Bank stocks rallied with the rest of the market Wednesday after voters bolstered Democrats in midterm elections.

Democratic victories removed two of President Clinton's most virulent critics-Republican Sens. Alfonse M. D'Amato of New York and Lauch Faircloth of North Carolina-lessening the possibility of impeachment. The specter of a protracted inquiry into the scandal involving the President and former White House intern Monica Lewinsky has made investors jumpier and more apt to sell their holdings.

The Standard & Poor's bank index rose 2.84% and the Dow Jones industrial average 0.88%. The S&P 500 climbed 0.70% and the Nasdaq bank index 2.15%.

Gainers included American Express & Co., $3.5625, to $94; and Fleet Financial Group, $1.3125, to $40.3125.

J.P. Morgan & Co. surged $7.625, to $101.75, on speculation that it was in talks with Germany's Deutsche Bank.

"The election had an effect on people who were very worried that we were going through wrenching political turmoil," said bank analyst Lawrence W. Cohn of Ryan, Beck & Co., Livingston, N.J. "The market's conclusion is that the impeachment hearing will be short-lived."

The rally in bank stocks, however, could be short-lived, too. The surge lost steam late in the day, as some market experts suggested that the election results could hurt the banking industry.

Though the election knocked out some of the President's biggest detractors, it also removed one of banking's biggest advocates. As chairman of the Banking Committee, Sen. D'Amato has been a strong proponent of financial reform. His likely successor is Sen. Phil Gramm, R-Tex.

"D'Amato was perceived as a constituent of Wall Street, investment banking, and the commercial banking industry," said Mr. Cohn. "I am not sure if Phil Gramm is nearly as committed to the whole process of financial services reform.

"There is a lot of basic populist in him and distrust of large financial institutions."

Such a stance could hurt Citigroup, formed by the recent merger of Citicorp and Travelers Group. The merger was predicated on the expectation that banking law would change, and the election has put that in jeopardy, Mr. Cohn said.

Citigroup stock, which had rallied strongly in the morning, later fell back, closing at $44.1875, up 6.25 cents.

David S. Berry, research director at Keefe, Bruyette & Woods Inc., said he does not believe that the change in power will affect Citigroup at all.

"Although short-term passage of the financial reform bill is less likely, Citigroup has a long time to push such a bill through," said Mr. Berry.

In approving the deal, the Federal Reserve gave the combined company two years to shed its insurance business, unless the law is changed. The Fed could extend that deadline by up to three years.

Mr. Berry said bank stocks are unlikely to falter anytime soon: "We seem to be in an environment where bad news is dismissed and good news is embraced."

In other news, shares of First Union Corp. gained 3.61% after the Charlotte, N.C., bank announced that it would buy back up to $50 million, or 5% of its stock, to boost its per-share earnings.

"It is a confidence builder for investors," said bank analyst Steven Biggar of S&P Equity Group. "The company is saying that, A, we have excess capital and, B, we are saying our stock is cheap."

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