What Obama's State of the Union Address Means for Banks

WASHINGTON — President Obama vowed to veto any future "unraveling" of the Dodd-Frank Act during his State of the Union address Tuesday night, further uniting Democrats against major changes to the law under the GOP-led Congress.

The speech largely focused on the White House's efforts to grow jobs, raise wages and rewrite the tax code, along with plans to improve diplomacy abroad. But it also contained several nods to the financial services world, including an urgent plea to Congress to pass cybersecurity legislation.

Below are three key takeaways for the banking industry from Obama's second-to-last address before Congress.

Obama holds the line on Dodd-Frank

Arguably the president's strongest statement on financial services policy came as part of a larger promise to stop Republican efforts to undo some of his most controversial programs: his executive actions on immigration, his landmark healthcare law and Dodd-Frank.

"We can't put the security of families at risk by taking away their health insurance, or unraveling the new rules on Wall Street, or refighting past battles on immigration when we've a got a system to fix," Obama said. "And if a bill comes to my desk that tries to do any of these things, it will earn my veto."

The statement was welcome news to more liberal Democrats, who watched the White House stand down during the lame duck session last month, when Republicans inserted language easing a Dodd-Frank swaps provision into a must-pass spending bill. Obama signed the measure into law, despite vocal opposition from progressives in the House and Senate.

But the president has already started to take a harder line against further changes to Dodd-Frank in the wake of that battle. Before Tuesday's speech, Obama had vowed to veto legislation, which passed the House earlier this month, delaying a portion of the Volcker Rule involving the sale of collateralized loan obligations 2019.

His comments on Tuesday night further underscored that shift.

"I think it's very important for the president to draw a line on this," Sen. Jeff Merkley, D-Ore., a member of the Banking Committee, told reporters after the speech. "We've already seen a strategy of inserting various proposals into unrelated legislation - a strategy on behalf of Wall Street of undoing the parameters that have restabilized our country."

Still, it remains unclear where the White House would actually draw that line if a package of Dodd-Frank reforms reached his desk, raising fresh questions about whether a bipartisan "fix" bill is still possible. If there is one certainty in the fight over Dodd-Frank changes so far, it is that one person's tweak is another person's "unraveling." How those differences in opinion ultimately get sorted out remains to be seen.

"If there's a bill that's put on the president's desk that he believes destroys, mutilates or unravels Dodd-Frank, he will veto it," said Rep. Sherman, D-Calif., in an interview. "If there's a bill on his desk that he thinks tweaks, improves or doesn't do too much harm to Dodd-Frank, he'll sign it."

Indeed, even some Democrats have started coming around to the idea that certain changes to the law might be required.

"It's really important to have a discussion on Dodd-Frank about the facts, and the Affordable Care Act," said Rep. John Delaney, D-Md., a member of the Financial Services Committee, in an interview. "Both of these [laws] could benefit from some improvement - some strengthening in some areas and some modification and reform in other areas."

Republicans, meanwhile, took a predictably tougher view of Obama's speech and on his defense of administration policies, including the financial reform law.

"The solutions to make America stronger are not found in the thousands of pages of Obamacare, the hundreds of rules and regulations under Dodd-Frank, or in tonight's proposed tax increases on investments and college savings accounts," said Rep. Randy Neugebauer, R-Texas, a senior member of the House banking panel, in a press release.

Cybersecurity legislation is crucial

Obama also pressed Congress to continue work on cybersecurity issues in the new term.

The president had already rolled out several initiatives that deal with cyber risk in the week leading up to the speech. They include a plan to establish a national standard for companies to inform consumers of a data breach within 30 days of discovery and released an updated proposal to improve information-sharing across industry and government around cyber threats.

"I urge this Congress to finally pass the legislation we need to better meet the evolving threat of cyberattacks, combat identity theft, and protect our children's information," Obama said. "If we don't act, we'll leave our nation and our economy vulnerable. If we do, we can continue to protect the technologies that have unleashed untold opportunities for people around the globe."

Congress has debated the need for increased cybersecurity measures for years, but has so far failed to pass more comprehensive legislation, despite a growing number of high-profile breaches at retailers, banks and other businesses.

Even if Obama's urging does little to inspire the Republican-controlled Congress to act, the increased publicity for the issue could help spur some momentum. Consumers are directly affected when debit and credit card information or other personal data is stolen in connection with cyberattacks.

"I think he made cybersecurity a very important issue, and I'm glad because it's so, so important," Sen. Chuck Schumer, D-N.Y., a top member of the Banking Committee, told reporters Tuesday night.

Focus on bank tax is muted

Before the address, the White House unveiled a new proposed bank tax over the weekend, to the ire of many in the industry. But the plan ended up receiving little attention in the speech itself. The president instead spoke more broadly about tax reform, including efforts to increase taxes on the wealthiest individuals.

"Let's close the loopholes that lead to inequality by allowing the top one percent to avoid paying taxes on their accumulated wealth," the president said. "We can use that money to help more families pay for childcare and send their kids to college. We need a tax code that truly helps working Americans trying to get a leg up in the new economy, and we can achieve that together."

The proposal, which resembles one introduced last year by now-retired Rep. David Camp, who headed the Ways and Means Committee, calls for a fee of 7 basis points on liabilities for financial firms with more than $50 billion in assets. It is also similar to previous Obama administration calls for a "financial crisis responsibility fee."

Banking officials and some GOP lawmakers reacted quickly to the news, charging that the proposal is bad for industry and the economy.

"If the president is really concerned there is too much risk in the financial system, then clearly Dodd-Frank isn't working as he intended and is thus yet another administration failure," said Rep. Jeb Hensarling, R-Texas, chairman of the Financial Services Committee, in a press release Tuesday.

Frank Keating, president and chief executive of the American Bankers Association, added in a statement over the weekend that the tax would hit borrowers as well as banks.

"It is completely at odds to want more jobs while hurting banks that finance the business growth necessary to create them," he said.

But despite the strident response from critics, analysts say there's little cause for industry concern over such a tax in the current political environment.

Sherman, a long-time member of the banking panel, said he agreed.

"I think that there are many risks that banks face - that a Republican House would send to a Republican Senate that would then enact an increase in taxes on banks is probably the smallest of the risks," he said.