Taiwan's financial regulator plans to punish a local bank for aggressively pushing complex foreign currency derivatives on companies, as complaints about losses rise amid the Chinese yuan's recent sharp fall.
Chairman William Tseng of the Financial Supervisory Commission (FSC) did not name the lender in a legislative session on Thursday, but said it had misled clients into overinvesting in risky foreign currency derivatives.
"We will impose a big punishment in the near future," Tseng said, but did not elaborate on the penalities.
The FSC said the bank sold derivative products that were not designed to hedge currency risks, charged very high commissions and it cared only about its best interest.
The move comes after the regulator in March flagged potential risks associated with a more volatile yuan by looking into the rapid rise of yuan deposits in the island's banking system.
The Chinese currency staged a sharp reversal earlier this year, wiping out nearly all of its 2.9 percent gain against the dollar in 2013 that had been driven by speculative bets and a wave of structured-product selling by banks.
The FSC had checked seven banks to see if they properly advised clients about the potential risks of currency investments after receiving complaints about losses incurred on structured products due to the yuan's fall.
Banking ties with China have gathered steam in the last few years, with both sides signing a yuan clearing agreement and allowing local banks to take yuan deposits starting in February.
Since then, yuan deposits in Taiwan have surged rapidly, to 268.4 billion yuan ($43.16 billion) as of the end of March, according to the latest figures from the central bank.
As the exposure to the yuan is small relative to the Taiwanese banking system, regulators are more likely to be concerned about investor losses, especially retail investor losses, rather than any systemic risk these exposures may pose.
The FSC will make a punishment as soon as next Monday if the bank's explaination is not valid. A press conference could be set on Monday.
