Treasury inquiry announced into Co-op Bank turmoil as Paul Flowers bailed

It could produce uncomfortable findings for both last Labour government and current Coalition

George Osborne has announced an independent Treasury inquiry into the turmoil at the Co-operative Bank (Getty)

An independent Treasury inquiry into the turmoil at the Co-operative Bank, including the appointment of Paul Flowers as its chairman, was announced tonight by Chancellor George Osborne.

As it will cover the last five years, it could produce some uncomfortable findings for both the last Labour government and the current Coalition administration.

The move followed the arrest of Mr Flowers, a 63-year-old Methodist minister, in connection with claims he bought and used class A drugs. He was being questioned by West Yorkshire police last night after being arrested in Liverpool and later bailed.

Amid mounting allegations about his private life, he has been suspended by the church and the Labour party, which he represented as a councillor until 2011 when "inappropriate but not illegal adult content" was found on his council computer.

Labour and the Tories have traded accusations over who was responsible for the bank coming to the brink of collapse because of a £1.5bn black hole in its finances.

The Treasury inquiry will range across how the bank ran up vast losses, its ill-fated merger with the Britannia Building Society in 2008, its failed attempt to acquire Lloyds branches seven months ago and how appointments were made to senior positions.

The probe will be led by an independent person appointed by the City regulators, the Prudential Regulation Authority (PRA) and the Financial Conduct Authority (FCA).

It will add to an investigation planned by the PRA and the FCA into whether there were adequate systems and controls in place to prevent the crisis at the bank.

It will also consider whether there was any wrongdoing by individuals, which could lead to fines and censures.

David Cameron has denounced the links between the bank, Mr Flowers and the Labour party. Tories have also pointed to connections between the Co-op and Ed Balls, the shadow Chancellor.

Ed Miliband, the Labour leader, retorted yesterday, accusing the Prime Minister of "cheap political points" and "unjustified smears".

Labour also seized upon a comment by the former Tory minister David Davis that Mr Osborne and the Treasury had "serious questions to answer" about the oversight of the bank in connection with its attempted acquisition of Lloyds branches.