from costs of crises that are borne by market participants. the bailout of banks during the crisis shifted private costs to taxpayers and raised levels of public debt worldwide. many reforms thus seek to realign incentives by withdrawing implicit public guarantees. as a result, risk - taking on the part of banks may decline, allocation of credit may change, and costs of debt may increase because creditors cannot rely on bailouts and thus demand higher risk premia. profits in the financial sector may decline as a consequence of reforms. taken together, costs are shifted from the public sector to the ( private ) financial sector. an example from environmental policy may serve to illustrate the point. a pigovian tax on chemical producers that pollute a river internalises the externalities of polluting the river by aligning private and social costs, thereby realigning the incentives to pollute. the direct result of this policy is lower production of chemicals, as pollution of the river is now part of the private sector ’ s costs, and lower sectoral profits. however, these are not the costs of the reform but the intended consequence. practical implementation of reform assessments needs to address the issue of a missing counterfactual. how should the benefits of the reforms that have been implemented be 3 / 7 bis central bankers'speeches measured ex post? is it possible to measure the benefits of reforms if no crises have occurred? wouldn ’ t the lack of a counterfactual render an assessment of the benefits of reforms impossible? these questions are not new, and they are in fact similar to cost - benefit analysis in other policy areas. it is in the very nature of counterfactuals that they cannot be observed. if monetary policy keeps the inflation rate at or below a target of, say, 2 %, how does one quantify the macroeconomic benefits of having avoided an acceleration of inflation? if educational policies increase school enrolment rates, how does one quantify the benefits of reduced youth unemployment and perhaps even reduced youth crime rates? the need to quantify benefits of ( economic ) policies without knowing the counterfactual is not unique to financial sector reforms. there are two – complementary – approaches of dealing with them : first, assessing the benefits of reforms can be done without directly measuring the broad objectives of reforms in terms of enhanced stability of ( global ) financial markets or a lower probability of financial crises. indeed, the benefits of reforms can be assessed by looking at the channels through which excessive risk - taking in

the financial sector materializes and through which risks to financial stability can build up. the focus can be on indicators that are closely related to factors contributing to financial sector stress. in the same vein, indicators might include the soundness of the financial sector and the contribution of the financial sector to real economic activity. this then leads to the second question, namely the question of establishing a causal impact of reforms on these indicators and the construction of counterfactuals : how would the financial system have developed without the reforms having been implemented? constructing macroeconomic counterfactuals is difficult and not desirable. we do not wish to see a financial crisis in a country that has not undertaken financial sector reforms just so we can improve our understanding of the benefits of reforms in a country that has undertaken such reforms. so, while the “ real ” counterfactual is neither possible nor desirable, there are nevertheless many ways to construct synthetic counterfactuals that can serve a similar purpose and many ways to use econometric methods that make it possible to establish causality. there are many possibilities of dealing with the challenge of causal identification, even in the area of macroeconomics ( fuchs - schundeln and hassan 2015 ). but empirical methods alone are not enough ; good conceptual and theoretical frameworks are also needed to decide what to look for in the data. b ) have reforms had similar effects across markets and jurisdictions ( heterogeneity )? reform effects differ across countries, banks, and sectors of the financial services industry. this heterogeneity facilitates rather than prevents reform evaluation. essentially, heterogeneity and institutional knowledge are important for good ( causal ) impact assessments. comparing countries that enacted different types of reforms at different points in time, comparing developments before and after reforms have been initiated, comparing banks for which new regulations are more or less binding can help to establish causal effects. understanding differential effects across markets or jurisdictions delivers valuable lessons for policy development that would be missed by looking only at averages. take, for example, the increase in capital requirements for banks after the crisis. higher capital requirements increase the resilience of banks with regard to shocks and provide the basis for sustainable lending to the real economy. trends in post - crisis bank lending have differed across countries and individual banks. a decline in lending can, for instance, be due to a decline in credit demand, more prudent lending behavior of banks in response to higher risks, or it can