Northern Rock collapsed because it replaced its regional motivation with an “incentive to vice,” a Labour peer has said.
Lord Glasman said that banks who lost their local links and tied themselves up in complex loan deals only had themselves to blame for their failures.
The peer, director of the Faith and Citizenship Programme and a senior lecturer in political theory, singled out Northern Rock as an example of what can go wrong when banking loses sight of its roots during a debate in the House of Lords on regional banking.
He said that when there is a “constraint on the bank to lend within a prescribed geographic area, banks will flourish.”
Lord Glasman said: “One anecdote that crystallises the problem is the example of Northern Counties Permanent Building Society, which was established in 1850 and flourished through 150 years. It went through four depressions, grew and merged as a mutual in 1965 – noble Lords will see where this story is going – with the Rock Building Society.
“It then became the Northern Rock Building Society, which did well until 1997, when it was demutualised.
“It became the fourth largest mortgage lender in the country and sponsored Newcastle United but it also, by the maximisation of returns, completely lost its asset.
“We do not need any symbolism here; Newcastle United Football Club used to be sponsored by Northern Rock and now it is sponsored by Wonga. That is the reality of the circumstance that you confront, and there is no virtue in that; it is of no benefit to anybody.
“There is centralisation, lack of accountability, recklessness and deceit. They are all part of the same story of being unable to hold anybody to account.
“Without incentives to virtue, unfortunately, you get incentives to vice. That was the system, and it is the system that we still have.” He added: “Above all, as the story of Northern Rock teaches time and again, if you maximise immediate returns on investment, you will lose the asset.
“There have to be constraints on that which allow capital to maintain its presence in areas and be a partner to business and families.”
His comments came as the North East continues to head towards a new regional bank. Politicians on both sides have united behind the cause, and it is believed several groups are interested in setting up new lending institutions in the North East.
The region recently held a conference on the issue in which business leaders and councils were urged to back the plans.