State-backed Royal Bank of Scotland has hired a law firm to investigate claims of "unscrupulous" treatment of small businesses - described as "shocking" by Chancellor George Osborne.
A new report alleges that the lender drove firms to collapse to buy back their assets at rock-bottom prices.
Businessman Lawrence Tomlinson, entrepreneur in residence at the Department for Business, Innovation and Skills, said he had uncovered a dossier of evidence that RBS had deliberately forced companies into default to seize their properties.
His report into small business lending practices across the sector contains explosive accusations against RBS, which have now been passed to the City watchdogs by Business Secretary Vince Cable.
Mr Cable told BBC Breakfast he was "appalled" by the claims while Mr Osborne told ITV's Daybreak they were "shocking".
A spokeswoman for RBS - 80% owned by the taxpayer - confirmed that it had now hired law firm Clifford Chance to look into the claims. Details are set out in a letter from the banking group's new chief executive Ross McEwan.
Mr Tomlinson, who has been compiling the report independently for the past six months, focuses allegations on the turnaround division at RBS - its Global Restructuring Group (GRG).
But the report alleges that firms not necessarily in immediate financial distress are "engineered" into GRG, sometimes through small technical breaches of loan terms, such as late filing of minor financial information.
They are then hit with exorbitant rates and fees, which in some cases cause them to collapse, allowing RBS to buy their property and assets on the cheap for the benefit of its West Register property arm, according to Mr Tomlinson.
His report claims that fees charged by GRG can run into hundreds of thousands of pounds. One business that submitted evidence to Mr Tomlinson said that it forked out £256,000 in fees alone while in GRG.
Another said that RBS made it pay an immediate sum of £40,000 to continue borrowing terms with the group.
Mr Tomlinson said he was calling for "immediate action to stop this unscrupulous treatment of businesses".
He added: "From the cases I have heard, it is clear that a perception has arisen that the intention is to purposefully distress businesses to put them in GRG and subsequently take their assets for the West Register at a discounted price.
"There are many devastating stories of how RBS has wrecked good businesses and the ruinous impact this has on the lives of the business owners.
"I look forward to seeing how RBS proposes to take forward the forensic investigation into this part of the bank."
The report found a "disproportionately high" number of complaints against RBS, but also found examples of similar practice at other banks.
Fellow part-nationalised player Lloyds Banking Group is also criticised for concentrating on short-term gain at the expense of its business customers.
The report said Santander UK was among a few banks that were praised by small business customers for their treatment.
Mr Cable has confirmed that evidence against RBS in the report had been referred to the Financial Conduct Authority (FCA) and the Prudential Regulation Authority (PRA).
He said: "Some of these allegations are very serious and I am waiting for an urgent response as to what actions have been taken.
"I am, however, confident that the new management of RBS is aware of this history and is determined to turn RBS into a bank that will support the growth of small and medium sized businesses."
Mr Cable added he had passed the report to Sir Andrew Large - the former deputy governor of the Bank of England, who has also published his full review into small business lending at RBS today.
Sir Andrew, who was commissioned by the bank alongside management consultant Oliver Wyman, released initial findings and recommendations earlier this month that raised concerns over "serious" allegations of poor treatment by firms in financial distress.
He also said RBS had failed to meet even the bank's own lending targets or the expectations of its customers.
An RBS spokesman said that GRG's role was key to helping the bank face up to its commercial property "mistakes" made in the run up to the financial crisis.
He said: "In the boom years leading up to the financial crisis, the over-heated property development market became a major threat to the UK economy.
"RBS did more than its fair share to fuel this and commercial property lending was one of the key drivers of our near collapse as valuations rapidly plummeted."
He added: "GRG successfully turns around most of the businesses it works with, but in all cases is working with customers at a time of significant stress in their lives. Not all businesses that encounter serious financial trouble can be saved."
John Allan, national chairman of the Federation of Small Businesses (FSB), said: "The regulators need to investigate the findings of both the Tomlinson and Sir Andrew Large reports and swiftly address any issues raised to restore trust in the banks."
Mr McEwan's letter to Sir Andrew Large did not make direct reference to the Tomlinson report, but acknowledged that some customers in distress described in Sir Andrew's review said they were "angry about the treatment they received".
He wrote: "To ensure our customers can have full confidence in our commitment to them, I have asked the law firm Clifford Chance to conduct an inquiry into this matter, reporting back to me in the new year."
In the letter, Mr McEwan also pledged RBS would write to thousands more businesses setting out how much more the bank was willing to lend them. It had already offered £4 billion in this way, and this would go up to £10 billion.
He said the bank was working to enable all but the most complex lending decisions to be taken within five days of all necessary information being received - a process that can currently take months.
Mr McEwan admitted RBS "over-corrected for the reckless lending practices that broke this bank five years ago".
"We can never return to those days again and your report recognises the steps we have taken to re-balance and stabilise the bank.
"But in many cases the pendulum of risk aversion has swung too hard to one side. As you have identified, there are loans that we could, and should, be making, but are not.
"You have shown that in many cases we are too complicated, and too slow to react to the needs of our customers.
"We recognise that the bar is set higher for RBS than any other bank, because we were rescued at the public expense. We have an obligation to do more than any other to support the British recovery."