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Using a sample of 473 Latin American banks over the period2001-2008, this paper investigates how bank concentration and size influence cost/profit efficiency and risk-taking behavior. We show that (1) banks increase their sizes in order to gain the advantages of economies of scale, (2) Latin American banking sectors perform better as a whole in a more diversified market and (3) large banks in concentrated markets do not perform as good as they perform in diffuse markets, suggesting an empirical evidence of too big to fail behavior. This poses a challenging trade-off between efficiency and financial stability for bank regulators in the context of the implementation of a Basel III accord.

Stochastic Frontier Analysis, Financial Stability, Emerging Markets, Market Structure, Basel III.