Banks and Financial Crises

I agree, though not for the usual reason. Research shows just what it takes to cause runs, and opens the door to the effective solution rather than current patches: Equity financed banking and narrow deposit taking.

We understand crises and systemic risk much better than 100 years ago. Crises are still possible and the magnitude of their impact is reduced by deposit insurance, supervision, regulation and ex-post intervention. I think that there remains a significant impact.

Yes, this research has made a big difference, with respect to bank runs. But we must bear in mind the Global Financial Crisis, which came well after this research was understood by regulators. Much more needs to be done.

Better understanding run dynamics helps to identify and implement better policies. But financial crises are broader than banks and bank runs, and regulatory arbitrage (among other limitations) limits their effectiveness in practice.

research might have reduced the economic damage but I don't think it "substantially" reduced it, as the question asks.

The term ``made is possible'' is actually too strong and ``substantially limit'' is too vague. The research was an important contributor to the constructive policies that were implemented in our most recent global financial crisis.

There is evidence from a number of episodes that government backstops help alleviate panics.

Research has helped us spot and understand risks, but not always limit the damage substantially. Lots of constraints, for instance look at the money market funds. They have been a risk in plain sight yet they are still not safe. See the IGM Brookings report for more examples
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The research has certainly improved our understanding of these crises. Our management of the crises has improved...as for "substantially", I am not sure. Certainly better than how the Fed managed the great depression.

I think we have learned what can cause or exacerbate a bank run and that he led us to enact measures and policies that might help mitigate or slow it down. But, this is not my primary area of expertise.

With emphasis that "made it possible to limit" is not the same as "has in practice, everywhere limited"

Examples abound, but US response to the 2008 financial crisis included an alphabet soup of programs, each designed as a roughly optimal mechanism to deal with a particular problem of asymmetric information identified in theoretical and empirical research.
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In ST, yes. In LT, unclear. Research does not help distinguishing between crisis caused by panic or insolvency. Research showing crisis maybe generated by liquidity crisis -> governments intervened too often even when banks insolvent (Ireland 2008). Increase moral hazard in LT.

We understand some of the economic forces. But the policies that have followed leave much to be desired.

Not sure that damages can always be substantially limited.

Research on financial fragility has informed the design of macroprudential policy, modern bank supervisory regime, stress testing, etc., all of which has made banks much safer.

Reforms have had some effect, particularly on large US banks, but there remains a meaningful risk of financial crises.

The current wave of reform is one more larger patch on the same leaky boat. Guarantee more creditors, ever larger bailouts, promise that this time regulators will see risks ahead of time. It failed again in 2020.

Although no regulatory step can eliminate the possibility that new practices may lead to crisis, recent reforms have at least eliminated some channels

Although the probability remains significant, I think it is reduced. Stress tests and capital requirements in the regulated banking sector make it more stable. Risks remain as some of the risks migrate out of that sector.

Reforms have more than doubled big-bank capital buffers and significantly increased their liquidity coverage--big improvements. But, as we have seen recently (Gilt market), non-bank financial stability concerns remain, bond market design is weak, and much more needs to be done.

There is large variation across countries in regulation and enforcement, plus dissimilar changes post-2008, so better to learn from heterogeneity than to draw broad conclusions. Moreover, the shocks going forward are not necessarily those that drove recent regulatory changes.

it might have reduced probability of a crisis but I don't think "substantially" reduced it.

Reforms across countries are heterogeneous in form and magnitude, some of which seem ill conceived and counterproductive and others that look to be prudent.

Though it is unlikely to be "substantial" reduction, there might be a small reduction. However, at what cost? Heavy-handed regulation may reduce growth opportunities in the economy.

Regulations often target yesterday's problems. Financial innovations like crypto are difficult to keep up with for a variety of reasons including political economy ones.

Too much activity has migrated into the shadow banking system. The banks, at least in US and UK, are definitely stronger and safer, but the 2008 reforms were incomplete. See the same report

One of the biggest challenges in preventing future crises relates to the fact that the underlying triggers are often different.

some previous risks will have been reduced while new macro-prudential policies could create new ones.

Increased bank capital requirements help but could be substantially larger to promote stability without large social costs. Regulation generated large outflows to lightly regulated shadow banks and should also account for banks' adjustment on the retain vs. securitize margin.
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Financial crises do not occur frequently, hence it is difficult to know how effective reforms to prevent or lessen them will be. However, there is increasing micro evidence that supply-side channels have impact and hence reforms that target that could plausibly matter.

Banks are funded with more equity than before, which helps. But vulnerabilities may shift into poorly regulated areas. Actions taken by central banks to fight crises in the past may have unintended consequences in the future. On balance a bit better, but not much.

Current regulation is largely predicated on regulators anticipating, measuring, and managing risks inside the financial sector that they sit apart from. Might not work well? Eg last week, an interest rate rise destabilized UK defined-benefit pensions and government debt markets.

the reforms have already reduced the risk of crises, a lot, but not down to zero.

Probably not, for several reasons. Regulation alone is not sufficient to create financial stability. This regulation was heavily lobbied. There are many possible arbitrage strategies (e.g. shadow banks). The next crisis will not be identical to the previous one.

Some policies are sensible. A host of others (especially those that assume regulators can forecast asset price "bubbles" before market does and regulate accordingly) will be counterproductive.

This is too strong a statement to answer either way. It is the case that there were no financial crises in advanced economies from 1940 to the mid 1970s, which is worth noting when we think of policies that will reduce probability of crises.

Tighter bank capital rules and stress testing have reduced the risk of banking crises. Some of the risk has migrated to shadow banks, who are less regulated.