The smart transformer (ST) has been proposed as an alternative to the traditional low frequency transformer as a means to provide extra control functionality in the smart power system. The ST has merits in terms of reactive power decoupling and voltage decoupling at the primary and secondary side. This provides flexibility for reactive power compensation in the transmission system and demand reduction in the distribution system. Using its ability to control demand through voltage regulation, the ST provides the possibility to reduce demand while keeping the entire load online, which can provide an alternative to load curtailment. Thus, it may provide a means to improve power system reliability. However, no of previous research has investigated these potential system reliability benefits of the ST. The paper presents a methodology which can be used to quantify the system reliability impacts of the use of STs as an interface between the transmission and distribution systems. Using the methodology, the ST impacts on the system reliability are assessed using the IEEE 39-bus system as an example.