Bank stocks advanced Wednesday, bucking the broader market's downward trend, after Bank of America Corp. made a bold move to start forgiving principal on troubled home loans.

The KBW Bank Index rose 0.42%, to 52.34, paced by a 2.6% jump in B of A's shares, which closed at $17.57 after the company said it would reduce mortgage balances for some customers by up to 30% if they have missed at least two months of payments and owe 20% more than their homes' current value. Analysts said the decision could be a bellwether for the industry, potentially prompting rival banks to consider principal forgiveness.

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