Highlights :

• The financial crisis has strengthened the role of non-financial deposits as a stable source of bank funding.
• Evidence suggests important switching costs on deposit markets.
• Financial intermediation is studied when households pay search costs to fi nd adequate financial products and banks to attract depositors and to select borrowers.
• Financial intermediation is efficient when interest rates are posted by banks or bargained under a specific Hosios (1990) condition.
• Interbank market frictions are introduced to show how an crisis on this market leads to inefficient financial intermediation.

 Abstract :
This article develops a search-theoretic model of financial intermediation to study the efficiency condition of the banking sector. Competitive financial intermediation is determined by the search decisions of both households (to find adequate financial products) and banks (to attract depositors through marketing and to select borrowers through auditing) and by the interest rate setting mechanism. The efficiency of the competitive economy requires that interest rates are posted by banks or are bargained under a specific Hosios (1990) condition, which addresses the hold-up problem induced by search frictions on the credit and deposit markets. Interbank market frictions are introduced to show how an interbank market crisis leads to inefficient financial intermediation characterized by credit rationing and high net interest margin.

 Keywords : Banking | Search | Search | Matching | Switching Costs | Efficiency

 JEL : C78, D83, G21