The prudential regulator is demanding Westpac set aside an extra $500 million in capital to reflect a heightened risk profile in the wake of the lender’s child exploitation and money laundering scandal.

APRA on Tuesday imposed the immediate increase in Westpac’s capital requirements as it launched its own investigation into the conduct that led to an alleged 23 million breaches of money laundering laws, including a failure to properly monitor payments potentially linked to child sex offences in Southeast Asia.

The $500 million capital increase brings Westpac’s total operational risk add-ons it is required to hold to $1 billion, following the increase announced by APRA in July.

Westpac’s soon-to-be-ex-chairman Lindsay Maxsted said the change is expected to reduce the bank’s Level 2 common equity tier 1 capital ratio by approximately 16 basis points.

Mr Maxsted repeated assurances that the bank accepted the gravity of the issues at hand.

“As previously stated, these shortcomings are unacceptable and we are determined to urgently fix these issues and lift our standards,” he said.

Westpac was handed an historic second strike on executive pay last week but dodged a potential board spill despite copping a roasting from shareholders.

The scandal has claimed the scalp of chief executive Brian Hartzer – who has been replaced on an interim basis by chief financial officer Peter King – while Mr Maxsted will follow suit in the first half of 2020.

Mr Maxsted admitted at the bank’s AGM on Thursday that it did not act quickly enough to implement “robust” monitoring of money transfers potentially linked to child abuse but defended the reductions made to executives’ pay packets.

APRA said its Westpac probe will run concurrently to a separate investigation by the Australian Securities and Investments Commission and legal proceedings by AUSTRAC, which in itself could result in a more than a billion dollar fine for Westpac.

Commonwealth Bank was asked to stump up an extra $1 billion in 2018 following an APRA investigation into the bank’s money laundering and counter terrorism funding breaches, which also resulted in a $700 million fine.

APRA will examine whether Westpac’s directors, or its senior managers, contravened the Banking Act 1959 and prudential standards by the way they responded to the scandal.

The regulator will also examine whether Westpac’s governance, control and risk management framework was adequate and appropriately implemented, and whether accountability and remuneration arrangements were adequate, and appropriately implemented to effectively manage non-financial risks.

APRA deputy chair John Lonsdale said while Westpac remained financially sound, there were potentially substantial gaps in risk governance that needed to be closed.

“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,” the regulator said in a statement.

-AAP