Pope Francis has approved a reform proposal keeping the Vatican bank operative, ending a year of speculation over whether the pontiff would close the institution that has embarrassed the Church for decades.

The bank's stated purpose is to manage funds for Roman Catholic orders of priests and nuns, charitable institutions and Vatican employees and retirees. But it has been dogged by episodes of malpractice by people authorised to hold accounts there and murky dealings with Italian financial institutions.

"The IOR will continue to serve with prudence and provide specialised finiancial services to the Catholic Church worldwide," the Vatican said on Monday in a statement annoucing Francis had approved recommendations for the future of the bank, known as the Institute for Works of Religion (IOR).

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Monsignor Nunzio Scarano, a former senior Vatican accountant who had close ties to the IOR, is currently on trial accused of plotting to smuggle millions of dollars into Italy from Switzerland to help rich friends avoid taxes.