Thursday, 10 December 2015

Petroleum prices in India : Acheche din are here

Indian economy's achche din, are primarily due to the crash in crude oil prices  from its peak of $110 in mid 2015 to current $37.34 now in Dec 2015. However GoI has not passed all the price reduction to consumers but has retained bulk of that savings in form excise tax.

Benefit has been threefold:

1. Lower import bill thus less transfer of money to external economy and simultaneously savings of precious foreign currency.
2. Introduction of market linked prices for diesel (petrol has been done earlier itself) thus saving huge revenue outgo on subsidy.
3. Increased excise duty provides revenue thus helps in plugging GoI fiscal deficity.
4. Increased refinery margins for OMC/refiners due to high petroleum prices.

GoI needs to do is:

1.  Dis-investment in OMC: since this is the best period for refiners and OMC in India and is likely to fetch premium for companies like IOC/BP/HP. which are at high due to favorable circumstances. This is today's market condition is close to 200,000 crores  (or roughly $30 billion) and equal to 1.5% of GDP.  This should act as a catalyst and invite foreign capital/know-how.

2. Align Diesel/petrol prices to international standards, which would mean that diesel should be 5-10% higher than petrol as that additional price is for negative externality due to higher pollution. This would mean that excise needs to be reduced on petrol and increased on diesel.  To keep this revenue neutral for Govt, every Rs 1/ increase in diesel can result in Rs 4/- decrease in Petrol. Given the current prices @ Rs 46 and 60 for diesel and petrol respectively this would mean some where around Rs 50-52 for diesel and Rs 48-50 for petrol.

This would mean that GoI has to show that it has commitment towards market economy.

Saturday, 14 September 2013

IPhone - Why such high ASP?

A Smartphone cost for a consumer over its life is:
  1. Upfront cost of buying
  2. Data and Voice service
  3. Content cost (Apps, could be one time or periodically like in digital media or both)
Today, Apple’s iphone major revenue share is driven through combination of 1 & 2 in post-paid/contract dominant market where it Network uses the iphone as demand generation catalyst which it fulfills by its supply of services reflected in higher ARPU. This has been used twice in rolling out 3G and now LTE services. It is a moot point but going by evidence available before iphone (especially in 3G rollouts in Europe where demand did not increase to meet the supply) that in absence of this new demand the rollouts would have been spread over longer time period.
This is nice virtuous circle as long as it continues to work, since it is demand led hence allowing the Network provider’s to command a premium which would not be the case if it was supply driven i.e. if by infusing new technology Network provider would have hoped for demand of its services.
In US, current wireless ARPU (subscriber based) is $69 for 2012 which is for both feature and smart phone users, if only smart phone users are taken then this would definitely be around $90 which would mean that for the tenure of contract a subscriber is worth $2160 of which $1100 is attributable to smart phone based data usage.  This additional revenue is basically getting shared between Network provider and phone manufacturer (Apple).
The best example for understanding the subsidy cost is the ipad, it has the same appeal /game changing innovation when introduced and has identical content available through the iOS platform but the crucial difference is from Apple perspective is that consumer and the customer are same and no dichotomy like it is there in iphone.
Ipad although having a premium price compared to its competition does not have high operating margin of iphone. This the model that will be prevalent when smart phone reaches maturity, and the same model will work in pre-paid or low ARPU markets. 
Content Services
The third leg of this stool is Content providers (include app developer) who would like to be part of the eco-system and are willing to share revenue with eco-system owners. The content provider the way they have evolved are independent of Network providers i.e. no commercial relationship between them or any cross-subsidies. [This could potentially change in future if some content requires specific network quality/quantity for e.g. an HD movie streaming might involve paying to network provider temporarily sort of on-demand network charges, more in pre-paid rather than in contract market.]
The three eco-systems that are dominant currently are:
  1. Apple – comprising of iOS/itune
  2. Google – Android
  3. Amazon (not in smart phone world currently)
(Windows Mobile is also in reckoning but has not been successful in building a momentum)
Currently, this does not represent a substantial source of revenue for Apple (as content provider are not solely dependent on eco-system but could deliver the services over open Web) but this has important criteria in eco-system’s success which are
  • Stickiness: once a consumer setup their digital content which could be around media publications, photo management, music/movie services, social media etc. It makes them reluctant to move out and reduces the churn.
  • Demand generation: The more content a user consumes they are likely to increase their network ARPU.
  • Additional Revenue: A stream of revenue that that has highest upside potential in future as device and network growth matures
  • Eco-system/Cloud services: These are services such as Mail/Calendar/Document Apps (spreadsheets etc)/ Maps which would be provided by Eco-systems owners to distinguish it from others.
  • Ad Revenue: through collection of humongous behavioral information many times with implicit consent. Of course, this will be combined with information gathered through non-smart phone based behavioral pattern to provide a complete picture.
Currently, this does not translate directly into a major stream for Apple as its major revenue stream is from upfront purchase and Network provider subsidies. On the other hand Google and Amazon whose business models have relied on Web services revenue stream have unsurprisingly put major emphasis on this stream. (Google keeps its Android platform free and Amazon keeps it device at almost zero operating margin)
High ASP: How long?
As long as the previous virtuous cycle continues where network can continue to move their customers on higher ARPU they would be willing to subsidize. The basic question is for how long and to attempt to predict we need to understand that currently
  • USA has smart phone penetration of 56% (May 2013) and saturation may be expected at somewhere in 85% range (9% currently do not own a mobile phone). This would mean USA has still approx. 2 year to reach that stage.
  • LTE subscriber amounts to only 20% of total subscriber, this increases the ARPU further and potentially could take 3-4 years for majority of smart phone subscribers to be on LTE
  • Currently, there is not any specific “killer application” that could not be sufficed by LTE so once the above two is done smart phone market would be in the mature phase.
The downside specifically for iphone is that it is device primarily owned by educated and moneyed segment which has a higher propensity to consume and majority of them would already be owning one, so that leave the consumers who are not technology faddists and are likely to spent less on their network plan. How much would the network providers be ready to subsidize this group?
This is very difficult to answer but the best case scenario (for Apple) would be for next 2-3 years. The clear signal would be that device life cycle would increase  (Apple is admitting in this year release that the iphone 5 is good enough with plastic covers, only serious gaming and photography enthusiast may pay the 15% premium for 5S).
Another unpredictable is competition as differential in both phone and eco-system is fast reducing and this would provide more negotiation power to network providers to reduce their cost basically phone subsidy.
Apple has consciously taken a decision to ignore or low priortize  pre-paid segment as in their opinion they can always play this game when the growth matures in high ARPU markets. They could have segmented a device for prepaid mkts but that would have probaly affected the halo on the premium tag in USA or developed mkts.

Monday, 29 October 2012

Apple's Product Portfolio strategy

Apple's Mini ipad was launched last week and most of the critic's complain about the 'lack of innovation' and its pricing especially the entry point, considered too high.

Let me consider the pricing argument, most of the critics are looking at ipad mini more as Nexus/Nook/Kindle plus thus has expected it price to be around $250 (+/- 10%). This perspective is totally different from Apple's perspective as company does NOT consider itself to volume/mass-marketer of  personal computing but a premium/luxury brand that provides superior experience. This has been put beautifully and succinctly by Felix Salmon (

"The point here is that Apple has already done the work of persuading people to buy the iPad mini — it’s done it through many years of creating products which are a pleasure to use.
Apple, famously, has the same pricing philosophy as Louis Vuitton: it sells premium products at premium prices, and it never discounts. That philosophy has made it an aspirational brand worldwide: you don’t see vendors in China selling fake Google Nexus 7s. Sometimes, as with the iPhone and iPad, the world beats a path to the company’s door in any case. Other times, as in the case of wireless routers or external displays, Apple’s products are so much more expensive than the competition that only the rich Apple faithful tend to buy them. But that uncompromising devotion to the fundamental philosophy is what has made Apple such a powerful global brand.
The result is that most of the millions of people who buy an iPad mini will never seriously consider any of the alternatives. They know what works for them, and they trust Apple to deliver. That’s the power of the Apple brand."

This in a nut-shell explains Apple's philosophy where it only wants to provide beautiful products for consumers who are ready to pay a premium. This was always the case even in initial era of PC before the arrival of Ipod, Iphone and Ipad. 
This is in stark contrast to Microsoft/Intel which created an ecosystem of hardware/software vendors that catered to mass-market demand for personal computing. They captured the 90% of global market, due to pricing which can be seen in historical price of an average personal computer from Apple, today OSX starting point is $1000 (in today's dollar this was $1500 in early nineties same as MS ones) while that of Windows is $400-500. MS built on this advantage due to network effect where being the successful platform attracted lots of third-party products and IT human resources which left Apple fighting for its very survival.

Now Apple with its introduction of ipad (built on iphone) has upended the old order of personal computing in a big way for individual consumers (Enterprises are always a second thought while reverse is the case for MS-Intel duopoly) by producing an exceptional product with touch based human-computer interface that is more natural to use especially in personal Use cases of Mail, Web surfing/reading, Gaming, Video/Audio consumption, education and all of this while supporting high mobility. The cons are mostly related to Enterprise use cases where lack of keyboards, accessibility to MS-office and availability of enterprise applications.
If only this was the case the product would have been successful and created an option for probably 15-20% of global market in consumer computing but it was launched with a brilliant pricing strategy from Apple where it decided to lower the entry price to $500 (50% of its traditional computing devices such as MacBook Air). This meant that lots of consumers looking for a device for home use consider ipad above a low end traditional PC, this has been reflected in figure of PC shipments from 2010 onward where either PC shipment are stagnant and recently have started showing a declining trend (excluding Mac platform) for the first time since their inception! Industry response which was initially either skeptical or scornful has now changed to fear where they would to grab a share of this growth (Industry response especially MS-Intel duopoly will require a post of its own) where we saw launch of MS Surface this week specifically to address this lacuna.

Meanwhile Apple is repeating its strategy of iPod for personal computing (I guess they have learnt their lessons from initial battle with MS!) which is to provide a flavor of Apple product at increasing lower prices (Ipod shuffle starts at $50!) for customers who appreciate Apple's attention to detail and build/usability quality. And in this world i.e. the world of Apple admirers/fanboys they are providing another lower price-point of $329 for almost all of Ipad functionality and looks. If we consider Ipod Touch  a sort of micro ;-) Ipad which starts at $300 then depending on your personal computing need you have products at almost every $100 interval until $2000.

This range of product portfolio is going to meet the needs of most of people (presumably in developed world) and at the same time ensuring that there is no repeat of early nineties where Apple brand was locked out into a niche market due to its higher pricing for superior products.
PS:  Personally, I would have liked Apple to reduce the $130 premium for 3G/LTE to a more $75 but that is just me ;-)

Friday, 7 September 2012

Indian Energy Industry: Petroleum Overview

Energy in India: An Overview

The objective of this post is to provide an overview of Energy with emphasis production, consumption and pricing snapshot, idea for the same being that it will help us understand the exact nature of Energy related subsidy and in-efficiencies. 
First we will identify the primary sources of Energy and then go into details for the ones that can be classified into Petroleum and Electricity (there are some overlapping but in India’s case they are minor).

1.       Primary Sources of Energy

                                                                                Fig. 1 Primary Energy Sources %
The key facts from Energy perspective are:
a.       Majority of energy is met by Coal whose share is set to increase in short to medium term.
b.      India imports 80% of its Oil & Gas which has consequences from Energy security perspective.
c.       Nuclear & Renewable energy have not taken off in India but India need to consider them for to meet its Energy needs in long term i.e. 2020 onwards.
d.      India’s energy needs is growing at 6% CAGR

2.      Oil & Gas

Fig 2.  Petroleum products by consumption % for 2011-12
 Major facts that need to kept in mind:
a. HSD (Diesel), SKO (Kerosene) and LPG constitute Sensitive products whereby GoI provides subsidies for the same (implicit and explicit)
b.  Petrol has been removed from the above list from Jun 2010 hence currently there is no under-recovery or losses to OMC (Oil marketing Co.) on Petrol.
c.    Others constitute furnace oil, Naphtha etc are industrial products which can be bought and sold in open market without GoI intervention in its pricing.
d.  India is self sufficient in refining crude and exports approximately 20% of its refined petroleum products

HSD (Diesel)

Fig 3.  Use-wise percentage share in total consumption of diesel 2008-09
Consumption analysis of diesel brings out few salient points that should weigh in for overall Energy policy
a.       Except for a share of passenger car and power generators which is used by home owners for personal use majority of diesel consumption is for commercial activities.
b.      Hence, any price increase in diesel will result in price increase in various sectors so for e.g. farmers will be compensated by higher MSP of major crops, transporters can increase their rentals similarly for industry.
c.       The closer the diesel price is to market price will result in lesser subsidies which could then be used for targeted subsidy to economically weaker groups.
d.      Removal of distortion/inefficiencies that build up in economy for e.g.
                                 i.            Railway consumes 25% energy in moving freight vis-à-vis trucks, by bringing diesel prices closer to market price good movements demand will be moved towards railways improving efficiency
                               ii.            Diesel based passenger cars have proliferated from 4% of passenger car market in 2004-05 to 40% in 2011-12. This causes inverse subsidy whereby GoI is subsidizing the rich creamy layer from taxes!
e.      To discourage diesel based passenger cars as compared to Petrol an excise duty should be levied that should take into account difference in taxes for Petrol (customs, excise as well as VAT/sales) over a life time of a vehicle of 10 years plus a tax to account for negative externality like pollution (Diesel is more as compared to petrol). For e.g. a vehicle that is driven 8000 km/year and gives an average of 13.5/ Km per litre receives a benefit of Rs 12,000/year which should be levied as tax after discounting the same for 10 year or average life of a vehicle.

SKO – Kerosene
PDS Kerosene is used by homeowners primarily for lighting. It is mainly used in rural environment for lighting where electricity is not available or if available its supply is erratic. It is an very inefficient form of lighting/cooking medium as compared to electricity or LPG with which it should be substituted.

Fig 4.  Kerosene (SKO) production in ‘000 MT

Fig 5.  Share of Energy sources for Lighting in Households from NSSO 2010
The key points with regard to SKO – Kerosene are:
a.       Over the years there has developed a inverse relationship between consumption of Kerosene and a state’s income level, thus today per capita kerosene consumption in high income states is 41% higher than low income states. This need to be rationalized and GoI allocation of kerosene needs to account for rise in personal income across households.
b.      From 1999-2000 to 2005-06 there has been decline by 53% in households using kerosene in high income states while the same is 24% for low income states.
c.       As per NSSO data for majority of households 3.5 litre of kerosene per month is sufficient for lighting purpose hence a PDS limit of 5 litre per household should be more than adequate.
d.      A large price difference in price of Kerosene vis-à-vis diesel (approx Rs 30/litre in Delhi) is an incentive for adulteration. It is estimated that around 40% of PDS kerosene is diverted for unauthorized purposes including adulteration. This not only is substantial leakage in taxpayers money but causes loss both due to pollution and wastage of money in upgrading vehicles as well as fuels into Euro III and Euro IV standards.
e.      Cell based lanterns and solar powered lanterns would be a clean and efficient replacement for kerosene based lighting, also with spread of rural electrification need for Kerosene as source of lighting could be phased off.
Domestic consumption of LPG has increased from 9.3 MMT in 2003-04 to 15.4 MMT in 2011-12. Sale of subsidized domestic LPG cylinders constituted 86.5% (cylinders of 14.2 KG) of total LPG sale in 2008-09 which would have only decreased slightly with coming in of private players.

Fig 6.  Share of Energy sources for Cooking in Households from NSSO 2010
The key understandings about LPG are:
a.       It is stated policy of GoI to provide access to clean and efficient cooking medium primarily LPG to 75% of households by 2015.
b.      LPG usage is primarily urban based with only 9% of rural households having access to LPG.
c.       LPG is heavily subsidized by GoI and in unlimited quantity (although there have been recent measure to restrict no of cylinder refills per connection) thus providing substantial subsidy to well-off section of population.
d.      The LPG-consuming households in the top 3 decile (Fig 7) in urban areas, comprising some 22 million households, use nearly 40 per cent of LPG and spend less than 5 per cent of their total expenditure. These households get a large part of the subsidy even when they have the capacity to pay the market price for LPG and will use LPG even when the price is raised.
e.      LPG subsidy as currently structured is a regressive subsidy whereby people spending more (of course they earn more) are the ones who get more subsidy from GoI while ideal subsidy should have been reverse where household below certain threshold should only qualify for the subsidy.

Fig 7.  LPG consumption per decile of household Rural/Urban from NSSO 2010
        Until June 2010 Petrol was also classified as Sensitive products i.e. its pricing was determined by GoI directive and any losses incurred by OMC were to provided by GoI in implicit or explicit subsidies. Now , its prices are market driven hence in current financial year there are no implication from its under-recovery/losses.

3.      Subsidy and Pricing of Petroleum products

Energy subsidy is basically defined as a government action that
a.       Lowers the cost of production,
b.      Raises the price received by producers
c.       Lowers the price paid by consumers.
In India’s case it is the last which forms the bulk of subsidy with a slight bit coming in the form of tax credits.
India has a huge population that is in extreme poverty and majority of population approx 60-70% that has limited economic mean; it is a well established fact that basic energy demand is in-elastic thus in market driven environment this would cause extreme burden on majority population and secondly price volatility would cause further distress. Hence, it has been considered one of the core objective of GoI policies to provide subsidies for Petroleum products consumed at household i.e. domestic LPG, PDS Kerosene and Diesel (Petrol was declared market driven in June 2010)
Types of Subsidy
Sensitive petroleum products are sold for less than cost prices to OMC (related to international market prices), with the government providing a fiscal subsidy on LPG and Kerosene. The subsidy, however, covers only a part of the difference between the cost price (including marketing costs) and the selling price of these three petroleum products, thereby resulting in “under-recoveries” for the OMCs.
Under Recovery = Cost Price – (Depot Price + Fiscal Subsidy*)
 where, Cost Price is cost to OMC including its profit margin
Depot price is the price at which OMC sells the same to Distributor
*In case of Diesel there is no direct fiscal subsidy
The Under Recovery is covered by GoI either by direct cash assistance or Oil bonds (2005-2009) and part of the amount is covered by upstream NOCs like ONGC, GAIL etc. (Indian Producers) whose profits will now be shared with downstream OMCs, remaining any amount has to be borne by OMCs themselves.

Fig 8. Financing of Under-Recovery for 2010-11

Fig 9 Trend in Under-Recovery

Over a period of time Petrol has moved out of sensitive product hence has no losses for OMCs while Kerosene consumption is also on a downward trend but Diesel and LPG are area of concern as they are growing at high rates.


These are the prices for Sensitive products as of 1-Sep-2012 in Delhi with their corresponding Under-Recovery amount.

In FY 2012-13 Apr-Jun quarter alone the total amount for Under-Recovery is Rs 47,811 crore which is more than double the amount of 2010-11.


GoI various taxes from Petroleum industries both at Central and State level in the form of customs, excise, sales and VAT etc. The revenue for last two years was

These revenues is from all petroleum products and not just sensitive ones but the important fact to note is that total amount of subsidy including Under-Recovery for OMCs is less than total taxes collected by government in any given year!
The issue is that OMCs are solely supported from Central budget while taxes are split between central and state government. However, these do not include corporate tax, tax on dividend, profit petroleum including all such accruals to GoI the total taxes were Rs 225,494 crore in 2010-11.

4.      Subsidy : A way forward
No one in their senses can ignore energy poverty prevailing in India and they do need all help from government for a better future. The current way subsidies are operated due to their historical and political reasons they are highly inefficient and in some cases perverse where middle-class tax payer are subsidizing rich or well-off section of society.

The key steps that are recommended are:
a.       Targeted Subsidy: Subsidies in current form are executed in blunt fashion to improve their efficiency going they need to be better targeted mostly BPL or household with income below mean. This need to be strongly linked to a Unique identification system (Aadhar/UID ?). This will help in rationing of either LPG/Kerosene and could also in future be used to have cash transfer of subsidy into beneficiary bank accounts.
b.      Market Price: These needs to be done for Diesel initially as most of its consumers have the ability to pass on the price to end customers. For LPG and Kerosene this needs to be done in conjunction with above as then GoI will have the ability to achieve cash transfer for subsidy amount to beneficiary. This will help in reducing Under-Recovery amount drastically a part of which would be used for direct cash transfer.
c.       Taxation: Petroleum products are currently attracts substantial taxes at both central and state level. As products are de-regulated these could be brought down to levels that are prevailing world wide, it is also suggested to have rationalization whereby Govt promotes cleaner and efficient fuels.

 I have aggregated these from multiple sources for a simpler understanding. If you wish to delve deeper into these issues it is highly recommended to go through the following documents

1.       Petroleum Planning and Analysis Cell: MoPNG, New Delhi
2.       A citizens guide to Energy Subsidies in India
Produced by The energy and resources Institute and The International Institute for sustainable development’s global subsidies Initiative.
3.       Report of The Expert Group on A Viable and Sustainable System of Pricing of Petroleum Products
Govt of India, New Delhi 2010
4.       Energy Statistics 2012: Central Statistics Office MoSPI New Delhi

Wednesday, 7 March 2012

Finally two party rule in UP!

UP election results are out and have surprised most of the political analyst and psephologist covering the state mainly because it is seen as multi-party state hence most of the time it returns fractured verdict which means hung assembly or coalition govt.
But starting 2007 and now 2012, the result confirms the trend of it becoming a two party state with SP and BSP as the front runners while BJP and INC relegated to bit players here is the evidence:

1. Vote share
         SP :   29% (25.4)
         BSP:  26% (30.4)
         BJP:  15%  (17)
         INC:  14% (8.6)

Vote has not change much but in the range of  4-5% away from BSP towards SP and  this has caused huge wins in no of seats for SP from 24% (97) to 55% (224). Basically, floating voters have  ignored INC/BJP and gave their mandate to SP or BSP depending on their perception of governance. 

2. Party Influence: Most of the time political party contest election in almost all seats but their chances of winning them are on far fewer seats, hence to understand the same I have created this table for parties according to their top 2 placings (as an aside in most majority election there is a clause where winning candidate needs to have 50% vote share otherwise a second round with top 2 is held, this is useful in multi-cornered contest where parties with extreme position tend to do better in first past the post system but would lose out in second round, also it avoids the backroom deal making that would prevail otherwise). 

On that basis each party's influence in UP is

Winner  RunnerUp
SP 224 77 301
BSP 80 209 289
BJP 47 55 102
INC 28 31 59
RLD 9 9 18
Others 15 22 37

 This clearly shows that SP and BSP have influence in some 75% seats of UP whereas BJP and INC have the same in less than 25% or less of constituencies. Historically, Cong used to be a major player till early nineties while BJP was influential in nineties while the temple/mosque affair was at its prime, post that UP polity has settled into local/regional mode a la Tamil Nadu where national parties are only on periphery.

What next for National party in UP? INC and BJP are clearly between rock and a hard place and I can see only two solution:

1. To emerge once again as a local player they will need to have creditable leadership at state level who are there 24x7x365 working for the UP from there itself and preferably newer leaders without too much baggage (corruption/castism/communalism) but this will mean that they will have a long wait probably something like 5-10 years. Actually, INC has tried this with mixed results, it was successful in 2009 Loksabha election where they got 18% vote-share translating into 22 MPs but less successful this time. Here my hunch is that if they can groom a local leader for CM then voters will perceive them as a more serious player and they should be able to attract more voters as just being a contender and not also ran.

2. Bihar model, which is to tie up a serious alliance with a regional party where national party is secondary in state but could have more weight-age in national elections. This will ensure that coalition has an advantge (especially if the other party is not in a alliance). I am surprised why BJP did not decide to do this with BSP in this election (SP cannot tie up with BJP!). I am sure we will see this option at play in 2014 national elections.

Friday, 27 January 2012

Banking Industry: A way forward

Banking Industry

The bankruptcy of Lehman Brothers, investment bank, was the business world’s equivalent of comic book characters fall off the cliff moment when it suddenly realizes that it does not have solid ground underneath. For the financial world it discovered the same on that fateful day, warning signs of what is to come were many like, when it was reported (2007) that financial institution account for 40% of corporate profits in US or US national real estate price increase of 100% in less than 5 years!.
Although, world economy has slowly recovered from that body blow and might be on its way back to complete recovery (a big If, it can avoid full blown Euro crisis, once again with European Banks along with its Govt. playing the roles of gladiators). It is definitely past some time to identify the causes for crisis, so that decisions could be taken to re-structure the financial industry otherwise it won’t be long before we have another crisis.
Historically, banking has been recognized as a unique industry with its own structure of ownership, rules for governance and regulations. This has been due to its high risk and high rewards but over a period of time the distribution has changed, thus currently it has privatized returns (profits) and socialised risks (losses). Thus Banking industry as a whole has its incentives horribly skewed towards higher risks this needs to be rectified to ensure that millions do not have to suffer due to the greed’s of few. 
Banking at the start of industrilization
In the mid 19th century (Europe & US) banking represented the staid part of the business with a typical firms being unlimited liability partnerships or mutually owned co-operatives (UK building societies). Due to unlimited liability owners and managers were one and the same, having their own personal wealth being at risk. Thus “market” ensured that risk management was exercised with due-diligence and discipline. 
Another crucial factor in bringing the market discipline was that most of the banks had equity capital comprising 50% of liabilities while liquid securities and cash comprise almost 30% of bank’s assets. Thus, bank creditors/depositors were comfortable in knowledge that if any losses are to be taken it has to be born first by the owners themselves.
In terms of taxation there was not any differentiation between equity and debt thus dividend and debt payments (principal and interest) were made net of taxes i.e. without any bias towards the structure of financing the business. And of-course, banks at the time did not have such curious things as “cross-border” banking where their liabilities and assets are in different parts of the world.
In mid 19th century UK (it represents a global empire spread across globe) total financial sector assets represented less than 50% of annual GDP and the largest bank had less than 5% of GDP in its assets.  

How it we get here?
The change in banking control structure started in 19th century itself as Western world started industrializing it had tremendous requirement to fund its new infrastructure and industries (Railways, Ship-building, and Textiles etc.) and it was felt that unlimited liability was holding back the from wealthy populace to invest in banks.
Thus, to address these issues legal changes were made over a period of time in both UK and US which allowed for banks with limited liability but with a provision for reserve capital (i.e. the capital that could be called in at the time of bankruptcy). Thus, even with limited liabilities bank’s total capital (paid up and uncalled) still represented 50% of its liabilities.
By start of 20th century a major consolidation took place in financial industry which meant that as banks were becoming bigger/larger they could not be managed on earlier partnership model where by owners/managers were one and the same. Hence, with consolidation came in the practice of professional managers separate from owners.
At the start of 20th century laws were changed in terms of treatment of banks capital and thus debt and interest payment were given tax free status which was slowly adopted world over. The rationale behind the move being that for financial industry debt is more akin to a raw material or part of business; slowly this rationale was applied to non-financial industry.

During the depression and previous banking crisis (lots of them in USA during its robber baron era) in early twentieth century, it came to be observed that extended capital was not of much use as it would always worsen the situation by spreading more panic about bank as a going concern.
As a part of policy response to Banking crisis of 1930’s and global depression many steps were undertaken the foremost being the introduction of Federal deposit Insurance which was to assure banks creditors so as to not turn a crisis of liquidity into one of insolvency. To limit the scope of contagion in one part of business causing to other and many bank related governance issues, Glass-Steagall Act 1933 was introduced in USA that ensured a clear separation between different financial institutions.
Due to these changes most of the investment banking was to continued to be a separate entity with partnership structure until late into eighties and would turn into public listed companies as the regulation climate turned business friendly.
The last bastion to fall in this climate of de-regulation was the repeal of Glass-Steagall Act in 1999 combined with very regulation lite for new derivative industry which was argued for in by such worthies as Greenspan and Summers. The former allowed the now too familiar behemoths in the form of Citi, BoA (Bank of America) and JP Morgan to be structured about who it is said that they are not ‘To Big to Fail’ but rather ‘To Big To Save’.
Where are we?
Now past three years from last crisis and probably staring into a new one in Europe which could be dramatically more painful as what was once a private debt on banking/financial institution has now been converted into a public debt crisis.
Today, when we survey the banking landscape it is dominated by “all in one” banking conglomerates, in UK banks have assets  more than 600% of its GDP thus representing undue systemic risk in case of financial contagion. In 2007, 40% of US corporate sector profits were from financial sector which earns its income for risk management and transfer, must surely signifies the mis-alignment of the sector. In US on an average, CEO of a large bank earn a compensation of $26 million which is 500 times US median household income while no downside in case of losses indicating malaise called profits are private while losses are publichelped by ever increasing leverage ratio which was north of 30 before crisis and still is around 25.
The banking crisis has had a huge cost not just economical which is substantial but in terms of cost to society due to huge increase in unemployment, burden of unsustainable debt, in some cases people with no access to savings for their retirement years.  In a study it was estimated that total loss due to banking crisis from 2007-2010 is approx. $5000 billion or $1250 billion per year (equivalent to Japanese GDP). 
These systemic changes have not happened in ideological vacuum but has helped cult like devotion to Efficient Market Hypothesis (EMH), whereby it has been hypothesized that market are the best regulator thus all public listed companies merely require self-regulation (read Alan Greenspan’s testimony to US Congress one of his gems is “I made a mistake in presuming that the self-interests of organizations, specifically banks and others, were such as that they were best capable of protecting their own shareholders and their equity in the firms.”)! Secondly, laissez-faire proponents started justifying it as part of next level of evolution, like earlier one from agriculture to industry, where people argued that finance could exist for finance sake and not exist as an catalyst to real economy need to be discarded where we have UK’s PM Gordon Brown wishing to have everyone in London working financial industry. 
We as a society need to go back to basics, that money is predominantly means of exchange (of course beside store of value, a function we tend to forget in an era of fiat currency) and needs to be viewed solely in that context and not as a stand-alone sector on its own, once financial sector activity is cut-off from real economy than its activity starts to resemble gambling casinos rather than one of traditional banks.
Where we want to be?
It is high time that decision makers need to align the interest of broad society with that of banking industry, it  cannot be allowed to continue in its existing form of particularly in its perverse risk-reward behaviour.
The recommended changes are:
Increase equity in financial institution: It has been suggested that optimal equity ratio is about 20% of risk weighted assets. This will align the risk of equity holders with that of credit holder and will also provide a much needed buffer in times of crisis but additionally lower the leverage for management to undertake risks.
Introduction of Contingent capital: Banks need to have contingent convertible securities which will be debt instruments in normal times but will convert automatically to equity on predefined thresholds (this to be done pre-crisis thus avoiding Time-inconsistency issues). To avoid gaming possibility these securities should be tradable in market as current crisis experience suggests that market based equity prices were a better indicator of financial health of institutions rather than regulatory/accounting reports.
Re-introduce Glass-Steagall Act or Separation of retail/commercial  banking from Investment banking: This is to ensure ring fencing of “every-day” banking which needs to be protected by state for operational reason as well as for the well being of its citizens (no bank runs etc). This need to be further strengthened by imposing lower leverage ratio (lower risks) for retail banks to ensure that state is not require to be bail out. 
Introduce Partnership for Investment banking: Investment banking with its huge risk-reward profile has a principal-agent problem where agent (management) has incentives to take huge risks as they do not have to suffer from downsides as oppose to share-holders. Thus, this needs to avoid such problem by having partnership structure as was the case before nineties where a deal has to be signed on by shareholders who were to bear the risk. Also, since this industry is not crucial from every-day banking aspects hence it cannot qualify for state subsidies but needs to be treated on par with hedge-funds or private equity.
Measure performance of Return on Asset (RoA) rather on Return on Equity (RoE): Currently most of financial institutions are measured on RoE which is flawed measure as it does not account for the increase in risk profile in search for higher returns. If the bank CEO’s compensation was to be linked to RoA then their pay would have gone from average of $ 2.8 million in early nineties to $ 3.4 million in 2007 unlike on RoE which will take it to $26 million! If any further proof is needed, in US 2007 top 5 CEO with highest stake in their institutions were Dick Fuld (Lehman Brothers), James Cayne (Bear Stearns), Stan O’Neal (Merrill Lynch), John Mack (Morgan Stanley) and Angelo Mozilo (Countrywide)
Shadow Banking including cross border banking:  One of the fallout of introducing measure such as above is that it might push such activities to institutions that are not under regulator’s radar, for e.g. most of the banking regulation is done nationally but banks are allowed to operate globally thus there is serious lacuna where a bank in foreign country might undertake more riskier bet thus causing pain to its tax payer for e.g. in Iceland , Ireland and Spain where most of the private banking bad debt has been laid at the Govt.’s door. 
But surely, the most profound learning from this crisis is not of one particular measure but of relaxing the regulatory roles played in finance. Thus, although the changes in banking industry were being made over last century it is only with the coming of laissez-faire ideology that this industry ran amuck at taxpayer’s cost. It is high time where a proactive regulation is brought on with clear separation between those who are regulator to the ones who are regulated and ending the practice of revolving-door particularly in USA between the two. In my opinion finance should be treated on par with pharmaceutical or health industry as any misstep’s cost has to be borne by society at large.