Tangible common equity

Tangible common equity is a measure used to gauge how big a hit a bank can take before its shareholders’ equity is wiped out. Although a fairly old-fashioned ratio, it has become popular in the wake of the credit crunch as a way of assessing the worst-case scenario for battered banks. The calculation is a bit fiddly.

It starts with the value of a bank’s total net assets and subtracts intangible assets (long-term assets, such as mortgage servicing rights), goodwill (a very common intangible asset) and preference shares (since these would always have a prior claim on the bank’s assets before ordinary shares). This is divided by the bank’s tangible assets (these tend to include property, equipment and the like).

The higher the result, the better. Intangible assets (which can be a big proportion of a bank’s balance sheet) are excluded because they are deemed to have no value if a bank fails. But critics argue the TCE measure is too brutal and treats banks that hold toxic assets largely the same as those holding safer ones.

Merryn

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