Tangible Common Equity

Tangible Common Equity (TCE) is defined as equity capital (common stock) of a bank, less goodwill and other intangibles (net worth). It indicates the borrowing capacity or strength of a bank or what common shareholders would get if the bank were dissolved. Intangible assets like goodwill don't produce any income and therefore don't have a cash equivalent value.

Regulators have determined that TCE is the key indicator to follow in their stress test evaluations. Some experts believe that a TCE ratio of 4% to 5% should indicate enough strength for a bank to stay solvent in a deep recession. The nineteen top US banks received TARP funds in the form of preferred stock which carry a dividend of 5%. The Obama administration hopes to convert the preferred stock to common stock thereby eliminating the 5% dividend and increasing the banks cash flow. This conversion would increase the TCE ratio for the bank and dilute common shareholders. The only bank that has agreed to convert is CITI which will see its' TCE ratio go to 5% or above after the conversion.

In summary, on May 4th regulators will release the results of the stress tests which will indicate which other financial institutions will have to dilute their shareholders by converting the TARP preferred stock to common stock.

Random thoughts....Swine flu is the talk of the day.....will the markets ignore it and go up anyway? ..GM unveiled another restructuring plan ....will it succeed....Obama's first hundred days are over...what do you think? ...look for regional banks with large commercial real estate loans to get low grades from the stress tests.....potential large banks that will have to raise capital include Wells Fargo and Bank of America...