JPMorgan Trust Bank has fallen foul of Japanese regulators for activities related to its real estate trust group. The Financial Service Agency has suspended the bank from generating new business by its real estate trusts for six months, and ordered it to submit a plan detailing its efforts to improve internal systems, governance and compliance.

A routine FSA inspection revealed that JPMorgan had not sufficiently investigated or assessed the underlying assets included in real estate securitization products. Specifically, the regulator found sites to be in breach of construction rules, overvalued, and unfit for liquidation or development.

The net effect of these breaches, FSA said, was that defects and risks were passed on to trust beneficiaries, mainly institutional investors.

Responses to FSA action

In response, the bank said: "JPMorgan Trust Bank takes this situation very seriously. We will make every effort to remedy the issues identified and further improve our internal control systems to avoid any repeat of the incidents. We have already taken certain measures to address these issues, including the appointment of new representative directors and changes to management of the affected division. We will develop and complete the required business improvement plan and submit it to the FSA as soon as possible."

In a related release, Fitch Ratings said FSA's decision would not have an immediate impact on its ratings of Japanese CMBS transactions. Fitch has already interviewed JPMorgan officials and, having reviewed the bank's operational framework for entrusted properties and taken future changes into account, felt the suspension would not affect its ability to act as a real estate trustee.

(c) 2006 Asset Securitization Report and SourceMedia, Inc. All Rights Reserved.

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