Antonio Fazio, the Bank of Italy governor, yesterday defended his conduct in a bank takeover battle before a committee of government ministers, but was told the central bank still needed to make far-reaching internal reforms.

An unrepentant Mr Fazio insisted at the three-hour meeting that he had acted correctly and without bias in his handling of two rival bids, one Italian and one Dutch, for Banca Antonveneta, Italy's ninth-largest bank.

But according to one person at the meeting, Domenico Siniscalco, finance minister, told Mr Fazio that his explanations were not enough to restore the central bank's credibility.

As a result, Mr Siniscalco plans to propose several major institutional reforms at a cabinet session next Friday.

These include changes to the Bank of Italy's ownership structure - it is majority owned by the private sector banks it regulates, an anomaly that has remained since the state banks were privatised in the 1990s - and a fixed term of office for the governor. The list also includes an end to the practice whereby the governor reserves all important decisions for himself.

The Antonveneta affair has rocked the Italian political and business world and put the Bank of Italy - one of the country's proudest and most professional institutions - under unprecedented scrutiny.

Mr Fazio is under fire for allegedly abandoning his role as the impartial regulator of Italy's banking sector and favouring Banca Popolare Italiana, a bank with whose chief executive he was on friendly terms, in its bid for Antonveneta.

Gianpiero Fiorani, BPI's chief executive, has been suspended from his duties by magistrates investigating possible criminal offences in the affair, and Italian regulators have frozen the stakes that BPI and its allies built up in Antonveneta.

Defending his actions yesterday, Mr Fazio told the government committee that there had been no doubt BPI's capital ratios were large enough to permit its takeover offer for Antonveneta.