Taiwan's financial institutions, like their counterparts in other East Asian countries in recent years, have been bogged down by bad loans, deteriorating asset quality, and mismanagement. Government efforts to reform the financial system are at best piecemeal. This paper analyzes the political, social, and economic context of Taiwan local financial institutions, a body whose problems are symptomatic of the general banking sector in Taiwan. The paper finds that Taiwan r local financial institutions are deeply embedded in the Kuomintang (KMT)-centered political economy, and are thus not easily subject to large-scale reforms. The ascension to power by the Democratic Progressive Party (DPP) since the 2000 presidential elections should pave the way for more serious reforms. Difficulties still abound, however.