Do defeated keeps increase the hand size for allies?
Yes. Each ally's hand limit is increased by the number of keeps they themselves own.

The general rules for drawing cards only refer to your own keeps, since cooperative rules are ignored in the general section. However, on Page 13, under Team Rules, the rulebook states:


  When in or adjacent to an allied keep, his
  Hand limit is increased, but only for the keeps he owns himself.
  That means, if close to an allied keep but he has no keeps of his
  own, his Hand limit is not modified.


Don't forget that a city hand limit bonus does not stack with this bonus, you simply get whichever is better. This also applies to your allies.