FACTBOX-Tangible common equity and Tier 1 capital

Feb 23 (Reuters) - Citigroup Inc (C.N) is talking to U.S. officials about converting the preferred shares it sold to the government last year into common equity, which would instantly boost the bank's tangible common equity ratio.

The move is putting a spotlight on a measure of capital strength that is commanding more investor attention.

Banks themselves typically argue that another capital measure, known as Tier 1 capital, is more relevant to assessing stability. Regulators and credit rating agencies often watch Tier 1 capital measures more closely.

Tangible common equity (TCE) looks at how much common equity is supporting a company, and ignores intangible assets such as goodwill, on the theory that in bad times, intangible assets are less likely to have value.

Critics of tangible common equity as a measure of risk argue that it ignores intangible assets that have value even in bad times, such as the right to collect payments on mortgages, known as mortgage servicing rights. And tangible common equity also treats all assets as equally risky, without giving any extra credit to banks with safer assets.

The Tier 1 risk-based capital measure considers how risky a bank's assets are. All other things equal, a banks with lower-risk assets such as U.S. government debt would have a better Tier 1 risk-based capital ratio than a bank with higher-risk assets such as junk bonds. This ratio is meant to reflect the fact that banks with safer assets are themselves safer.

But critics of Tier 1 argue that assets that seem safe during normal periods may not be safe during risky periods. They say that however solid a bank's assets may be, if a lender has too many assets relative to equity, it will have trouble financing itself.

Below are some key elements of how each of these capital measures is calculated:

TANGIBLE COMMON EQUITY RATIO

* Equal to tangible common equity divided by tangible assets.

* Excludes equity from preferred shares.

* Some investors add back intangible assets, such as mortgage-servicing rights that are seen as having real value.

* There is no consensus on what a bank's appropriate TCE ratio should be. Some argue it should be above 5 percent, some argue it should be above 7 percent. Many major banks have TCE ratios below 3 percent.

TIER 1 RISK-BASED CAPITAL RATIO

* Equal to Tier 1 capital divided by risk-weighted assets.

* Tier 1 capital includes common stockholders' equity, noncumulative perpetual preferred stock, minority interests in consolidated subsidiaries, among other items.