The Co-operative Group has struck a deal to save its battered banking arm by ceding control of the ethical lender to a group of powerful investors.
Co-op Group chief executive Euan Sutherland confirmed in a video message that the customer-owned group will be left with a 30% stake in the Co-operative Bank - but insisted the lender will retain its ethical values.
Under pressure from regulators to plug a £1.5 billion black hole in the bank's finances, its mutual parent had hoped to retain control of the bank through a stock market flotation, giving owners of its bonds a minority stake in return for a £500 million loss on their debt.
However, US hedge funds and big blue-chip investors such as pension funds and insurers today emerged victorious from lengthy negotiations by securing majority ownership.
Mr Sutherland said the agreement in principle "saves the Co-operative Bank" and will also avoid a taxpayer bailout.
But the likelihood of the self-styled ethical lender being controlled by predatory US hedge funds and blue-chip investors triggered warnings over the bank's future ethos and a possible customer exodus.
Several thousand retail investors such as pensioners, who invested an average of £1,000 each in the high-yielding bonds for a steady income, are expected to be handed income-paying bonds, after campaigning against the initial plan which would have given them shares in the bank.
Mr Sutherland insisted the supermarkets-to-funerals group, which traces its roots back to the Rochdale Pioneers in 1844, will retain "effective control" of the bank by "securing 30% of the equity", and will be its biggest single shareholder.
He said: "This bank will remain the Co-operative Bank. We are embedding the co-operative principles in the constitution of the bank to guarantee this."
He added: "This is the first bank to be rescued and to survive as a standalone entity without taxpayer money."
Meanwhile, the bank revealed it is setting aside up to £105 million more to cover mis-sold payment protection insurance (PPI) and other issues, after taking a fresh look at its provisions.
However, it said the Prudential Regulation Authority's (PRA) demand for it to raise another £1.5 billion of rescue capital "remains unchanged" - as it had already factored in "future conduct risk provisions".
Unite national officer Dominic Hook said: "Today is a tragic day for the UK as the Co-operative Group is no longer in a position to maintain its majority ownership of the Co-operative Bank. This is dreadful for the staff, customers and the wider banking industry.
"This may mean customers will have even less choice on the high street and means we will have yet another finance company seeking shareholder returns over better banking.
"The Co-operative Bank with its long and proud history is now at risk of losing all it ever stood for. The ethos of this important organisation must be protected."
Andre Spicer, professor of organisational behaviour at Cass Business School, said: "It is unlikely that the Co-op will maintain its ethical approach in the long run.
"History suggests that once a mutual bank is privatised it drops the focus on doing good to focus on doing well for shareholders."
Figures published in August showed the bank plunged to half-year loss of £709.4 million.
At the time Mr Sutherland insisted there is "no plan B" for rescuing its bank, as he reiterated a turnaround strategy requiring a £500 million contribution from bondholders, with £1 billion coming from the group.
But bondholders led by US hedge funds Aurelius Capital Management and Silver Point Capital - who own 43% of the higher-ranking bonds which had been due to be hit - ratcheted up the pressure on the bank, proposing an alternative plan of converting more debt into shares.
Today the Co-op admitted the bank's capital-boosting plan will be "materially different" to the earlier blueprint.
Mr Sutherland, the former chief operating officer of B&Q owner Kingfisher, said the customer-owned group will announce more detail in coming days.
The Co-op Bank also said it has requested suspension of trading in its subordinated debt and preference shares while it finalises the plan.
The extra £105 million provision also includes compensation for mortgage customers affected by a newly-discovered flaw in which they were charged only interest on their first mortgage instalment - meaning further payments were higher than they should have been.
Customers who took out Platform and Optimum mortgage products would have been affected, although the bank has not yet notified any of them and further details of the scale of the issue remain unclear.
The bank said the new provision also took into account "the identification of a technical breach of the Consumer Credit Act".
This was thought to relate to failing to inform some loan customers that they could reduce their outstanding balance.
The extra provision also includes money put aside because of overdue payments and unpaid cheques.
The bank's woes have been blamed on soured corporate loans, many of which were acquired with its takeover of Britannia Building Society in 2009.
The Co-op Bank has around 4.7 million customers and employs about 10,000 staff. Its turnaround is expected to see heavy cost-cutting and job losses.