* Fourth-largest Austrian bank excused from EBA recap process
* FMA says restructuring reduces bank's international role
* Step reduces risk Volksbanken could need more state aid (Adds quotes and background)
By Michael Shields and Angelika Gruber
VIENNA, Jan 20 Austria's Volksbanken AG (OeVAG) has been excused from meeting onerous European capital targets by mid-year because it is in the midst of a sweeping reorganisation, the country's FMA markets watchdog said.
"OeVAG no longer has to present a recapitalisation plan on the level of the EBA (European Banking Authority)," an FMA spokesman said.
The EBA had insisted major banks submit plans by Friday on how they will meet tougher capital standards.
The move means Austria's fourth-largest bank has more time to shore up its stretched balance sheet and reduces the risk it might need more state aid soon.
The FMA spokesman noted that the EBA had already seen OeVAG's recapitalisation process as pro-forma because it is selling major assets -- primarily its VBI eastern European arm to Sberbank -- to shrink its risk.
"At the end of the process OeVAG will be active only regionally. With the sale of VBI to Sberbank, OeVAG will no longer be a systemically relevant cross-border bank," he added.
An OeVAG spokesman said the bank would continue its revamp to focus on mid-sized customers in Austria.
Sources close to the matter had told Reuters last week that Volksbanken could escape the EU's core capital target this year by closing the VBI sale within weeks.
Loss-making Volksbanken, which failed the EU stress tests of big banks last year, had said it would struggle to hit the EBA target for key banks to have core Tier 1 capital of 9 percent of risk-weighted assets by mid-2012.
Volksbanken would have needed an extra 1.05 billion euros ($1.35 billion) in capital to reach the EBA goal. Its core Tier 1 ratio is now around 5.5 percent.
Ratings agency Fitch had said last month it was "exceedingly likely that in order to meet the EBA target ... OeVAG will require additional capital, either from within the Volksbanken sector or the Austrian government".
Volksbanken has been unable to start repaying on schedule the 1 billion euros in non-voting capital it got from Austria during the financial crisis, which means the government had the option to convert the aid into equity.
But Finance Minister Maria Fekter has said she would prefer not to go that route and nationalise a third bank.
The FMA gave no information about the other Austrian banks involved in the EBA exercise, Erste Group Bank and Raiffeisen Bank International.
BAWAG PSK, Austria's fifth-biggest bank, said it had not had any discussions about whether it could be involved in European regulators' next capital exercise. ($1 = 0.7757 euros) (Writing by Michael Shields; Editing by Will Waterman)
Our top photos from the past week.