Under the _user-cost approach,_ the net revenue generated by a particular asset or liability item determines whether that financial product is an input or an output.<sup>Hancock(1991)</sup> developed a model for bank production and was among the first to apply the<sup>user cost approach</sup> to banking. Hancock stated that it is not clear _ex ante_ whether monetary<sup>goodsare inputs or</sup> outputs in the production process. She goes on to say that if the financial<sup>returnson an asset</sup> exceed the opportunity cost of funds (or if the financial cost of a liability<sup>is less than the</sup> opportunity cost), then the instrument is considered to be a financial output.<sup>Otherwise,it is</sup> considered to be an input. According to Hancock's rule, demand deposits would<sup>be classified as</sup> outputs while time deposits would be classified as inputs. However, there are problems<sup>with this</sup> approach. First of all, as interest rates fluctuate, so does the user cost.<sup>An item which is</sup> considered to be an output in one period can tum into an input in the next period if<sup>the sign of its</sup> user cost changes. Secondly, it is difficult to measure marginal revenues<sup>and costs for each</sup> individual liability item. Th?us the answer to the question whether an item is<sup>an input or output</sup> becomes a subject of significant measurement error and is sensitive to changes in<sup>data over time.</sup> And finally, the _value-added approach_ considers that both liability and asset categories have some output characteristics. Nevertheless, only those categories that have<sup>substantialvalue</sup> added are treated as outputs while the others are treated as either inputs or intermediate<sup>products</sup> depending on the specific attributes of each category. The value added approach<sup>differsfrom the</sup> user cost approach in that it is based on actual operating cost data rather than<sup>determining these</sup> costs explicitly. This approach has been widely used in studies of the banking<sup>industry (Berger</sup> _et al._ (1987), Berger and Humphrey (1997), etc.).

Taking into account the advantages and disadvantages of each method, the value added approach was employed, which enabled the classification of inputs and outputs<sup>based on their</sup> perceived value added. This method turns out to be quite attractive as it allows<sup>one to</sup> differentiate between various functions performed by the banks. What are they<sup>and why does</sup> one need to account for them? This too turns out to be crucial for the analysis.<sup>In analyzing the</sup> functions performed by commercial banks, Bergendhal (1998) mentions five<sup>fundamentalgoals</sup> of efficient bank management: profit maximization, risk management, service<sup>provision,</sup> intermediation, and utility provision. To keep things simple, we argue, without<sup>the loss of</sup> generality, that these five approaches could be pooled into two broadly defined<sup>ones:</sup><sup>_profit_</sup> _maximization_ (combining features of Bergendhal's profit maximization and risk<sup>management)</sup> and _service provision_ (combining elements of service provision, intermediation<sup>and utility</sup>