The Agricultural Bank of China, one of the country's four largest lenders, has said that it could lose as much as 3.915 billion yuan (597 million U.S. dollars) in what it called a "material risk incident."
The incident took place at the Beijing branch of the bank involving notes held under resale agreement, the bank said in a filing on Friday night to the Shanghai and Hong Kong stock exchanges.
"The amount exposed to risks is 3.915 billion yuan," it said, adding that police have initiated an investigation.
The Agricultural Bank of China promised it would work with the public security authority and enhance coordination with related institutions "to safeguard the security of funds to the greatest extent."
The bank, listed in both Shanghai and Hong Kong, didn't provide any detailed information about the scandal in the filing.
Business magazine Caixin, however, reported that two employees at the bank's Beijing branch were at the center of the scandal, having illegally sold bills of exchange worth 3.915 billion yuan to an agent in the southwestern city of Chongqing, who sold them to another bank.
The bills of exchange work in a similar way to post-dated cheques, which demand one party pay a fixed sum to another in a set period of time, Caixin said.
The two employees, both very young, used money from the sale of the bills to invest in the stock market and suffered huge losses owing to a plunge in share prices, according to Caixin.
The Chinese stock market suffered a rout starting June 12, 2015, when the benchmark Shanghai Composite Index peaked at 5,178 points. The index was almost halved at Friday's closing of 2,916 points.
On Friday, share prices of the Agricultural Bank of China ended 0.65 percent higher in Shanghai and 1.11 percent higher in Hong Kong.