NEW YORK (Reuters) - U.S. bank stocks rebounded on Wednesday as investors took comfort that the federal stress test being applied to the largest lenders may be lenient enough to avoid forcing banks to seek additional bailouts.
The KBW Bank Index <.BKX> of larger lenders closed up 2.4 percent, after earlier being down as much as 7.6 percent.
Bank of America Corp
Several regional banks with operations in Florida, a hard-hit housing market, fared well. Regions Financial Corp
Bank stocks recovered from an earlier swoon after U.S. banking regulators laid out terms of a stress test program to assess the ability of the largest lenders to cope with the possibility of a deeper recession.
The tests will help determine whether the banks need more government capital injections that could dilute common shareholders. Under an "adverse" scenario, for example, they assume an average unemployment rate of 8.9 percent this year and 10.3 percent for 2010.
"We are getting some of the terms of the stress test, and it seems like it might not be as severe as people might have expected, and that the capital is coming in at a reasonable level," said Blake Howells, vice president in equity research at Becker Capital Management in Portland, Oregon.
"Stocks are reacting in part to the stress test scenario that came out of the Treasury," said Craig Peckham, equity trading strategist at Jefferies & Co in New York. "They're looking at that set of assumptions embedded in the stress test as not terribly challenging. The assumptions ... are relatively the same as what was expected."
Investors also took heart from Federal Reserve Chairman Ben Bernanke's testimony to Congress about bank nationalization. He said "we don't plan anything" such as nationalizing U.S. banks, in a way that would wipe out shareholders.
"Bernanke really backed off on the idea of the government being very active in taking in banks," said Robert Lutts, chief investment officer of Cabot Money Management in Salem, Massachusetts. "He indicated that he was willing to provide assistance, but not necessarily take control, and I think the market kind of responded favorably to that."
(Reporting by Elinor Comlay, Juan Lagorio, Christian Plumb and Jonathan Stempel; editing by Jeffrey Benkoe)
