The Co-op Bank, part of the UK mutual the Co-op Group, has announced it’s plan to fill the £1.5bn ($2.3bn) hole in its balance sheet by issuing shares on the stock market.
Bond holders at the bank will be offered shares in the bank, in a process known as a ‘bail-in’.
The plan will result in the Co-op Group being listed on the stock market.
The bank said the deal meant both investors and the group would make "a joint contribution" to the bank’s recapitalisation.
Euan Sutherland, Co-operative Group chairman, said: "Investors in the bank’s subordinated capital securities are also being asked to support the bank at this crucial time by participating in a wider exchange offer."
"This solution, under which they will own a significant minority stake in the bank, will then allow them to share in the upside of the transformation of the bank."
Niall Booker, chief executive of Co-operative Bank, said: "Whilst we recognise that the short-term outlook is challenging, the measures we are announcing today mean we now have a credible plan for addressing the capital shortfall we face and can turn our attention to managing our non-core assets down and restructuring our core bank."
In April 2013 the Co-op pulled out of a deal known as project Verde to buy 631 branches from Lloyds Banking Group.
The bank subsequently had its credit rating downgraded by Moody’s to junk status two weeks later.
In March, the Co-op Bank reported annual losses of £674m for 2012.
The Co-op Bank acquired Britannia Building Society in 2009, inheriting its bad loans which most of the Co-op’s current problems originate.