Definition
Tangible common equity is the subset of shareholders’ equity that is not preferred equity and not intangible assets.
Tangible Common Equity – TCE
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, goodwill 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 company can boost TCE by converting preferred shares to common shares.
Explaining ‘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 a company’s value. 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.
Further Reading
- Bank capital: Lessons from the financial crisis – onlinelibrary.wiley.com [PDF]
- A cost–benefit analysis of Basel III: Some evidence from the UK – www.sciencedirect.com [PDF]
- Macroeconomic impact of Basel III – papers.ssrn.com [PDF]
- The economics of small business finance: The roles of private equity and debt markets in the financial growth cycle – www.sciencedirect.com [PDF]
- The measurement and determinants of brand equity: A financial approach – pubsonline.informs.org [PDF]
- Financial reporting, supplemental disclosures, and bank share prices – www.jstor.org [PDF]
