As the Treasury announced an independent investigation into the near collapse of the Co-operative Bank its former chairman, Paul Flowers, was released on bail after detectives questioned him over drugs allegations.
The 63-year-old Methodist minister, who was arrested in the Liverpool area last night, spent the day being questioned at a Leeds police station by officers "investigating allegations of drug supply offences".
The investigation into the Co-op announced by Chancellor George Osborne will cover "the appointment of senior staff" and examine events from at least 2008 - which could mean potential embarrassment for both Labour and the coalition Government over ministers' dealings with the bank.
City regulators the Prudential Regulation Authority (PRA) and Financial Conduct Authority (FCA) have also announced they are considering whether to launch formal enforcement investigations into the bank.
Mr Flowers stepped down as Co-op bank chairman in June and questions have since been asked about his competence in the role amid claims of illegal drug use, inappropriate expenses, drink-driving and pornographic material found on a council computer.
He was suspended by both the Methodist church and the Labour Party following allegations that he bought and used illegal drugs.
Mr Flowers' solicitor, Andy Hollas, told reporters gathered outside Stainbeck police station in Leeds where the questioning took place that his client was in a "rather ponderous frame of mind".
"On the basis of the account Mr Flowers has given, police will be making further inquiries," he said.
A police spokesman said: "West Yorkshire Police investigating allegations of drug supply offences have released a man on unconditional bail.
"The 63-year-old arrested last night in the Liverpool area will answer bail in the new year at a West Yorkshire Police station."
The political fall-out from the allegations continued, with both Labour and the Chancellor facing questions about their handling of the Co-op situation.
Senior Conservative MP David Davis told the Financial Times his fellow Tory, Mr Osborne, and the Treasury had "serious questions to answer" about the oversight of the bank.
Issues over the bank's operations were raised by a rival at the time of a subsequently-aborted takeover bid of Lloyds Bank branches."
These problems were apparent to a rival and would have been - with a bit of work - to anyone else," said Mr Davis, who fought David Cameron for the Conservative leadership in 2005.
Labour, which has faced questions over its ties to the Co-operative Group and a £50,000 donation to shadow chancellor Ed Balls' office, has written to the country's senior civil servant demanding assurances that the inquiry into the bank will be impartial.
In a letter to Sir Jeremy Heywood shadow Cabinet Office minister Michael Dugher wrote: "We believe, however, that as Cabinet Secretary it is your responsibility to ensure that any such inquiry must be genuinely independent and robust.
Treasury Select Committee's Conservative chairman, Andrew Tyrie has also called for an inquiry to be wholly independent.
Meanwhile, the Co-operative Bank has confirmed it is seeking to recover contractual payments totalling £31,000 made to Mr Flowers amid reports that he was also the subject of an inquiry into "lavish" expenses claims at the Co-op when he resigned from the mutual's group board in June. He quit as chairman of the Co-operative Bank at the same time after the group brought in banking industry veteran Richard Pym to replace him.
It emerged yesterday that Mr Flowers left the Manchester-based drug charity Lifeline Project in 2004 after an investigation over claims for expenses there.
He also quit as a Labour councillor in Bradford after pornography was found on his computer, although at the time he claimed he was leaving due to pressure of work.