When the FRB and FDIC rejected the big banks’ living wills, it sent shock waves not just through the banks, but also through the policy debate over TBTF. As a foreign diplomat succinctly told me earlier this week, if banks can’t fail, then they’re too big. Opprobrium was promptly heaped on the banks for failing to plan for their own funerals, and some of this is deserved – as with us mortals, it’s hard to leave a do-not-resuscitate directive. But, there’s blame also to be shared by the FDIC and FRB: It’s not fair to hold banks accountable for understanding policy actions for which they are not responsible.

One of the nation’s most astute TBTF hawks – FDIC Vice Chair Hoenig – expected this defense. He thus made sure to counter it in his statement accompanying the inter-agency decision. With some justice, he said that Dodd-Frank demands bankruptcy – not OLA resolution and that Chapter 11 of the Bankruptcy Code is there for all to read. Banks, he said, thus have no option other than to kiss themselves good-bye. This statement, though, side-steps several problems with bankruptcy as is, along with unsettled business for the financial system as it has become in the wake of the crisis.

There is no question that Chapter 11 of the Bankruptcy Code is insufficient to handle many aspects of a financial institution’s demise. This is because the Code protects counterparties to complex financial instruments, a decision made in 2005 when policy-makers believed that derivatives and the like made the world a safer place. This turned out to be way wrong, but it’s still the law. The fight now is not over whether a new section of the Bankruptcy Code is needed – all agree on that in broad strokes – but rather over whether this should be done with or without simultaneous repeal of Title II’s OLA. That’s a critical question, but not germane to knowing that, all by itself, Chapter 11 won’t do.

Mr. Hoenig’s comments also criticize big banks for failing to hold enough funding to ensure that their affairs could be wound down in bankruptcy – what has come to be known as gone concern loss-absorbency capacity in regulatory parlance. But, how can banks do this when Chapter 11 just doesn’t work for them? Debtor-in-possession financing is a long-used, well-understood practice for airlines, steel companies, and the like. It wasn’t used when Lehman failed not because no one knew about it or because Lehman didn’t have the funds at hand. The latter is likely true, but it wouldn’t have mattered. All of the chaos that ensued would have happened anyway due not only to the lack of a relevant provision in the U.S. Bankruptcy Code, but also the wholesale absence – only slightly remedied since, if at all – of any protocols for cross-border collapse. If big banks have to hold sufficient added capitalto handle risks spawned by cross-default clauses and the like, debt markets will quickly be full to the brim and banks will go broke.

In their living-will censure earlier this week, the agencies also flun added capitalked the big banks for failing to anticipate risk in the event of trouble at a central counterparty (CCP) or similar clearing facility. However, CCP resolution is one of the most vital unfinished parts of the post-crisis reform agenda.

CCPs are largely acts of law, not market demand – most of them barely existed before 2007, let alone had the systemic role they have now assumed. Dodd-Frank told regulators to identify systemic financial-market utilities, and several have now been so designated by FSOC. Some of the prudential rules are also being implemented, but to this day no one knows how any one of them would fare if an operational crisis pulled a CCP’s plug or a major user failed to pay up one night.

Global regulators know how dangerous this is – indeed, the FSB has laid out the initial framework for CCP resolution in a long-pending consultation. But, knowing and doing are different. Banks thus made their best guess which was, apparently, not good enough. This may well be because they didn’t plan for taking on giant losses in a CCP stress scenario. Going forward, they may well do so, but only at considerable cost to their ability to use CCPs and, thus, to the liquidity these entities were supposed to provide to a reformed financial framework.

I’ve said it before, but the living-will fracas warrants a repeat: the new regulatory framework is very, very complex. Given that big banks are still very large and likewise very complicated, any one action to comply with rules has a cascading series of others that result in perverse consequences and unintended, often riskier results. Banks can and should make themselves ready to die by the market’s hand, but they can’t be expected to craft the new legal and regulatory framework that makes this feasible all by themselves.