The European Central Bank has told Austria's Volksbanken group to strengthen its balance sheet by next July as it rushes to wind down its flagship unit and plug a capital hole exposed by this year's health checks on euro zone banks.

Owners of part-nationalized Volksbanken AG (VBAG) (OTVVp.VI) on Tuesday approved in principle plans to turn the group's lead institute into a "bad bank", relieving pressure on other regional lenders in the Association of Volksbanks that own 52 percent of VBAG.

By relinquishing its banking license next year VBAG would be freed from minimum capital requirements for banks, and simply run off its remaining assets over the years to come.

It said that the ECB had now given the Association a draft target to maintain a common equity tier 1 (CET1) capital adequacy ratio of 14.63 percent of risk-weighted assets from July 26, 2015. The Association had a CET1 ratio of 11.5 percent at the end of September.

Volksbanken officials said the preliminary target was based on end-2013 data which did not reflect the drastic overhaul plan unveiled in October and the scheduled sale of its problematic Romanian unit in the first half of next year.

They gave no figures on how the group's CET1 ratio would look taking those factors into account.

VBAG has said its conversion into a "bad bank" will trigger around 500 million euros in writedowns this year and wipe out more than half its capital.

On Tuesday it put its expected 2014 loss at around 750 million euros ($913 million).

Volksbanken, in which the state has a 43 percent stake after a 2012 rescue, still needs regulatory approval from the European Commission, ECB and national authorities for its wind-down.

With the state opposed to injecting more aid on top of the 1.35 billion euros Volksbanken has already got, and the regional banks unable to chip in, it remains unclear who would foot the bill should the ECB insist on a capital top-up.

The bank said its management board had told a shareholder meeting "that currently neither VBAG's core shareholders nor third parties are prepared to provide capital to VBAG".

VBAG shareholders include DZ Bank [DETGNY.UL] with 3.8 percent and Raiffeisen Zentralbank [RZB.UL] with 0.9 percent.