The government’s pledge to help the financial sector, regional banks and related exchange traded funds (ETFs), could begin a much-needed healing process.

The recent Public/Private Investment Partnership (PPIP) along with other monetary and fiscal initiatives should allow banks to unload troubled assets and patch up their balance sheets, writes Morgan Keegan for Barron’s.

The program is a boon for regional banks, as it should get rid of troubled loans. Nevertheless, regional banks may record more write-downs on troubled real estate loans or other real estate owned so that they may sell these assets under the PPIP.

These initiatives could also signal the beginning of private capital finding its way into financial institutions, and help banks pay back capital borrowed under Troubled Asset Relief Program (TARP).

Mark-to-market accounting and the reinstatement of the uptick rule may keep the rally going in the banking sector. Bank stocks have seen their stocks go up and it is beginning to cool down with investors going through the time-honored tradition of profit-taking. But mortgage “cram downs” and stress tests are still an overhang on bank stock valuations.

• KBW Regional Bank (KRE): down 29.9% year-to-date

• iShares Dow Jones U.S. Regional Banks (IAT): down 29.2% year-to-date

Max Chen contributed to this article.

Tags: Financial, IAT, KRE, Regional Banks, Sector ETFs