We are finalizing our in-depth assessment of the Fed’s systemic proposal, but one thing is already clear: the Fed is planning to break big banks asunder. The NPR doesn’t ever say so straight out, but the purposes outlined for the new standards combined with their actual content make clear that, if you’re a bank holding company with over $50 billion, papa’s got a brand new bag.

How do we know the knives are out? Initially, we thought the Board had sheathed at least a few of its daggers. The NPR doesn’t, for example, immediately mandate the GSIB surcharge, as some Fed officials prophesized. Nor does it immediately institute the Basel III liquidity-risk standards, warts and all, or force new inter-affiliate transaction limits walling off different business lines or those in different places. But, on close read, the actual details of the capital and liquidity rules are anything but gentle. Further, the new credit-exposure limits are powerful break-up tools even though never expressly couched as such.

And, if somehow a big BHC manages to stay so, its beleaguered board of directors might still break it up if only to make their jobs manageable. One of the little-noticed, but far reaching proposals in the systemic magnum opus redefines what directors are to do, essentially making them super-charged chief risk officers. So much for the day job.

But, our principal problem with the NPR isn’t so much what it does, but what it doesn’t do. First among the no-shows is any effort to put the massive new rules in context with all the others upon which it is piled. Why three stress tests with all sorts of overlapping requirements, different dates and varying stress criteria? All the FRB does is mandate them, not explain why one tough one just won’t do. Do big BHCs need to build separate systems based on each of the different requirements in all of the rules? This does nothing to promote compliance and all too much to exacerbate complexity risk. Worse still, policy conclusions come undone due to these contradictions – why, for example, are GSEs treated totally differently in the pending market-risk rules (punitively) and the systemic ones (favorably)?

Moreover, the FRB shouldn’t just be picking on big BHCs. We’ve argued before that the growing corpus of U.S. financial regulation is not only dogged by complexity risk – see above – but also marred by its bank-centric structure. This NPR is yet another sorry proposal that leaves the shadows undisturbed. Although the NPR says it covers any nonbank designated as a SIFI, its details are so bank-centric that even the FRB concedes that much of it won’t work for nonbanks. Thus, throughout the NPR, questions are posed as to how the Fed might somehow someday do something about SIFIs not unfortunate enough to be big BHCs. If the FRB actually listens to some of the answers to these questions, the final systemic standards might go some of the distance to balancing U.S. financial regulation.

But, even so, there’s one remaining conundrum: the NPR is premised on big BHCs being TBTF even though Dodd-Frank makes them anything but. The Fed’s entire systemic super-structure remains premised on the belief that firms with a “systemic footprint” stomp on the financial system because of all sorts of “implicit subsidies.” What these are and why regulators don’t use their awesome powers to rid the rules of what’s left of them is never spoken of in these pronouncements. In our view, that’s the most serious flaw in these complex rules – for all their technical prowess and ferocious reach, they leave the most critical challenge of meaningful financial reform – real market discipline – wholly untouched.