Cooperative banks, especially Volksbanken, are considered stable because of their regional roots and their financing of small and medium-sized enterprises (SMEs). However, several cases show that risk management and controls are not keeping pace everywhere, while at the same time the economy is slowing down their core business. Discussions with industry experts also reveal that the deposit protection fund has to intervene more frequently, and this is increasing concerns about a chain reaction. Many cooperative banks are also experiencing a rapid erosion of trust when individual institutions deviate from their established practices. (focus: 27.12.25)
Cooperative Banks and Deposit Protection Funds: When the “Prevention Bank” Has to Bail Out More Often
The deposit protection mechanism of the Federal Association of German Cooperative Banks is considered a safeguard, yet it is increasingly becoming a crisis manager. A “restructuring” is underway at the Volksbank Braunschweig-Wolfsburg (“Brawo”), signaling a precarious situation despite its large balance sheet total. Furthermore, when a large institution falters, the risk of contagion for smaller ones increases.
The Volksbank Dortmund-Nordwest demonstrated how serious this can become when it miscalculated its real estate investments. Losses amounted to around €280 million, exceeding equity, forcing the association to intervene. Critics saw this as acting outside the traditional logic of regional banks, thus highlighting the quality of risk management. In Düsseldorf-Neuss, fraud also brought a bank to its knees when around €100 million flowed to Turkey due to a lack of effective auditing procedures.
SMEs and the Economy: Why Lending is Weaker
The economic downturn is hitting SMEs particularly hard, and this is precisely where cooperative banks traditionally have the closest relationship with their customers. Many family businesses are postponing investments, resulting in a noticeable decline in loan demand. In a survey of the sector, only 63 percent of SMEs plan any investments at all in the next six months.
For numerous institutions, this means that lending is “stagnating at a slightly lower level than in 2024.” This results in a lack of growth in their core business, while earnings expectations remain unchanged. This gap creates incentives because individual decision-makers seek sources of return that don’t fit the traditional profile. Small and medium-sized enterprises (SMEs) expect reliability, but without disciplined risk management, this promise quickly evaporates.
Risk Management in Practice: Brothel Properties, Football Financing, and Drastic Cutbacks
The case of VR-Bank Bad Salzungen serves as a textbook example of a failure of oversight. According to media reports, the institution invested in real estate in Oberhausen, including brothels, which were purchased and leased in 2021 and 2022. Simultaneously, the bank developed football financing programs and hired an exclusively appointed “football expert” to manage loans and investments related to professional clubs.
Investigations against management had been underway since 2018 on suspicion of embezzlement and inappropriate business practices, and in December 2023, the regulatory authorities intervened. The executive board was removed from power, the supervisory board resigned en masse, and two special administrators assumed control. Subsequently, the bank reported retrospective losses of approximately €280 million for 2022 and 2023, halved its workforce, and significantly reduced its balance sheet total, while the deposit guarantee scheme had to provide support. This contrast is particularly dangerous for cooperative banks, as their brand image is based on solidity.
Guarantee Funds, Interconnections, and Pressure for Reform: What Needs to Change Now
In Bavaria, too, we see how costly missteps can be. Cooperative banks had to contribute around €100 million to cushion the near-collapse of the agricultural cooperative BayWa after the company overextended itself with global projects. Such cases strain the guarantee fund, and at the same time, political and public pressure is mounting.
Critics also warn of a mechanism that creates perverse incentives. If the guarantee fund intervenes too early, it creates the impression of a tacit guarantee, and risky strategies are not sanctioned harshly enough. Industry experts are therefore calling for clearer intervention rights, earlier responses to warning signals, and fewer personnel overlaps. In this context, it is also striking how closely mandates and partnerships are sometimes intertwined, which complicates oversight and undermines credibility.
Whether further institutions will fail depends on the economic climate and interest rate environment, but the series of instability could continue without reforms. Cooperative banks must therefore combine their culture of close relationships with measurably stricter controls to regain their credibility and stability. Cooperative banks, in particular, need stringent standards, because this is the only way to maintain trust within the network.