When Ernest (Pug) Vickers Jr., a former World War II pilot and automobile dealer in Huntingdon, Tenn., decided in 1977 that he wanted to own a bank, he borrowed the money to buy the Carroll County Bank of Huntingdon from a bank controlled by Jake and C. H. Butcher.

In 1980, Vickers began to encounter personal financial difficulty, according to a House subcommittee report, and he decided to steal money from his own small bank, which had $8.1 million in assets, using one of the most common devices of insider fraud in banks: nominee loans.

Vickers persuaded several friends, including a mechanic at his auto dealership, to sign large personal notes from the bank while pocketing the proceeds himself, assuring his friends he would take care of repaying the notes.

After using this technique to steal more than $500,000 from the bank, the subcommittee said, neither Vickers nor his friends had the money to repay the notes when they came due, and the small bank failed.

Vickers' story is typical of the insider abuse that goes undetected by regulators before it is too late, even though such cases were a "major contributing factor" in about half of the bank failures in the last two years, the House Government Operations commerce, consumer and monetary affairs subcommittee said in a report released yesterday.

Vickers was sentenced to three years imprisonment and is appealing the decision. The Federal Deposit Insurance Corp., the government agency that guarantees bank deposits up to $100,000, estimates its losses in the bank will be $1.7 million, according to the report.

"The bank insider who, like 'Pug' Vickers, steals $1 million from a bank by writing fictitious loans to himself uses methods that are practically invisible to the general public but that usually cause far more damage to an institution than the masked man who walks into a bank and passes a note to a teller, instructing her to hand over $1 million in small bills," the committee report said.

The report, based on congressional hearings and a 15-month investigation of insider abuse in the nation's financial institutions, sharply criticizes federal regulators for their "poor record" of investigating and bringing civil enforcement action against insiders whose fraudulent activities are closely tied to bank failures.

The bank regulators criticized in the report are the FDIC, the Federal Reserve, the Office of the Comptroller of the Currency and the Federal Home Loan Bank Board. The Justice Department is criticized for failing to follow up on tips from regulators and for its reluctance to take action against abusive insiders before a bank or savings and loan association fails.

The comptroller and the bank board agreed with the report's recommendations for legislation that would make it easier for them to prevent bank fraud, but disagreed with criticism directed at the regulatory agencies as a group. Spokeswomen said their agencies outperformed the others by aggressively pursuing insider fraud.

Another example related by the subcommittee involved Orrin Shaid, who was convicted of 45 counts involving bank fraud and embezzlement at the Chireno State Bank in Texas in 1974. After serving five years of an eight-year sentence, he was released from prison. That did not stop him from outfoxing the comptroller by obtaining control of Ranchlander National Bank in Melvin, Tex., in 1981, using his girlfriend's name on the application, naming a former waitress as president, and fleeing to the Cayman Islands after his fraudulent activity caused Ranchlander to fail, the subcommittee report said.

To buy Ranchlander, Shaid "bought" two $1,000 certificates of deposit from Ranchlander with a post-dated check, altered them to $100,000 CDs in the presence of Jean Moon, the former waitress who would become the bank's president, and then went to another bank and pledged the CDs for a $200,000 loan he used to buy Ranchlander. After seizing control of Ranchlander, Shaid made fictitious cattle and real estate loans and issued more phony CDs, which he used as collateral for loans from other banks, the report said. In the process, he acquired a pair of Rolls Royces, two airplanes, a yacht and $6 million that he sent to the Cayman Islands. Meanwhile, Shaid also managed to acquire control of the First State Bank, of Wells, Tex., by paying a $50,000 kickback to secure a fraudulent loan there for the purchase price of the bank.

In November 1982, Shaid told Ranchlander President Jean Moon to destroy the bank's records and to fly to his house, but she drove instead to San Antonio and informed the FBI. Shaid fled to the Cayman Islands but was apprehended several weeks later when he returned to the United States to kidnap his son, the report said. He later was convicted of mail fraud, bank fraud and false statements to federally insured banks and sentenced to 35 years in prison.