There are plans to tighten the rules governing the joint guarantee scheme, including introducing a new code of conduct and strengthening intervention powers, to support banks in crisis more quickly and effectively.
Outside the few towns where it serves small businesses and individuals as their local cooperative lender, VR-Bank Bad Salzungen Schmalkalden was never a household name in Germany.
It gained some recognition seven years ago when it bragged about hiring Stefan Effenberg, a former star player in Germany's national soccer squad, to boost its business with sports clubs, earning it the nickname Effenberg Bank.
The marketing stunt, however, wasn't the only unusual business at the lender. Two years ago, it emerged that the value of some of its loans and other assets was overstatedBloomberg Terminal by hundreds of millions of euros. Other cooperative banks stepped in to stabilize the firm, whose property holdings included buildings that housed brothels, according to people familiar with the matter.
The costly rescue of the lender, which has since been renamed, is one of several in recent years that have left the cooperative banking sector with a surge in bad assets and triggered a debate over how to improve governance and mitigate moral hazard. The group of about 650 mostly small lenders sold more than €1.2 billion ($1.4 billion) in unwanted loans to their joint bad bank last year, the most in more than two decades.
The increase, from €230 million in the prior year, "was primarily due to the restructuring banks in our group that had to be supported," said René Kunsleben, who heads the bad bank known as BAG Bankaktiengesellschaft.
The sector's troubles reveal another pressure point in Germany's fragmented financial system as it works through the overhang from years of negative interest rates. The process has also left some occupational pension funds nurturing steep losses and put a spotlight on governance and control issues there.
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With a combined balance sheet of more than €1.2 trillion, local cooperative banks are a key pillar of the German banking sector, though the individual lenders are usually small. To shore up confidence, they support each other through a joint guarantee system in times of crisis, with lenders that get into trouble often being merged with neighboring institutions from within the group. Problematic loans, real estate and other investments are often transferred to BAG.
Over the last two years, several cooperative banks had to be supported because of real estate investments. Raiffeisenbank im Hochtaunus was mentionedBloomberg Terminal in a list of creditors to Signa Development Selection, which was part of Rene Benko's collapsed property empire. Another cooperative lender, Volksbank Dortmund-Nordwest, was stabilized when its real estate investments wentBloomberg Terminal sour, Bloomberg has reported.
Volksbank Düsseldorf Neuss made headlines when it revealedBloomberg Terminal in 2024 that it was facing a €100 million claim after becoming a victim of "fraudulent activities." It later said that it reached a solution, without giving details. There are now plans to combine the lender with a neighboring institution.
The failures have alarmed Germany's top financial watchdog. In a reportBloomberg Terminal published in 2025, BaFin said that despite overall satisfactory earnings, "there were a small number of extremely expensive recoveries at cooperative banks. This was due to errors in the banks' risk management and governance."
"There was mismanagement, irresponsible risks were taken," Marija Kolak, the president of Germany's cooperative banking sector, said in an interviewBloomberg Terminal earlier this year. She now spearheads efforts to tighten the rules that govern the joint guarantee scheme.
Kolak wants to support banks in crisis more quickly and effectively, strengthening the intervention powers of the joint guarantee scheme. Some banks may be subject to higher contributions, and lenders could even be kicked out of the mutual support community for good.
There are also plansBloomberg Terminal to introduce a new code of conduct, spelling out expectations when it comes to rights, duties, and responsibilities of management and supervisory board members in all firms within the group.
According to Kunsleben, the amount of loans sold to BAG last year was the highest since 2003, when €2.3 billion in loans were shifted. As a bad bank, BAG has more time to extract value from troubled assets, meaning liquidating collateral is not always the best solution, he said. With construction projects, for example, there is the option of completing them or not doing anything at all.
"BAG can afford to ride out a market downturn until demand picks up again, given its ownership structure," Kunsleben said. "That is advantage for the group".
BAG's roots go back to 1987, after a cooperative lender ran into difficulties. Its liquidation led to the creation of center for handling stressed assets. The bad bank currently employs around 200 people.
For this year, Kunsleben expects BAG to buy more loans, real estate and investments, "but not on such a large scale as in 2024 or 2025".
