Moody’s warned: "any legal liability assigned to the bank would set a precedent for banks and investors in future similar cases. We see such risks as a recurring credit risk as banks strive to introduce new products to increase non-interest income."

Currently, the Beijing-based Hua Xia Bank is being investigated by the China Banking Regulatory Commission’s Shanghai Office and the police after allegations that a former employee sold such risky wealth management products without permission.

Moody’s added that the investigation and investors’ anger are credit negative for Chinese banks and that it highlights the risks of implicit liability in the banks’ fast-growing wealth management product business.

The rating agency further said that even if the investigation does not find Hua Xia liable, banks in general will take a hit to their reputation that could adversely affect their overall business.

Moody’s said the investigation further underscores the risk that banks face from potential fraud and misconduct arising from China’s burgeoning wealth management product sector.