We are placing the shares of First Republic FRC under review as emerging tail risks are causing us to re-evaluate the name. While we calculate that the bank could theoretically handle all outflows of “at risk” deposits, several items give us pause.

First, even if a deposit is technically insured, there are no guarantees that it stays with the bank. Clients could simply withdraw all their deposits anyway simply due to psychological discomfort.

Further, even if it can technically survive from a liquidity standpoint, a bank that loses half its deposits overnight is still an impaired franchise. Relying on borrowing from the FHLBank system at 5% or more while receiving 3.5%-3.7% on loans is not a viable franchise long term. There are also no guarantees customers will ever bring their deposits back. Considering a scenario where a bank simply loses 30%, 40%, or more of its deposit base is not something we considered even in our bear case just a few days ago.

Finally, First Republic’s loan portfolio is primarily composed of mortgages, and based on the fair value disclosures from the fourth quarter, if these mortgages were sold at fair value, they would zero out equityholders.

If the collective action of customers is negative enough, it can doom any bank, First Republic included. While this was not a scenario we considered in the past, we did believe previously that having a business model based on good customer service was not moatworthy, and this is turning into an extreme example of that.

As we re-evaluate the shares, we would advise investors today that if enough customers pull away from First Republic, the future is not bright, and it does not matter how much of a liquidity outflow the bank can handle in the short term. The bank may survive, but a value of $0 is not a 0% possibility anymore.