TCE ratio

The tangible common equity ratio (TCE ratio) is a measure of the financial soundness of banks. It is more conservative than the usual capital adequacy ratios (including tier 1) because it excludes preference share capital and all intangible assets. The TCE ratio is also usually calculated using actual total assets with no risk weighting. It is:

tangible common equity ÷ total tangible assets

In other words it is the shareholders funds belonging to ordinary shareholders as a proportion of a bank's tangible assets (most of which are usually loans to customers).

The TCE ratio became prominent because it became evident, during the credit crunch, that some banks had apparently healthy capital adequacy ratios only because of large amounts of preference share capital and intangible assets of uncertain value such as deferred tax. With the banks' own risk models discredited, a simple and conservative measure was useful to both regulators and investors.

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