Antonio Fazio's resignation as governor of the Bank of Italy is welcome, if overdue. Successive disclosures since the summer over his alleged role in trying to keep Banca Antonveneta in Italian ownership have shown him unfit to head the central bank.

It has been clear for some years that Mr Fazio has been using his position as regulator of Italy's banking system to fend off bids from abroad. During more than 12 years of regulating mergers and acquisitions, no large bank has fallen into foreign hands. The banking sector he leaves remains underdeveloped, inefficient and costly in comparison with others in Europe.

Mr Fazio finally came unstuck when ABN-Amro of the Netherlands bid for Antonveneta, one of Italy's smaller banks. After he had acted in a way his critics charge handed control to Banca Popolare Italiana, allegations emerged in July that he had an unhealthily close relationship with Gianpero Fiorani, BPI chief executive.

Mr Fazio refused to quit, despite pressure from Silvio Berlusconi, the prime minister. The Northern League, part of the ruling coalition, stood by him and blocked a unified cabinet response. More important, he could not be sacked: Bank of Italy governors are appointed for life. Only the governing council could sack him and its 13 members - many appointed by the governor - backed him in September.

It then emerged that prosecutors were investigating Mr Fazio over the BPI affair. Last week, it was alleged that Mr Fiorani had given expensive presents to Mr Fazio, his wife and children. Then came the final straw: it was disclosed that he was under investigation by magistrates for insider trading, though not for personal profit.

Mr Fazio's determination to cling on to office has undermined the reputation of the Bank of Italy, one of the country's most respected public institutions. It has also embarrassed the European Central Bank on whose board he sits. And it has exposed the weakness of the government in dealing with a problem that has compromised Italy's international reputation.

Merely replacing Mr Fazio will not be enough, however. The affair has exposed weaknesses in the central bank's governance and Italy's banking regulation. Reform is essential.

The elements must include financial independence for the Bank of Italy, which is owned by the banks it regulates. Its governor should serve for a fixed term and be accountable to a board not of his or her choosing. Regulation of mergers and acquisitions should pass to the anti-trust authority and be conducted more transparently.

Only with such a thorough shake-up of the system can the Bank of Italy's reputation be restored. Independence can be reconciled with accountability, as other central banks have shown. It cannot be preserved, however, if those who run central banks appear to regard themselves as above the law.