process is to monitor current and forecast levels of select measures that serve as preemptive indicators of a potentially adverse capital or liquidity adequacy situation. These measures are one of the inputs used to set our capital adequacy level. We review these measures annually for appropriateness and relevance in relation to our financial budget and capital plan. Stress Testing We have a robust State Street-wide stress-testing program that executes multiple stress tests each year. Our stress testing program is structured around what we determine to be the top material risks incurred by State Street, which are the end product of the corporate-wide material risk identification program. These top material risks serve as an organizing principle for much of our risk management framework, as well as reporting, including the "risk dashboard" provided to the Board. Over the past few years, stress scenarios have included a deep recession in the U.S., a break-up of the Eurozone, and an oil shock precipitated by turmoil in the Middle East/North Africa region. In connection with the focus on our top risks, each stress test incorporates idiosyncratic loss events tailored to State Street's unique risk profile. Due to the nature of our business model and our consolidated statement of condition, our risks differ from those of a traditional commercial bank. The Federal Reserve requires bank holding companies with total consolidated total assets of $50 billion or more, which includes State Street, to submit a capital plan on an annual basis. The Federal Reserve uses their CCAR process, which incorporates hypothetical financial and economic stress scenarios, to 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 the 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 and approve CCAR results and assumptions before submission to the Federal Reserve. Information about the Federal Reserve's review of our capital plan for 2013, submitted in January 2013 in connection with the CCAR process, is provided under "Capital Actions" in this "Capital" section. The Federal Reserve is currently conducting a review of capital plans for 2014 submitted by us and other large bank holding companies in January 2014. The levels at which we will be able to declare dividends and purchase shares of our common stock after March 2014 will depend on the Federal Reserve's assessment of our capital plan and our projected performance under the stress scenarios. While we anticipate that the Federal Reserve will not object to the continued return of capital to our shareholders through dividends and/or common stock purchases in 2014, we cannot provide assurance with respect to the Federal Reserve's assessment of our capital plan, or that we will be able to continue to return capital to our shareholders at any specific level. Governance In order to support integrated decision making, we have identified three management elements to aid in the compatibility and coordination of our capital adequacy strategies and processes: • 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 and liquidity

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 Planning group within Global Treasury is responsible for capital policies, development of the capital plan, the management of global capital, capital optimization, and business unit capital management. ALCCO has oversight of our management of regulatory capital, capital adequacy with respect to regulatory requirements, internal targets and the expectations of the major independent credit rating agencies. ALCCO's roles and responsibilities are designed to work complementary to and coordinated with the MRAC, which approves State Street's balance sheet strategy and related activities. The Board's RCC assists the Board in fulfilling its oversight responsibilities related to the assessment and management of risk and capital. Regulatory Capital The following table presents regulatory capital ratios for State Street and State Street Bank as of December 31: Currently Applicable Regulatory Guidelines State Street State Street Bank Well Minimum Capitalized 2013 2012 2013 2012 Tier 1 risk-based capital ratio 4 % 6 % 17.3 % 19.1 % 16.4 % 17.3 % Total risk-based capital ratio 8 10 19.7 20.6 19.0 19.1 Tier 1 leverage ratio(1) 4 5 6.9 7.1 6.4 6.3 (1) Regulatory guideline for "well capitalized" applies only to State Street Bank. The following table presents the components of tier 1, tier 2 and total capital, and the components of total risk-weighted assets, for State Street and State Street Bank as of December 31; additional information about our 107



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AND RESULTS OF OPERATIONS (Continued)



regulatory capital is provided in note 15 to the consolidated financial statements included under Item 8 of this Form 10-K.

State Street State Street Bank (Dollars in millions) 2013 2012 2013 2012 Tier 1 capital: Total common shareholders' equity $ 19,887$ 20,380$ 19,755$ 19,681 Preferred stock 491 489 - - Trust preferred capital securities 950 950 - - Goodwill (6,036 ) (5,977 ) (5,740 ) (5,679 ) Other intangible assets (2,360 ) (2,539 ) (2,239 ) (2,392 ) Deferred tax liability associated with acquisitions 653 699 638 680 Other 310 (242 ) 304 (246 ) Tier 1 capital 13,895 13,760 12,718 12,044 Tier 2 capital: Qualifying subordinated debt 1,918 1,219 1,936 1,223 Allowances for on- and off-balance sheet credit exposures and other 48 41 45 39 Tier 2 capital 1,966 1,260 1,981 1,262 Deduction for investments in finance subsidiaries (74 ) (191 ) - - Total capital $ 15,787$ 14,829$ 14,699$ 13,306 Adjusted total risk-weighted assets and market risk equivalent assets: On-balance sheet assets: Cash and interest-bearing assets $ 2,175$ 1,429$ 1,979$ 1,287 Investment securities 34,000 36,094 33,514 35,495 Loans and leases 13,201 12,118 13,257 12,187 Interest, fees and other receivables 2,951 2,355 2,332 2,068 Other assets 7,950 6,242 6,517 4,912 Total on-balance sheet assets 60,277 58,238 57,599 55,949 Off-balance sheet equivalent assets: Guarantees and unfunded commitments to extend credit 10,125 4,602 10,125 4,602 Foreign exchange derivative contracts 5,282 5,353 5,302 5,353 Standby letters of credit and asset purchase agreements 2,995 3,096 2,995 3,096 Other 185 104 176 93 Total off-balance sheet equivalent assets 18,587 13,155 18,598 13,144 Market risk equivalent assets 1,262 519 1,262 445 Total risk-weighted assets $ 80,126$ 71,912 $



77,459 $ 69,538 Adjusted quarterly average assets $ 202,801$ 192,817$ 199,301$ 189,780

As of December 31, 2013, State Street's regulatory capital ratios declined compared to December 31, 2012, primarily the result of increases in total risk-weighted assets. State Street's tier 1 capital in the same comparison increased slightly, as the positive effect of net income and other comprehensive income was mostly offset by declarations of common stock dividends and purchases by us of our common stock. The increase in total capital was primarily the result of the May 2013 issuance of $1 billion of subordinated debt, which qualifies as tier 2 capital under current federal regulatory capital guidelines. The increase in total risk-weighted assets was primarily associated with higher off-balance sheet equivalent assets, mainly associated with an increase in exposure associated with our participation in principal securities finance transactions, as well as an increase in on-balance sheet assets, primarily due to higher levels of loans and other assets. The decrease in the tier 1 leverage ratio mainly resulted from an increase in adjusted quarterly average assets associated with balance sheet growth during the year. 108



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AND RESULTS OF OPERATIONS (Continued) As of December 31, 2013, State Street Bank's tier 1 risk-based and total risk-based capital ratios declined compared to December 31, 2012, primarily the result of increases in total risk-weighted assets. State Street Bank's tier 1 capital in the same comparison increased, as the positive effect of net income and other comprehensive income was partially offset by the payment of dividends to our parent company. The increase in total capital was primarily the result of the above-mentioned subordinated debt issuance. The increase in total risk-weighted assets were the result of the above-mentioned changes in on- and off-balance sheet equivalent assets. The slight increase in the tier 1 leverage ratio mainly resulted from an increase in tier 1 capital almost entirely offset by an increase in adjusted quarterly average assets associated with balance sheet growth during the year. Capital Actions Preferred Stock In 2013, we declared aggregate dividends on our non-cumulative perpetual preferred stock, Series C (represented by depositary shares, each representing a 1/4,000th ownership interest in a share of State Street's non-cumulative perpetual preferred stock, Series C) of $5,250 per share, or approximately $1.31 per depositary share, totaling approximately $26 million. In 2012, dividends on our perpetual preferred stock, Series C, totaled approximately $8 million. In 2012, we declared dividends on our non-cumulative perpetual preferred stock, Series A, totaling approximately $21 million. We redeemed our Series A perpetual preferred stock in 2012. Common Stock In March 2013, we received the results of the Federal Reserve's review of our 2013 capital plan in connection with its CCAR process. The Federal Reserve did not object to the capital actions we proposed, and, in March 2013, our Board approved a new common stock purchase program authorizing the purchase of up to $2.10 billion of our common stock through March 31, 2014. From April 1 through December 31, 2013, we purchased approximately 24.7 million shares of our common stock, all under this program, at an aggregate cost of $1.68 billion. As of December 31, 2013, approximately $420 million remained available for purchases of our common stock under the program. Shares acquired in connection with this program which remained unissued as of year-end were recorded as treasury stock in our consolidated statement of condition as of December 31, 2013. In March 2013, we completed a $1.8 billion common stock purchase program, authorized by our Board in March 2012. In the first quarter of 2013, we purchased 6.5 million shares at an average per-share and aggregate cost of $54.95 and approximately $360 million, respectively. In 2013, under both programs combined, we purchased approximately 31.2 million shares of our common stock at an average price of $65.30 per share and an aggregate cost of approximately $2.04 billion. In 2012, we purchased approximately 33.4 million shares of our common stock, all under the March 2012 program, at an aggregate cost of $1.44 billion. In 2013, we declared aggregate quarterly common stock dividends of $1.04 per share, totaling approximately $463 million, on our common stock. In 2012, we declared aggregate quarterly common stock dividends of $0.96 per share, totaling approximately $456 million. 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. Information concerning limitations on dividends from our subsidiary banks is provided in "Related Stockholder Matters" included under Item 5, and in note 15 to the consolidated financial statements included under Item 8, of this Form 10-K. Basel Capital Framework and Developments 109



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AND RESULTS OF OPERATIONS (Continued) The currently applicable minimum regulatory capital requirements enforced by U.S. banking regulators are based on a 1988 international accord, commonly referred to as Basel I, which was developed by the Basel Committee on Banking Supervision, or Basel Committee. Basel II Framework In 2004, the Basel Committee released an enhanced capital adequacy framework, referred to as Basel II. Basel II requires large and internationally active banking organizations, such as State Street, which generally rely on sophisticated risk management and measurement systems, to better align the use of those systems with their determination of regulatory capital requirements. Basel II adopted a three-pillar framework for addressing capital adequacy and minimum capital requirements, which incorporates Pillar 1, the measurement of credit risk, market risk and operational risk; Pillar 2, supervisory review, which addresses the need for a banking organization to assess its capital adequacy relative to the risks underlying its business activities, rather than only with respect to its minimum regulatory capital requirements; and Pillar 3, market discipline, which imposes public disclosure requirements on a banking organization intended to allow the assessment of key information about the organization's risk profile and its associated level of regulatory capital. In 2007, U.S. banking regulators jointly issued final rules to implement the Basel II framework in the U.S. The framework does not supersede or change the existing prompt corrective action and leverage capital requirements applicable to banking organizations in the U.S., and explicitly reserves the regulators' authority to require organizations to hold additional capital where appropriate. Basel III Framework In 2010, in response to the financial crisis and ongoing global financial market dynamics, the Basel Committee proposed two significant reforms to the Basel II capital framework. The first reform was composed of changes to the market risk capital framework associated with Basel I, and was referred to as Basel 2.5; the second reform was composed of comprehensive revisions and enhancements to Basel II, which became known as Basel III. Market Risk Capital Rule The Basel Committee introduced significant changes to the then-existing market risk capital framework, aimed at addressing certain issues in that framework highlighted by the 2008 financial crisis. U.S. banking regulators introduced their version of this so-called Basel 2.5, in the form of a proposed new market risk capital rule, in 2011, which included the concept of an incremental risk capital requirement to capture default and credit-quality migration risk for non-securitization credit products. Other revisions placed additional prudential requirements on banking organizations' internal models for measuring market risk and required enhanced qualitative and quantitative disclosures, particularly with respect to banking organizations' securitization activities. In August 2012, U.S. banking regulators jointly issued a final market risk capital rule to implement the new market risk capital framework in the U.S. The new market risk capital rule, which was effective beginning on January 1, 2013, supplements Basel I and Basel II, and replaces the prior market risk capital framework under Basel I and Basel II in place since 1998, by requiring banking organizations with significant trading activities, as defined in the rule, to adjust their regulatory risk-based capital ratios to reflect the market risk inherent in their trading activities. Among other things, the final rule requires the use of internal models to calculate daily measures of Value-at-Risk, or VaR, that reflect general market risk for certain trading positions defined as "covered positions," as well as stressed VaR-based measures to supplement the VaR-based measures. Our adoption of the new market risk capital rule on January 1, 2013 did not significantly affect our or State Street Bank's risk-based capital ratios, although it did modestly increase our market risk equivalent assets. Market risk equivalent assets are disclosed in the foregoing "Regulatory Capital" portion of this "Capital" section. Basel III Basel III proposed to establish more stringent regulatory capital and liquidity requirements, including higher minimum regulatory capital ratios, new capital buffers, higher risk-weighted asset calibrations, more restrictive definitions of qualifying capital, a liquidity coverage ratio, and a net stable funding ratio. In June 2012, U.S. banking regulators introduced Basel III by issuing proposed revisions to the existing Basel II framework. These proposals were intended to incorporate the above-described revisions and enhancements proposed by the Basel Committee, and implement relevant provisions of the Dodd-Frank Act, in order to restructure the U.S. capital rules into a harmonized, codified regulatory capital framework. In July 2013, U.S. banking regulators jointly issued a final rule implementing the Basel III framework in the U.S. Among other things, the final rule raises the minimum tier 1 risk-based capital ratio from 4% to 6%; adds requirements for a minimum common equity tier 1 capital ratio of 4.5% and a minimum supplementary tier 1 110



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AND RESULTS OF OPERATIONS (Continued) leverage ratio of 3% for so-called "advanced approaches" banking organizations (described below); and implements a capital conservation buffer and a countercyclical capital buffer, both described below. The Basel III final rule also incorporates the new market risk capital rule to create a single and comprehensive capital adequacy framework. Under the Basel III final rule, a banking organization would be able to make capital distributions, subject to other regulatory constraints, such as the review of capital plans, and discretionary bonus payments without specified limitations as long as it maintains the required capital conservation buffer of 2.5% over each of the minimum tier 1 and total risk-based capital ratios and the common equity tier 1 capital ratio (plus any potentially applicable countercyclical capital buffer). Banking regulators would establish the minimum countercyclical capital buffer, which is initially set by banking regulators at zero, up to a maximum of 2.5% above the minimum ratios inclusive of the capital conservation buffer, under certain economic conditions. As of January 1, 2019, the date that full implementation is required, and assuming no countercyclical buffer, the minimum Basel III capital ratios, including the capital conservation buffer, will be 8.5% for tier 1 risk-based capital, 10.5% for total risk-based capital, and 7% for common equity tier 1 capital, in order for us to make capital distributions and discretionary bonus payments without limitation. Each of these Basel III ratios is calculated differently under the Basel III final rule than those similar ratios calculated under Basel I, and therefore these Basel III ratios are not comparable with the Basel I ratios presented earlier in the "Regulatory Capital" section. The Basel III final rule provides for two frameworks: the "standardized" approach, intended to replace Basel I, and the "advanced" approach, applicable to advanced approaches banking organizations, like State Street, as originally defined under Basel II. Once phased in, the Basel III final rule will change the manner in which our regulatory capital ratios are calculated, will reduce our calculated regulatory capital, and, as noted above, will increase the minimum regulatory capital that we will be required to maintain. Under the Basel III final rule, we will be subject to the more stringent of our regulatory capital ratios calculated under the standardized approach and those calculated under the advanced approach in the assessment of our capital adequacy under the prompt corrective action framework. Provisions of the Basel III final rule will become effective under a transition timetable which began on January 1, 2014. These provisions will supersede or modify corresponding elements of the Basel I and Basel II risk-based and leverage capital requirements and prompt corrective action framework. The requirement for the capital conservation buffer will be phased in beginning on January 1, 2016, with full implementation by January 1, 2019. The timing of application of the provisions of the Basel III final rule related to the calculation of risk-weighted assets under the advanced approach will depend on State Street's completion of a required qualification, or parallel run, period. During its qualification period, State Street must demonstrate that it complies with the related Basel III requirements to the satisfaction of the Federal Reserve. The calculation of risk-weighted assets under the Basel III standardized approach will become effective on January 1, 2015. On February 21, 2014, we were notified by the Federal Reserve that we have completed our parallel run period and will be required to begin using the advanced approaches framework as provided in the Federal Reserve's July 2013 Basel III final rule in the determination of our risk-based capital requirements. Pursuant to this notification, we will use the advanced approaches framework to calculate and publicly disclose our risk-based capital ratios beginning with the second quarter of 2014. Under the July 2013 Basel III final rule, we must meet the minimum risk-based capital ratios under both the advanced approaches and generally applicable risk-based capital frameworks in Basel III and Basel I, respectively. Estimated Basel III Tier 1 Common Ratio As described above, the Basel III final rule adds a requirement for a minimum common equity tier 1 capital ratio, or tier 1 common ratio. The tier 1 common ratio is a measurement of capital representing tier 1 capital, reduced by the deduction of "non-common elements," such as trust preferred capital securities and preferred stock, divided by total risk-weighted assets. The Basel I tier 1 common ratio is used by regulators and by management to monitor and assess State Street's capital position, both individually and relative to other financial institutions, and management believes it may be of interest to investors. The following table presents our tier 1 common ratio as of December 31, 2013, calculated using Basel I standards, and our estimated tier 1 common ratios as of December 31, 2013, calculated in conformity with the Basel III final rule under both the standardized approach and the advanced approach. These estimated Basel III tier 1 common ratios are preliminary, reflect tier 1 common equity calculated under the Basel III final rule as applicable on its January 1, 2014 effective date, and are based on our present understanding of the final rule's impact. As indicated above, under the Basel III final rule, the more stringent of the Basel III tier 1 common ratios calculated by us under the standardized and advanced approaches will apply in the assessment of our capital adequacy under the prompt corrective action framework. 111



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Table of Contents MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued) December 31, 2013 Basel III Final Rule Basel III Final Rule Currently Applicable Standardized Approach Advanced Approach (Dollars in millions) Regulatory Requirements(1) (Estimated)(2) (Estimated)(2) Tier 1 capital $ 13,895 $ 13,216 $ 13,216 Less: Trust preferred capital securities 950 475 475 Preferred stock 491 491 491 Plus: Other - 87 87 Tier 1 common capital $ 12,454 $ 12,337 $ 12,337 Total risk-weighted assets $ 80,126 $ 121,562 $ 104,919 Tier 1 common ratio 15.5 % 10.1 % 11.8 % Minimum tier 1 common ratio requirement, assuming full implementation on January 1, 2019 4.5 4.5 Capital conservation buffer, assuming full implementation on January 1, 2019 2.5 2.5 Minimum tier 1 common ratio requirement, including capital conservation buffer, assuming full implementation on January 1, 2019(3) 7.0 7.0 (1) Using Basel I standards, the tier 1 common ratio was calculated by dividing (a) tier 1 risk-based capital, calculated in conformity with Basel I, less non-common elements including qualifying trust preferred capital securities and qualifying perpetual preferred stock, or tier 1 common capital, by (b) total risk-weighted assets, calculated in conformity with Basel I. (2) As of December 31, 2013, for purposes of the calculations in conformity with the Basel III final rule, capital and total risk-weighted assets under both the standardized approach and the advanced approach were calculated using our estimates, based on the provisions of the final rule expected to affect capital in 2014. The tier 1 common ratio was calculated by dividing (a) tier 1 common capital, as described in footnote (1), but with tier 1 risk-based capital calculated in conformity with the final rule, by (b) total risk-weighted assets, calculated in conformity with the Basel III final rule. These estimated Basel III tier 1 common ratios are preliminary, reflect tier 1 common equity calculated under the Basel III final rule as applicable on its January 1, 2014 effective date, and are based on our present understanding of the final rule's impact. • Under both the standardized and advanced approaches, tier 1 risk-based capital decreased by $679 million, as a result of applying the estimated effect of the Basel III final rule to Basel I tier 1 risk-based capital of $13.90 billion as of December 31, 2013. • Under both the standardized and advanced approaches, estimated tier 1 common capital used in the calculation of the tier 1 common ratio was $12.34 billion, reflecting the adjustments to Basel I tier 1 risk-based capital described in the first bullet above. Tier 1 common capital used in the calculation was therefore calculated as adjusted tier 1 risk-based capital of $13.22 billion less non-common elements of capital, composed of trust preferred capital securities of $475 million, preferred stock of $491 million, and other adjustments of $87 million as of December 31, 2013, resulting in estimated tier 1 common capital of $12.34 billion. As of December 31, 2013, there was no qualifying minority interest in subsidiaries. • Under the standardized approach, total risk-weighted assets used in the calculation of the estimated tier 1 common ratio increased by $41.44 billion as a result of applying the provisions of the Basel III final rule to Basel I total risk-weighted assets of $80.13 billion as of December 31, 2013. Under the advanced approach, total risk-weighted assets used in the calculation of the estimated tier 1 common ratio increased by $24.79 billion as a result of applying the provisions of the final rule to Basel I total risk-weighted assets of $80.13 billion as of December 31, 2013. The primary differences between total risk-weighted assets under Basel I and total risk-weighted assets under the Basel III final rule include the following: under Basel I, credit risk is quantified using pre-determined risk weights and asset classes, and in part, uses external credit ratings, while the Basel III final rule, specifically the standardized and advanced approaches, introduces a broader range of pre-determined risk weights and asset classes, uses certain alternatives to external credit ratings, includes additional adjustments for operational risk (under the advanced approach) and counterparty credit risk, and revises the treatment of equity exposures. In particular, asset securitization exposures receive higher risk weights under both the standardized and advanced approaches in the Basel III final rule compared to Basel I. (3) The minimum tier 1 common ratio requirement does not reflect the countercyclical capital buffer under the Basel III final rule, or the capital buffer for global systemically important banks prescribed by the Basel Committee (refer to "Systemically Important Banks" below); such countercyclical capital buffer, which is initially set at zero, would be established by banking regulators under certain economic conditions, and U.S. banking regulators have not yet issued a proposal to implement the prescribed capital buffer for systemically important financial institutions. The estimated Basel III tier 1 common ratio as of December 31, 2013 presented above, calculated under the advanced approach in conformity with the Basel III final rule, reflects calculations and determinations with respect to our capital and related matters as of December 31, 2013, based on State Street and external data, quantitative formulae, statistical models, historical correlations and assumptions, collectively referred to as "advanced systems," in effect and used by State Street for those purposes as of the time we filed this 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 accurately represent or calculate the scenarios, circumstances, outputs or other results for which they are designed or intended. Due to the influence of changes in these advanced systems, whether resulting from changes in data inputs, regulation or regulatory supervision or interpretation, State Street-specific or market activities or experiences or other updates or factors, we expect that our advanced systems and our capital ratios calculated in conformity with 112



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AND RESULTS OF OPERATIONS (Continued) the Basel III final rule will change and may be volatile over time, and that those latter changes or volatility could be material as calculated and measured from period to period. Impact of Basel III Final Rule Our current assessment of the implications of the Basel III final rule indicates a potential impact which could be material to our businesses and our profitability, as well as to our regulatory capital ratios. One significant provision in the final rule would require us to apply the "Simplified Supervisory Formula Approach," referred to as the SSFA, in the risk-weighting of asset securitization exposures, such as asset-backed securities, carried in our investment securities portfolio. The approach required by Basel II utilizes the ratings-based approach, under which external credit ratings are used to risk-weight such exposures. The Dodd-Frank Act prohibits the use of external credit ratings in the risk-weighting of asset securitization exposures. Currently, our investment portfolio contains significant holdings of mortgage- and asset-backed securities that are highly rated by credit rating agencies, but for which the SSFA would apply higher regulatory risk weights compared to the approach required by Basel I and Basel II. In contrast, certain of our securities with lower credit ratings would receive lower regulatory risk weights if the SSFA were applied. Based on the composition of our investment portfolio with respect to the types of securities and related external credit ratings as of December 31, 2013, our application of the SSFA would materially increase our total regulatory risk-weighted assets relative to those calculated in conformity with Basel I, and correspondingly decrease our regulatory risk-based capital ratios relative to those calculated in conformity with Basel I; as a result, we are re-evaluating the composition of our investment portfolio in order to maintain an investment strategy appropriately aligned with our maintenance of an appropriate level of regulatory capital. Depending on future market conditions, this re-evaluation could result in the reinvestment of our portfolio securities into different types of investments, which could materially affect our consolidated results of operations by reducing our net interest revenue. Certain of the provisions in the Basel III final rule, including the requirement to apply the SSFA, became effective beginning on January 1, 2014 under the advanced approach, although certain provisions will be implemented, in whole or in part, in later periods. As such, a significant number of the securities currently held in our investment portfolio that are highly rated by credit agencies are expected to mature or pay down over time, and we would currently anticipate replacing those securities pursuant to our reinvestment program in a manner that would seek to manage our risk appetite, our return objectives and our levels of regulatory capital. As a result of our balance sheet management efforts, all else being equal, we would anticipate being able to significantly offset the impact of application of the SSFA on our total regulatory risk-weighted assets and our regulatory risk-based capital ratios. In addition, the qualification of trust preferred capital securities as tier 1 capital will be phased out over a two-year period which began on January 1, 2014 and will end on January 1, 2016, and subsequently, the qualification of these securities as tier 2 capital will be phased out over a multi-year transition period beginning on January 1, 2016. We had trust preferred capital securities of $950 million outstanding as of December 31, 2013. There remains considerable uncertainty with respect to multiple provisions of the Basel III final rule, and the timing and manner in which they will be applied to us. Models implemented under the Basel III final rule, particularly those implementing the advanced approach, remain subject to regulatory review and approval. The full effects of the Basel III final rule on State Street and State Street Bank are therefore subject to further evaluation and also to further regulatory guidance, action or rule-making. In general, we expect to be held to the most stringent of the various provisions in the Basel III final rule; however, we anticipate that we will be able to comply with the relevant Basel III regulatory capital and liquidity requirements when and as applied to us. Supplementary Leverage Ratio Framework In July 2013, U.S. banking regulators jointly issued a Notice of Proposed Rulemaking, or NPR, which proposes to enhance leverage ratio standards for the largest, most systemically significant U.S. banking organizations. The July 2013NPR applies to any U.S. top-tier bank holding company with at least $700 billion in consolidated total assets or at least $10 trillion in total assets under custody, referred to as a covered bank holding company, and any insured depository institution subsidiary of such bank holding company. We expect the standards to apply to State Street and State Street Bank based on our total assets under custody. Under Basel I, the tier 1 leverage ratio is calculated by dividing tier 1 capital by adjusted quarterly average assets. While Basel II did not incorporate a leverage ratio, the Basel III final rule provides for a leverage ratio similar to Basel I, as well as a supplementary leverage ratio for advanced approaches banking organizations. This supplementary leverage ratio adds certain off-balance sheet exposures, such as those related to derivative contracts and unfunded lending commitments, to the denominator of the ratio calculation. 113



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AND RESULTS OF OPERATIONS (Continued) Under the July 2013NPR, covered bank holding companies would be required to maintain a supplementary tier 1 leverage ratio of at least 5%, which is 2% above the similar minimum Basel III supplementary tier 1 leverage ratio of 3% described earlier in this section. Failure to exceed the 5% supplementary tier 1 leverage ratio would subject covered bank holding companies to restrictions on capital distributions and discretionary bonus payments. In addition to the leverage buffer for covered bank holding companies, the July 2013NPR would require insured depository institution subsidiaries of covered bank holding companies, like State Street Bank, to maintain a 6% supplementary tier 1 leverage ratio to be considered "well capitalized." State Street is one of eight large U.S. banking organizations to which the July 2013NPR would apply, if finalized as currently proposed. The July 2013NPR would not apply to all banking organizations with which we compete. If finalized as currently proposed, the new supplementary tier 1 leverage ratio requirements will be effective beginning on January 1, 2018. The July 2013NPR is a proposed rule, and remains subject to interpretation, regulatory guidance, industry and other comment and issuance in the form of a final rule. In January 2014, the Basel Committee finalized its revisions to the denominator of the Basel III supplementary tier 1 leverage ratio. The revised denominator differs from the denominator of the supplementary leverage ratio in the July 2013NPR and the Basel III final rule in several important respects that could adversely affect the calculation of our supplementary tier 1 leverage ratio, including the treatment of derivative contracts, securities financing transactions and certain off-balance sheet exposures. U.S. banking regulators may issue rules to implement these revisions. Systemically Important Banks We meet the criteria of a large bank holding company subject to enhanced supervision and prudential standards, commonly referred to as a "systemically important financial institution," or SIFI, and we are one among a group of 29 institutions worldwide that have been identified by the Financial Stability Board, or FSB, and the Basel Committee as "global systemically important banks," or G-SIBs. Our designation as a G-SIB will require us to maintain an additional capital buffer, ranging between 1% and 2.5%, above the Basel III minimum common equity tier 1 capital ratio of 4.5%, based on a number of factors, as evaluated by banking regulators. Factors in this evaluation will include our size, interconnectedness, substitutability, complexity and cross-jurisdictional activities. In November 2013, the FSB maintained their designation of us as a category-1 organization, with a capital surcharge of 1%, although this designation and the associated additional capital buffer are subject to change. U.S. banking regulators have not yet issued a proposal to implement the G-SIB capital surcharge. We expect these additional capital requirements for G-SIBs to be phased in beginning on January 1, 2016, with full implementation by January 1, 2019. Assuming completion of the phase-in period for the capital conservation buffer, and no countercyclical buffer, the minimum capital ratios as of January 1, 2019, including the capital conservation buffer and G-SIB capital surcharge, would be 9.5% for tier 1 risk-based capital, 11.5% for total risk-based capital, and 8% for common equity tier 1 capital, in order for State Street to make capital distributions and discretionary bonus payments without limitation. Not all of our competitors have similarly been designated as systemically important, and therefore some of our competitors may not be subject to the same additional capital requirements. Economic Capital We define economic capital as the capital required to protect holders of our senior debt, and obligations higher in priority, against unexpected economic losses over a one-year period. Economic capital usage is one of several measures used by management and our Board to assess the adequacy of our capital levels in relation to State Street's risk profile. Due to the evolving nature of quantification techniques, we expect to periodically refine the methodologies, assumptions, and information used to estimate our economic capital requirements, which could result in a different amount of capital needed to support our business activities. We quantify economic capital requirements for the risks inherent in our business activities and group them into categories that we broadly define for these purposes as follows: • Market risk: the risk of adverse financial impact due to fluctuations in market prices, primarily as they relate to our trading activities;



• Interest-rate risk: the risk of loss in non-trading asset-and-liability

management positions, primarily the impact of adverse movements in

interest rates on the repricing mismatches that exist between the assets

and liabilities carried in our consolidated statement of condition; • Credit risk: the risk of loss that may result from the default or downgrade of a borrower or counterparty; 114



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AND RESULTS OF OPERATIONS (Continued)



• Operational risk: the risk of loss from inadequate or failed internal

processes and systems, human error, or from external events, which is generally consistent with the Basel II definition; and



• Business risk: the risk of negative earnings resulting from adverse

changes in business factors, including changes in the competitive environment, changes in the operational economics of our business activities, and the effect of strategic and reputational risks. OFF-BALANCE SHEET ARRANGEMENTS In the normal course of our business, we hold assets under custody and administration and assets under management in a custodial or fiduciary capacity for our clients, and, in conformity with GAAP, we do not record these assets in our consolidated statement of condition. Similarly, collateral funds associated with our securities finance activities are held by us as agent; therefore, we do not record these assets in our consolidated statement of condition. 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 $320.08 billion as of December 31, 2013, compared to $302.34 billion as of December 31, 2012. We require the borrower to provide collateral in an amount equal to or 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 $331.73 billion and $312.22 billion as collateral for indemnified securities on loan as of December 31, 2013 and December 31, 2012, 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 equal to or 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 $331.73 billion as of December 31, 2013 and $312.22 billion as of December 31, 2012 referenced above, $85.37 billion as of December 31, 2013 and $80.22 billion as of December 31, 2012 was invested in indemnified repurchase agreements. We or our agents held $91.10 billion and $85.41 billion as collateral for indemnified investments in repurchase agreements as of December 31, 2013 and December 31, 2012, respectively. Additional information about our securities finance activities and other off-balance sheet arrangements is provided in notes 11 and 16 to the consolidated financial statements included under Item 8 of this Form 10-K. SIGNIFICANT ACCOUNTING ESTIMATES Our consolidated financial statements are prepared in conformity with GAAP, and we apply accounting policies that affect the determination of amounts reported in these consolidated financial statements. Our significant accounting policies are described in note 1 to the consolidated financial statements included under Item 8 of this Form 10-K. The majority of the accounting policies described in note 1 do not involve difficult, subjective or complex judgments or estimates in their application, or the variability of the estimates is not material to our consolidated financial statements. However, certain of these accounting policies, by their nature, require management to make judgments, involving significant estimates and assumptions, about the effects of matters that are inherently uncertain. These estimates and assumptions are based on information available as of the date of the consolidated financial statements, and changes in this information over time could materially affect the amounts of assets, liabilities, equity, revenue and expenses reported in subsequent consolidated financial statements. Based on the sensitivity of reported financial statement amounts to the underlying estimates and assumptions, the relatively more significant accounting policies applied by State Street have been identified by management as those associated with recurring fair-value measurements, other-than-temporary impairment of investment securities and impairment of goodwill and other intangible assets. These accounting policies require the most subjective or complex judgments, and underlying estimates and assumptions could be most subject to revision as new 115



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AND RESULTS OF OPERATIONS (Continued) 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 brief discussion of the above-mentioned significant accounting estimates. Management of State Street 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, investment securities available for sale and derivative instruments. As discussed in further detail below, 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. As of December 31, 2013, approximately $105.59 billion of our financial assets and approximately $6.36 billion of our financial liabilities were carried at fair value on a recurring basis, compared to $114.94 billion and $5.43 billion, respectively, as of December 31, 2012. The amounts as of December 31, 2013 represented approximately 43% of our consolidated total assets and approximately 3% of our consolidated total liabilities, compared to 52% and 3%, respectively, as of December 31, 2012. The decrease in the relative percentage of consolidated total assets as of December 31, 2013 compared to 2012 mainly reflected a decline in the investment securities portfolio, generally associated with a lower level of purchases in 2013 compared to 2012, and an increase in interest-bearing deposits with banks, the result of the continued elevated level of client deposits. Additional information with respect to the assets and liabilities carried by us at fair value on a recurring basis is provided in note 3 to the consolidated financial statements included under Item 8 of this Form 10-K. 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 a prescribed three-level valuation hierarchy. The hierarchy gives the highest priority to quoted prices in active markets for identical assets or liabilities (level 1) and the lowest priority to valuation methods using significant unobservable inputs (level 3). As of December 31, 2013, including the effect of netting, we categorized less than 1% of our financial assets carried at fair value in level 1, approximately 92% of our financial assets carried at fair value in level 2, and approximately 7% of our financial assets carried at fair value in level 3 of the fair value hierarchy. As of December 31, 2013, on the same basis, we categorized approximately 1% of our financial liabilities carried at fair value in level 1, approximately 98% of our financial liabilities carried at fair value in level 2, and approximately 1% of our financial liabilities carried at fair value in level 3 of the fair value hierarchy. The assets categorized in level 1 were substantially composed of trading account assets. Fair value for these securities was measured by management using unadjusted quoted prices in active markets for identical securities. The assets categorized in level 2 were composed of investment securities available for sale and derivative instruments. Fair value for the investment securities was measured by management primarily using information obtained from independent third parties. Information obtained from third parties is subject to review by management as part of a validation process. Management utilizes a process to verify the information provided, including an understanding of underlying assumptions and the level of market-participant information used to support those assumptions. In addition, management compares significant assumptions used by third parties to available market information. Such information may include known trades or, to the extent that trading activity is limited, comparisons to market research information pertaining to credit expectations, execution prices and the timing of cash flows, and where information is available, back-testing. 116



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AND RESULTS OF OPERATIONS (Continued) The derivative instruments categorized in level 2 predominantly represented foreign exchange and interest-rate contracts used in our trading activities, for which fair value was measured by management using discounted cash flow techniques, with inputs consisting of observable spot and forward points, as well as observable interest rate curves. The substantial majority of our financial assets categorized in level 3 were composed of asset-backed and mortgage-backed securities available for sale. Level-3 assets also included foreign exchange derivative contracts. The aggregate fair value of our financial assets and liabilities categorized in level 3 as of December 31, 2013 compared to December 31, 2012 increased approximately 7%, primarily the result of new purchases of asset-backed and non-U.S. debt securities. With respect to derivative instruments, we evaluated the impact on valuation of the credit risk of our counterparties and of our own credit. We considered such factors as the market-based probability of default by us and our counterparties, and our current and expected potential future net exposures by remaining maturities, in determining the appropriate measurements of fair value. Valuation adjustments associated with derivative instruments were not significant to our consolidated financial condition in 2013, 2012 or 2011. Other-Than-Temporary Impairment of Investment Securities Our portfolio of fixed-income investment securities constitutes a significant portion of the assets carried in our consolidated statement of condition. GAAP requires the use of expected future cash flows to evaluate other-than-temporary impairment of these investment securities. The amount and timing of these expected future cash flows are significant estimates used in our assessment of other-than-temporary impairment. Additional information with respect to management's assessment of other-than-temporary impairment is provided in note 4 to the consolidated financial statements included under Item 8 of this Form 10-K. Expectations of defaults and prepayments are the most significant assumptions underlying our estimates of future cash flows. In determining these estimates, management relies on relevant and reliable information, including but not limited to deal structure, including optional and mandatory calls, market interest-rate curves, industry standard asset-class-specific prepayment models, recent prepayment history, independent credit ratings, and recent actual and projected credit losses. Management considers this information based on its relevance and uses its best judgment in order to determine its assumptions for underlying cash-flow expectations and resulting estimates. Management reviews its underlying assumptions and develops expected future cash-flow estimates at least quarterly. Additional detail with respect to the sensitivity of these default and prepayment assumptions is provided under "Financial Condition - Investment Securities" in this Management's Discussion and Analysis. Impairment of 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. Other intangible assets represent purchased assets that can be distinguished from goodwill because of contractual rights or because the asset can be exchanged on its own or in combination with a related contract, asset or liability. Goodwill is not amortized, while other intangible assets are amortized over their estimated useful lives. Substantially all of the goodwill and other intangible assets recorded in our consolidated statement of condition have resulted from business acquisitions by our Investment Servicing line of business, with the remainder associated with our Investment Management line of business. Goodwill is ultimately supported by revenue from our Investment Servicing and Investment Management lines of business. A decline in earnings as a result of a lack of growth, or our inability to deliver cost-effective services over sustained periods, could lead to a perceived impairment of goodwill, which would be evaluated and, if necessary, be recorded as a write-down of the reported amount of goodwill through a charge to other expenses in our consolidated statement of income. On an annual basis, or more frequently if circumstances arise, management reviews goodwill and evaluates events or other developments that may indicate impairment of the carrying amount. We perform this evaluation at the reporting unit level, which is one level below our two major lines of business. The evaluation methodology for potential impairment is inherently complex and involves significant management judgment in the use of estimates and assumptions. We evaluate goodwill for impairment using a two-step process. First, we compare the aggregate fair value of the reporting unit to its carrying amount, including goodwill. If the fair value exceeds the carrying amount, no impairment exists. If the carrying amount of the reporting unit exceeds the fair value, then we compare the "implied" fair value of the reporting unit's goodwill to its carrying amount. If the carrying amount of the goodwill exceeds the implied fair value, then goodwill impairment is recognized by writing the goodwill down to the implied fair value. The implied fair value of the goodwill is determined by allocating the fair value of the reporting unit to all of the assets 117



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AND RESULTS OF OPERATIONS (Continued) and liabilities of that unit, as if the unit had been acquired in a business combination and the overall fair value of the unit was the purchase price. To determine the aggregate fair value of the reporting unit being evaluated for goodwill impairment, we use one of two principal methodologies: a market approach, based on a comparison of the reporting unit to publicly-traded companies in similar lines of business; or an income approach, based on the value of the cash flows that the business can be expected to generate in the future. 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. Additional information about goodwill and other intangible assets, including information by line of business, is provided in note 6 to the consolidated financial statements included under Item 8 of this Form 10-K. Our evaluation of goodwill and other intangible assets indicated that no significant impairment occurred in 2013, 2012 or 2011. Goodwill and other intangible assets recorded in our consolidated statement of condition as of December 31, 2013 totaled approximately $6.04 billion and $2.36 billion, respectively, compared to $5.98 billion and $2.54 billion, respectively, as of December 31, 2012. RECENT ACCOUNTING DEVELOPMENTS Information with respect to recent accounting developments is provided in note 1 to the consolidated financial statements included under Item 8 of this Form 10-K.


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