This paper empirically investigates the x-efficiency (technical and allocative) in Australian banks. A non-parametric method of Data Envelopment Analysis (DEA) has been used to arrive at the efficiency scores. Banks in this sample were found to have low levels of overall efficiency compared with the banks in the European countries and in the US. The results indicate that, as a source of overall inefficiency, the technical component was more important than the allocative component. Thus, the inefficiency in Australian banks can be attributed to wasting of inputs (technical inefficiency) rather than choosing the incorrect input combinations (allocative inefficiency). Domestic banks were found to be more efficient than foreign owned banks. The study has important implications such as guiding the government policy regarding deregulation and mergers. Since the study pinpoints the sources of inefficiency, it would also help banks with strategic planning.