Healthy demand in a government auction of seven-year U.S. Treasury notes helped boost bank stocks for a second straight day.

The KBW Bank Index spent most of the day in the red until the last hour of trading, when word that the $24 billion offering had been well received lifted the sector. The index eked out a 0.5% gain. The Dow Jones industrial average rose 2.3%, as did the Standard & Poor's 500 index.

Tim Curran, a bank trader at Regions Financial Corp.'s Morgan Keegan & Co. Inc., observed that, as on Wednesday, "plain vanilla" investors aggressively bought into bank stocks to close out the day. He said that makes him nervous, and he warned of "undue optimism" about bank stocks.

"It's not going to take a lot to spook this market," Curran said. "I believe we will see a natural pullback ahead of earnings. But the positive we're seeing is that all sectors of the government seem to be on the same page regarding what needs to get done" about the financial crisis.

Investors paid close attention to testimony by Treasury Secretary Timothy Geithner, who told the House Financial Services Committee that regulators need more authority over financial institutions. "Over the past 18 months, we have faced the most severe global financial crisis in generations," he said. "To address this will require comprehensive reform. Not modest repairs at the margin, but new rules of the game."

The testimony came as the Obama administration proposed a major expansion of federal authority over financial institutions, including tougher standards for companies deemed "too big to fail." The proposal, which requires congressional approval, would also extend federal oversight to cover trading in financial derivatives and calls for the regulation of systemic risk.

New government data showing that the economy continues to struggle did not dampen investor optimism, perhaps because the results were not as bad as feared. Gross domestic product shrank at a rate of 6.3% in the fourth quarter. The Labor Department reported that new claims for unemployment rose 1.2% from a week earlier, to 652,000, and that the number of people claiming unemployment benefits hit a record high of 5.5 million.

Jason Goldberg, an analyst at Barclays PLC's Barclays Capital, said in a research note Thursday that JPMorgan Chase & Co., Citigroup Inc. and Wells Fargo & Co. could be among the biggest beneficiaries of the Treasury Department's public-private investment program. Regional companies such as BB&T Corp., Fifth Third Bancorp and Regions could experience less of a boost, he said.

Fifth Third rose 5.3% and JPMorgan Chase rose 1.9%. Citi fell 4.8%, Regions 3%, Wells 2.9% and BB&T 0.9%.

Shares of South Financial Group jumped 11.7% a day after the Greenville, S.C., company disclosed in a filing that it would settle legal claims tied to the retirement of Mack I. Whittle Jr., who had been its chairman and chief executive. The lawsuit, filed last fall, claimed that South Financial accelerated Whittle's retirement so his compensation would not be affected by the company's receipt of capital from the Treasury.

The company said Whittle would leave its board and would be succeeded by an independent director with financial experience. South Financial also agreed to split the roles of chairman and chief executive, addressing a topic expected to come before shareholders at a number of other banking companies this proxy season.

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