Financial Sector Boosted By Fed Stress Tests

Last week banks' shares saw a sizable boost after the Federal Reserve's stress test results indicated that most of the nation's biggest banks' balance sheets were sound enough to weather another economic downturn. Last week,the KBW Index of large commercial banks increased 0.6 percent, a marked difference from the S&P 500's 0.9 percent decline. Test ResultsThe Fed's test results will allow some of the sector's biggest names to release capital to their shareholders. Morgan Stanley (NYSE: MS) was given the green light to raise its dividends and conduct stock buybacks due to a strong balance sheet, leading to a six percent increase in the company's share price.The tests yielded some surprises; two banks whose capital plans were rejected in the past, Citigroup (NYSE: C) and HSBC Holdings PLC (NYSE: HSBC), passed with flying colors this year.Bank Of America Corp (NYSE: BOA) was the only large US bank whose plans were not approved outright. The Fed conditionally cleared the firm's capital plans, but it remains uncertain as to wether or not the bank will be able to return money to its shareholders or not. Out Of The Woods?The financial sector in the US has suffered a dramatic decade of economic struggles and public mistrust, but the Fed's tests seem to indicate that the banks have turned a corner. However, some say that the damage has already been done. Because of the turmoil created during the financial crisis, strict regulations have put a damper on banking firms' profits. Additionally, with several investigations into mortgage lending practices still ongoing, many financial firms are still burdened by hefty legal bills. Despite that, many investors consider the relatively low price of banking shares a good buying opportunity. With the US recovery gaining momentum and the US Federal Reserve widely expected to begin raising interest rates in the coming months, banking stocks are likely to continue improving.