In early January, 1973, the State Corporation Commission closed the doors of an industrial loan association located in the City of Norfolk. Subsequently, the Commission applied for the appointment of a receiver to take charge of the institution and wind up its affairs. The collapse of this institution, which had been in existence since 1915, marked the first failure of a Virginia industrial loan association. Needless to say, the first failure was one too many.

The failure of any financial institution is a tragic event rarely experienced by Virginians in recent decades.(*1) The tragedy ensuing the collapse was amplified by the fact that the deposits(*2) of the industrial loan association, which at the time of closing amounted to approximately $12 million, were not insured. The depositors were thus deprived of an immediate payoff which would have been available had their deposits been insured. Instead, since their recoveries will depend solely upon the total amount that will be realized by the liquidation of the association's assets, the depositors face excruciating uncertainty as to both the amount and time of their recoveries. This lack of insurance has precipitated the question of whether a11 financial institutions which accept and invest the funds of Virginia's citizens should be required to have deposit insurance.(*3) This question held the concern of many Members of the General Assembly who, during the 1973 Session, considered no less than eight Bills directly attributable to the Norfolk collapse.(*4) Their concern is appropriate because it has been long recognized, at least by regulators, that the examination process cannot and will not afford complete protection against failures. A recent study by the Federal Deposit Insurance Corporation of 57 failures of insured banks with deposits ranging from $435,000 to $93 million that occurred between 1960 and 1972 concluded: "It is unreasonable to expect that bank failures will ever be eliminated."(*5) This conclusion carries with it the obvious implication that examinations, as conducted by either state or federal regulatory authorities, do not create insurmountable barriers to failures. If this premise is valid, and we think it is, it follows that some means should be sought by which the impact of failures on depositors may be either eliminated or substantially alleviated.
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(*1) Since 1950, one State-chartered bank and two State-chartered savings and loan associations have been placed in involuntary liquidation. The bank and one of the savings and loan associations had deposit insurance. The other savings and loan association was uninsured and was not subject to periodic examination by the Commission under the law as it existed at that time (1956). While a number of State-chartered credit unions have been liquidated, only two, since 1959, have been involuntarily liquidated (See Footnote 21, infra).
(*2) The word "deposits," where it appears in this Report, is used in a broad sense to include funds of the public placed in savings and loan associations where they are called '"shares" and industrial loan associations where they are called "certificates of investment." In credit unions, the savings of members are known as "shares" and are so referred to in this Report.
(*3) The term "deposit insurance" as it appears in this Report is also used in a broad sense to include insurance issued to and held by a financial institution which directly protects persons who deposit funds in savings accounts or purchase certificates of deposit, savings shares, certificates of investment or other writing: evidencing that such person has funds in the institution.
(*4) See Appendix A for a summary of these Bills.
(*5) John J. Slocum, Chief, Division of Liquidation, Federal Deposit Insurance Corporation, "Why 57 Insured Banks Did Not Make It-1960 to 1972," The Journal of Commercial Bank Lending, August, 1973, pp. 44-66.