The dual cooperative protection scheme – comprising the BVR protection scheme and BVR Institutssicherung GmbH – plays a key part in ensuring the stability of the entire Cooperative Financial Network and confidence in the creditworthiness of all its members.

Institutional protection scheme of the Cooperative Financial Network

BVR protection scheme (BVR-SE)

BVR-SE is Germany’s and the world’s oldest deposit guarantee fund for banks that is financed entirely without government support. Right from its establishment in 1934, this system has always ensured that all institutions covered by the scheme have been able to meet their financial obligations – especially toward retail customers holding deposits. BVR-SE is regulated and monitored by the Bundesanstalt für Finanzdienstleistungsaufsicht (BaFin) [German Federal Financial Supervisory Authority].

Since the requirement to establish a legally recognized deposit insurance scheme was introduced by the German Deposit Insurance Act (EinSiG), BVR-SE has been continued as an additional voluntary institutional protection scheme in accordance with section 2 (2) and section 61 EinSiG.

The main responsibilities of BVR-SE are to ensure stability by averting imminent financial difficulties or eliminating any such existing problems at the affiliated institutions and to prevent any negative impact on confidence in the Cooperative Financial Network. To this end, BVR-SE has established a comprehensive preventive management regime including a monitoring system and restructuring management processes. So that it can provide the necessary support in securing these aims, BVR-SE has access to a guarantee fund that is funded by contributions from the member institutions. If necessary, the institutions will also support each other with additional funding (guarantee obligations).

As can be seen from its annual report, BVR-SE was able to fulfill the responsibilities set out in its articles of association – especially its responsibilities as an institutional protection scheme – in 2024. A total of 679 institutions of the Cooperative Financial Network belonged to BVR-SE as at December 31, 2024 (December 31, 2023: 704 members). The decrease stemmed from mergers within the Cooperative Financial Network.

BVR Institutssicherung GmbH (BVR-ISG)

BVR-ISG is an officially recognized deposit guarantee scheme and, since July 1, 2015, has been operating an institutional protection scheme within the meaning of article 113 (7) of Regulation (EU) No. 575/2013 for CRR credit institutions that has been approved by the regulator. By operating the institutional protection scheme, BVR-ISG satisfies its responsibility under its articles of association to avert or eliminate imminent or existing financial difficulties in its member institutions.

To this end, BVR-ISG will initiate any preventive or restructuring action as required, coordinating closely with BVR-SE. Where, in accordance with section 10 EinSiG, BaFin identifies a compensation event in relation to a CRR credit institution that is a member of the BVR-ISG protection scheme, BVR-ISG will compensate the customers of the credit institution concerned in accordance with sections 5 to 16 EinSiG. BVR-ISG thus fulfills the statutory requirements regarding deposit protection for customers.

Together, BVR-ISG and BVR-SE form the Cooperative Financial Network’s dual cooperative protection scheme. The members of the BVR-ISG protection scheme are those CRR credit institutions that also belong to the BVR, are based in Germany, and are affiliated to BVR-SE. As at December 31, 2024, the membership comprised 677 CRR credit institutions (December 31, 2023: 702).

Under section 50 (1) EinSiG, BVR-ISG is subject to supervision by BaFin and to monitoring by the Bundesrechnungshof (BRH) [German Federal Court of Audit] with regard to its responsibilities to compensate depositors in accordance with sections 5 to 16 EinSiG and with regard to funding and target funding levels in accordance with sections 17 to 19 EinSiG.

To the extent possible under EinSiG, BVR-ISG’s organizational and decision-making structures match the organizational and decision-making structures of BVR-SE. A service agreement is in place so that BVR-ISG’s day-to-day business operations can be carried out by the BVR employees who perform the relevant functions for BVR-SE. These include monitoring and assessing risks for all CRR credit institutions that are members of BVR-ISG.

The activities of BVR-ISG in 2024 related to the fulfillment of its responsibilities as defined by law, the articles of association, and regulatory requirements. These activities centered on the risk-based collection of contributions, which is compliant with the relevant guidance of the European Banking Authority (EBA), the management of funds, extensive operational stress tests, and management of the IPS recovery plan in accordance with the Regulation on the Minimum Requirements for the Design of Recovery Plans for Institutions (MaSanV). BVR-ISG can look back on a highly successful year, having not had to take any action to protect depositors or member institutions or pay any compensation in accordance with section 145 of the German Bank Recovery and Resolution Act (SAG) at any time in 2024.

Risk identification and analysis

Basic structures

The Cooperative Financial Network is a decentralized organization made up of legally independent institutions that are linked – through the dual cooperative protection scheme – on the basis of the rules in the statutes of BVR-SE and in the articles of association of BVR-ISG. This decentralized element is in contrast with banking groups that have a parent company at the top of a hierarchical structure. Consequently, the power to make business decisions lies with each individual institution and its indepen­dent Board of Managing Directors and Supervisory Board. This decentralized structure determines the focus of the analytical activities of the dual cooperative protection scheme, which is primarily on overall analysis of the financial risk carriers – i.e. the institutions – rather than on isolated examination of individual risk types and their scope. This fundamental methodological approach ensures that, in establishing that each individual institution’s financial position and risk position are appropriate and its financial performance is adequate, the entire system – i.e. the entire Cooperative Financial Network – as a unit can be considered to be on a sound economic footing.

The dual cooperative protection scheme has systems for identifying and classifying risks and for monitoring the risks of all its members and of the institutional protection scheme as a whole. Risks are rated on the basis of BVR-SE’s classification system, which has been in use since 2003. The aim of this rating process, which is based on the annual financial statements, is to obtain an all-round, transparent view of the financial position, financial performance, and risk position of all members. Rating a bank in accordance with the classification system provides the basis for determining the risk-adjusted guarantee fund contributions of BVR-SE and is also the starting point for preventive management, comprising the monitoring process and ongoing support for an institution in the form of preventive measures. The purpose of monitoring is to identify, analyze, and assess abnormalities at member institutions at an early stage, so that a decision can then be made about whether to include an institution in preventive measures. Preventive measures involve providing intensive support for the institution affected by abnormalities in order to eliminate the identified weaknesses and ensure that it has a strong and sustainable business model, primarily in order to avoid threats to its ability to continue as a going concern.

The results of the classification are supplemented by further analysis and sources of data on an ongoing basis, in particular regulatory reporting data and evaluations of the data collected as part of an annual comparative analysis. This is a data pool that the BVR compiles from data collected from its member institutions and is predominantly based on information from the institutions’ accounting and reporting systems. The data from the annual comparative analysis forms the basis for analyses that use key risk indicators to identify and examine particular abnormalities. In addition, BVR-SE prepares special analyses on specific issues and specific risks.

In accordance with its risk-oriented mode of operation, BVR-SE performs individual bank analyses on institutions of major financial significance to the protection scheme as a whole. This includes applying the concept used to analyze large banks. It thus takes into account the risks resulting from the size category of the affiliated institutions.

To assess BVR-SE’s risk-bearing capacity, probabilities of default are determined on the basis of various stress scenarios and Monte Carlo simulations are used to calculate the possible restructuring amounts. This involves carrying out scenario-specific classifications on the basis of different assumptions (e.g. interest-rate changes, declining credit ratings in the customer lending business).

BVR-SE classification process

The classification system uses eight key figures relating to financial position, financial performance, and risk position to assign the institutions to one of the nine credit rating categories, which range from A++ to D. The classification system is based on quantitative key figures, most of the data for which is taken from the institutions’ audited annual financial statements and audit reports. BVR-SE receives this data from the regional auditing association responsible for the individual institution.

In 2023, the general meeting of members of the BVR adopted changes to the key figures and to the parameterization of the classification process. These changes were applied for the first time in 2024. January 1, 2024 marked the start of a two-year transitional period regarding the method used for determining the BVR-SE guarantee fund contributions. As part of this process, the classifications based on the 2023 and 2024 annual financial statements are being calculated twice, using the legacy method and the new method. The more favorable result will be used to determine the BVR-SE guarantee fund contributions.

Generally, all institutions covered by BVR-SE are included in the classification system. Only a small number of institutions are not included, notably those that are rated separately by an external rating company, e.g. DZ BANK and Münchener Hypothekenbank eG.

The 2024 risk assessment partly drew on the classification process based on an analysis of data from the 2023 financial statements. This risk assessment was supplemented with further up-to-date information and reporting data over the course of 2024.

Overall, the classifications showed a better distribution than in the previous year. At the same time, the spread of classifications also widened slightly. The key figures for financial performance demonstrated a positive trend in terms of income statement line items. Net interest income and net fee and commission income both increased. The administrative expenses ratio improved once again as administrative expenses rose at a slower rate than gross profit. There was a significant positive impact from interest-rate-related valuation effects on own-account investments that ran counter to the effects in the previous year and from the associated decrease in write-downs to the lower of cost and market that were avoided. A higher expense for risk in the lending business, mainly as a result of the macroeconomic slowdown, created a slight negative effect. The robust financial performance created scope to strengthen capital adequacy through profit retention.

Classification of the BVR-ISG contributions

The contributions from the CRR credit institutions that are members of BVR-ISG are calculated on a risk-oriented basis in accordance with the BVR-ISG rules on contributions. The main structural elements and the details of the calculation methodology are drawn from EBA Guidelines EBA/2015/10, in accordance with which deposit guarantee schemes and institutional protection schemes are required to collect risk-related contributions. The EBA revised and finalized this standard in 2023, replacing it with the new Guidelines EBA/GL/2023/02. Application of the new contribution rating requirements becomes mandatory for the first time for the 2025 financial year.

Risk management and monitoring

Preventive management

The aim of preventive management is to identify and counteract adverse economic trends in the member institutions at an early stage, thereby helping to prevent the need for supporting measures and providing impetus for improving the financial situation of institutions in the Cooperative Financial Network. An analysis is carried out of the available data and other information in order to identify institutions with potential issues. Further discussions are then held with the senior management of the institutions in order to agree the measures required to stabilize and improve business performance.

The results of the classification process provide important foundations for BVR-SE’s systematic preventive management. An institution is brought into the scope of this preventive management approach no later than when it is classified as B– or lower on the basis of its annual financial statements. For some years now, however, other key figures (e.g. key figures from institutions’ reporting systems or their financial planning and reporting data) and qualitative information have been added that supplement the classification results so that any abnormalities at institutions can be identified at an early stage. In 2024, this data included the multi-year planning and the institutions’ regular reporting as well as the statutory ad hoc disclosures required pursuant to section 24 (1) no. 4 of the German Banking Act (KWG) and the outcomes of industry-wide stress tests.

Before the prevention phase, the monitoring of conspicuous institutions plays a significant role in the early identification of possible risk situations at institutions. Developments in the real estate markets continued to be particularly significant to this aspect of BVR-SE’s work in 2024. However, the problem was not so much one of decreases in new traditional home finance business with retail customers – the core assets-side business of many cooperative banks – but of increased risk in the commercial finance business. Alongside a handful of initial contacts, a major focus in 2024 was on assessing institutions that were already being supported and were experiencing an accumulation of risk – reflected, for example, in a greater need to recognize impairment losses or even write-offs.

As had become established practice in previous years, the monitoring program once again also reached out to institutions that were not showing any indications of particular risk but that could potentially represent a major risk simply because of the size of their balance sheet. The proportion of these institutions continued to go up, primarily due to mergers.

Restructuring management

As before, the work of the dual cooperative protection scheme in restructuring member institutions is primarily aimed at ensuring, through the provision of supporting measures, that these institutions’ annual financial statements can be prepared on a going concern basis. This also helps to avoid regulatory measures against member institutions. In 2024, some supporting measures were agreed during the year. The measures required are contractually agreed in order to ensure that the bank’s business regains its future viability while accommodating the interests of all members of the Cooperative Financial Network. BVR-SE’s statutes and BVR-ISG’s articles of association provide the legal basis for all actions of the dual cooperative protection scheme.

The ‘Manual for future-proof bank management – guidelines for reorganizing and restructuring cooperative banks’ forms the basis for providing restructuring assistance and carrying out restructuring measures. The principles documented in the manual provide affected institutions with guidance on re-establishing competitive structures, e.g. through recovery, and describe concepts for restoring their fundamental profitability. The aim is for the institutions to complete this restructuring phase within no more than five years. The manual is also specifically aimed at institutions undergoing preventive measures and any institutions that have themselves identified the need for reorganization. In addition, it includes a dedicated section setting out in detail the restructuring steps that need to be carried out in close consultation with the bank undergoing restructuring and the competent cooperative auditors’ association. This section of the manual addresses different potential target institutions separately and can be applied specifically to each individual case.

Over the course of 2024, a mid-single-digit number of institutions required supporting measures due to institution-specific risk factors or weaknesses. No costs were incurred for cases from previous years where risks already covered had materialized or for which a loss allowance had been recognized. These legacy cases are being progressively reduced. There were only a few noteworthy repayments under debtor warrant obligations and other guarantee release obligations.

In 2024, BVR-ISG achieved the target funding level required by law. Further contributions are only required to be paid in if there is an increase in the volume of deposits covered and the returns generated by the fund are not sufficient to meet the additional cover required. Fund assets are held and safely invested in accordance with the relevant EU directive.

Overall, the business performance meant that the capital base of the dual cooperative institutional protection scheme decreased slightly in 2024 due to the aforementioned cases where support was required.

Outlook for the dual cooperative institutional protection scheme

The main influence on the financial performance of the cooperative institutional protection scheme in 2025 will once again be the macroeconomic environment in Germany. This may lead to new restructuring cases, resulting in risks for the dual scheme and demands on its resources. However, these are expected to be lower than in the reporting year. The reduction in fund assets within BVR-SE will be replenished through income from contributions in 2025 and subsequent years with the aim of restoring the asset volume to a target significantly above the 2023 level. A changing regulatory environment for institutional protection schemes could present both a structural risk and a high financial risk to the dual cooperative institutional protection scheme. The dossiers on crisis management and deposit insurance (CMDI) and on the European deposit insurance scheme (EDIS) are of particular relevance in this context. Negotiations regarding the CMDI are at the trilogue stage of the European legislative procedure; EDIS has been put on hold until the CMDI process has been completed. In 2024, a multi-year project was launched at BVR-SE to refine the institutional protection scheme.

Regulatory capital

The consolidated financial statements of the Cooperative Financial Network provide a comprehensive overview of the main capital ratios, particularly the consolidated regulatory capital ratios. These capital ratios are fundamentally calculated in accordance with the CRR provisions using the extended aggregated calculation pursuant to article 49 (3) CRR in conjunction with article 113 (7) CRR. Information concerning the regulatory capital ratios relates to the reporting date of December 31, 2024 and does not include the retention of the profits reported in the 2024 annual financial statements. Profit is retained after the individual institution’s relevant committees have given their approval. This retention of profits will further strengthen capital in 2025.

The cooperative banks hold 85.0 percent of consolidated own funds. Growth in own funds arises primarily from the profits generated, and in most cases retained, by the cooperative banks and network institutions. Rights issues by the network institutions are for the most part subscribed internally and consolidated within the Cooperative Financial Network.

Due to the exclusion of internal exposures within the network in accordance with article 113 (7) CRR, the related amounts are generally not consolidated. The consolidation measures carried out primarily include directly and indirectly held own funds instruments within the Cooperative Financial Network and therefore particularly affect equity investments of cooperative banks and subordinate receivables due to them from the network institutions, especially from DZ BANK. The own funds instruments are consolidated in the relevant own funds categories and in the total risk exposure. The impact of consolidation on the level of the risk-weighted exposure amounts is negligible. The method by which the consolidation is carried out results in a reduction in own funds. The total capital ratio for the Cooperative Financial Network is therefore lower than the corresponding ratio for the sum of all cooperative banks.

Regulatory own funds stood at €139.6 billion as at December 31, 2024 and were thus up by 7.0 percent year on year (December 31, 2023: €130.5 billion). The rise in own funds mainly resulted from the retention of the profits reported by the cooperative banks in the 2023 financial statements.

The institutions in the Cooperative Financial Network primarily use the Standardized Approach to credit risk to determine their regulatory capital requirements. Some institutions also apply the internal Ratings-Based Approach (IRB Approach), including institutions in the DZ BANK Group, Münchener Hypothekenbank eG, and Deutsche Apotheker- und Ärztebank eG. The table below shows the risk-weighted assets of the institutions in the Cooperative Financial Network.

BVR-SE analyzes the regulatory capital ratios of each member institution on an ongoing basis. The institutions themselves are responsible for fulfilling the regulatory requirements at all times, including in respect of bank-specific SREP surcharges.

The total capital ratios of the individual institutions in the Cooperative Financial Network remained solid as at December 31, 2024 (see chart on pages 58–59).

The Cooperative Financial Network reported equity of €150.3 billion as at December 31, 2024 (December 31, 2023: €143.2 billion). It has continually boosted its level of capital in recent years by retaining profit. This trend substantiates the Cooperative Financial Network’s sustainable business model with its broad diversification of sources of risk and income.

The Cooperative Financial Network’s consolidated leverage ratio pursuant to the CRR came to 8.4 percent as at December 31, 2024 (December 31, 2023: 8.0 percent). This is continued proof of the healthy capital adequacy of the Cooperative Financial Network. The rise in the leverage ratio was attributable to the increase of €9.0 billion in Tier 1 capital. The leverage ratio is calculated for the Cooperative Financial Network in accordance with the provisions of article 429 CRR. It is based on Tier 1 capital as determined in the extended aggregated calculation in accordance with article 49 (3) CRR. The risk exposures are determined by aggregating the individual leverage ratio submissions of all the institutions in the Cooperative Financial Network and adjusting them for material internal exposures within the joint liability scheme. The leverage ratio total exposure measure increased by 2.1 percent year on year, rising to €1,602.7 billion.

Normative and economic risk-bearing capacity

Capital is proactively managed to ensure that an institution always has an adequate level of capital. This is achieved with calculations of risk-bearing capacity, in which the available risk capital is compared with the capital risks taken on. Risk-bearing capacity must be examined from two perspectives that complement each other, namely the normative and the economic perspectives. The normative perspective is centered on the institutions having adequate levels of regulatory capital. The economic perspective focuses on the institutions adequately and efficiently allocating their available internal capital across their material risk types.

Capital management is a core management task for all institutions in the Cooperative Financial Network. Pursuant to the Minimum Requirements for Risk Management (MaRisk), the institutions must structure it according to the specifics of their organization, reflecting their complexity, scope of business activities, and size. The cooperative banks’ main risk types in this context are usually counterparty risk, market risk (including interest-rate risk), liquidity risk, and operational risk.

Notwithstanding the challenging economic environment, the Cooperative Financial Network again strengthened its equity position in 2024. Based on internal reporting data, the Cooperative Financial Network’s normative risk-bearing capacity was satisfactory with a utilization level of 83.1 percent as at December 31, 2024 (December 31, 2023: 85.3 percent). In the economic calculation of risk-bearing capacity, the median utilization stood at 45.7 percent of the total economic capital as at December 31, 2024.

parcIT GmbH, the center of excellence for management processes in the Cooperative Financial Network helped the cooperative banks to apply and refine their procedural and calculation methods for risk-bearing capacity. Areas of focus in 2024 included integrating sustainability (ESG) risks into risk management and conducting stress tests. In addition, information on how to account for provisions for pensions and other post-employment benefits and for the present value of risk premiums for internal exposures and securities within the network were added to the risk-bearing capacity manual developed by parcIT. The template used for the parameterization of the adverse scenario in the normative perspective was updated and a revised procedure for strategic planning at the institutions was drafted.

Credit ratings of the Cooperative Financial Network

The Cooperative Financial Network has been awarded a credit rating of AA– from Fitch and of A+ from Standard & Poor’s, in both cases with a stable outlook. The agencies point to the consistently successful business model focused on retail and corporate banking as the reason for the current credit ratings. Capital adequacy is also judged to be above average in terms of quantity and quality. This means that the IPS is able to handle restructuring cases in a manner that we deem appropriate. The rating agencies recognize the Cooperative Financial Network’s ability to build up capital from its own resources by retaining profits. The granular credit structure and high proportion of mortgages in the retail business are the hallmarks of the overall high level of quality in the customer lending business. Funding based on customer deposits remains stable, even in the prevailing interest-rate environment. The dual cooperative protection scheme is seen by the rating agencies as an important connecting link and a crucial element of the risk governance system in the Cooperative Financial Network.

Credit risk

Credit risk is the risk of losses that may arise as a result of the default or deterioration in the creditworthiness of a borrower, issuer, counterparty, or equity investment. As at December 31, 2024, the credit risk-weighted assets of the Cooperative Financial Network amounted to €751.7 billion (December 31, 2023: €738.0 billion), which equated to 91.2 percent of total risk-weighted assets (December 31, 2023: 91.9 percent). This means that credit risk is the most significant risk category for the Cooperative Financial Network’s risk-bearing capacity in the normative perspective.

To assess the creditworthiness of individual borrowers in the customer business, the institutions use segment-specific rating systems. Most of the institutions measure risk in the economic perspective on the basis of value at risk (VaR), which is calculated using a credit-portfolio model. These processes are validated annually at both parameter level and overall model level.

To assess the credit quality of own-account investments, the institutions use segment-specific rating systems and, in some cases, assessments from external rating agencies. In the case of own-account investments too, economic risk is usually measured on the basis of VaR, which is calculated using a regularly validated portfolio model. Furthermore, scenario analysis and stress analysis are regularly used both in the customer lending business and for own-account investments.

Lending to regional retail and corporate customers is a core element of the Cooperative Financial Network’s strategy. This involves the profit-oriented assumption of risk, taking account of the level of equity and pursuing a risk-conscious lending policy. For the institutions in the Cooperative Financial Network, knowledge about customers plays a central role in lending, as does the capacity of customers to meet their obligations. Overall, the Cooperative Financial Network’s customer lending business has a predominantly granular credit structure and a high proportion of loans secured against real estate. The granularity and extensive regional diversification of the Cooperative Financial Network’s business activities in Germany limit the formation of risk clusters.

The Cooperative Financial Network’s lending business grew slightly in 2024. Loans and advances to customers increased by 2.6 percent year on year (2023: 2.4 percent). Long-term home finance remained the principal driver of the growth in lending. Consumers benefited from rising income levels and the slowdown in inflation. Slightly more attractive borrowing costs and higher purchasing power led to an increase in demand for mortgages. Residential property prices stabilized in 2024. On average for the reporting year, prices edged down only marginally, following a sharp decline that had begun in mid-2022. According to data from the Verband deutscher Pfandbriefbanken (vdp) [Association of German Pfandbrief Banks], prices for owner-occupied housing went down by 1.6 percent in 2024, compared with a drop of 4.1 percent in the previous year. Prices also fell less sharply in the commercial real estate market, which recorded a year-on-year decrease of 5.4 percent (2023: decrease of 10.2 percent).

The growth in the local cooperative banks’ corporate banking business was predominantly driven by lending to companies in the service and energy sectors. Because of their regional roots, the local cooperative banks regularly assist with projects in the renewable energies market and provide financial support to companies in relation to projects for increased energy efficiency and for power generation from renewable sources. The DZ BANK Group’s lending business was primarily focused on entities within the Cooperative Financial Network, on corporate banking, and on real estate finance in the reporting year.

The number of insolvencies in 2024 was higher than in the previous year. According to estimates by Creditreform, personal insolvencies went up by 8.5 percent to 72,100 in the reporting year. Meanwhile, figures published by the German Federal Statistical Office show an even steeper increase of 22.4 percent in corporate insolvencies in 2024. In the retail customer business of the institutions in the Cooperative Financial Network, insolvencies were mainly driven by the higher cost of living and rising credit interest rates. Key factors in the corporate customer business included high energy prices, excessive bureaucracy, political uncertainty, muted consumer spending, and the phasing-out of exemptions that had been introduced during the coronavirus pandemic. Companies in the transportation, warehousing, construction, and hospitality sectors were particularly affected.

Work to refine our methodologies in 2024 focused on the further development of the credit portfolio model for own-account investments and of loss estimates in the customer business. A new procedure for real estate customers was added to the segment-specific rating systems in order to enhance the coverage of all relevant segments in the lending business.

The expense for loss allowances amounted to €4.9 billion in 2024 (2023: €1.8 billion) and was mainly attributable to the larger addition required for loss allowances as a result of the gloomier economic conditions and the increase in corporate and personal insolvencies over the course of the reporting year. According to the internal reporting, the Cooperative Financial Network’s NPL ratio (non-performing loans as a proportion of the total lending volume) rose to 1.9 percent as at December 31, 2024 (December 31, 2023: 1.5 percent). This rise in the NPL ratio was attributable to the increase in the volume of NPLs. Nevertheless, the NPL ratio remains at a low level. In summary, the institutions in the Cooperative Financial Network operate a healthy lending business overall.

Market risk

Market risk is the risk of losses that could arise from adverse changes in market prices or in factors that influence prices. Market risks are generally grouped into the following categories: equity risk, interest-rate risk, currency risk, and commodity risk. As at December 31, 2024, the risk-weighted assets of the Cooperative Financial Network for market risk amounted to €12.1 billion (December 31, 2023: €10.3 billion), which equated to 1.5 percent of total risk-weighted assets (December 31, 2023: 1.3 percent).

The institutions in the Cooperative Financial Network chiefly use VaR models to measure and manage their market risk. They also use various scenario analyses (planning, adverse, and stress scenarios), for example to produce their capital plans and create transparency about the impact of developments in the markets.

The assumption of market risk – particularly interest-rate risk – has a significant influence on the institutions’ financial performance. As in previous years, the largest proportion of net interest income was generated from net interest margin contributions in the customer business.

Following sharp interest-rate hikes in 2022 and a general sideways trend in interest rates in 2023, the central banks of many major economies began to lower their base rates in 2024. Longer-term yields, as measured by ten-year Bunds, went up year on year. However, yield movements remained volatile during the reporting year. The outlined conditions caused the inversion of the yield curve to revert over the course of 2024. In 2024, net interest income in the Cooperative Financial Network increased by 0.9 percent compared with the previous year.

The cooperative banks have a suitable system for managing market risk in the economic perspective. This process, the present-value market risk model, was further refined by parcIT GmbH in 2024 and is validated at regular intervals. Present-value models for measuring market risk are also used by the institutions in the DZ BANK Group, Münchener Hypothekenbank eG, and Deutsche Apotheker- und Ärztebank eG. The institutions within the Cooperative Financial Network calculate their market risk based on a one-year horizon and a confidence level of 99.9 percent.

Liquidity risk

In the Cooperative Financial Network, liquidity risk is managed with the aim of ensuring that a bank can meet its payment obligations at all times. In accordance with the cooperative principle of subsidiarity, each cooperative bank is in charge of its own liquidity management and risk management. Compliance with the liquidity coverage ratio (LCR) and net stable funding ratio (NSFR), which are regulatory normative key figures, is a core aspect of liquidity analysis for the institutions in the Cooperative Financial Network. The institutions also deploy business management tools, for example to determine liquidity risk and any changes in liquidity levels. Stress tests are carried out too.

For many years, the Cooperative Financial Network has had a reliable liquidity structure that is deemed crisis-resistant. The loan to deposit ratio of the Cooperative Financial Network is 99.0 percent (December 31, 2023: 99.3 percent). The basis for this lies in the diversifying, risk-mitigating effect created by the stable and granular business structure of the cooperative banks and, in particular, in the institutions’ traditional method of obtaining funding through customer deposits. This reflects the recognition by customers of the Cooperative Financial Network of the effectiveness of the institutional protection provided by BVR-SE and BVR-ISG, which is particularly aimed at safeguarding deposits and goes beyond the statutory requirements regarding deposit protection.

The liquidity of the Cooperative Financial Network is characterized by the strong portfolio of deposits from retail and corporate customers. This deposit portfolio has an extremely granular structure. Excess liquidity is invested using the Cooperative Financial Network’s internal market system at DZ BANK. As the central institution, DZ BANK is responsible for offsetting liquidity peaks that arise by pooling the excess liquidity from individual cooperative banks and balancing out differences in their liquidity levels. BVR-SE shares information about the liquidity situation of the individual institutions with DZ BANK on an ongoing basis. In addition, BVR-SE monitors the liquidity situation of the individual institutions and of the network as a whole as part of its statutory responsibilities.

The liquidity situation at the institutions remained stable in 2024. The consolidated LCR for the Cooperative Financial Network stood at 161.6 percent as at December 31, 2024 and thus held steady compared with the figure of 162.0 percent as at December 31, 2023.

The NSFRs were also monitored as a way of measuring the institutions’ ability to meet their payment obligations over the longer term. The median NSFR for all institutions in the Cooperative Financial Network exhibited a very low level of volatility during the reporting year. As at December 31, 2024, this figure came to 121.1 percent (December 31, 2023: 120.5 percent), remaining at the largely stable level seen over a longer-term observation period. Once again, the Cooperative Financial Network’s liquidity structures proved resilient even during a challenging year characterized by a rapidly changing market environment.

Operational risk

Based on the definition used by the banking regulator, operational risk is the risk of losses arising from inadequate or failed internal processes, personnel, or systems, or from external events. As at December 31, 2024, the risk-weighted assets of the Cooperative Financial Network attributable to operational risk amounted to €57.0 billion (December 31, 2023: €52.1 billion), which equated to 6.9 percent of total risk-weighted assets (December 31, 2023: 6.5 percent). The level of reputational risk for the Cooperative Financial Network increased in 2024 as a result of the restructuring cases that emerged and the associated press coverage. BVR is addressing this issue systematically with the Geno Next Level project, which is primarily focused on optimizing BVR-SE’s processes.

The cooperative banks’ internal control system (ICS) is aimed at reducing operational risk. It comprises an internal management system and an internal monitoring system that, in turn, consists of monitoring mechanisms that are built into processes as well as cross-process monitoring mechanisms. The various mechanisms include procedural instructions, application of the principle of separation of functions, the use of standardized contract templates that have been reviewed by a legal expert, and the appointment of IT security, compliance, data protection, and anti-money-laundering officers. In addition, business continuity plans for failure of technical equipment are in place.

Internal control processes are designed to ensure that material operational risks are identified, analyzed, and assessed on a regular basis. The institutions can use guidelines to conduct a systematic risk assessment in keeping with market standards. The institutions record any loss events in their own database. Based on the outcome of the loss event analysis, internal procedures are adjusted and preventive safeguards implemented as necessary.

Operational risk is measured in consideration of the business model of the individual institution. parcIT GmbH supported the cooperative banks with an update of the process map and additions to the reporting for the loss event data pool. Most institutions use lump sums for quantification, while some use VaR approaches.

Customer membership is a distinctive feature of the cooperative banks’ business model and one that is ideally suited to conveying the values of the cooperative idea. It offers the cooperative banks and product suppliers in the Cooperative Financial Network the opportunity to differentiate themselves from rival banking groups. The extensive branch network allows the institutions in the Cooperative Financial Network to continue to reach a wide range of customers in a way that online banks cannot. Strong customer loyalty results in measurable economic benefits, such as income growth for the institutions in the Cooperative Financial Network and protection of their market share. In our view, the cooperative principle has received a boost – partly because the coronavirus pandemic and geopolitical tensions have resulted in a trend toward regionalization – that creates new opportunities for the cooperative banks to strengthen their competitive position.

Sustainability is firmly enshrined in the DNA of the cooperative identity. Financial success and socially responsible business are inextricably linked for the institutions in the Cooperative Financial Network and are always geared toward working together to support the common good. In its sustainability guidelines, the Cooperative Financial Network has made a commitment to the Paris climate goals and the UN’s global sustainable development goals (SDGs). It has also set itself the objective of playing a significant role in creating sustainable forms of employment in the regions and a climate-friendly economy.

Even in the digital age, the business model of the institutions in the Cooperative Financial Network puts people and their wishes and objectives first. The aim is to forge ahead with digitalizing the cooperative banks’ products and services and to offer all of the touchpoints that customers want (local branches as well as online and hybrid banking).

The advance of digitalization and automation, along with the expanded availability of omnichannel products and services on the new sales platform, is designed to allow the Cooperative Financial Network to take account of the changes in customer behavior and to adjust and strengthen the overall business model accordingly. The focus is on the comprehensive omnichannel presence and thus the implementation of efficient processes at all levels. Nonetheless, personal contact remains a key component of the customer relationship, alongside high-quality advice and the possibility for customers to choose how they would like to communicate with their bank. The Cooperative Financial Network is therefore establishing a variety of different customer touchpoints and giving its members integrated access to all information and services through all the relevant channels, whether in branch or via digital media.

By marketing new digital payment services, implementing an online inquiry process for all of the main products, and offering digital membership, banks can address customer needs and should be able to attract new customers. This also enables them to target young, tech-savvy customers and members. The BVR believes that, by establishing the smart data company Truuco, it has created the structures that allow highly tailored recommendations to be created for customers based on smart data. Furthermore, the new strategic equity investment and company-building unit Amberra, which invests in relevant start-ups and develops new business models, allows ecosystem offerings to be provided that go beyond banking products in the traditional sense.

We believe that the downward trend in interest rates that set in from mid-2024 presents opportunities for growth for the institutions’ lending business, especially in connection with an upturn in real estate finance. This will positively affect net interest income, not least because market-related pressures on interest rates on liability-side products are expected to ease. The management of interest-rate risk remains of crucial importance in this environment. However, macroeconomic and geopolitical risks are currently at high levels, and the actual effect of changes in the interest-rate environment on earnings in 2025 will depend on the extent to which these risks materialize.