No taxpayers' money will be involved in the plan, with bondholders forced to take losses on their investment as part of a "bail-in" due to happen in October. They will be offered shares in the banking arm, a move which will result in a stock market listing for the UK's biggest mutual.
The Co-op said that around 5% of the bondholders were smaller retail investors - a figure thought to number 7,000 - and whose average investment was around £1,000.
The black hole in the Co-op's capital reserves largely stems from commercial property loans acquired through a merger with the Britannia building society in 2009 which created a financial ''super-mutual''.
Concerns over its financial position came to a head last month after credit ratings agency Moody's downgraded the bank to junk status, just weeks after it had pulled out of a deal to buy more than 600 Lloyds branches. As a member-owned institution, the Co-op is hamstrung in its ability to raise fresh capital.
The shortfall was identified by the Prudential Regulation Authority (PRA), the new City watchdog. It is due to set out further details on the capital positions of all eight major banks and building societies in a briefing on Thursday. It launched its review after the Bank of England's new Financial Policy Committee claimed that banks needed another £25 billion of capital to prop up their balance sheets.
However, Lloyds Banking Group and Royal Bank of Scotland have already agreed with the PRA that their requirements will be met without having to raise funds through the issue of new shares or securities.
Co-op chief executive Euan Sutherland, the former B&Q boss who joined the group last month, said the long-term plan was to now focus on retail customers. He told the BBC Radio 4 Today programme: "I think we are really strengthening the group right now and we have put in, in a very short time, a very strong management team and we have got a very clear plan to drive a very successful future for this bank going forward.
"Clearly there are lessons to learn and clearly there will be a time to look back and do that but, to be honest, in the last six weeks, where I have been involved with the Co-operative group, we have focused on driving a very solid future for this bank. In effect this is the best solution for all concerned. It's a very equitable solution and we believe that this will provide security, safety, stability for our customers and the bank going forward."