The Westpac Banking Corp (ASX: WBC) share price is trading lower on Tuesday.
In morning trade the banking giant's shares are down almost 1% to $24.66.
Why is the Westpac share price trading lower?
Investors have been selling Westpac's shares after APRA formally commenced an investigation into possible breaches of the Banking Act 1959 by Westpac.
According to the release, APRA will focus on the conduct that led to the matters alleged last month by AUSTRAC, as well as the bank's actions to rectify and remediate the issues after they were identified.
APRA's investigation will examine whether the bank, its directors and/or its senior managers breached the Banking Act (including the Banking Executive Accountability Regime), or contravened APRA's prudential standards.
What now?
Due to the magnitude and nature of the issues alleged by AUSTRAC, APRA is aiming to ensure that fundamental deficiencies in Westpac's risk management framework are identified and addressed and that Westpac and those responsible are held accountable as appropriate.
It will also impose an immediate increase in Westpac's capital requirements of $500 million, to reflect the heightened operational risk profile of the bank.
This means the total operational risk capital add-ons that Westpac is required to hold is now $1 billion.
The additional $500 million operational risk capital requirement will apply from December 31. This change is expected to reduce Westpac's CET1 capital ratio by approximately 16 basis points, based on its balance sheet as of September 30.
In addition to this, APRA will initiate an extensive review program focused on Westpac's risk governance. The review program will include risk management, accountability, remuneration and culture.
APRA's Deputy Chair, John Lonsdale, said: "AUSTRAC's statement of claim in relation to Westpac contains serious allegations that question the prudential standing of Australia's second largest bank. While Westpac is financially sound, there are potentially substantial gaps in risk governance that need to be closed."
"Given the nature of the matters raised by AUSTRAC, the number of alleged breaches and the period of time over which they occurred, this will necessarily be an extensive and potentially lengthy investigation."
Westpac response.
The banking giant has acknowledged APRA's announcement and revealed that it is committed to cooperating with the regulator in all aspects of its investigation and review.
Westpac's Chairman, Lindsay Maxsted, said: "Westpac accepts the gravity of the issues presented by AUSTRAC. As previously stated, these shortcomings are unacceptable and we are determined to urgently fix these issues and lift our standards. We will provide our full support to APRA through its investigation and review."
The bank also advised that it has appointed Promontory to undertake an Accountability and Financial Crime Program Review. This review is currently underway.
