U.S. bank stocks, which had their best week on record last week, powered higher again on Monday amid optimism that banks are succeeding in efforts to restore profitability, and that a change to accounting rules might alleviate feared capital shortfalls.

The British bank Barclays Plc on Monday said it was having a strong start to 2009, echoing comments last week by the chief executives of Bank of America Corp , JPMorgan Chase & Co and Citigroup Inc that they had been profitable in January and February.

Meanwhile, the Financial Accounting Standards Board, which sets U.S. accounting rules, proposed to give companies more freedom to exercise their own judgment in valuing assets.

Critics of the current fair-value rule say it can lead to asset writedowns to artificial fire-sale levels, overwhelming efforts to reduce costs and better manage credit losses.

In afternoon trading, the KBW Bank Index <.BKX> of large U.S. lenders was up 6.8 percent, after rising 37.4 percent last week in what Barclays Capital analyst Jason Goldberg called the biggest gain in the index's history. The index still is close to two-thirds below where it closed at the end of 2007.

Among individual lenders, Bank of America shares were up 18.1 percent in afternoon trading to $6.80, JPMorgan 5.5 percent to $25.05, Citigroup 42.1 percent to $2.53, and Wells Fargo & Co 7.3 percent to $14.96.

There is a general picture emerging that at least from an operating standpoint, banks are enjoying a better period than they have had for a couple of years, said Marshall Front, chairman of Front Barnett Associates LLC in Chicago. This does not address the issue of further writedowns that are inevitable in the face of continued falling home prices, commercial real estate deterioration, and adverse trends in credit cards.


Bank stocks also rose after finance chiefs from the Group of 20 nations over the weekend pledged to boost efforts to help economies, and Federal Reserve Chairman Ben Bernanke said the U.S. economy will probably emerge from recession this year.

There's a lack of pessimism, said Jack Ablin, chief investment officer at Harris Private Bank in Chicago. Maybe investors are taking that meltdown scenario off the table.

FASB Chairman Robert Herz said at a board meeting on Monday that he hopes the new accounting guidance will let companies value assets as if they were sold in an orderly market.

Some investors have expressed concern that easing existing rules could result in greater balance sheet manipulation. Yet board members said market conditions forced them to consider public policy in issuing accounting guidance.

What we're voting on right now is hopefully elevating those fair values to a reasonable point so investors are more interested in investing in the banking system, one said.

Banks have blamed mark-to-market accounting for part of the declines in their shares.

It has driven banks to write down assets based on scraps of information, Front said. I haven't spoken to one banker, publicly or privately, who wasn't strongly in favor of the elimination, at least temporarily, of what they call an 'abomination.'

(Reporting by Jonathan Stempel; Additional reporting by Ellis Mnyandu in New York and Karey Wutkowski in Washington, D.C.; editing by John Wallace and Gerald E. McCormick)