The Church of England's investment arm is to have a stake in the running of 314 bank branches being hived off by state-backed Royal Bank of Scotland as part of a £600 million deal.
Investors including the Church Commissioners and financial firms Corsair Capital and Centerbridge Capital are to revive the dormant Williams & Glyn's brand, under the plans announced today.
RBS, which is 80% state-owned following its near-collapse during the financial crisis, has been forced to sell the branches under European rules.
The new business will operate "to the highest ethical standards", according to the Church Commissioners.
Under the deal, the Williams & Glyn business will return to the high street as a "challenger bank" to the major players in the industry, with a particular focus on small business banking - a sector seen as vital to the UK's recovery.
The new business will take over 308 RBS branches and six NatWest branches in Scotland, serving nearly 1.7 million customers, including personal account holders and small-to-medium businesses.
It is not yet known when the brand will start to appear on high street facades. The sites are spread across a "broad national footprint", RBS said. The business will take on a £19.7 billion loan book and £22.2 billion in customer deposits
Annual operating profits were £168 million in the first half of 2013.
The deal involves RBS issuing a bond to the investors ahead of a stock market flotation which will take place at a later date. This will convert to cash and minority share stake worth a total of £600 million at the time of the share sale.
John Maltby, former head of commercial banking at Lloyds, will be chief executive of the bank with Philip Green, former chief executive of United Utilities, as chairman.
The consortium of investors is made up of Corsair, whose vice chairman is former Labour trade minister Lord Davies, as well as Centerbridge and RIT Capital Partners, an investment trust led by Lord Rothschild, plus the Church Commissioners.
The commissioners are responsible for managing an investment portfolio to support the Church of England's work across the country.
Andreas Whittam Smith, first estates commissioner, said: "The Church Commissioners are excited to have the opportunity to be involved in creating a UK challenger bank operating to the highest ethical standards and giving consumers more choice."
RBS chairman Sir Philip Hampton said: "We are delighted to be working in partnership with these investors to establish a new challenger bank for UK customers.
"Williams & Glyn's will play an important role in the UK banking landscape and will be an excellent new addition to the market, with a particular strength in small business banking - a sector that is so crucial to the UK's economic recovery.
"Much has been done already in building the standalone business, and today's announcement provides more certainty for our customers and employees ahead of a flotation."
The move follows the revival of TSB after another state-backed bank, Lloyds, was forced to hive off more than 600 of its branches.
Today's announcement comes after a £1.6 billion deal to sell the branches to Santander fell through last year.
Williams & Glyn is expected to have a 5% market share of the small and medium-sized enterprise (SME) and mid-corporate banking markets and a 2% share of UK personal current accounts.
The Church Commissioners manage a £5.5 billion investment fund including shares, real estate and other investments.
The commissioners' aims are to support poorer dioceses with administrative costs, provide funds for missionaries, pay for bishops and some cathedral costs, as well as administer reorganisations and church building closures.
It also pays pensions for clergy for service before 1998 and runs the national payroll for serving and retired clergy.
Earlier this year, the Archbishop of Canterbury Justin Welby said he was irritated and embarrassed after it emerged that the church had invested in lender Wonga - after he took on the payday loan industry.
The Church Commissioners already have exposure to financial institutions and banks through their investment portfolio but today's move is understood to be the first time they have been involved as a "cornerstone" investor in a new venture.
RBS is expected to disappear as a branch network in England and Wales as a result of the deal, though the group will continue to operate through NatWest.
Staff numbers at the new Willliams & Glyn bank, which currently employs 4,000 through its branches, are expected to increase to 6,000 but many of these will be brought over from RBS to run the operations of the business and will not be new jobs.
Its stock market float is not expected until "beyond 2015", chief executive John Maltby said.
Mr Maltby said the new bank would be "free from the legacy issues hanging over the other banks" and help to stimulate the UK economy with a positive impact on SME lending.
"Our aim is to help restore the faith in business banking," he added. "This bank will be all about doing banking in the right way."
Mr Maltby predicted Williams & Glyn would benefit from new arrangements making it easier for customers to switch accounts.