In 2014, Germany's economic performance continued to be held back by what was generally a difficult situation internationally. Nevertheless, the latest data shows that there was a much bigger increase in inflation-adjusted gross domestic product (GDP) than in previous years, with GDP rising by 1.6 percent in 2014 compared with 0.4 percent in 2012 and 0.1 percent in 2013.

Mild weather helped the economy to expand significantly at the start of the year. However, there was a marked decline in the pace of economic growth as 2014 continued before it picked up again at the end of the year. Hopes of a strong upturn in investing activities in Germany were dashed by factors such as the violent conflicts in eastern Ukraine, Syria, and Iraq and the unexpectedly weak recovery of the eurozone's economy. Foreign trade, too, only provided muted stimulus overall. Consumption continued to be a dependable pillar of growth, however.

Consumer spending increased significantly and, together with government current account spending, contributed 0.9 percentage points to the rise in GDP. The sustained improvement in employment and the general trend of significantly rising real incomes provided a particular boost to consumer spending.

Business situation

The Volksbanken Raiffeisenbanken Cooperative Financial Network again proved to be a central pillar of the German banking sector in 2014. The reporting year was dominated by efforts to support economic growth through monetary policy and avoid deflationary tendencies in the eurozone. To boost the recovery of the economy as a whole, the European Central Bank (ECB) cut interest rates twice more in 2014, which took its key lending rate to 0.05 percent. Furthermore, the ECB decided at the start of September 2014 to introduce a negative interest rate of minus 0.2 percent on money deposited with the ECB. This poses major challenges for the banking industry, as does the extensive list of regulatory requirements.

With its focus on value creation and customers, the regionally oriented business model of the Cooperative Financial Network proved robust and reliable against this difficult economic backdrop. Profit before taxes rose again year on year, climbing to €10,655 million. This represented an increase of €1,102 million on what had already been an impressive figure in 2013. The Cooperative Financial Network therefore continued to show itself to be one of the most profitable banking groups in Europe.

In their lending business with retail and corporate customers, the Cooperative Financial Network gained further market share in 2014. Overall, loans and advances to customers grew by 3.4 percent. The primary banks, in particular, were able to build on their record success in the previous two years and expanded the lending business with retail and corporate customers by 4.3 percent compared with 2013. The market as a whole expanded by only 1.0 percent, thereby increasing the market share of the primary banks by 0.5 percent to 15.4 percent. Lending to corporate customers was down in the market as a whole. However, the primary banks achieved a year-on-year gain of 3.7 percent in this business, which meant they were well above the industry average. The primary banks also generated 3.9 percent growth in their lending to retail customers, a rise that was mainly attributable to consumer home finance.

Financial performance

The Cooperative Financial Network's net interest income, traditionally its biggest source of income, amounted to €20,047 million and was therefore largely unchanged on the strong prior-year level of €20,010 million thanks to an encouraging increase in the volume of customer business. This was a respectable result given the sustained low level of interest rates accompanied by a worsening of margins and a competitive market environment.

Allowances for losses on loans and advances decreased from €774 million in 2013 to €299 million in 2014. The reason for this was the encouraging decline in the number of personal and corporate insolvencies. Companies benefited from Germany's favorable economic conditions and continually strengthened their capital buffers. Another factor was the reduction in the interest burden resulting from low interest rates.

Compared with the previous year, net fee and commission income went up by 8.0 percent to €5,467 million. The increase primarily resulted from improved contributions from securities and funds business and from payments processing.

The Cooperative Financial Network's gains and losses on trading activities in 2014 came to a net gain of €752 million compared with a net gain of €507 million for 2013. As in previous years, investment and risk management products were the main contributors to the gains achieved in business with corporate and institutional customers.

The level of gains and losses on investments amounted to a gain of €148 million, whereas there had been a loss of €523 million in 2013. This was primarily the result of selling securities that had been impaired in previous periods. The prior-year figure had included losses on disposals and impairment losses in connection with securities.

Financial position

The total assets of the Volksbanken Raiffeisenbanken Cooperative Financial Network had risen by €55.2 billion to €1,135.8 billion as at December 31, 2014 (December 31, 2013: €1,080.6 billion). The volume of business had increased by 6.1 percent to €1,446.5 billion as at December 31, 2014.

Of the total assets, 59.2 percent was attributable to the primary banks (December 31, 2013: 59.3 percent), 30.5 percent to the DZ BANK Group (December 31, 2013: 30.6 percent), and 7.2 percent to the WGZ BANK Group (December 31, 2013: 7.2 percent).

On the assets side of the balance sheet, loans and advances to customers grew by 3.4 percent to €670.7 billion (December 31, 2013: €648.5 billion). This rise – which has continued for years now – was again predominantly attributable to the primary banks in 2014. They achieved a gain of 4.1 percent, similar to the previous year's gain of 4.1 percent. Lending to corporate customers (loans to non-financial companies and self-employed people) by the local cooperative banks advanced by 3.7 percent, whereas the market as a whole declined by 0.8 percent. The volume of lending to retail customers rose by 3.9 percent. As anticipated, longterm home finance was the growth driver in the retail customer business.

Financial assets held for trading grew by €3.7 billion or 6.3 percent to €61.2 billion in the reporting year. This rise was mainly due to an increase in derivatives (positive fair values) of 29.9 percent to €31.9 billion and an increase in securities of 12.1 percent to €17.2 billion, while loans and advances fell by €5.5 billion to €11.7 billion.

Bank operating segment

The net interest income of the Bank operating segment declined slightly, falling by €179 million to €1,917 million in 2014 (2013: €2,096 million). Net interest income from corporate banking was unable to maintain its prior-year level due to growing competition, the resulting pressure on margins, and the level of demand for corporate loans, which remained muted. There was uncertainty among many corporate customers, particularly in view of the instability in some regions of the world, such as Ukraine and the Middle East. As a result, German companies' investing activities fell short of expectations, despite the stable domestic economy and historically low interest rates. Many businesses continue to perform well in terms of income and liquidity and are thus able to fund capital spending from their own resources.

In the development lending business, the volume of new business in the reporting year did not match the level achieved in 2013. Both the contraction in demand for borrowing from corporate customers and the cutbacks in grants in certain development segments had an adverse impact. On the other hand, the residential construction business with retail customers held steady in 2014.

Net interest income in the syndicated business/renewable energies product field rose sharply in the year under review. The first half of 2014 was influenced by the effect of spending brought forward because of the imminent amendment to the German Renewable Energy Sources Act (EEG) on August 1, 2014. In consequence, the second half of the year was more subdued. In the acquisition finance business, the high degree of liquidity in bond markets led to loans being repaid. This and the selective granting of new lending, especially outside Germany, led to a reduction in the size of the portfolio. There was a small year-on-year increase in net interest income from international trade and export business and from project finance business.

Net fee and commission income came to €576 million in 2014 and was therefore slightly higher than in the previous year (2013: €567 million). The lending business and payments processing saw year-on-year increases in this income. The contribution from international business was down slightly compared with the previous year. The higher contribution from the securities business mainly resulted from lower reallowance expenses. Net fee and commission income within the transport finance lending business reflected the muted level of global growth and the associated impact on international freight and passenger transport markets.

The Bank operating segment's gains and losses on trading activities in 2014 came to a net gain of €570 million compared with a figure of €269 million for 2013. The considerable narrowing of spreads that had created an adverse effect in 2013 was not repeated to the same extent in 2014. Interestrate-related increases in the value of cross-currency basis swaps were also reflected in gains and losses on trading activities last year. In addition, the balance of recognized and unrecognized gains and losses relating to asset-backed securities (ABSs) had a positive impact on gains and losses on trading activities in the Bank operating segment.

As in previous years, the gains and losses on trading activities in 2014 stemmed mainly from customer related business in investment and risk management products involving the asset classes of interest rates, equities, loans, foreign exchange, and commodities. The main focus of sales to retail investors in 2014 was on capital preservation products (capital guarantees and partial protection) and structured interest-rate products.

Retail operating segment

There was a further small year-on-year increase in the net interest income of the Retail operating segment, which rose to €17,277 million from €17,083 million in 2013. The narrowing of margins in the deposit-taking and lending businesses caused by persistently low interest rates was offset by brisk customer business. The primary banks' lending business, which relies on a surplus of deposits, remained stable in 2014. Net interest income from consumer finance again rose substantially during the year under review. In what was a flat market for consumer finance, the Cooperative Financial Network successfully defended its share of this market despite cut-throat competition in terms of pricing. Reduced volume in LuxCredit foreign-currency lending led to a decline in net interest income.

Allowances for losses on loans and advances decreased from €291 million in 2013 to €174 million in 2014. The risk situation in this operating segment proved stable, above all because of benign economic trends in Germany and a drop in the number of insolvencies.

Net fee and commission income in the Retail operating segment advanced slightly, rising from €5,239 million in 2013 to €5,542 million in the year under review. This increase was driven primarily by income from payments processing, account charges, strong demand among customers for building society and insurance products, and rising demand for investment funds and some securities. The encouraging growth in average assets under management was essentially attributable to the net new business generated during the year and the overall growth in the market and strong performance of the Cooperative Financial Network.

Real Estate Finance operating segment

The net interest income of the Real Estate Finance operating segment was virtually unchanged year on year at €1,552 million (2013: €1,554 million). The marked rise in demand for advance and interim financing led to an increase in interest income in the non-collective home finance business and compensated for the lower average interest rates. In the home savings loans business, a smaller portfolio and the drop in average interest rates led to a fall in interest income. Overall, net interest income from building society operations in 2014 was slightly down compared with the previous year.

There was a countervailing change in net interest income in the mortgage lending business. Against the backdrop of stable economic and political conditions, the transaction volume for commercial real estate in Germany reached a new record level of €39.8 billion in the reporting year. The critical contributing factors were the fundamentally favorable environment and, above all, the period of historically low interest rates, which focused investor attention on the stability of a real-estate investment. At the same time, German banks as well as institutional and foreign investors were becoming increasingly drawn to the highly attractive commercial real-estate market in Germany.

Allowances for losses on loans and advances in the Real Estate Finance operating segment decreased from minus €34 million in 2013 to €9 million in 2014.

Net fee and commission income increased by €146 million to a loss of €146 million in 2014 (2013: loss of €292 million). This improvement was essentially due to a change in the way that accruals are recognized for fees and commissions in building society operations.

Insurance operating segment

Premiums earned grew by €1,234 million to €13,927 million, reflecting the integral position held by R+V within the Cooperative Financial Network. The already very high level of premiums earned in 2013, which had been boosted by significant growth stimulus, was therefore exceeded again. Gross premiums written increased to €14,040 million in 2014, up by 10.1 percent on the impressive level of premiums generated in 2013 of €12,753 million. Premiums earned in the life insurance and health insurance business grew appreciably year on year, advancing by 12.4 percent. This increase was mainly derived from unit-linked life insurance and the R+V-PrivatRente IndexInvest product. In the non-life insurance business, premiums rose by 4.2 percent, with most of this growth being generated in the vehicle insurance and corporate customer businesses. In the inward reinsurance business, premiums earned climbed by 15.8 percent.

Gains and losses on investments held by insurance companies and other insurance company gains and losses went up by 53.3 percent to a net gain of €4,481 million (2013: gain of €2,923 million). The substantial year-on-year fall in long-term interest rates in 2014 contrasted with a marked increase in corresponding interest rates in 2013. Equities markets relevant to R+V improved during the course of 2014, but the gains had been even greater in 2013. Furthermore, exchange rate movements were far more favorable for R+V than in the previous year. In the overall gains and losses on investments held by insurance companies, the aforementioned market trends led to higher realized and unrealized gains and to higher foreign exchange gains, primarily as a result of the strengthening of the US dollar and pound sterling. However, owing to the countervailing effects from the recognition of provisions for premium refunds (particularly in the life insurance and health insurance business) and claims by policyholders in the fund-linked business in the 'insurance benefit payments' line item presented below, the associated change in the level of gains on investments held by insurance companies only partially affected the level of net income from insurance business in the reporting year.

The world of work is becoming increasingly technology-driven and digitized. Social, legal, and regulatory changes are also having a growing impact. Simple tasks and activities are more and more likely to be replaced by technological or digital solutions. At the same time, new highly specialized occupations are emerging. But although demand for specialists is rising, the supply of skilled workers is depleting as a result of demographic change. Companies will find it increasingly difficult to recruit qualified, motivated employees as each year passes.

The members of the Cooperative Financial Network have been working hard to counteract these changes. This has enabled them to identify potential shortages of personnel at an early stage and develop strategies for resolving such situations. Appropriate skills training for existing employees plays an important role in ensuring they are prepared for dealing with future requirements.

Inhouse training and development for the next generation remains a mainstay of the local cooperative banks' personnel strategies. The ratio of trainees to other employees of the local cooperative banks, the DZ BANK Group, and the WGZ BANK Group was 8.0 percent in 2014 (see page 23), which is high compared with the rest of the sector. The range of training offered by the cooperative banks clearly puts them in a strong position compared with other companies in what is becoming, from the perspective of employers, an increasingly small market of potential trainees. This attractiveness is backed up by surveys: In 2014, for example, the local cooperative banks were once again voted one of Germany's top 100 employers in the trendence schoolchild barometer.

Employment in local cooperative banks, the DZ BANK Group, or the WGZ BANK Group is also becoming increasingly appealing to university graduates. This can be seen from the growth in the proportion of employees with a degree, which rose from 7.9 percent in 2013 to 8.4 percent in 2014 (see page 24). And the list of Germany's top 100 employers in the trendence graduate barometer indicates that the local cooperative banks have a good reputation among future graduates, too. In 2014, the banks again secured a place on this list, which is voted for by around 14,000 students who are approaching their final exams.

The Volksbanken Raiffeisenbanken Cooperative Financial Network again enjoyed a very successful year despite all the adversities that it faced in the market, enabling it to continue carrying out its consistent and stabilizing role in the German financial sector. This positive impact is attributable to its sustainable business model. The protection scheme run by the BVR ensures the stability of the entire Cooperative Financial Network and confidence in the creditworthiness of all its members. The BVR protection scheme acts as the financial and organizational linchpin in the solidarity-based system of cooperative institutions.

The BVR protection scheme is the world's oldest exclusively privately funded deposit guarantee fund for banks and has always proved its effectiveness and functionality. Since being set up more than 80 years ago, it has guaranteed comprehensive protection for all member institutions and, consequently, for customers' deposits. No customer of a local cooperative bank or other bank affiliated with the protection scheme has ever lost their deposits. The BVR protection scheme will continue to exist under the new regulatory requirements laid down in Germany's new deposit insurance legislation (EinSiG, applicable from July 3, 2015).

Remit of the BVR protection scheme

Section 4 of the BVR's articles of association requires the BVR to manage a protection scheme. This facility was specified expressly as a bank-protection scheme in section 12 of the legislation implementing the EU deposit guarantee schemes and investor-compensation schemes directives, which still applied as at the reporting date having come into force in 1994 and having been modified most recently in 2010. From August 1, 1998, the protection scheme has been therefore subject to monitoring by the Bundesanstalt für Finanzdienstleistungsaufsicht (BaFin) [Federal Financial Supervisory Authority] (section 12 (1) in conjunction with section 7 (3) of the German Deposit Guarantee and Investor Compensation Act, EAEG); as a result, the member institutions did not need to participate in any statutory compensation scheme in 2014.

The main aims of the BVR protection scheme are to safeguard the credit standing of the member institutions 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 institutions. The BVR manages a guarantee fund and a guarantee network to assist with any supporting measures needed in this connection. The basic structures of the work of the protection scheme have remained in place since Germany's deposit insurance legislation (EinSiG) came into effect on July 3, 2015.

In 2014 the protection scheme met, without qualification, all its responsibilities as a bank-protection scheme in accordance with statutory requirements and the articles of association. A total of 1,062 institutions of the Cooperative Financial Network belonged to the BVR protection scheme as at December 31, 2014 (December 31, 2013: 1,093 members). The decrease in membership stemmed solely from mergers.

The results of the classification are supplemented by further analysis, in particular evaluations of the data collected as part of an annual comparative analysis. This is a data pool that the BVR obtains itself from its member institutions and consists, above all, of accounting and reporting data. 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, the BVR prepares special analyses on specific issues, such as determining the impact of sustained low interest rates or evaluating levels of capital under Basel III.

In accordance with its risk-oriented procedure, the protection scheme performs individual bank analyses on institutions of major financial significance to the protection scheme as a whole. This also includes the unclassified member banks. In doing so, the protection scheme is applying the concept used to analyze large banks, taking into account the risks resulting from the size category of the affiliated institutions.

To assess the protection scheme'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).

Besides assessing each individual member institution, the BVR protection scheme develops standard tools, methods, and guidelines that provide each member institution in the scheme with a similar internal structure for managing risk (including VR-Control and the VR rating system). The institutions use this standardized concept to tackle their strategic and operational challenges.

Risk management and monitoring

Preventive management

The results of the BVR's classification process also provide a basis for the BVR protection scheme's systematic preventive management. Preventive management continues to be used when a bank is classified as B- or lower on the basis of its annual financial statements, but sometimes earlier. In addition, other key figures and data have increasingly been used over the past few years so that any abnormalities at institutions can be identified at an early stage. Before the prevention phase, the monitoring of conspicuous institutions is playing an ever more significant role in the early analysis of institutions. This underpins the longterm trend of shifting the focus of the protection scheme's work away from restructuring and toward end-to-end preventive management that now also includes monitoring. Significantly more institutions are now in the preventive phase of restructuring rather than the support phase.

The aim of preventive management is to identify and counteract adverse economic trends at an early stage, thereby helping to prevent the need for supporting measures. Data and other information from the banks that might be affected are analyzed and, following additional discussions with the management of these banks, appropriate measures are agreed that are aimed at stabilizing and improving their business performance.

In order to supplement the prevention phase enshrined in the statutes, the protection scheme established a monitoring process some years ago that precedes the actual preventive action. Irrespective of the results of the classification, further information sources available to the protection scheme are used to analyze the institutions in order to ascertain if there is anything conspicuous that might indicate unusual trends at an early stage.

Outlook for the protection scheme

In financial terms, the protection scheme expects to maintain its positive performance in 2015.

At present there is no sign of any scenarios resulting from the BVR protection scheme's remit – as defined in its statutes – that might present a material threat to the stability of the scheme. Given the robust state of the German economy, the level of support and assistance provided by the protection scheme is not expected to increase in 2015. At its meeting on November 27, 2014, the BVR Association Council voted unanimously for the rate of contributions to be paid into the guarantee fund for 2015 by the member banks to remain at its 2014 level of 0.12 percent, this resolution being based on the protection scheme's statutes. This means that the total contributions received for 2015 are likely to be at the same level as in 2014. Taking account of returns on the investment of guarantee fund resources, administrative expenses, and the expected cost of restructuring measures (legacy and potential new cases), the net income for the year is expected to be sufficient for a significant addition to be made to the guarantee fund's capital.

In 2014, the protection scheme's work on regulatory and legislative matters focused on examining various initiatives launched by the European Commission to regulate the European banking sector and on dealing with the Cooperative Financial Network's core issue of bank protection during the closing discussions on the EU Deposit Guarantee Schemes Directive. Other activities in this area in 2014 included drawing up amendments to the legal basis of the existing cooperative deposit guarantee fund that were then implemented in 2015. The basis was also created in the articles of association for the new, officially recognized cooperative deposit guarantee fund. This required extensive preparatory work on designing the new 'dual system' of bank protection and for the general meeting of the BVR's members on May 6, 2015, which voted on this matter.

An integrated approach developed under the leadership of the BVR is available for measuring credit risk in own-account investing activities. It takes full account of the aspects of risk in the securities business by simulating spread risk, migration risk, and credit risk in the securities portfolio. Furthermore, the risk arising from securities of the issuers in the Cooperative Financial Network is determined using simplified spread shifts. This provides the bank with the expected value of the portfolio plus any unexpected losses and enables it to calculate the expected and unexpected fair value gains and losses for balance sheet management purposes. It is also possible to calculate stress scenarios. The portfolio model and its parameters are validated regularly.

As legally independent companies, the cooperative institutions are responsible for their own capital management. Therefore, they manage their riskbearing capacity in compliance with the MaRisk and to fit in with their business strategy.

The protection scheme supports the consistent use of tools for measuring and managing risk capital. It worked with the primary banks, central institutions, associations, and computing centers to draw up a concept for the bank-wide allocation of risk on the basis of a statement of assets and liabilities. The method underlying this concept is the Markowitz approach to creating efficient portfolios. By implementing the concept, each bank is able to use the strategic risk categories it has selected to carry out an allocation process from an efficiency perspective and to calculate possible allocations.

The Cooperative Financial Network provides a comprehensive overview of its financial position and financial performance by preparing annual consolidated financial statements. These statements include a group-level presentation of key figures such as equity, the Tier 1 capital ratio, and the total capital ratio.

Changed requirements resulting from Basel III and CRD IV

The new regulatory framework of Basel III came into force on January 1, 2014 with various transitional rules. One important core area of the new regulatory measures aims to fundamentally improve institutions' capital adequacy and liquidity. At European level, the Basel III regulations are implemented by the CRD IV package, which consists of the amended ’Capital Requirements Directive IV‘ (CRD IV) and the ’associated Capital Requirements Regulation’ (CRR).

On January 2, 2014, BaFin permitted the institutions in the Cooperative Financial Network that are affiliated with the BVR protection scheme to not deduct investments within the Cooperative Financial Network when calculating their capital ratios, as provided for in article 49 (3) CRR. This waiver of the requirement to deduct long-term equity investments was granted, among other reasons, because multiple application of capital between the members of the bank-related protection scheme has been eliminated.

The Cooperative Financial Network's regulatory total capital ratio was 15.1 percent as at December 31, 2014 (December 31, 2013: 16.1 percent). Overall, regulatory capital decreased by €1.9 billion to €81.6 billion. This reduction essentially reflects the new method of calculating capital adequacy based on the CRR rules. The Tier 1 capital ratio was virtually unchanged at 11.5 percent (December 31, 2013: 11.4 percent). For information only, the material Tier 1 capital ratio, i.e. including the reserves pursuant to section 340f HGB, was 13.8 percent. The Cooperative Financial Network's capital is predominantly held by the primary institutions.

Credit risk

Credit risk is the most important risk category given the cooperative banks' high volume of customer lending business. The cooperative banks manage their credit risk efficiently and sustainably using extensive, high-quality methods of risk measurement. So that they can assess the creditworthiness of individual borrowers, the cooperative banks have access to a rating system that is tailored to their requirements. The system was developed by the BVR together with its partners in the Cooperative Financial Network and satisfies the regulatory requirements. Credit risk at portfolio level is measured using value-atrisk methods along with structural analysis of credit ratings, size categories, proportion of unsecured lending, and sectoral concentrations.

The Cooperative Financial Network's strategy focuses on the profit-oriented assumption of risk, while taking its level of equity into consideration and pursuing a cautious lending policy. The cooperative banks are conservative in their lending decisions, with knowledge of the customer and borrowers' capacity to meet their obligations playing a central role. Overall, the Cooperative Financial Network's customer lending business has a granular credit structure and a high proportion of mortgages. The granularity and extensive regional diversification of the Cooperative Financial Network's business activities limit the formation of risk clusters.

In 2014, expenses for allowances for losses on loans and advances declined by 61.4 percent to €299 million and therefore remained at a low level equating to 0.04 percent of the total lending volume. This indicates that the cooperative banks operate a healthy lending business overall.

The Cooperative Financial Network's exposures in respect of bonds from public-sector borrowers in countries particularly affected by the sovereign debt crisis remained at a manageable level, as was the case in previous years. The total carrying amount of these bonds came to €13.9 billion as at December 31, 2014 (December 31, 2013: €11.6 billion).

Market risk

Interest-rate risk has a significant influence on the banks' financial performance. Despite low interest rates in 2014, there was a small increase of 0.2 percent in the Cooperative Financial Network's net interest income. Given the persistently low level of interest rates and growing competition for deposits, the banks expect interest margins to be narrower in the future. Moreover, a reversal of interest rates poses risks for financial markets because the funding costs of the loans extended in the current environment of low interest rates will go up in the event of an interest rate hike.

important role for most of the cooperative banks. The European Banking Authority (EBA), the Basel Committee on Banking Supervision (BCBS), and the German regulator are currently carrying out activities to obtain an overview of institutions' vulnerability with regard to rising interest rates. These activities include inquiries about the phase of low interest rates, the EBA's recently published Guidelines on the Management of Interest-rate Risk and the BCBS's Consultative Document: Interest-rate Risk in the Banking Book (IRRBB), and the activities of a task force of the BCBS on the possible treatment of interest-rate risk in the banking book within pillar 1.

The German economy remained on an upward trajectory at the start of 2015. Initial official estimates indicate that Germany's GDP rose by 0.3 percent in the first quarter. This was roughly the same as the average rate of growth seen in the years after the country's reunification. Leading economic indicators, such as the ifo Business Climate Index, seem to suggest that economic growth will continue throughout the rest of this year.

Based on the data that came out in the spring, the BVR anticipates that German GDP adjusted for inflation will rise by around 2 percent on average in 2015. This growth forecast is underpinned by the assumption that economic expansion in the eurozone and the rest of the world will gain momentum. It is also assumed that the Euro exchange rate will remain low against the US dollar and that oil prices will increase only moderately.

Consumer spending is likely to be higher in 2015 than last year, remaining the biggest driver of economic growth. It continues to be boosted by favorable conditions in the labor market and the general trend of significantly rising incomes. Capital expenditure should also contribute to overall economic growth, albeit to a lesser extent than in 2014. However, foreign trade is likely to provide little stimulus. Although exports are expected to expand more strongly than last year as the global economy rebounds, the robust level of domestic demand should also lead to a bigger rise in imports.

The positive trends in the German labor market are expected to continue. The average number of people employed is predicted to rise by approximately 200,000 year on year to reach 42.8 million for 2015. A smaller decline of 0.2 percentage points to 6.5 percent looks likely for the rate of unemployment.

The outlook for the business performance of the Cooperative Financial Network is shaped by the ongoing phase of extremely low interest rates, a hike in costs in order to meet regulatory requirements, and the introduction of the European bank levy. By contrast, the economic environment is expected to provide a boost to the real economy and small and medium-sized enterprises and, consequently, also for the Cooperative Financial Network. Brisk customer business is likely to further strengthen its market position.

Net interest income will decline, above all as a consequence of the persistently low interest rates. In particular, income from interest-rate-dependent business models will come under increasing pressure. Net interest income could be negatively impacted in 2015 by a renewed deterioration in sentiment regarding the prospects for economic growth in the eurozone and by discussion of a possible Greek exit.

Allowances for losses on loans and advances will rise presumably compared with 2014. In 2014, the higher reversals of portfolio loan loss allowances had a positive impact on overall allowances for losses on loans and advances and such reversals are not planned for subsequent years. As far as 2015 is concerned, it is expected that allowances for losses on loans and advances will normalize and change in line with the lending portfolio. Risks would primarily arise if there were a sharp economic downturn in Europe, and Germany were unable to escape the effects. Such a development would then have a detrimental impact on the level of allowances for losses on loans and advances.

The net income from insurance business is predicted to be much more muted in 2015, although premiums earned in 2015 are expected to be at a similarly high level to that achieved in 2014. The reason is the increased supplementary change-in-discountrate reserve and the negative effect of the return to normal levels in 2015 following extraordinary gains under gains and losses on investments held by insurance companies in 2014. Exceptional events in the capital markets or changes in underwriting practices may affect the level of net income expected to be earned from insurance business.

Administrative expenses are predicted to rise again in 2015. This growth will reflect the response of the Cooperative Financial Network to the tighter regulatory and statutory provisions. The main consequences of these provisions are likely to be higher staff expenses and increased project costs.