What is Tangible Common Equity - TCE
Tangible common equity (TCE) is a measure of a company's 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.
BREAKING DOWN Tangible Common Equity - TCE
Using tangible common equity to calculate a capital adequacy ratio is one way of evaluating a bank's solvency and is considered a conservative measure of its stability. The TCE ratio (TCE divided by tangible assets) is a measure of capital adequacy at a bank.
Example of Tangible Common Equity
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. 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.