Under a law to be submitted to parliament next month, the conglomerates -- known as chaebol -- and the other firms will be allowed to own stakes of up to 10 percent in local banks, the Financial Services Commission (FSC) said.
Current law limits investment in a bank by a non-financial company or an industrial group to four percent.
The curbs were imposed after the 1997/98 financial crisis to stop the family-run conglomerates which dominate the economy from using financial units to obtain easy credit for reckless expansion.
The watchdog said the new law would allow conglomerates, pension funds, private equity funds and foreign banks to take larger stakes.
The move will help boost competitiveness and smoothe the privatisation of those banks that are state-owned, Kim Joo-Hyon, a senior FSC official, told reporters.
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The privatisation of state banks is a key part of President Lee Myung-Bak's economic reform policy aimed at revitalising Asia's fourth largest economy.
Lee's g