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.
Tangible common equityis 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.
Subscribe to MoneyWeek
Subscribe to MoneyWeek today and get your first six magazine issues absolutely FREE

Sign up to Money Morning
Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter
Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter
Sign up for MoneyWeek's newsletters
Get the latest financial news, insights and expert analysis from our award-winning MoneyWeek team, to help you understand what really matters when it comes to your finances.
MoneyWeek is written by a team of experienced and award-winning journalists, plus expert columnists. As well as daily digital news and features, MoneyWeek also publishes a weekly magazine, covering investing and personal finance. From share tips, pensions, gold to practical investment tips - we provide a round-up to help you make money and keep it.
-
Aberforth Smaller Companies Trust: a fund that lets you buy Britain on a triple discount
Opinion If UK stocks return to favour, Aberforth Smaller Companies Trust, a value-focused investment trust, should perform well, says Max King
-
Infrastructure investing: a haven of stable growth amid market turmoil
From booming construction in emerging markets to digital and green transitions, the infrastructure sector offers security, returns and long-term opportunities