25 Following public ownership the Treasury has maintained oversight of Northern Rock's progress against a new business plan. On entering public ownership, the Treasury appointed two directors to the company's board and soon afterwards a Shareholder Relationship Framework was agreed. The Treasury receives regular updates on the company's performance and holds regular meetings with the management team to review progress.
26 By 31 December 2008, the company had repaid some £3 billion more than planned for that year. One of the key objectives for the company was to encourage existing mortgage customers to move to other lenders, with the resultant repayments used to repay the loans from the Bank. The business plan envisaged full repayment of the loans from the Bank by 2010. As part of the government's financial intervention to support lending in the economy, Northern Rock announced in January 2009 that it would reduce the rate of mortgage redemptions and that repayments of the Bank's loans (which were transferred to the Treasury in 2008) would continue at a slower rate.
27 The Treasury did not challenge with sufficient rigour the company's forecasts of future trading conditions, before approving its initial business plan under public ownership. The timetable for approving an initial business plan for the company was driven by the need to submit an approved plan to the European Commission by the end of March 2008, less than six weeks after it was taken into public ownership. When scrutinising the plan, the Treasury's focus was on the period over which the emergency support would be repaid and the factors that might directly impinge on that objective. It paid less attention to the robustness of the broader business plan. The plan, which had been under development during the last few months of 2007 and early 2008, for example, assumed a five per cent fall in house prices between 2008 and 2011. These assumptions were not updated as the housing market began to turn downwards in early 2008.
28 In the lead up to public ownership, the Treasury did not commission its own due diligence on the company's operations, for example, on the quality of the loan book. The Treasury judged that it could rely on the work of the Bank, supported by its accounting advisers, and the Financial Services Authority as respectively lender to and regulator of the company. The company had capitalised arrears on its mortgage book at a much earlier stage than other lenders which, when changed in May 2008, increased the reported rate of arrears significantly and brought it into line with that reported by other lenders.
29 The company's reported loss at 30 June 2008 of £585 million was £314 million greater than the base case and worse than the recession case used in the plan approved three months earlier. In response to continued volatility and increasing weakness in the financial markets, some banks began to take steps to strengthen their regulatory capital positions. The Treasury announced in August 2008 that, subject to approval by the European Commission for State Aid purposes, some of the outstanding emergency loans to Northern Rock would be converted into an equity investment to bolster Northern Rock's regulatory capital and that the company had estimated that up to £3 billion of debt might need to be converted for this purpose. In March 2009, the company announced a loss of £1.4 billion for the year to 31 December 2008.