state street bank europe limited€¦ · · 2018-03-20state street bank europe limited pillar 3...

Pillar 3 Disclosure Statement Year ended December 31, 2013

State Street Bank Europe Limited

CONTENTS

1. Overview . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .1

1.1 Introduction 1

1.2 Basis of Disclosures 2

1.3 Materiality 2

1.4 Verification, Media, Location and Frequency 2

2. Company Overview . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .3

2.1 Group Structure 3

2.2 Overview & Activities 4

2.3 Consolidation 5

3. Governance and Risk Management Framework . . . . . . . . . . . . . . . . . . . . . . . . .5

3.1 Governance Framework 5

3.2 Risk Management Framework 5

3.3 Category of Risks 8

4. Capital . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .12

4.1 Capital Structure 12

4.2 Capital Resource Requirements 12

4.3 Capital Adequacy 12

4.4 Compliance with Pillar 2 13

5. Remuneration . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .13

CONTENTS

1. Overview . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .1

1.1 Introduction 1

1.2 Basis of Disclosures 2

1.3 Materiality 2

1.4 Verification, Media, Location and Frequency 2

2. Company Overview . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .3

2.1 Group Structure 3

2.2 Overview & Activities 4

2.3 Consolidation 5

3. Governance and Risk Management Framework . . . . . . . . . . . . . . . . . . . . . . . . .5

3.1 Governance Framework 5

3.2 Risk Management Framework 5

3.3 Category of Risks 8

4. Capital . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .12

4.1 Capital Structure 12

4.2 Capital Resource Requirements 12

4.3 Capital Adequacy 12

4.4 Compliance with Pillar 2 13

5. Remuneration . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .13

STATE STREET BANK EUROPE LIMITED PILLAR 3 DISCLOSURE STATEMENT

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1. Overview

1.1 INTRODUCTION

The Capital Requirement Directive (“CRD”) came into effect on 1 January 2007 and is the

framework for implementing the Basel II Accord in the European Union, prepared by the Basel

Committee on Banking Supervision. The objective of the Basel Committee was to introduce

consistent capital adequacy standards and a supervisory framework.

The CRD was implemented in the UK by the Prudential Regulatory Authority (PRA) and the

Financial Conduct Authority (FCA) through rules1 adopted by the regulator.

The Basel II framework is built on three pillars:

• Pillar 1: Defines the rules and regulations for calculating risk-weighted assets and regulatory

minimum capital requirements for credit risk, market risk and operational risk.

• Pillar 2: Addresses a banking organisations internal process for assessing its overall capital

adequacy in relation to its risks, the process that is also referred to as the Internal Capital

Adequacy Assessment Process (ICAAP). Pillar 2 also entails the Supervisory Review and

Evaluation Process (SREP).

• Pillar 3: Designed to promote market discipline by providing market participants with key

information on a banking organisation’s risk exposure and risk management processes through

a set of minimum disclosure requirements.

The revised Capital Requirements Directive and a new Capital Requirements Regulation (together

“CRD IV”) came into effect in the UK on 1 January 2014 and is the framework for implementing

the Basel III Accord in the EU. The Basel III Accord contains global regulatory standards on

bank capital adequacy, stress testing and market, liquidity risk, intended to strengthen bank

capital requirements and to implement new liquidity, leverage, governance and remuneration

requirements. The new CRD IV rules will apply to the State Street Bank Europe Limited (SSBEL)

Group Pillar 3 Disclosures in respect of the year ending 31 December 2014.

1 The relevant rules are contained in the PRA Handbook, General Prudential Sourcebook, Prudential Sourcebook for Banks, Building Societies and Investment Firms and Senior Management Arrangements, Systems and Controls.

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1.2 BASIS OF DISCLOSURES

This Statement has been prepared in accordance with the requirements of Pillar 3 in Chapter

11 of the Prudential Sourcebook for Banks, Building Societies and Investment Firms (BIPRU) by

SSBEL Group, also referred to as ‘the Company’ within this Statement. Further information on the

Company and the basis of disclosure is included in section 2, Company Overview.

This Statement has an accounting reference date of 31 December and unless otherwise stated

all information is as at 31 December 2013.

1.3 MATERIALITY

The statement does not contain a discussion of all matters that may affect the capital adequacy

of SSBEL. Rather, certain information has been omitted from this Statement on the basis

of materiality, or where it is regarded as proprietary or confidential if, in the opinion of the

management of SSBEL, such information would not change or influence the assessment or

decision of a market participant or other user of this Statement.

1.4 VERIFICATION, MEDIA, LOCATION AND FREQUENCY

This Statement has been prepared to explain the basis of preparation and disclosure of certain

capital requirements of SSBEL and to provide information about SSBEL’s management of

certain risks and for no other purpose. The information provided in this Statement has not been

examined by independent external auditors and does not constitute any form of audited financial

statements. This Statement has been produced solely for the purposes of complying with Pillar 3

requirements. This Statement will be updated at least annually and more frequently if appropriate.

Copies of this Statement are available on the internet at www.statestreet.com and at SSBEL’s

main office located at 20 Churchill Place, Canary Wharf, London E14 5HJ, United Kingdom.


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2. Company Overview2.1 GROUP STRUCTURE

SSBEL is an authorised institution under the United Kingdom Financial Services and Market Act

(2000). For regulatory capital purposes SSBEL is classified as a UK bank with three wholly owned

subsidiaries (the SSBEL Group). All subsidiary entities are fully consolidated for both accounting

and prudential purposes.

SSBEL is a wholly owned direct subsidiary of State Street International Holdings (SSIH), the

Edge Act2 subsidiary of State Street Bank and Trust Company (SSBTC) which is wholly owned by

State Street Corporation (SSC), the group parent company. SSC is subject to the supervision and

regulation of the Board of Governors of the Federal Reserve System (the Federal Reserve) and

the Federal Deposit Insurance Corporation and SSBTC is subject to the primary supervision and

regulation of the Federal Reserve and the Massachusetts Commissioner of Banks. The SSBEL

Group is subject to regulation by the PRA and the FCA. The SSBEL Group’s ultimate parentage

is shown in Figure 1 below.

Figure 1 – SSBEL Group Legal Entity Structure

2 An Edge Act corporation is a subsidiary of a bank or bank holding company that is federally chartered by the Federal Reserve under section 25A of the Federal Reserve Act, to engage in banking activities outside the US.

State Street Corporation (SSC)

State Street Bank and Trust Company (SSBTC)

State Street International Holdings (SSIH)

State Street Bank Europe Limited (SSBEL)

State Street Trustees Limited

(SSTL)

State Street Global Markets

International Ltd. (SSGMIL)

State Street (UK) Service Co. Ltd. (SSSC)

Inactive


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2.2 COMPANY OVERVIEW AND ACTIVITIES

SSBEL through its subsidiaries and affiliates is engaged in investment servicing, brokerage,

transition management, currency management, trustee and administrative services. The

business is undertaken in the UK, EMEA and Asia-Pacific, and is focused exclusively on

institutional clients. No financial instruments are used by the Company for operational purposes

although financial instruments are held for risk mitigation purposes in the form of UK Gilts and

German Bunds.

State Street Bank Europe Limited (SSBEL)

SSBEL is authorised by the PRA and regulated by the PRA and FCA and is a private company

limited by shares under the laws of England and Wales. SSBEL provides outsourced middle-

office operational services to one asset manager whereby SSBEL assumes responsibility for the

middle-office operations of that firm although SSBEL delegates some middle office operations

to SSBTC. SSBEL contracts with clients in respect of the provision of transition management

services and currency management services. SSBEL also executes foreign exchange trades as

an agent on behalf of its currency management clients providing them with execution of their

foreign exchange trading requirements and calculation of the trades necessary to meet their

stated objectives, including foreign exchange execution services and passive hedging programs

(although SSBEL delegates such execution to SSBTC).

State Street Global Markets International Limited (SSGMIL)

SSGMIL is authorised and regulated by the FCA and is a private company limited by shares under

the laws of England and Wales. SSGMIL is a UK registered broker dealer and also a member of

various exchanges in different capacities dependent on the nature of its component business

activities. These relate to securities brokerage services and the execution of order flow derived

from transition management business delegated to SSGMIL by SSBEL. SSGMIL also acts as the

contracting entity for the provision of electronic trading services to clients.

State Street Trustees Limited (SSTL)

SSTL is authorised and regulated by the FCA and is a private company limited by shares under

the laws of England and Wales. SSTL acts as the depositary of open-ended investment companies

(OEICs) or trustee of authorised unit trusts. In addition, SSTL’s FCA permissions include authority

to act as trustee or depositary of authorised and unauthorised Alternative Investment Funds

(AIFs) with effect from 10 July 2014.

State Street (UK) Service Company Limited (SSSC)

SSSC was incorporated as of 19th July 2011. SSSC is a fully owned unregulated subsidiary of

SSBEL and is currently dormant.

UK Joint Venture

In 2009 SSBEL entered into a general partnership with State Street Bank and Trust Company’s

London Branch, with respect to SSBEL’s consolidated operations together with the bulk of State

Street Bank and Trust London Branch’s operations. SSBEL has a 12.5% interest in the profits

and losses of the general partnership.

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2.3 CONSOLIDATION

The financial statements are prepared under the historical cost convention with the exception

of investment securities which are recorded at fair value. They are drawn up in accordance with

the special provisions of the Companies Act 2006 relating to Banking Companies, applicable

accounting standards, and the Statements of Recommended Practice by the British Bankers’

Association. For further information see 2013 SSBEL Group Report and Financial Statements.

3. Governance and Risk Management Framework3.1 GOVERNANCE FRAMEWORK

SSBEL’s Board members are responsible for exercising reasonable skill, care and diligence

in overseeing the prudent and sound management of the Company. The Board will exercise

its duties and responsibilities in promoting the success of the Company for the benefit of

its shareholders.

The SSBEL Board includes members of the senior management team from its major subsidiaries,

senior corporate executives from outside the business and three non-executive directors, two of

which are independent. The SSBEL Board has established a risk committee, an audit committee

and a nomination committee as sub-committees of the Board, each of which is comprised of

SSBEL non-executive directors. The Board and its sub-committees ensure that the Company’s

subsidiaries are being adequately controlled and appropriately governed, that risks are being

appropriately managed and that the SSBEL Board is comprised of directors with the requisite

competence and experience.

Members of senior management of State Street UK are responsible for on-going operations of

SSBEL, including day-to-day management of risk within their respective areas of the business.

Members of senior management and the Board may also have additional reporting lines to senior

management of SSBTC and SSC.

The SSBEL Board delegates day-to-day oversight of the Company to the UK Executive

Committee (UK ExCo), which is the most senior State Street UK governance committee, and its

sub-committees. The UK ExCo is comprised of a member of SSC’s Management Committee,

senior executives of SSC’s four business units, State Street Global Services, State Street Global

Markets, State Street Global Exchange and State Street Global Advisors. The mission of UK

ExCo includes approving and overseeing the State Street UK-wide business plan, monitoring

performance against the plan and overseeing capital, liquidity and risk management across the

State Street UK business.

3.2 RISK MANAGEMENT FRAMEWORK

The risk management strategy of SSBEL is to develop and implement effective processes to

identify, report, assess, measure and manage risks incurred by the business, and to comply with

applicable regulatory requirements and internal guidelines associated with risk management.

SSBEL complies with its own risk policies as well as all applicable SSC corporate and regional risk

policies and guidelines, including those governing credit risk, operational risk, trading and market

risk, and new business and new product approvals.

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SSBEL has implemented an appropriate risk management programme and maintains a level of

capital proportionate to the risk it is exposed to. Key areas of focus are:

• Identification and effective management of all types of risk the Company is exposed to;

• Strong governance;

• Use of key risk and business performance indicators to monitor levels of risk;

• A culture of ethical conduct, accountability, risk awareness and transparency that extends

across the Company and all of its activities enabling effective escalation and decision making;

• Focus on reputational integrity that ensures Company’s on-going position of trust as a premier

service provider and;

• Full compliance with applicable laws, regulations and policies.

Though responsibility for the management and control of risk lies with every individual in SSBEL,

key responsibilities are allocated as detailed below.

Board of Directors (the “Board”) — The Board is responsible for approving SSBEL’s Risk Appetite

and the Risk and Compliance Policy, including the risk strategy of the business. The Board

reviews the capital level and ensures that it is in accordance with the stated risk appetite of the

business. The Board delegates the responsibility for the design, implementation and monitoring

of risk management policies and guidelines to the appropriate stakeholders within the Risk and

Compliance functions.

Board Risk Committee (the Risk Committee) — The Risk Committee is responsible for advising

the Board on SSBEL’s current and future risk appetite, assisting the Board in overseeing the

implementation of that strategy, reviewing whether the prices of liabilities and assets offered to

clients fully take into account SSBEL’s business model and risk strategy and examining whether

incentives provided by the remuneration system take into consideration SSBEL’s risk, capital,

liquidity and the likelihood and timing of earnings.

Board Nomination Committee (the Nomination Committee) — The Nomination Committee is

responsible for identifying and recommending for approval potential candidates for any Board

vacancy; assessing the structure, size, composition and performance of the Board; promoting

diversity on the Board; and assessing the knowledge, skills and experience of individual members

of the Board and of the Board collectively.

Board Audit Committee (the Audit Committee) — The Audit Committee assists the Board in

overseeing the operation of a comprehensive system of internal controls covering the integrity of

the Company’s financial statements and compliance with laws, regulations and corporate policies.

The Audit Committee oversees the independent external auditor’s qualifications, performance and

independence, the internal audit activities and the independent external auditor.

Senior Management — Senior management is responsible for managing business performance

in line with SSBEL’s overall risk appetite. Senior management holds primary responsibility for

the day-to-day management and control of risk. Senior management ensures that the business

complies with applicable SSC policies and guidelines, as and when they are amended, and those

risk guidelines and policies established specifically for SSBEL or applicable to its businesses, as

amended from time to time.


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Risk Function — The Risk Function is part of the second line of defence and assists with

the formulation of risk strategy and supports the Board to fulfil the specialists’ delegated

responsibilities in respect of risk governance. The risk function assists in the identification and

quantification of risks associated with the ICAAP and assists in the overall development of the

ICAAP. The Risk function also assists with the documentation and maintenance of the risk

strategy, and related risk management policies and procedures, which outline the methodology

for identifying, measuring, managing, controlling and reporting of risk in SSBEL.

Compliance Function — The Compliance Function is part of the second line of defence and is

responsible for the compliance framework applicable to SSBEL and advises the Board and senior

management on compliance with applicable laws, rules and regulations. The Compliance Function

is also responsible for ensuring that compliance issues are identified, escalated to the appropriate

person and reported to the Board, and oversees the resolution of compliance issues.

UK Risk and Compliance Committee — The UK Risk and Compliance Committee provides

assistance to the Board and the Risk Committee in order to ensure compliance with SSC policies

and relevant local regulations, and in identifying risk and compliance issues within SSBEL that

could result in material financial loss or damage to SSBEL’s reputation.

Finance Function — The Finance Function is responsible for preparing the annual financial and

capital plans for SSBEL. The Finance Function prepares and submits statutory reporting and

monitors compliance with regulatory capital limits and is also responsible for providing periodic

reporting to the Board and senior management on capital levels and management.

Corporate Audit — Corporate Audit is the third line of defence and is responsible for performing

independent reviews of the application of risk management practices and methodologies.

This involves evaluating the design of controls as implemented by management and testing the

effectiveness of the controls. Corporate Audit reports to the Examination and Audit Committee of

SSC and to the Audit Committee of SSBEL.

3.2.1 Risk Identification and Assessment

Management ensures comprehensive risk assessments are in place across the business to

identify and assess internal and external risks. Risk assessments are owned by the relevant

business or functional group. Risk exposures are evaluated in terms of anticipated financial

impact and likelihood of occurrence. Different approaches may be adopted for the assessment

of risk or the type of risk and information available to assess the risk. These approaches may

include qualitative and quantitative assessments.

3.2.2 Risk Mitigation

A strong risk management culture exists across the business functions of SSBEL. In line with

the Risk Appetite Statement, risks are identified and assessed as part of the Risk Reporting

Framework. Tracking of loss history and trends provides information that is important to on-going

risk assessment and applicability. Where risk exposures are above tolerance levels, whether

through periodic review or from analysis of loss events, appropriate mitigating actions are put in

place to reduce the exposure and actions tracked to completion. The review of the quality of the

internal control framework is supplemented by Corporate Audit reviews. Mitigation activities and

techniques include use of controls, contingency planning, and capital allocation.

3.2.3 Risk Monitoring and Reporting

Risk Guidelines prescribe that reporting shall be generated with the appropriate frequency and

level of detail to facilitate the effective management of risk by senior management. Key risk

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and performance indicators are used to monitor risk exposure. These indicators are utilized

to establish SSBEL’s actual risk profile which is measured against its target risk profile as

established through the risk appetite setting process. These key indicators are intended to

trigger a management response when indicator threshold breaches are observed. Measures and

thresholds established for these indicators are consistent with corporate standards, industry best

practices and the risk appetite established for SSBEL.

Key risk and performance indicators are incorporated into management reporting which is

provided to all relevant management committees, the UK ExCo, the Board and where appropriate

the Risk Committee. Threshold breaches are escalated in accordance with established escalation

procedures. Commentary and analysis addressing cause and corrective actions should

accompany reporting of any threshold breaches.

3.3 CATEGORY OF RISKS

The principal risks SSBEL assumes in its business are operational risk and business/strategic

risk and the ways in which they manifest themselves are described below. Other risk types which

impact on the business are also considered and discussed below.

Operational Risk

Operational risk is defined as the risk of loss resulting from inadequate or failed internal

processes, people and systems or from external events. SSBEL is exposed to operational risk

as a consequence of the activities of its core businesses. SSBEL seeks to effectively manage

operational risk in support of achieving its corporate objectives, and to fully comply with all

regulatory requirements.

Operational risk encompasses legal risk and fiduciary risk. Technology management risk and

regulatory compliance risk are also considered as sub sets of operational risk for capital allocation

purposes. Reputational impacts are also considered as part of operational risk. For the purpose

of calculating the Pillar 1 operational risk charge, SSBEL uses the standardised approach under

Basel II.

Business/Strategic Risk

Business risk is defined as any risk to the Company arising from changes in its business,

including the risk that the Company may not be able to carry out its business plan and its

desired strategy. Concentration risk, which is concentration to individual clients or sectors that

can magnify the loss of clients, is also considered here. The Company complies with the new

business and product review and approval process that is used to capture and monitor this risk

and management regularly reviews business won and lost.

Credit Risk

Credit risk is defined as the current or prospective risk to earnings and capital arising from

an obligor’s failure to meet the terms of any contract with the institution or its failure to perform

as agreed.

£ in millions

Operational Risk Capital Requirement 5

Total Operational Risk Capital Requirements 5


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Credit risk is managed in accordance with SSC’s Credit and Counterparty Risk Policy Statement,

Credit and Counterparty Risk Guidelines and Credit and Counterparty Risk Approval Authorities

(CCRG). Together, these documents establish governance, principles and parameters for the

management of credit risk including guidance on SSC’s defined markets approach, due diligence

in new relationships, prohibited business and overarching conservatism in the extension of credit

and acceptance of counterparty risk.

The majority of credit risk assumed by SSBEL is in placing monies with highly rated banks for

fixed terms of three months or less.

SSBEL’s overall minimum capital requirement for credit risk under the standardised approach is

expressed as 8% of the risk-weighted exposure amounts for each of the applicable standardised

credit risk exposure classes. External ratings from External Credit Assessments Institutions

(ECAIs), Standard & Poor’s (S&P) and Moody’s are used in the credit quality steps.

The following tables detail SSBEL’s regulatory credit risk exposure as at 31 December 2013.

1. Analysis of credit exposure by asset class;

2. Geographic distribution of exposures (based on country of residence or domicile) by

significant asset class;

3. Residual maturity breakdown by exposure classes;

4. Credit quality step for institutions; and

5. Credit risk capital requirement.

Other items primarily relate to receivables for brokerage trades.

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1. Analysis of Credit Exposure by Asset Class

£ in million

Asset Class Exposure ValueCentral Governments or Central Banks 241

Institutions 129

Other Items 36

Total 406

2. Credit Exposure by Geographic Area

£ in million

Asset Class Non-UK UK TotalCentral Governments or Central Banks 95 146 241

Institutions 5 124 129

Other Items - 36 36

Total 100 306 406

3. Residual Maturity Breakdown by Exposure Classes

£ in million

Asset Class < 3 Months> 3 Months

< 1 Year> 1 Year

< 5 Years > 5 Years UndatedCentral Governments or Central Banks 146 95 - - -Institutions 38 - - - 91

Other Items - - - 3 33

Total 184 95 - 3 124

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SSBEL considers its exposure to credit risk to be immaterial, primarily as a result of its short-term

cash placements with highly rated institutions. All SSBEL exposures are subject to the firm risk

limits established in the CCRG.

Market Risk

Market risk is defined 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. Market risk can arise from positions (whether long or short) that expose the Company to

any of the above risk factors.

SSBEL and its subsidiaries do not maintain trading risk positions and any positions incurred are

the result of errors. Daily monitoring occurs to ensure that positions are not taken or those that

result from errors or failed trades are resolved as soon as possible. Market risk was considered

to be minimal as at 31 December 2013.

Although SSBEL does not have material direct exposure to foreign exchange, equity, commodity

or interest-rate risk, SSBEL has identified a specific area where the Company may be exposed

to first or second order market risk. SSBEL has a secondary exposure to exchange rate risk

arising through its revenue generation. SSBEL’s broker/dealer transacts in non-sterling-based

trades, therefore earning revenues in a range of currencies but having the vast majority of the

non-trading/administration costs in sterling. This mismatch of revenues and costs leads to a

potential foreign exchange risk if sterling appreciates against the other currencies to such an

extent that the multi-currency revenues are not sufficient to cover the sterling costs.

Interest-Rate Risk in the Non-Trading Book

Interest rate risk in the non-trading book is defined as the potential impact of adverse movements

in interest rates in the non-trading book and the impact these have on planned future cash

flows. The Company is exposed to interest-rate risk only as a result of placements held with

highly rated banks and investments in highly rated government securities maintained partly

for Liquid Asset Buffer requirements. All exposures are short-term in nature. Borrowings in the

Company are limited to lending provided by SSBTC in line with the Company’s overall approach to

liquidity management.

4. Institutional Credit Exposure by Credit Quality Step

£ in million

Credit

Quality Step

Maturity

Risk

Weight

S&P

Moody’s

Exposure

Value

Exposure Value After Mitigation

1 < 3 months 20% AAA to AA- Aaa to Aa3 129 129

2 < 3 months 20% A to A- A1 to A3 - -

3 < 3 months 20% BBB+ to BBB- Baa1 to Baa3 - -

Total 129

5. Credit Risk Capital Requirement

£ in million

Asset ClassCentral Governments or Central Banks -

Institutions 2

Other Items -

Total Credit Risk Capital Requirements 2


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Liquidity Risk

Liquidity risk is defined as the current or prospective risk to earnings and capital arising from an

institution’s inability to meet its liabilities when they become due.

Liquidity risk management is the responsibility of SSC’s Global Asset, Liability and Capital

Committee (ALCCO) and is executed by the Global Treasury group. ALCCO is chaired by the

Treasurer and is composed of Executive Management, Enterprise Risk Management, Global

Treasury and senior management from businesses that generate interest rate or liquidity risks.

SSBEL manages its liquidity in accordance with its Board approved Individual Liquidity Adequacy

Assessment and within the wider global framework established by SSC’s global treasury

guidelines and associated policies, which are applicable to all of its subsidiaries and underlying

entities. SSC’s global treasury guidelines are written and maintained by SSC’s Global Treasury

group, with approval provided annually by ALCCO. In addition, SSBEL maintains its own Liquidity

Guidelines that are written by global treasury and approved by the UK ExCo. The overarching

liquidity risk management principle establishes that SSC must have sufficient funds to replace

maturing liabilities, accommodate client transactions and meet other funding commitments; as

well as maintaining current executable liquidity contingency plans. Liquidity risk controls and

measures are managed, supervised and integrated on a global basis.

SSBEL’s policy has been, at all times, to maintain sufficient high quality liquid assets to cover

expected cash outflows and to stay comfortably within the limits for the sight to 8-day and sight

to 30-day gap positions set by the PRA.

SSBEL and its subsidiary SSGMIL are Individual Liquidity Adequacy Standard (ILAS) BIPRU firms

and further to the UK Regulators’ (FCA and PRA) enforced standards to strengthen bank’s capital

requirements through new regulatory requirements on bank liquidity, are required to enhance

their liquid resources through maintenance of a Liquid Assets Buffer (LAB). The LAB serves as a

buffer of unencumbered, highly liquid assets readily available to each Company.

Pension Obligations Risk

This is the risk to the Company caused by its contractual or other liabilities to, or with respect

to, a pension scheme (whether established for its employees or those of a related company or

otherwise). It also means the risk that the Company will make payments or other contribution to,

or with respect to, a pension scheme because of a moral obligation or because the Company

considers that it needs to do so for some other reason. This risk to SSBEL is mitigated because

the scheme is closed to new members, the scheme is closed to future accrual of benefits and

the scheme has changed its investment policy to better match its liabilities.

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4. Capital 4.1 CAPITAL STRUCTURE

The total capital of the Company currently consists entirely of Tier 1 capital.

4.2 CAPITAL RESOURCE REQUIREMENTS

4.3 CAPITAL ADEQUACY

SSBEL’s capital management process focuses on SSBEL’s risk exposures and regulatory capital

requirements. SSBEL’s Board members are responsible for overseeing the management of capital

and are responsible for ensuring capital adequacy with respect to regulatory requirements and

internal targets. As part of its ICAAP and in determining the capital required in order to support

its current and future activities, SSBEL has taken into consideration the current environment and

has identified and thoroughly considered its current businesses, potential new opportunities,

significant risks and future plans. The objective of the capital management process is to ensure

that SSBEL remains well capitalized both in the present and in the future. The ICAAP is intended

to affirm SSBEL’s capital adequacy by demonstrating the appropriateness of the risk management

practices that are employed to manage all risks related to achieving its business objectives.

One of the purposes of the ICAAP is to provide confidence around SSBEL’s business and risk

management practices.

SSBEL undertakes a diversified range of business activities and the risks are analysed and

quantified on a consolidated basis. SSBEL has assessed and quantified its current and expected

risks over a five-year projected period by considering the risk profiles and business activities of

its underlying subsidiaries. The Company has adopted a “Pillar 1 plus” approach to determine its

capital requirements. A bottom-up and top-down methodology is used to quantify and validate

the adequacy of the Company’s Pillar 1 and Pillar 2 capital add-on requirements and to ensure

completeness and comprehensiveness.

Total Eligible Capital as at 31 December 2013 £ in millions

Capital

Paid up ordinary share capital/common stock 6

Reserves (including revaluation reserves loss) 180

Deductions from tier one capital -

Intangible assets (3)

Total Tier 1 Capital after deductions 183

Tier 2Revaluation reserves gain -

Total Capital 183

Pillar 1 Capital Requirements £ in millions

Credit Risk (standardised approach) 2

Market Risk -

Operational Risk (standardised approach) 5

Total Pillar 1 Capital 7


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The bottom-up approach entails the completion of a risk register based on all risks relevant

to the business. Each subsidiary then determines the materiality of the risks to which its own

business is exposed. Significant risks are then quantified using actual internal loss experiences

and management’s expert judgment. The risk register considers input from the corporate risk

identification processes. The risk controls, systems, policies and procedures of SSBEL are

factored into the quantification to determine the probability of occurrence and net impact on

SSBEL’s profitability and capital reserves.

For operational risk, the adequacy of the Pillar 1 capital requirement is assessed by comparing it

with the unexpected loss quantification determined in the bottom-up approach. The unexpected

loss is quantified to a specified level of confidence and challenged by management’s expert

judgement. For other risks, the Pillar 2 capital add-on is determined by calculating the impact of

risk on the Company’s net profit after tax and capital reserves should the risk crystallise.

A top-down (scenario analysis) approach validates the Pillar 1 and Pillar 2 capital assessment

conclusions determined using the process described above to assess the Company’s ability to

absorb severe shocks/events and remain adequately capitalised.

The adequacy of SSBEL’s regulatory capital in relation to these and other risks is assessed

through its ICAAP. The Board reviews and approves the ICAAP on an annual basis, or when there

are any major changes to the business strategy and risk profile. The Board uses the ICAAP as

part of its business planning and capital management.

4.4 COMPLIANCE WITH PILLAR 2

Under Pillar 2 of the Basel II framework and the PRA’s and FCA’s capital requirements, SSBEL

has undertaken an assessment of the adequacy of its capital based on all risks to which it is

exposed. This has been assessed in the SSBEL ICAAP, which assess the risks which go beyond

the minimum capital requirement as determined in the ICAAP process.

As part of its ICAAP, the Company considered risks to capital combined with stress testing and

scenario analysis of operational and business risks in addition to an assessment of costs to wind

down the business in an orderly manner.

The Pillar 2 analysis conducted concluded that at 31 December 2013, the capital resources of

SSBEL exceed Basel II and regulatory requirements, as well as internal and Board-approved

capital requirements.

5. Remuneration Details of SSBEL’s annual remuneration process and policy are published separately on the State

Street website alongside this statement at www.statestreet.com.

ABOUT STATE STREET CORPORATION

State Street Corporation (NYSE: STT) is one of the world’s leading

providers of financial services to institutional investors including

investment servicing, investment management and investment research

and trading. With $28.4 trillion in assets under custody and administration

and $2.48 trillion* in assets under management as of 30 June 2014,

State Street operates in more than 100 geographic markets worldwide,

including the US, Canada, Europe, the Middle East and Asia. For more

information, visit State Street’s website at www.statestreet.com.

*Assets under management include the assets of the SPDR® Gold ETF (approximately $33 billion as of June 30, 2014), for which State Street Global Markets, LLC, an affiliate of SSgA, serves as the distribution agent.

14-22652-0914©2014 STATE STREET CORPORATION

www.statestreet.com

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