Before Jay Hooley became State Street Corp.'s chief executive 14 months ago, he had already concluded that the custodial bank's business model did not have to fundamentally change — it just had to keep up with investors whose strategies did.
A 20-year veteran of State Street, Hooley spent his first year at the company cleaning up asset and legal troubles, outlining an effort to shave $600 million from State Street's operating costs and integrating two acquisitions, the Intesa Sanpaulo securities business in Brazil and Bank of Ireland's asset management division. Rising asset values have provided a significant tailwind, and with 19.6% Tier 1 capital, the Boston company is poised to continue its acquisitions, particularly in Europe.
"We took advantage of a disrupted world with a relatively strong capital base," Hooley told American Banker in a recent interview.
State Street still has adjusting to do. Leverage and other restrictions from Basel III and other regulatory changes pose risks to the company's long-term return on equity. And while the extent of the burden is still unclear, State Street is bracing for its likely status as a systemically important financial institution.
Hooley also discussed State Street's tech push, a multiyear effort to move as much of its data to cloud computing, allowing the company to merge its own information with that of customers to create information-based products.
A condensed version of the interview follows.
You took over at the beginning of the second quarter of 2010. Tell us about the first year.
HOOLEY: The asset servicing and global asset management business have come through the crisis particularly well. In spite of what has gone on in the last four years, the trends for us are still retirement and savings, and the globalization of the financial markets. You have continued desire to outsource, and you've got consolidation.
When I stepped in last year, I knew we were on sound ground with the business model. I needed to clear out some old issues, reset the table and get us ready for the next 10 years. Part of that was knowing the new regulatory world we're all in, and fortifying our capital.
Custodial banks were not at the center of the financial crisis, but they are being affected by the subsequent regulatory and legal changes all the same. What areas are you worried about?
When Dodd-Frank and Basel were being constructed and conceived, they weren't thinking about the trust banks, though I would say that the visibility and understanding of trust banks have gone up quite a bit. When you look at Dodd-Frank, whether it's the Volcker Rule, derivatives, mortgage consumer protection — really none of that is targeted at our business. The one thing that is more central, would be the specific rules about SIFIs, systemically important financial institutions.
But I think that if I look at the history of this company and the history of the trust and custody industry, a lot of our new revenue opportunities have come on the back of changing regulation and changing tax rules. We sit poised to see how some of the regulatory reform comes out, and we are anticipating there will be opportunities. The one I'd highlight right now is the reform being posed around derivatives.
We're not in that business today, but we service all of the major asset owners who trade derivatives. If independent clearing settlement organizations emerge, that's an area where State Street would have an interest. It's a place where an unconflicted intermediary may have some value.
State Street has taken a number of sizable charges over the last year, from settling securities lending disputes to a $350 million mark on the sale of $11 billion of securities. What was your approach to getting these behind you?
The issues we dealt with during the financial crisis, we put them behind us in a way that didn't impair our relationships with customers. We could have resolved the securities lending issue last year in a number of different ways, but we incurred a financial loss in order to make sure that our customers were made whole. We did the right thing by the customers, and consistently we've always taken the long view.
Foreign exchange litigation has been in the news for a while now. How significant of a rift with customers is this?
I believe the foreign exchange issue is one where there's now a far better understanding of how custody-based foreign exchange works, and I think there's a growing understanding of its value.
This is a narrow issue. Over time, I think the clients have already recognized that there's good value there. They don't have to trade foreign exchange with us, but many of them choose to.
Cloud computing is central to the technology plan State Street unveiled in November. Give us a better idea of the benefits of a cloud-based system.
The simple practical example is that an asset manager who might deal with us in 10 locations could know their exposure to a security or anything risk- and compliance-related in real time. The access to data becomes enormously enhanced.
The exciting part is that once you're in this cloud environment, you can take your data and merge it with customer data to create information-based products. Our industry has historically been a transaction processing and valuation business. But it's going to radically evolve into an information business.
As we mobilize our own information, and are then able to combine it with other sources to provide information for portfolio managers and risk managers, it's a pretty exciting evolution. In a cloud environment, if a customer wants to add a new fund, it's a 30-second process.
Asset management is a field that many regional U.S. banks have exited. Are there further opportunities for acquisitions in this area?
It's perhaps more likely you'll see that in Europe than in the U.S. Most banks in the U.S. have played out their strategy hand to say, "We're in the asset management business or not." It was either banks that had capital pressure or didn't have scale.
But in Europe, it will be interesting to see stress tests and other capital restructuring moves that go on, and if that results in shedding. We're poised around that for trust and custody businesses, but you can see the same opportunities on the asset management side.