Impact of the 2022 interest-rate shock on cooperative banks in Germany : a case study

Between July and December 2022, the European Central Bank (ECB) raised its key interest rate by a very substantial 250 basis points. This interest-rate shock presented the German cooperative banks as well as many other credit institutions with huge challenges. The cooperative banks suffered a significant hit to their income, mainly in the form of high fair value losses in securities portfolios following the interest-rate shock and, to a much lesser extent, in a deterioration of fair value gains and losses in the lending business due to the faltering economy. Nonetheless, the cooperative banks delivered a strong operating performance and strengthened their capital base. Over the medium term, the return to positive interest rates should create a tailwind for financial performance. In the coming years, reversals of impairment losses should generate favorable effects as most securities are held to maturity. A key factor for future operating performance will be the trajectory of capital investment in Germany going forward.