Co-op warns of ‘severe consequences’ if £1.5bn rescue appeal fails

No taxpayers’ money will be involved in the plan, with bondholders forced to take losses on their investment as part of a proposed “bail-in” due to happen in October.

They will be offered shares in the banking arm, a move which will result in a stock market listing for the UK’s biggest mutual.

The Co-op said that around 5 per cent of the bondholders were smaller retail investors - a figure thought to number 7,000 - and whose average investment was around £1,000.

The black hole in the Co-op’s capital reserves largely stems from commercial property loans acquired through a merger with the Britannia building society in 2009.

Concerns over its financial position came to a head last month after credit ratings agency Moody’s downgraded the bank to junk status, just weeks after it had pulled out of a deal to buy more than 600 Lloyds branches.

As a member-owned institution, the Co-op is hamstrung in its ability to raise fresh capital.

The Co-op, which has around 4.7 million banking customers, is also planning to raise funds through the disposal of its insurance business, although the largest part of the rescue is coming from bondholders.

It said: “The group and the bank believe that the capital actions are in the long-term interest of all their respective stakeholders and of the bank itself and will prevent more severe adverse consequences for all stakeholders which might occur in the absence of such support.”

Euan Sutherland, chief executive, added: “This is the best solution for all concerned. It’s a very equitable solution and we believe that this will provide security, safety, stability for our customers and the bank going forward.”

The shortfall was identified by the Prudential Regulation Authority, the new City watchdog. It is due to set out further details on the capital positions of all eight major banks and building societies in a briefing on Thursday.