X-Efficiency in Banking: Looking beyond the Balance Sheet

The distribution free and stochastic frontier estimation methods are used to derive bank specific measures of cost and profit Xefficiency. This is done to investigate the importance of including aggregate measures of off-balance-sheet (OBS) activities. The results indicate that economic cost and production cost X-efficiency estimates increase with the inclusion of the OBS measure. Profit Xefficiency estimates are largely unaffected. Further, the composition of banksÕ OBS activities appears to help explain interbank differences in cost and profit X-efficiency estimates, whereas bank size and the mix between on- and off-balance-sheet banking activities are largely uncorrelated with the X-efficiency estimates.