Well, one can’t exactly say the Fed let up on big banks in its latest stress test. As we read the CCAR, the only adverse event the Fed left out is a direct asteroid strike on a major banking center. Other than that, the central bank wants BHCs with assets over $50 billion to ensure they can handle 13% unemployment, an annualized drop in real GDP growth of as much as eight percent, another house-price collapse, wild stock-market volatility and a flat-lined Eurozone. The capital needed to sustain all this will need to be as much as that mandated by Basel III and, for the behemoths, also that to come under the G-SIB surcharge. In fact, BHCs must show not just how they can survive all this stress, but also how they will plug along handing out loans to individuals and companies alike. Good luck, guys.

We fully understand the FRB’s point here – big firms handed out lollipops in the run-up to the financial cataclysm to lull investors into a false sense of security. Freddie Mac is the poster child here, not any of the biggest BHCs. However, one new-found BHC, Goldman Sachs, was more than generous to investors in late 2008. It paid luscious dividends that then caused consternation in the global regulatory community once it learned that the FRB authorized the pay-outs. In part, the FRB’s tough stand now results from its leniency then, although of course the spectacle of the fictitious EU “stress tests” has also heightened pressure on regulators to judge banks with an unforgiving eye.

But, has the Fed gone beyond unforgiving to flagellating? The answer to this critical question depends on what you want big BHCs to be and whom you demand they serve.

Increasingly, regulators want big banks to serve what the head of the Bank for International Settlements a week or so ago called “social-welfare” purposes – that is, systemic banks are to serve society because, it is reasoned, they are so beholden to it that the concept of a big bank as a private venture lacks validity. Once one concedes the social-welfare point, then it is a quick hop to setting stress tests so high that banks are required to bulletproof themselves regardless of the impact this has on profitability.  The analogy here – and not an accidental one – is to big banks as utilities. Electric companies are supposed to pay whatever it costs to ensure service under all circumstances, and the CCAR does the same for big BHCs.

Of course, utility-style regulation is not what most big BHCs signed up for. While many will concede that even their own companies ran a bit too wild in the run-up to the crisis, big BHCs still contend that they are first and foremost private enterprises beholden to capital-market investors and counterparties. This mission, they argue, promotes social welfare by deploying capital efficiently to where it will do the most good in the broader economy. The industry’s credibility on this critical point is more than dented by misdeeds in the MBS arena, pay packets provided with scant regard for risk-based remuneration and the litany of sins that played their part in precipitating the macroeconomic mess. But, dented though it is, is this argument so fundamentally flawed that big banks now must be governed by regulators, not their boards of directors?

Since the beginning of the financial crisis, this question has been fiercely debated in the halls of academe and at innumerable deep-think regulatory conferences. Now, though, the FRB’s stress test has framed it as the critical turning point for big U.S. BHCs: are they to run themselves in a prudent fashion that reflects hard lessons learned or must they now fundamentally be redesigned as proxies of the state to serve social-welfare goals regardless of their bottom-line impact?