Lotte Group Vice Chairman Lee In-won committed suicide on Aug. 26, just before he was due to be questioned by South Korean prosecutors. Over the past year, the Korean-Japanese conglomerate has been mired in a corruption investigation ignited by a family feud involving the group's founder and two sons. Lee was the highest-ranking Lotte executive outside the founding family and regarded as a pivotal link to allegations concerning slush funds, embezzlement and tax evasion.

Shocking though they are, such incidents are hardly unique in Korean or Asian corporate history. The success of Korea Inc. was founded partly on intimate relationships between the government and the sprawling business empires of the chaebol, the corporate groups formed by the country's powerful families. Out of the impoverishment of the 1970s, the government devised an industrial model to boost the competitiveness of the chaebol, arming them with government-directed financing and subsidies.

This arrangement inevitably involved a crucial role for the banking sector as the financial backer of Korea Inc.'s expansion overseas.

South Korea is entering an intensive political cycle, heading toward a presidential election in late 2017. One key policy agenda item is banking reform to break the triangular relationship between the government, banks and chaebol.

LASTING DAMAGE South Korean banks act as loyal financiers of the export-driven chaebol, in a page taken straight out of Japan's playbook. China has more recently adopted a similar role for its banks.

As a result, South Korea, Japan and China now share the problem of inefficient capital allocation from their respective banking sectors. South Korea is just beginning to understand the lasting damage to the economy from the misallocation of capital that can arise from this tripartite system.

This system is only effective when the recipients of the capital are growing and profitable. Over the past four years, South Korea's export model has been squeezed by slowing global demand and rising competition from China's overwhelming industrial expansion. A deep rethink of the role of South Korean banks in financing export industries, however, could lead to improved valuations for the country's listed banks.

Reforms to South Korea's outdated industrial model and the underlying banking system are urgent. Historically, South Korea's KOSPI stock index has been considered one of the most reliable proxies for global growth, due to the country's export-driven industries. South Korea has a heavy presence in a broad range of cyclical industries, including shipbuilding, and earnings swings have been magnified by these sectors' leveraged capital expenditure cycles.

Policymakers have recognized the structural problems with Korea Inc.'s export model after seeing declines in overseas shipments for 14 consecutive months. They are trying to avoid Japan's "lost decades" through reform. Recent press coverage has focused on the need to learn from Japan's mistakes.

PRETTY FIX South Korea's predicament is undeniable, as strategically vital industries like shipbuilding, engineering and construction are contracting more sharply than they did during the financial crises of 1998 and 2009. But corporate restructuring plans are rather common in South Korea and typically do not inspire much confidence.

A key difference now is the recognition that the South Korean banking system may be at the root of the problem. Sectors including shipbuilding, construction and engineering were historically seen as deserving of politically directed loans because they were viewed as able to win sizable projects that would earn foreign currency for the country without the need for big capital spending commitments or technological advantages.

It is almost inevitable that once an industry becomes accustomed to favorable treatment inefficiencies become chronic. The South Korean public has recently been alerted to the urgency of the problem. Daewoo Shipbuilding & Marine Engineering, among many former export champions, has been under the ownership of the government's Korea Development Bank since the 1998 Asian economic crisis.

Local media have highlighted mismanagement at Daewoo Shipbuilding, which is alleged to have inflated its operating and net profits by billions of dollars. Senior managers, including former chief executives and chief financial officers, have been indicted on charges of accounting fraud, embezzlement and graft. Even the usually reticent National Pension Service has filed a lawsuit against 10 executives linked to the company.

Daewoo Shipbuilding & Marine Engineering’s shipyard is seen in Geoje, South Korea, on May 25.

WHO'S WATCHING? The severe lack of oversight at Daewoo Shipbuilding from its creditor-appointed management is drawing attention to a flawed system that encourages state-owned banks to accumulate assets under supervision, rather than restructuring and privatizing them as soon as possible. The media spotlight could galvanize reform of the banking system.

Left-wing sentiment is sweeping across the globe, and South Korea is no exception. The government has been directing banks to support the chaebol on the basis that they are national champions that can deliver prosperity to the people. However, in recent years, as the income gap between the middle and working classes has widened, the chaebol and their employees are increasingly seen as representing the interests of an elitist upper-middle class.

The Minjoo Party of Korea and the left-wing coalition that won a majority in parliament in April will be campaigning heavily for a clampdown on chaebol-friendly policies in the run-up to next year's presidential vote.

With people becoming more aware of the mismanagement of public funds, South Korean banks may soon have to meet higher standards. In August, Hanjin Shipping, a symbol of South Korea's export success, filed for bankruptcy protection. An affiliate of equally iconic Korean Air Lines, Hanjin's demise is a strong signal that government backing for exporters via the banks has begun to erode. This change could be a boon to equity investors, who have been frustrated by almost a decade of painful declines in bank valuations. South Korean banks should begin to benefit as they are freed from "national service" in the coming years.

Peter S. Kim is a managing director and investment strategist at Mirae Asset Daewoo. The views expressed here are his own.