German regional banks face strain as Volksbank Brawo troubles deepen

German regional banks are facing strain as Volksbank Brawo's troubles deepen, highlighting growing issues among the country's cooperative banks. Several lenders have expanded into riskier loans and investments, leading to concerns over potential asset write-downs and the need for support from the cooperative banking sector's rescue fund.

The cooperative banking sector, which includes over half a dozen German cooperative lenders, had a €1.7 trillion balance sheet last year, with DZ Bank contributing a significant portion. DZ Bank expects its contributions to the rescue mechanism to nearly double this year, as troubled assets are increasingly being transferred to the sector's joint bad bank, BAG Bankaktiengesellschaft.

The broader sector remains profitable, but reforms approved in June aim to strengthen oversight and enable earlier intervention when lenders encounter financial problems.

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