Tangible common equity (TCE), the subset of

shareholders' equity In finance, equity is ownership of assets that may have debts or other liabilities attached to them. Equity is measured for accounting purposes by subtracting liabilities from the value of the assets. For example, if someone owns a car worth $2 ...

that is not preferred equity and not

intangible asset An intangible asset is an asset that lacks physical substance. Examples are patents, copyright, franchises, goodwill, trademarks, and trade names, as well as software. This is in contrast to physical assets (machinery, buildings, etc.) and fin ...

s, is an uncommonly used measure of a company's financial strength. It indicates how much

ownership equity In finance, equity is ownership of assets that may have debts or other liabilities attached to them. Equity is measured for accounting purposes by subtracting liabilities from the value of the assets. For example, if someone owns a car worth $2 ...

owners of

common stock Common stock is a form of corporate equity ownership, a type of security. The terms voting share and ordinary share are also used frequently outside of the United States. They are known as equity shares or ordinary shares in the UK and other Comm ...

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 A commercial bank is a financial institution which accepts deposits from the public and gives loans for the purposes of consumption and investment to make profit. It can also refer to a bank, or a division of a large bank, which deals with corp ...

. 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 The Office of the Comptroller of the Currency (OCC) is an independent bureau within the United States Department of the Treasury that was established by the National Currency Act of 1863 and serves to charter, regulate, and supervise all natio ...

to determine if a bank has become insolvent.

Formula

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

Example

On February 27, 2009, the U.S. Government converted

preferred shares Preferred stock (also called preferred shares, preference shares, or simply preferreds) is a component of share capital that may have any combination of features not possessed by common stock, including properties of both an equity and a debt ins ...

common shares Common stock is a form of corporate equity ownership, a type of security. The terms voting share and ordinary share are also used frequently outside of the United States. They are known as equity shares or ordinary shares in the UK and other Co ...

to increase Citigroup's tangible common equity."Citi to Exchange Preferred Securities for Common, Increasing Tangible Common Equity to as Much as $81 Billion"

Wall Street Journal ''The Wall Street Journal'' is an American business-focused, international daily newspaper based in New York City, with international editions also available in Chinese and Japanese. The ''Journal'', along with its Asian editions, is published ...

, 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).

References

{{stock market Balance sheet United States Generally Accepted Accounting Principles

Formula

Example

See also

References