Around 50 branches are to close as control of the Co-operative Bank is handed to a group of investors as part of a rescue plan.
The Co-operative Group said investors who bought bonds in its troubled banking arm, including US hedge funds, will be given 70% of the bank, leaving it with 30%.
The Co-op said its values and ethics will be 'legally embedded' in the lender's new rules
The revised rescue plan aims to plug a £1.5 billion black hole in the bank's finances caused by the purchase of the Britannia Building Society and aborted plans to buy hundreds of Lloyds Bank branches.
The funerals-to-supermarkets group had initially hoped to retain control of the ethical lender by giving bond investors a minority stake in return for a £500 million loss on their debt.
But bondholders, including US hedge funds Aurelius Capital Management and Silver Point Capital, will take control of the bank under the new plan, which will see it listed on the stock market next year.
The Co-op's loss of control of the bank has raised concerns among some customers. The bank has traditionally attracted organisations like trade unions and charities because of its ethical approach.
But the Co-op said its values and ethics will be "legally embedded" in the lender's new rules.
Investors must now vote to back the plan, and the Co-op warned that the bank will fall into state hands through the resolution process if they do not, leaving investors empty-handed.
The group announced plans to close around 50 of its 324 bank branches, about 15% of its estate, without revealing how many jobs will go among the lender's 9,000 staff.
But Co-op Group chief executive Euan Sutherland admitted there will be "significant" job losses, saying that staff will be informed first. The company also aims to slash costs across its call centres, while investing in digital and self-service banking.
The group, which traces its roots back to 1844 when a number of workers known as the Rochdale Pioneers pooled resources, took out advertisements in national newspapers on Monday to reassure customers that the bank will retain its ethical approach.
It insisted the lender has not seen a customer exodus, despite the involvement of hedge funds, adding that the bank will only be able to use the Co-op name while the ethical principles remain embedded in its constitution.
Mr Sutherland said: "We recognise the huge importance of ethics and values for all our customers and remain committed to upholding them."
Its turnaround is expected to take four to five years, and will shift its focus to households and small and medium-sized businesses.
The Co-op added that the bank's outlook remains "challenging", although monthly bad debt charges have fallen.
The fundraising has been forced on the bank by City regulators after it endured heavy losses in recent years, including a half-year loss of £709.4 million, following its takeover of Britannia Building Society in 2009.
The Co-op said the plan has been backed by the Financial Conduct Authority and Prudential Regulation Authority, who are demanding it finds £1.5 billion of capital as a buffer against future crises.
Retail investors such as pensioners who bought the bank's bonds for a steady income will be offered a choice between two types of bond - one paying income and another repaying the principal they invested - although they will still suffer losses.
Mark Taber, who campaigned for retail investors, said: "This deal has been extremely hard-fought and is now a much better solution for retail holders and pensioners."
The Co-op Group will contribute £462m to the bank's turnaround, including £129m handed to retail investors, £333m in cash and £40m in interest savings.
Investors such as hedge funds will take up to 70% of the bank's equity through a combination of converting debt to shares, buying equity and acquiring fresh bank debt.
The Co-op will be the bank's single biggest shareholder, and it insisted no other single shareholders will have more than 9.9%.
"That will give us a key role in shaping the bank's future direction," said Mr Sutherland.
Niall Booker, the bank's chief executive, said the hedge funds' influence is "not as nefarious as people like to make out".
A vote is likely in December, and the plan has binding commitment from hedge funds and support from other investors.
The lender will also set up an internal bad bank to run down a £14.2bn book of "non-core" assets, such as interest-only mortgages, a residential property portfolio and loans to big businesses and housing associations. It aims to slash this to below £11.5bn by the end of next year.
Cost cuts in the bank will come from simplifying products, efficiency, more digital and self-service, reduction in middle and back office operations, management cuts and fully integrating Britannia.
The bank expects to spend £500m on the turnaround, including overhauling IT and redundancies.