Recent financial liberalization in Taiwan has caused local banks to face major structural changes. This paper examines the cost structure of 36 local banks in Taiwan using the translog cost function and attempts to identify suitable operating strategies for cost reduction and performance improvements. Results indicate scale economies for small and large-sized banks and scope economies for all banks. The establishment of a financial holding company appears to benefit largely those banks affiliated with market-leading insurance conglomerates. These results suggest active diversification should focus on deposits and lending while promoting lending jointly with deposits and investments.