A measure of a company’s physical capital called tangible common equity (TCE) is used to assess a financial institution’s capacity to absorb possible losses. The company’s book value is subtracted from preferred equity and intangible assets (including goodwill) to determine the amount of tangible common equity.
Both tangible (physical) and intangible assets are owned by businesses. For instance, a structure is tangible, yet a patent is intangible. Similar things can be said regarding a company’s equity. The most common way to evaluate financial companies is through TCE.
When assessing businesses with significant holdings of preferred stock, such as US banks that received federal bailout funds during the 2008 financial crisis, it is particularly helpful to know a company’s TCE.
These banks gave the government a sizable quantity of preferred stock in exchange for bailout money.
By changing preferred shares into common shares, a bank can increase TCE.
Patents may or may not be considered intangible assets for the purposes of this equation, depending on the specifics of the firm, as they occasionally may have a liquidation value.
A bank’s tier 1 capital, which comprises of common shares, preferred shares, retained earnings, and deferred tax assets, can also be used to assess its solvency. Bank stability is evaluated by banks and regulators based on tier 1 capital levels.
Notably, bank assets with lesser risk provide more safety than low-grade instruments, such as U.S. Treasury notes.
