Westpac is selling its remaining stake in fund manager BT Investment Management, offloading up to $645 million worth of stock to institutional investors and signalling it intends to ultimately sell all shares it holds in the business.

In a move that will improve Westpac's capital position, the bank is selling 60 million shares it holds in BTIM, which will take its stake in the investment manager from 29 per cent to 10 per cent.

The bank, which used to hold a controlling 59 per cent of BTIM before selling this down in 2015, said it intended to sell the remaining 10 per cent stake, subject to market conditions. This would not occur before May 2018.

The sale will lower Westpac's exposure to funds management, and raise 10 basis points of top tier capital at a time when banks are building up larger buffers to protect them against future shocks.

The deal does not change Westpac's ownership of BT Financial Group, the wealth management business that is fully owned by the bank and is a key vehicle for selling products in superannuation and insurance.

Westpac chief financial officer Peter King said the bank no longer needed the stake in BTIM, because BT Financial Group's priorities centred on the distribution of wealth products.

"This was a strategic decision about looking at the portfolio and focusing BT Financial Group on wealth distribution and platform management," Mr King said.

BTIM products were still important, he said, but BT's platform Panorama would offer customers the best products, irrespective of where they were produced.

"When we look at BTFG strategically, it's really around building wealth management solutions. We are prepared to put the best investment management products on Panorama."

Macquarie is underwriting the offer, which will allow big institutions to pick up BTIM stock at between $10.25 and $10.75. At the bottom end of the range, that is a discount of 16 per cent to the last closing price.

It comes before the Australian Prudential Regulation Authority will soon publish a report on bank capital requirements, which is likely to indicate how much extra capital the big four banks will need to hold in order to be "unquestionably strong," a key policy objective.