Tangible common equity (TCE), the subset of

shareholders' equity In finance, equity is an ownership interest in property that may be subject to debts or other liabilities. Equity is measured for accounting purposes by subtracting liabilities from the value of the assets owned. For example, if someone owns a ...

that is not preferred equity and not

intangible asset An intangible asset is an asset that lacks physical substance. Examples are patents, copyright, exclusive franchises, Goodwill (accounting), goodwill, trademarks, and trade names, reputation, Research and development, R&D, Procedural knowledge, ...

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

ownership equity In finance, equity is an ownership interest in property that may be subject to debts or other liabilities. Equity is measured for accounting purposes by subtracting liabilities from the value of the assets owned. For example, if someone owns a ...

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 C ...

would receive in the event of a company's

liquidation Liquidation is the process in accounting by which a Company (law), company is brought to an end. The assets and property of the business are redistributed. When a firm has been liquidated, it is sometimes referred to as :wikt:wind up#Noun, w ...

. 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 that accepts Deposit (finance), deposits from the public and gives loans for the purposes of consumption and investment to make a Profit (economics), profit. It can also refer to a bank or a division o ...

. 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 corporate charter, charter, bank regulation ...

to determine if a bank has become insolvent.

Formula

*''TCE = total equity – intangible assets – goodwill – preferred stock'' *''tangible assets = total assets - intangible assets - goodwill - preferred stock'' *''TCE ratio = TCE / (tangible 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 inst ...

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 Com ...

to increase

Citigroup Citigroup Inc. or Citi (Style (visual arts), stylized as citi) is an American multinational investment banking, investment bank and financial services company based in New York City. The company was formed in 1998 by the merger of Citicorp, t ...

'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'' (''WSJ''), also referred to simply as the ''Journal,'' is an American newspaper based in New York City. The newspaper provides extensive coverage of news, especially business and finance. It operates on a subscriptio ...

, 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

{{econ-term-stub Balance sheet United States Generally Accepted Accounting Principles

Formula

Example

See also

References