Tangible Common Equity (TCE)

Tangible Common Equity (TCE)

Tangible common equity (TCE) measures a firm’s physical equity available to common shareholders after removing intangibles and preferred capital. It is most commonly used to assess banks and other financial institutions’ ability to absorb losses and to estimate a conservative liquidation value.

Why TCE matters

• Focuses on tangible (physical) capital—what would remain for common shareholders in a liquidation.
• Helps evaluate capital adequacy and resilience during stress scenarios.
• Especially useful for institutions with large preferred-stock holdings or significant goodwill/intangible assets.
• Commonly used by analysts and internal risk teams even though it is not a GAAP requirement.

How to calculate TCE

TCE = Book Value of Equity − Intangible Assets − Goodwill − Preferred Equity

Notes:
* “Book value of equity” = total shareholders’ equity on the balance sheet.
* Intangibles and goodwill are removed because they may have limited realizable value in a liquidation.
* Preferred equity is excluded because it ranks ahead of common equity.

Tip: Many banks disclose TCE or the components in supplementary financial statement sections.

Example

If a bank reports:
* Book value of equity = $273.8 billion
Goodwill = $69.01 billion
Intangible assets = $2.2 billion
* Preferred stock = $24 billion

Then TCE = $273.8B − $69.01B − $2.2B − $24B = $178.59B

TCE ratio and interpretation

TCE ratio = TCE ÷ Tangible Assets

• The ratio expresses tangible equity as a share of tangible assets and serves as a conservative leverage measure.
• Higher TCE ratio → less leverage, more tangible equity buffer to absorb losses.
• Lower TCE ratio → higher leverage and greater vulnerability to asset shocks.

Key considerations

• Treatment of intangibles: Some items (e.g., patents) may retain liquidation value and could be treated differently depending on the analyst’s assumptions.
• Comparison to regulatory measures: Tier 1 capital is another common metric (includes common equity, preferred equity, retained earnings and certain adjustments). TCE is more conservative in excluding intangibles and preferred stock.
• Asset quality matters: A high share of low-quality assets reduces the practical protection offered by TCE.
• Not a regulatory requirement: TCE is an analytical tool rather than a GAAP or regulatory mandate, though regulators use related measures in stress tests.

When to use TCE

• Evaluating banks and other financial firms where intangibles and preferred shares materially affect reported equity.
• Stress-testing scenarios and analyses focused on survivability or liquidation value.
• Comparing resiliency across institutions on a conservative, tangible-only basis.

Limitations

• Based on book values, which may diverge from market values or true recoverable amounts.
• Excludes off-balance-sheet exposures and liquidity considerations.
• Sensitive to accounting judgments (goodwill impairment, intangible valuation).

Bottom line

TCE provides a conservative estimate of the tangible equity cushion available to common shareholders and is a helpful complement to regulatory capital metrics when assessing a bank’s ability to withstand losses. Use it with an understanding of its assumptions and limitations, and alongside other measures of asset quality, liquidity, and regulatory capital.