According to Flavetta, in northern California at least, this time last year acquisition numbers (the number of new checking accounts opened) began to drop and bottomed out in May. Since August, the trend marks have tentatively been up again. And so he is cautiously optimistic about an imminent economic recovery.

The enviable nature of the banking business is that even as rough economic times hit, people need just as many (if not more) financial services. So revenue streams always materialize. The Fed’s continual rate cuts have begun to show their effects. Flavetta reports, “The last four weeks we’ve seen a significant increase on the borrowing side, both in terms of equity products and re-finances. Consumers want to get back into a better position to meet mortgage payments and get rid of some of their debt.”

As a general trend, Flavetta sees his consumer customers anxious to achieve more liquidity in their personal finances, whereas perhaps they may have incurred more debt during boom times. Specifically he sees consumers adopting a wait-and-see attitude towards the stock market, although bonds may look appealing right now.

The interest rates, from a credit perspective, are driving people into Flavetta’s bank branches, but that is not to say that they are borrowing more overall.

“Technically people are financing more — re-financing to get a lower rate and in some cases re-financing consumer debt. But I wouldn’t say that they are borrowing more. They are now more targeted in how they plan to utilize either excess from a new payment or the increase in cash flow from paying off other types of consumer debt,” he explains.

Startup Capital Flows
In some places, particularly tech hubs like Silicon Valley, there are some indications that this downturn is having unique and unprecedented effects on the banking business. Harry Kellogg, Vice Chairman of Silicon Valley Bank, helped build that institution into a major player in financial services for emerging, mostly high tech, companies.

“Certainly we are seeing a slowdown,” says Kellogg. “On balance sheet our deposits have run down over a billion dollars since the first of the year.” It doesn’t take a genius to understand why. VCs aren’t investing that aggressively; there have been almost no IPOs to speak of in the fast moving tech sector, and companies aren’t profitable. So money is being spent but not being deposited.

These are difficult times for Silicon Valley Bank’s core technology startup customers. As they look for cash to sustain them, companies would be expected to borrow more. In fact the opposite has happened. Kellogg speculates, “usually when liquidity slows down companies start borrowing more. We’re trying to figure out why that isn’t happening. We have some feedback from VCs who say that debt was so easy to come by in the last 18 months that a lot of companies have loaded up on debt and its come to haunt them.”

As so many companies meet dead ends in their ambitious plans, investors are likely to pull the plug early rather than see startups take on debt. Loans are down around $200 million for Silicon Valley Bank this year.

In the case of failing companies like Exodus and Webvan, banks ended up with some very troubled loans recently. So even as emerging companies borrow to leverage the equity that they do have in a tough funding environment, banks will likely be more cautious about how they lend.

“I wouldn’t say that we’re being less flexible and so more conservative, we’re spending more time in our due diligence process,” says Sam Bhaumik managing director at Comerica Bank. “When companies get down to six months of cash you can expect the banks to ask a lot about where the next round of funding is coming from.”

Flavetta, whose business is perhaps less centered on venture-backed companies, observes that “from an overall standpoint, the last 12 months have seen real slowdown in the number of new businesses established.” There has been less borrowing from small businesses, as people wait for a rosier economic picture.

Silicon Valley Bank is looking to diversify its business, and recently announced the acquisition of boutique merger and acquisition advisor Alliant Partners, as well as its participation in the re-capitalization of Aozora Bank in Japan.

Marquee Clients
Silicon Valley Bank has also expanded its private banking division. Despite the meltdown, the recent boom created a large number of extremely wealthy people. The private banking industry takes on a new scope in the face of large wealth in a volatile stock market.

“Now clients are feeling as if they and their companies are not infallible,” explains Marc Bean, managing director at the Citigroup Private Bank, speaking of high net worth individuals who may have very concentrated equity positions in companies that they founded or work in.

Suddenly a whole variety of services aimed at diversification and wealth preservation that might have seemed less relevant in a soaring market have taken on a new urgency.

View From Here

People at banks across the board are surprisingly upbeat about where the economy is moving. Naturally, they want customers to be bullish on the future. Arun Motianey director, CPB research at Citigroup, advises his banking colleagues about market and economic trends. He acknowledges the difficulty of making predictions in a volatile geo-political environment, but advises, “All other things being the same, beginning in the second quarter we will see a recovery led by the U.S. We’re not in the bear market camp.” Motianey sees general economic indicators pointing toward growth rather than a deep recession.

He says, “We are advising: keep your strategic portfolios. Deviate tactically into more fixed income, risk free holdings; get ready, however in two quarters to go back to your strategic portfolio which is probably weighted towards equities.”

Clearly the recent economic slowdown has made people more cautious about the way that they handle their money. As long as people take Motianey’s advice, and similar advice from others, they may well view the current environment as more of a financial opportunity than a crippling blow. That’s good news for banks, eager to sell their services. Of course there are no guarantees that the recovery will be rapid. Either way at the end of the day, we all still answer to our banks.