Unlike rival Wall Street firms such as JPMorgan Chase (JPM) - Get Report and Goldman Sachs (GS) - Get Report , Morgan Stanley will have to resubmit documents by the end of this year showing that the deficiencies have been fixed, the Fed said Wednesday. Otherwise, the regulator could block further dividends or share buybacks from the New York-based firm.
The rebuke may prove more symbolic than injurious for shareholders, given that Morgan Stanley was still given the go-ahead to increase its dividend by 33% to 20 cents a share. The firm said in a statement that it also will boost stock buybacks through the second quarter of 2017 to $3.5 billion, from the current pace of $2.5 billion.
Last year, the Fed found that Morgan Stanley's payout plans were too aggressive, but the bank was allowed to adjust its plans, which were then approved.
"The Morgan Stanley issue is not really an issue," said Dick Bove, an analyst at Rafferty Capital Markets. "Every time a bank has been asked to submit, the submission has been accepted, and there wasn't really a problem."
In the Fed's annual "stress tests," a health examination of the largest banks, all U.S.-based lenders won approval for their payout plans. Bank of America (BAC) - Get Report won a 50% increase, while Citigroup (C) - Get Report tripled its dividend.
Capital plans submitted by the U.S. operations of two European banks, Germany's Deutsche Bank (DB) - Get Report and Spain's Santander (SAN) - Get Report , were rejected because of "unresolved supervisory issues."
In Morgan Stanley's statement, CEO James Gorman said that the increase in dividends and share buybacks was a "key element of our strategic plan."
"In addition, we are committed to addressing the Fed's concerns about our capital planning process and fully expect to meet their requirements within the established timeframe," Gorman said.
According to the Fed, Morgan Stanley has "material weakness in its capital planning process" that warrant near-term attention. Capital is the cushion of extra assets that regulators require a bank to hold, to protect depositors and prevent a failure that might necessitate a government bailout.
Such weaknesses include shortcomings in its practices for designing scenarios under which its capital base might come under stress as well as in models of how the firm would fare in those situations, the regulator said.