Tangible common equity

Tangible Common Equity (TCE) refers to the subset of shareholders' equity that is not preferred equity and not intangible assets.^[1][2]

TCE is an uncommonly used measure of a company’s financial strength. It indicates how much ownership equity owners of common stock would receive in the event of a company’s liquidation. During the financial and economic crisis of 2008-2009, it gained public popularity as a measure of the viability of large commercial banks.

TCE, when used in a ratio with tangible common assets, is a measure of a bank's ability to absorb losses (e.g., homeowners defaulting on mortgages) before becoming insolvent. It is one of the factors considered by the Office of the Comptroller of the Currency to determine if a bank has become insolvent.

Formulae

• TCE = total equity – intangible assets – goodwill – preferred stock
• TCE ratio = TCE / (total assets)
• Leverage ratio = (total assets – intangible assets – goodwill) / TCE

See also

• Bank stress tests
• Return on tangible equity

Example

On February 27, 2009, the U.S. Government converted preferred shares to common shares in order to increase Citigroup's tangible common equity.^[3] In this example, preferred stock equity is decreased, and total equity remains the same, increasing the TCE.

References

1. ^ "Tangled Tangibles", by Tracy Alloway an FT Alphaville November 23, 2008 blog entry
2. ^ "Tangible Common Equity for Beginners" from baselinescenario.com
3. ^ "Citi to Exchange Preferred Securities for Common, Increasing Tangible Common Equity to as Much as $81 Billion", Wall Street Journal, February 27, 2009