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 X-efficiency. 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 X-efficiency estimates are largely unaffected. Further, the composition of banks' 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.