He has been dubbed the "crystal Methodist" by the tabloids but there's precious little to laugh at in the sordid story of the former Co-operative Bank chairman Paul Flowers.

The disgrace of Flowers (63), who was filmed handing over £300, allegedly to pay for cocaine and crystal meth, is a personal tragedy for the Methodist minister, who was chairman of the self-styled ethical bank until June this year.

It s also a disaster for the Co-op, as shockwaves from the weekend exposé now threaten to destabilise the entire group, a once-proud movement that can trace its roots back to 1844, when the Rochdale Pioneers set up a retail co-operative in the northern town.

Members were given a share of the profits and a say in how the business was run.

The mutual model was copied throughout the country over the decades and the Co-op Group is now a £13 billion-a- year business, spanning super- markets, pharmacies, insurance, banking and funeral parlours. It has seven million customer members and employs 100,000 people.

During the banking crisis, the Co-op Bank was held up as a model for modern, ethical capitalism. It was a shock when we learnt, earlier this year, that it was the same as all the other banks – reckless, greedy and over-ambitious.

Its all-advised takeover of the Britannia Building Society in 2009, which tripled its size, brought the bank to the brink of collapse as Britannia's toxic property loans blew a £1.5 billion black hole in its accounts.

Now the insurance business is to be sold off to help plug the huge gap and control of the bank has been handed to the bondholders, led by two hedge funds but also including 15,000 retail investors.

All of this happened on Paul Flowers’ s watch.

Lloyds pursuit
He was not chairman of the bank at the time of the Britannia takeover but he was on the board – and he was certainly in the chair when the bank dog- gedly pursued a £750 million takeover of 600 Lloyds bank branches, hailing the deal as "the biggest shake-up in high street banking in a generation".

That deal, which had the support of the government, was abandoned when the bank’s true financial position became known earlier this year.

A fortnight ago, during a grilling by MPs on the treasury select committee, Flowers was revealed to be shockingly ignorant about the financial affairs of the business he had headed for three years.

To the obvious astonishment of committee chairman Andrew Tyrie, Flowers was unable to say – or even guess – how much money the bank had lent. And, when asked what the Co-op's assets were – a key measure of a bank's financial strength – Flowers took a stab at £3 billion. The true figure was £47 billion.

His knowledge of modern banking was, he admitted, somewhat “out of date”.

At the end of his brutal 2½-hour grilling at Westminster, Flowers was repeatedly asked by Tyrie whether he still believed himself to be a “fit and proper” person to run a bank.

Flowers insisted the question was entirely hypothetical: “I can conceive of no way in which I, in my semi-retirement, would ever wish to be involved in running another financial services institution.” At least he got that one right.

The hearing revealed Flowers as entirely unsuitable to serve on the board of a bank, let alone as its chairman. However it took the drugs exposé to force the resignation of the Co-op Group chairman, Len Wardle, who quit yesterday, taking responsibility for Flowers's appointment.

And it was only on Monday evening that the group announced a “root and branch review” of the 170-year-old organisation, including what it described as a “fact-finding process to look into any inappropriate behaviour.”

Just hours after Wardle announced his resignation yesterday, there were more revelations about Flowers's behaviour. It emerged he had quit as a Labour councillor in Bradford two years ago, after the discovery of "inappropriate" images on his computer.

It seems extraordinary that this would not have come to the attention of his colleagues on the Co-op board – and just how much did the authorities know of his behaviour?

More questions
There are many more questions to be answered and MPs have already made it clear that they intend to question the regulators who approved the appointment of Flowers.

There is a political dimension too – the Co-op is a substantial backer of the Labour Party and there are calls for it to return a £50,000 donation from the bank, made when Flowers was chairman.

More revelations look likely in this deepening scandal – and more heads may yet roll.

Fiona Walsh is business editor of theguardian.com