Just days after the arrests, Paolo Cipriani, the director of the bank, and Massimo Tulli, his deputy, resigned. They gave no explanation for doing so but appeared to be the first casualties of Pope Francis's determination to reform the secretive institution and clean up its murky finances.
The Vatican has warned that the investigation into the priest nicknamed "Monsignor 500" for his penchant for flashing a wallet bulging with 500 notes, "could be extended to additional individuals".
The scandal could hardly have come at a worse time - it broke just as the Vatican had put in place a whole new apparatus to enact reforms at the bank. Those reforms are being led by the new president, Ernst von Freyberg, a German lawyer with an aristocratic pedigree stretching back nearly 1000 years. In a sign of his firm, no-nonsense approach, he gave up the large office usually occupied by the organisation's presidents to staff from the US-based regulatory consultant Promontory Financial Group, which is working to bring transparency to the bank's activities.
"I became homeless - I gave them my office," he remarked cheerfully in a smaller, more modest office he now uses, before reflecting more seriously on the progress his team has made.
"Am I content? Not yet. Our reputation has been blurred by the Scarano case and it was a shock. Right now we are in the middle of it."
Von Freyberg took up his post in February after his predecessor, Ettore Gotti Tedeschi, was abruptly dismissed last year after being accused of neglecting basic management responsibilities at the bank, which manages more than 7 billion of Catholic Church funds and last year made a net profit of 86.6 million.
The extent of the challenge facing the German banker is revealed by a survey of media reports about the bank in recent times. A multi-coloured graph shows that the words most associated with the Pope's bank are "scandal", "crisis", "fraud", "Mafia" and "bribes" - not a very encouraging summary for an institution that is meant to be doing God's work.
The peculiarities of the bank are everywhere to be seen. Just getting inside it is no easy matter. First, you have to enter the Porta Santa Anna, one of the gates that leads into the Vatican City State, patrolled by members of the Swiss Guard in jaunty black berets and blue tunics.
After being met by a bank representative, visitors are led through a stone doorway crowned with a papal coat of arms. Inside are the pot plants, photocopiers and marble-topped tables that you might expect in a prestigious private bank, but also bronze busts of popes and portraits of Pope Francis and his predecessor, Benedict XVI.
The boardroom looks much like any other apart from a porcelain statuette of the Virgin Mary in one corner, a wooden crucifix on the wall, and on the ceiling an allegorical fresco depicting the Catholic Church, represented by a Marian figure in flowing robes, being presented with gold and jewels as a female figure representing Justice looks on serenely.
In an ante-room is a letter, signed by Pope Pius XII, that officially founded the bank in 1942, during the darkest days of Fascist rule in Italy.
"At that time, when it was possible that the Germans would come into Italy, there was an increasing effort by the church to have its own deposit box, so to speak, because the world around it was crumbling," said bank spokesman Max Hohenberg. "That's how it became a financial institution - to protect church assets in Europe at a time when it was under threat from both the Nazis and the Communists."
The day-to-day business of the bank takes place in a huge circular room consisting of a half-moon of cashiers' desks. Priests in clerical collars and black suits wait patiently alongside elderly nuns to withdraw money or check the balance of their accounts.
They don't have to come far - the bank is conveniently squeezed between the barracks of the Swiss Guard, the printing press for L'Osservatore Romano, the Vatican's daily newspaper, and the back of the Apostolic Palace, where Pope Francis was due to take up residence until he decided instead to live in the Vatican's "hotel" for visiting clergy.
"In financial terms, it's a very simple institution. It takes deposits and safeguards them for a defined group of clients, in first place the Holy See, and it offers international payment services," said Hohenberg.
The bank's failure to keep up with the stringent banking checks introduced after the terrorist attacks of September 11, 2001, left it vulnerable to crimes such as money-laundering. It is now having to play catch-up.
But while the presidents of most banks answer to shareholders and a board, von Freyberg and his team are accountable not only to two heavyweight commissions of cardinals, but also ultimately to the leader of the world's 1.2 billion Catholics, God's representative on Earth.
"The Holy Father is looking very closely at what is happening here," said Hohenberg. No pressure, then.
