Some 822.4 billion won ($679.8 million) in derivatives linked to overseas interest rates and sold mainly to retail investors were at risk, the Financial Supervisory Service said in a statement.
It cited one product linked to 10-year German government bond yields.
"If the interest rates (on the German bonds) remain at the current level until the maturity of the products falling between September and November, the average rate of loss will reach 95.1% when excluding gains from coupon payment," the regulator said.
These and other products were sold by Woori Bank, KEB Hana Bank, Kookmin Bank and three domestic brokerage firms to 188 corporate clients and 3,654 retail investors, who hold most of the derivatives.
The three banks did not immediately return calls from Reuters seeking comment.
The regulator said its probe would begin this month and it gave no further details about the investigation.
(Reporting by Choonsik Yoo; editing by Darren Schuettler)