Mark Taber, who has launched a campaign on behalf of Co-op Bank bondholders, said the Prudential Regulation Authority (PRA) failed to take action on the mammoth hole in the mutual's finances early enough and created a "false market" for the bonds.
He said he believes more than 15,000 retail investors will be impacted by the plan to meet the Co-op Bank's £1.5 billion shortfall - many of whom he said were pensioners who rely on the preference shares and permanent subordinated bonds for income in retirement.
In a letter to PRA chief executive Andrew Bailey, Mr Taber has called on the watchdog to review "clearly disproportionate" requirements to boost the Co-op Bank's capital strength and the plan to resolve its shortfall.
He said: "The PRA has endorsed the bank's capital raising plan which seeks to inflict the largest relative burden on the bank's 15,000 plus retail bondholders who trusted the regulators, politicians, bank and its accounts and are the one blameless group in this national disgrace."
The Co-op has claimed that around 7,000 of the bondholders are small retail investors with an average investment of around £1,000. But Mr Taber said he believes the figure has been significantly understated, adding that the average investment is closer to £10,000. The terms of the Co-op's "bail in" plan will not be set until September, but the bank has already warned there will be upfront losses on the face value of bonds.
Mr Taber said the PRA should have been aware of the risks involved in the Co-op's takeover of Britannia in 2009, which has been blamed for the capital shortfall. He has also questioned the PRA's "arbitrary and putative" demands for the Co-op's capital raising, which he said wrongly assumes it is a systemically important bank.
"Not only are the PRA's actions causing great distress they also threaten to cause an avoidable standoff which could result in unnecessary nationalisation of the bank and massive damage to the Co--operative Group and mutual sector," he said.
The Co-op Group last week said it is to launch an independent inquiry into how its banking arm ended up with a £1.5 billion black hole which will need rescuing by small investors.