Fitch Ratings has revised its rating outlook on State Street Corp. to negative from stable and has downgraded the investment bank’s individual rating on news that the firm is taking a charge related to subprime troubles.

The rating agency says that this action follows State Street’s announcement that it will record a US$279 million after-tax charge to establish a US$618 million reserve to cover legal exposure and other costs related to the underperformance of several of State Street Global Advisors’ actively managed fixed income funds, specifically those that contained investments backed by subprime mortgages. Following a review of and discussions with certain customers invested in these funds, State Street determined that the company had potential legal exposure to some of its investors in these funds, Fitch noted.

Fitch says it has downgraded State Street’s individual rating since operational losses of this magnitude are not consistent with the previous rating. “Fitch believes that there were deficiencies in the control environment that allowed the potential exposure to develop. Management has instituted a company-wide review process to detect and eliminate any similar weak control issues,” it adds.

The rating outlook revision indicates the potential negative impact on business volume if customers lose confidence in State Street’s risk control capabilities, Fitch explains. This risk is highest in State Street’s other investment management businesses, though it could potentially affect the servicing business as well, it says.

Fitch has affirmed State Street’s long- and short-term Issuer Default Ratings and other outstanding debt ratings in light of the company’s strong franchise and good earning capacity. Liquidity at the bank level is judged good. “While the parent currently has an acceptable level of financial flexibility for its current long-term and short-term ratings, Fitch expects management to accumulate resources at the parent level to be able to deal with any future contingencies,” it says.