As banks traverse the financial gauntlet placed before them, some financial institutions are providing some uplifting signs and investors are beginning to look favorably on the downtrodden financial sector and its related exchange traded funds (ETFs).

After Citigroup (C) announced that it was making money in the first two months of the year, some other major financial institutions, like Bank of America (BAC), JP Morgan Chase (JPM) and HSBC Holdings, also broke out in a show of strength and rode the ensuing wave of optimism, reports David Gaffen for The Wall Street Journal. Bank shares are up more than 40% since last week.

Looking at the fundamentals, borrowing costs have dramatically declined with federal-fund rates being greatly cut down, which allow banks to borrow for basically nothing, and banks are able to receive funds from the Federal Reserve. Furthermore, banks are still able to lend at higher rates, and that is where their profits are coming.

Improvements are also coming through with normalized hedging strategies and wider bid-offer spreads because of a reduced number of companies facilitating trades. It is thought that that ongoing deterioration in loan quality and expectations of more write-downs will impede regular banking in the future.

Wells Fargo (WFC) and a growing list of other bankers are vexed by restrictions imposed by the TARP program, which has affected lending, foreclosures, pay, and job perks, writes Ari Levy for Bloomberg. Now, some just want return the money. Wells Fargo had to reduce dividends by 85% to 5 cents a share and it made a quarterly payment of $371.5 million for interest on the $25 billion TARP investment.

The government is now going forth with a “stress test” to see which of the 19 largest U.S. banks need more capital. It is believed that the test will protect the banking system and help see that the necessary capital is provided for a more sound financial system.