Tangible Common Equity (TCE) definition

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What is Tangible Common Equity (TCE)?

Tangible Common Equity (TCE) is a measure of a company’s physical capital that is used to assess a financial institution’s ability to deal with potential losses. Tangible equity is calculated by subtracting intangible assets (including goodwill) and preferred capital from the company’s book value.

The central theses

  • Tangible Common Equity (TCE) is a measure of a company’s physical capital that is used to assess a financial institution’s ability to deal with potential losses.
  • Measuring a company’s TCE is particularly useful for assessing companies that have large amounts of preferred stock, such as US banks that received federal bailouts during the 2008 financial crisis.
  • The TCE ratio (TCE divided by property, plant and equipment) is a measure of a bank’s equity base. This metric measures the tangible equity of a company in relation to the tangible assets of the company.

Understand physical equity

Companies own both tangible (physical) and intangible assets. For example, a building is tangible while a patent is intangible. The same goes for a company’s equity. Financial firms are most often rated TCE.

Measuring a company’s TCE is particularly useful for evaluating companies that have large amounts of preferred stock, such as US banks that received federal bailouts during the 2008 financial crisis. In exchange for bailout funds, these banks issued large amounts of preference shares to the federal government.A bank can increase TCE by converting preferred stock into common stock.

The use of tangible common equity can also be used to calculate an equity ratio as a way of assessing a bank’s solvency and is considered a conservative measure of its stability.

TCE is not required by GAAP or banking regulations and is typically used internally as one of many indicators of capital adequacy.

Special conditions

The TCE ratio (TCE divided by property, plant and equipment) is a measure of a bank’s equity base. The TCE ratio measures the tangible equity of a company in relation to the tangible assets of the company. It can be used to estimate a bank’s sustained losses before it wipes out shareholders’ equity.

Depending on the company’s circumstances, patents can be excluded from the intangible assets for the purposes of this equation as they can sometimes have liquidation value.

Another way to assess a bank’s solvency is to look at its Tier 1 capital, which is comprised of common stocks, preferred stocks, retained earnings, and deferred tax assets. Banks and regulators track tier 1 capital levels to assess the stability of a bank.

In particular, lower risk securities held by a bank, such as US Treasury bills, offer more security than lower-rated securities. Regulators don’t require regular submission of Tier 1 capital levels, but they come into play when the Federal Reserve conducts stress tests on banks.

Example of material share capital

Bank of America (BAC) had a book value of $ 267.9 billion for fiscal 2019. Goodwill was $ 68.95 billion, intangible assets were $ 1 billion, and preferred stocks were $ 23 billion. As a result, Bank of America’s tangible capital at the end of 2019 was $ 174.95 billion ($ 267.9 billion – $ 68.95 billion – $ 1 billion – $ 23 billion).Many banks show tangible joint equity in the supplementary documents to their annual financial statements.

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