Tangible Common Equity (TCE)

Tangible common equity (TCE) is a measure of a company's physical capital, which is used to evaluate a financial institution's ability to deal with potential losses. Tangible common equity (TCE) is calculated by subtracting intangible assets and preferred equity from the company's book value.

Measuring a company's TCE is particularly useful for evaluating companies that have large amounts of preferred stock, such as U.S. banks that received federal bailout money in the 2008 financial crisis. In exchange for bailout funds, those banks issued large numbers of shares of preferred stock to the federal government. A bank can boost TCE by converting preferred shares to common shares.

[Important: the word tangible means physical, or able to touch; this can be contrasted with intangible things that lack a physical presence.]

Companies own both tangible (physical) and non-tangible assets. A building is tangible, for instance, while a patent is intangible. The same can be said about a firm's equity. Financial companies are most often evaluated using TCE.

The TCE ratio (TCE divided by tangible assets) is a measure of capital adequacy at a bank. The tangible common equity (TCE) ratio measures a firm's tangible common equity in terms of the firm's tangible assets. It can be is used to estimate a bank's sustainable losses before shareholder equity is wiped out. The tangible common equity (TCE) ratio is calculated by first finding the value of the firm's tangible common equity, which is the firm's common equity less preferred stock equity less intangible assets.

The tangible common equity is then divided by the firm's tangible assets, which is found by subtracting the firm's intangible assets from total assets. Depending on the firm's circumstances, patents might be excluded from intangible assets for the purposes of this equation since they, at times, can have a liquidation value.

Using tangible common equity can also be used to calculate a capital adequacy ratio as one way of evaluating a bank's solvency and is considered a conservative measure of its stability.

• Tangible common equity (TCE) is a measure of a company's physical capital, which is used to evaluate a financial institution's ability to deal with potential losses.
• Measuring a company's TCE is particularly useful for evaluating companies that have large amounts of preferred stock, such as U.S. banks that received federal bailout money in the 2008 financial crisis.
• The TCE ratio (TCE divided by tangible assets) is a measure of capital adequacy at a bank. The tangible common equity (TCE) ratio measures a firm's tangible common equity in terms of the firm's tangible assets.

In a simple example, suppose a bank has $100 billion in assets, $95 billion in deposits to support loans, and $5 billion in TCE. The TCE ratio would be 5%. If TCE drops by $5 billion, the bank is technically insolvent. However, TCE is not required by GAAP or bank regulations and is typically used internally as one of many capital adequacy indicators.

An Alternative Measure to TCE

Another way to evaluate a bank's solvency is to look at its tier 1 capital, which consists of common shares, preferred shares, retained earnings, and deferred tax assets. Banks and regulators track tier 1 capital levels to assess the stability of a bank because the types of assets held by a bank are relevant.

Notably, lower risk assets held by a bank, such as U.S. Treasury notes, carry more safety than low-grade securities. Regulators do not require regular submissions of tier 1 capital levels, but they come into play when the Federal Reserve conducts stress tests on banks.