The Financial Conduct Authority and the Prudential Regulation Authority have both backed the Chancellor’s plans, and are also considering separate investigations.

A Treasury statement said the investigation will examine issues such as the appointment of senior staff, the Co-op Bank’s acquisitions and the actions of regulators and government. It will be led by an independent person appointed by the regulators with the approval of the Treasury.

The FCA also issued a statement welcoming the announcement: “The FCA fully agrees that the investigation should be led by an independent person, and looks forward to supporting them in their work. The FCA will make its full resources available to support the investigation.”

While the Co-operative Bank has been in the spotlight because of its struggle to meet capital requirements since June 2013, the recent revelations that a former bank chair had drug problems has placed the organisation under renewed scrutiny.

Last week evidence emerged that Paul Flowers, who resigned from his post in June, bought drugs including cocaine and ketamine. 

At Prime Minister’s Questions, David Cameron floated the idea of an inquiry, saying: “There are clearly a lot of questions that have to be answered.

“Why was Rev Flowers judged suitable to be chairman of a bank? Why weren’t alarm bells ringing earlier, particularly by those who knew? It will be important in the coming days that if anyone does have information they stand up and provide it to the authorities.”