NEW YORK — Bank stocks closed higher Wednesday after Senate Banking Committee Chairman Christopher Dodd dropped his proposal to postpone restrictions on derivatives trading, though a key Senate procedural vote to end debate on the financial reform bill was held open, with the results unclear. If that vote fails, it will likely hurt stocks in the near term.
Worries about the proposed regulation, which has gone through many changes and iterations in the last few months, have been weighing on financial stocks recently as investors seek clarity about what might be included in the eventual law.
If the Senate's vote on ending debate were to fail, it wouldn't be good for the sector, because the market would still face uncertainty about where the process is going, First American Funds analyst Alan Villalon said. "Are we going to be debating more amendments?" he asked, adding the process could get more onerous, leading to more volatility in the stocks.
Villalon also said the market will have to watch for some clarity from the Senate, which has been behind closed doors for much of the process. Hopefully the Senate will report what the sticking points were and whether Senators are far apart or close to reaching an agreement, he said.
Bank of America led the big banks Wednesday, closing up 2.3% at $16.31. Citigroup Inc. gained 2.1% to $3.81, while Goldman Sachs Group Inc. rose 2% to $140.10, Morgan Stanley increased 1.2% to $27.04 and JPMorgan Chase & Co. edged up 0.9% to $39.38.
Sen. Dodd, D-Conn., had dropped a controversial derivatives proposal he offered Tuesday after it met stiff resistance from an unusual coalition of Wall Street bankers and liberal Democrats. His amendment would have delayed for two years any ban on derivatives trading and given the Treasury Secretary the ability to quash the proposal outright. Liberal Democrats loudly voiced their opposition, claiming Dodd was trying to gut a central part of their effort to crack down on Wall Street banks. Wall Street banks complained almost as loudly, saying the two-year window would create uncertainty and make it nearly impossible for them to offer derivatives contracts.
Dodd might be able to get more Republican senators to vote for the bill by taking that amendment away, Villalon said.
Banking stocks traded lower earlier Wednesday amid concerns about Germany's move to ban some short selling, among other factors. But analysts played down the impact on bank stocks, saying there was little direct effect and noting some other countries already have restrictions in place.
Sandler O'Neill analyst Jeffrey Harte said the regulatory concerns are a bigger catalyst for the financial sector than Germany's naked short-selling ban.
"There's an awful lot of angst out there about financial regulation in the U.S. and around the globe," he said, and Germany's action has "thrown another log on the fire."
Germany's ban took effect early Wednesday and will remain in effect through March 31. Its financial-markets regulator, BaFin, previously suspended trading of naked shorts and uncovered credit default swaps in 2008 to limit market volatility following the collapse of Lehman Brothers. The most recent German ban expired Jan. 31.