Large bank stocks closed slightly higher after a key Obama administration adviser indicated that its proposed overhaul of the financial system might note be as severe as Wall Street had feared.

The KBW Bank Index rose 0.23, to 47.31.

The closely watched index of 24 of the country's largest banks rebounded from a late-afternoon sell-off after former Federal Reserve Chairman Paul Volcker told the Senate Banking Committee that he did not want to outlaw trading at banks, but to rein in risk-taking. Volcker also said banks could keep running prime brokerages, though he was worried about trading that puts a bank's own capital at risks.

Large banks stocks have been volatile since the Obama administration said it would curb proprietary trading at banks, leading some market watchers to worry that money-center lenders like Citigroup Inc., Bank of America Corp. and JPMorgan Chase & Co. might have to spin off their highly lucrative capital markets businesses.

All three of those companies ended the day up: Bank of America 1.17%, JPMorgan Chase 2.32% and Citigroup Inc. 7 cents, to $3.41.

Wells Fargo & Co. fell 0.48%, Capital One Financial Corp. rose 1.77% and KeyCorp rose 2.45%.

The broader markets also closed slightly higher on some signs of stabilization in the housing sector. The National Association of Realtors said its index of pending home sales, which fell 16.4% in November, rose 1% in December.

The Dow Jones industrial average rose 1.09% and the Standard & Poor's 500 index rose 1.3%.

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