9 The Treasury had no choice but to put in place guarantee arrangements for retail depositors, once the run on deposits was underway. This support avoided the immediate risk of instability spreading to other banks. Following media reporting and the company's announcement of the emergency loan from the Bank, retail depositors withdrew around one fifth of their deposits over three days, the share price fell by more than half, and the cost of insuring against default by the company increased. The run on deposits was widely reported, including images of queues of retail customers outside branches. The Treasury decided that there was an increased risk of contagion in the financial markets and that further measures were necessary to maintain stability. The guarantee arrangements put in place removed the queues outside branches, reduced media coverage and avoided immediate potential problems at other banks.
10 Although the initial guarantee arrangements prevented wider financial instability, they did not completely stem the outflow of funds from Northern Rock. From 18 September 2007 to the end of that month, a further £4.4 billion of retail deposits was withdrawn. These outflows necessitated additional borrowing from the Bank and required further guarantee arrangements for deposits and certain wholesale borrowing to be made over subsequent months, all backed by the taxpayer. With each decision to extend public support, the Treasury's intention was to put taxpayers' money at risk only to the extent necessary to stabilise the situation. While the situation did eventually stabilise, the company's finances remained vulnerable.
11 Under the terms of the loans provided by the Bank, Northern Rock was required to put in place a plan to stabilise its business by conserving cash, primarily by reducing the number of mortgages written. The company also required the Bank's approval before entering into any corporate restructuring, making substantial changes to the general nature of its business and paying dividends. The Bank put in place arrangements to monitor compliance with the stabilisation plan and had wide ranging rights to information on Northern Rock's business. Given the extent of the financial assistance provided from October 2007, the Treasury could have sought to introduce further conditions to limit the company's activities, for example on the risk profile of lending undertaken.
12 Northern Rock continued to write Together mortgages of up to 125 per cent of a property's value throughout the period that it was receiving emergency support, albeit at a reduced volume. Between September 2007 and February 2008, over £1.8 billion of Together loans were written, around 30 per cent of total mortgage lending, compared with just under £5 billion (26 per cent of total mortgage lending) in the preceding eight months of 2007. Around £1 billion of these new mortgages reflected commitments made by the company to potential borrowers prior to September 2007. As part of the company's stabilisation plan, the terms for Together loans were tightened by the company in October and November 2007. At 31 December 2008, Together mortgages represented around 30 per cent of the mortgage book but about 50 per cent of overall arrears and 75 per cent of repossessions. The Treasury judged that mortgage transactions were necessary to maintain the business while a longer term solution was sought.
13 Indefinite and unlimited public support for Northern Rock was not an option that was available or desirable. Under the European Union rules on state aid, the emergency support provided to Northern Rock had to be notified to the European Commission. The Commission considered that the guarantee arrangements provided by the Treasury were permissible but could not remain in place for more than six months, unless the Treasury submitted a restructuring or liquidation plan by March 2008. In any event, it would not have been in the taxpayers' interest to continue to fund and bear the commercial risks of a private company over which the Treasury had limited control. The Treasury therefore had to find a longer term solution by March 2008.