tangible common equity
{{Accounting}}
Tangible common equity (TCE), the subset of shareholders' equity that is not preferred equity and not intangible assets,[http://ftalphaville.ft.com/blog/2008/11/21/18538/tangled-tangibles/ "Tangled Tangibles", by Tracy Alloway] an FT Alphaville November 23, 2008 blog entry[http://baselinescenario.com/2009/02/24/tangible-common-equity-for-beginners/ "Tangible Common Equity for Beginners"] from baselinescenario.com 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.
When used in a ratio with tangible common assets, it measures 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.
Formula
- TCE = total equity – intangible assets – goodwill – preferred stock{{cn|date=December 2017}}
- tangible assets = total assets - intangible assets - goodwill - preferred stock
- TCE ratio = TCE / (tangible assets){{cn|date=December 2017}}
- Leverage ratio = (total assets – intangible assets – goodwill) / TCE{{cn|date=December 2017}}
Example
On February 27, 2009, the U.S. Government converted preferred shares to common shares to increase Citigroup's tangible common equity.[https://www.wsj.com/articles/SB123573983418294221?mod=googlenews_wsj "Citi to Exchange Preferred Securities for Common, Increasing Tangible Common Equity to as Much as $81 Billion"], Wall Street Journal, February 27, 2009 In this example, the company's total equity remained the same, but its preferred equity decreased, thereby increasing common equity (and TCE).
See also
- Bank stress tests
- Return on tangible equity
- {{slink|Intrinsic value (finance)#Equity}}