A western Canadian bank that rode the energy boom of the 1970s collapsed over the Labor Day weekend when the government froze its deposits and announced plans to seek the institution's liquidation.

The demise of the Canadian Commercial Bank, based in Edmonton, in energy-rich Alberta Province, was the first bank failure in Canada since 1923. Minister of State for Finance Barbara McDougall said Sunday that it was no longer a "viable operation" despite massive injections of cash by the government and private banks in recent months to save it.

At the same time, McDougall froze deposits at another ailing Alberta financial institution, the Calgary-based Northland Bank, and indicated that she would seek to liquidate it as well unless the bank could be reorganized or merged with another bank.

McDougall said yesterday that the government would introduce legislation to protect fully the two banks' depositors, which include major pension plans and credit unions.

"Obviously, this is not going to be cheap," she told reporters in Ottawa.

She declined to speculate on how much the bailout of depositors might cost the government, although newspapers here suggested that the bill could run into the hundreds of millions of dollars.

Canadian Commercial, which has assets of about $2.2 billion, and Northland, with assets of about $1 billion, are comparatively small members of the Canadian banking community, and their failures were not regarded as having any significant impact in a country where banking is dominated by six major institutions and where overall assets exceed $330 billion.

Rather, the problems with the two banks have been more an embarrassment to Canadians who long have felt that they have a world-class banking system. It has highlighted the inadequacies of Canadian government bank regulators, who, by virtually all accounts, are overworked, poorly paid and overly dependent on the banks themselves for information about their operations.

Canadian officials' interest in the problems at Canadian Commercial Bank was triggered by findings of the U.S. Federal Deposit Insurance Corp. two years ago, after Canadian Commercial acquired a major interest in a California bank, Westlands of Santa Ana.

The U.S. FDIC issued a cease and desist order against Westlands in 1983, citing numerous reasons, including "hazardous lending, lax collection practices, large volumes of poor quality loans, inadequate liquidity, inadequate equity capital and reserves, inadequate loan loss provisions, large overhead expenses and poor management."

Two years later a Canadian parliamentary committee concluded that Canadian Commercial had bought a bank of "negative net worth."

Canadian Commercial was forced to inject about $15 million into the California bank to continue operations.

Canadian Commercial and Northland were started in the mid-1970s by westerners rebelling against the dominant Toronto-based major national banks. They rode the energy boom in the West, with loans primarily secured by real estate. Their troubles began emerging in 1981 when the recession hit.

The parliamentary committee, which examined Canadian Commercial's affairs this spring, indicated that the recession and the drop in oil prices had "exacerbated the fallacies" of the bank's "imprudent lending policy dating back to the late 1970s."

In March, as Canadian Commercial teetered on the brink of collapse, the federal and Alberta governments and Canada's six largest banks banded together to provide a $170 million rescue package.

But even after that, the bank was unable to stem its losses.