Why is tangible common equity important for banks?
Common Equity is the riskiest of all the sources of funding a company receives from the investors point of view. Investors tend to lose most when a company defaults.
In the case of a bank, tangible common equity serves as a shock absorber. The more tangible common equity a bank has, the greater is the banks ability to withstand from losses.
While Tier 1 Capital ratio is important, Tangible Common Equity constitutes a large part of the Tier 1 Capital. Therefore, Tangible Common Equity is important indicator of the health of a bank.