By removing the asset management functions Vatican officials hope to cut out the source of the much of the scandal that has plagued the bank since the 1980s when Roberto Calvi, dubbed "God's banker", was found hanged under Blackfriars Bridge in London.
Jean-Baptiste de Franssu, former chief executive of Investco Europe, is on the shortlist to be named the new head of the Vatican bank in an attempt to boost its reputation for financial discipline, according to a person familiar with the matter.
"We cannot have any more scandal," said a person close to the pope.
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The pontiff's plan to slim down the bank comes after a series of revelations about mismanagement which insiders suggest may have been partly responsible – together with the mounting clerical sex abuse scandal – for the unprecedented decision of Pope Benedict to step down in February last year.
In January, Italian prosecutors charged Monsignor Nunzio Scarano, a top cleric employed by APSA, the administration of the patrimony of the Holy See, which looks after the Vatican's vast real estate and sovereign bonds investment portfolio, for laundering fake donations through the IOR over several years.
In May, the Vatican was forced to deny that Cardinal Tarcisio Bertone, who retired last year from the second most powerful position in the Vatican hierarchy under Pope Benedict, was under investigation by Vatican magistrates for approving €15m loan to the production company of a friend and member of Opus Dei.
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A bank spokesman said that losses from the loan contributed to a plunge in 2013 profits for the Vatican bank, full details of which will be released week. Cardinal Bertone has denied any wrongdoing and said he is being harassed by the media.
The drip-feed of embarrassing news from the bank had led some papal advisers to push for its closure. But Pope Francis in a sparsely worded statement in April indicated that the bank would stay open albeit with reduced functions.
"IOR will continue to serve with prudence and provide specialised financial services to the Catholic Church worldwide," he said.
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Pope Francis has already sought to clean up the Vatican's financial system, establishing a powerful secretariat for the economy and a central bank. The move is intended to give the world's smallest city state a financial governance structure more akin to a country and help it shake off pariah status that had seen the bank placed on European money-laundering blacklists and probed by the Italian banking regulator.
The Pope appointed international bankers as advisers. Peter Sutherland, former attorney-general of Ireland and chairman of Goldman Sachs International, sits on the advisory board of Apsa.
Under the bank's German chairman, Ernst Von Freyberg, who is expected to step down this week, the IOR has shut hundreds of accounts. The total number of accounts is now 18,900, according to people familiar with the matter.
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Several hundred transactions have been investigated by the Vatican's newly created financial watchdog, which is being run by Rene Bruelhart, a Swiss lawyer who oversaw the crackdown on money laundering in Liechtenstein.
Vatican insiders say one consequence of Pope Francis's shake-up of the bank and the old Vatican bureaucracy is the proliferation of advisers – there are two advisory committees for IOR alone – which ultimately may end up creating a new administrative headache.
Pope Francis met victims of clergy sex abuse from Britain, Ireland and Germany on Monday and made an unprecedented request for their forgiveness "for the sins of omission on the part of church leaders who did not respond adequately to reports of abuse".
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