There are many different types of liabilities. Transaction accounts usually pay relatively low explicit interest rates but have higher non-interest processing costs. Other accounts offer limited check writing capabilities but pay higher rates. Liabilities with long-term fixed maturities typically pay the highest interest rates but have the lowest non-interest transaction costs. Customers who hold each instrument respond differently-to interest rate changes. Thus, the composition and maturity/duration of each bank's liabilities are important determinants of the interest cost and liquidity and interest rate risk associated with performance.
Government regulators determined allowable interest rates, and virtually all banks paid the maximum. Banks could compete for funds only by differentiating the quality of service and paying implicit interest through lowering service charges or offering premiums to open accounts. The primary strategy for most retail banks is centered on having a well-located home office and branches.
