UPDATE 1-Most big U.S. banks pass Fed's stress test, boosting shareholder payouts

Wed Jun 29, 2016 6:30pm EDT
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(Adds capital actions from banks, details on Morgan Stanley conditional approval, Deutsche Bank holding company reorganization)

By David Henry and Patrick Rucker

NEW YORK/WASHINGTON, June 29 (Reuters) - Nearly all of the largest U.S. banks are on steady enough footing to increase payouts to shareholders, the U.S. Federal Reserve said on Wednesday, with just two subsidiaries of foreign banks failing its annual stress test.

The results show that big U.S. banks have not only built up significant capital since the 2007-2009 financial crisis but that management teams have largely proven the merit of their internal disaster planning to the Fed.

However, the Fed criticized some elements of Morgan Stanley's capital planning process - but still allowed the bank to move ahead with plans for a $3.5 billion stock repurchase program and a quarterly dividend hike while it rectifies the issues.

The regulatory thumbs up prompted a slew of announcements from banks who plan to buy back more stock or increase dividends - good news for investors who saw their banks shares hammered by Britain's vote last week to leave the European Union.

The two banks that failed - Deutsche Bank Trust Corporation and Santander Holdings USA, which are subsidiaries of Deutsche Bank AG and Banco Santander SA - have also failed in the past. "Broad and substantial weaknesses" persist in their capital planning processes, the Fed said.

The rejection of their capital plans - the third year in a row for Santander and the second straight year for Deutsche - means that they cannot return any profits home.

(Click here to see how the banks performed: tmsnrt.rs/293nwd2)   Continued...