Chancellor George Osborne has announced plans for an independent inquiry into the Co-operative Bank's near downfall, as its former chairman is held by police.
The review uses new powers under the Financial Services Act and follows calls from Prime Minister David Cameron for an inquiry into the bank's ailing finances and the decision to appoint Paul Flowers as chairman.
It will add to an investigation being considered by the Prudential Regulation Authority (PRA) and the Financial Conduct Authority (FCA), following the regulators' talks with Bank of England governor Mark Carney on Friday.
Mr Osborne announced the review The Co-op faces a rescue which will see 50 branches close and investors including US hedge funds take control of 70% of the business.
The Treasury-led inquiry will look into mistakes made in the run-up to the Co-op Bank's woes and the £1.5bn black hole in its finances, dating back to at least 2008.
The Treasury said it will investigate actions of the regulators and government in relation to the issues at the bank.
It will cover the Co-op's takeover of Britannia Building Society at the height of the banking crisis, as well as appointment procedures in light of the scandal surrounding Mr Flowers.
Mr Flowers, who stepped down as the bank's chairman in June, was arrested by West Yorkshire Police on Thursday night.
The 63-year-old Methodist minister has been held in connection with an "an ongoing drug supply investigation", police said.
Mr Flowers has been questioned all day by police, and has yet to be released.
His solicitor Andy Hollas said questioning had finished for the day.
But Mr Hollas said inquiries were ongoing and a decision about whether Mr Flowers will be bailed is expected later.
Mr Flowers stepped down as Co-op chairman in June Mr Flowers was suspended by both the church and the Labour Party following newspaper allegations that he bought and used illegal drugs.
The Treasury's inquiry will not start until the outcome of criminal investigations into Mr Flowers or it is clear proceedings will not be prejudiced.
As with the recent review into Royal Bank of Scotland, the probe will be independently chaired, which is seen as vital by the Treasury Select Committee because the role of the regulators will also come under scrutiny.
The FCA said it "fully agrees" the investigation should be led by an independent person.
The Co-op is already at the centre of a barrage of investigations, with the group being grilled by MPs on the Treasury Select Committee into the bank's failed Project Verde bid for 632 Lloyds Banking Group branches.
Sky News has learned that the former Bank of England governor, Lord King, warned of a "political desire" for the Co-op to buy the branches.
It also emerged earlier that the Co-op is seeking to recover £31,000 paid to Mr Flowers since he quit his £132,000-a-year post in June.
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