Updated from 2:30 p.m. EDT

Financial stocks closed higher after an early spike Thursday, as the Financial Accounting Standard Board voted to relax the definition of how toxic assets are valued.

The changes in mark-to-market accounting rules will be applied as early as the current quarter. Many banks and financial institutions are expected to be able to report much better balance sheets for the second quarter as a result of the change. The NYSE Financial Sector Index ended the day with a gain of 5% to close at 3,098.

Bank of America ( BAC) shot up over 4% initially in heavy volume, but settled for the day up 2.3% to $7.21. CEO Ken Lewis said on CNBC on Thursday morning that the bank did not anticipate needing more aid from the government, but said paying back the current loan would take several quarters. Lewis also stated that he believed the market looked as if it was setting a bottom and that recovery could come early next year.

Wells Fargo ( WFC) shares soared nearly 16%, as investors bet the accounting changes would help it absorb its Wachovia acquisition made last year. The stock, which was one of the most actively traded financials in the morning, added 5.9% to close at $15.33.

The accounting ease also pushed Citigroup ( C) shares 2.2% higher to $2.74. Citigroup stands to improve its balance sheet by lifting the value of its toxic assets to a price it prefers.

AIG ( AIG) managed to increase seven cents to close at $1.14, as former CEO Hank Greenberg testified on Capitol Hill. This was his first appearance before Congress since the insurance giant was bailed out by the government. Greenberg was pushed out of his management role in 2005, several years before the government intervention. The stock initially climbed 12% in the euphoria of the accounting news.

MSCI ( MXB), the spun-off market index unit of Morgan Stanley ( MS), managed to beat expectations by four cents. The index maker shot up 12.8% to $19.17, while its former parent dropped 2.6% to $23.11. Morgan was downgraded by Credit Suisse from outperform to neutral.

One of the few negative moves for the day was from Lincoln National ( LNC). Citi Investment Research analyst Colin Devine cut his rating on the insurer to sell from buy and slashed his price target to $5 from $23. The analyst is concerned about liquidity and capital adequacy after the company said it didn't think it could meet the government's requirements to participate in a debt program. The stock slid 8.2% to $6.49.

If you liked this article you might like

How to Make Your Life Successful Just Like Billionaire Warren Buffett

How to Eat Lunch With Billionaire Warren Buffett

Fed Pares $4.5 Trillion Balance Sheet But Easy-Money Era Isn't Over

Bank Stocks Move Higher as Fed Decides to Start Unwinding Balance Sheet

How to Invest Like Billionaire Warren Buffett