I cannot over-emphasize the importance of a new BIS report we analyzed earlier this week—this year-long study shows how profoundly the new policy framework will restructure finance, and just how many new risks we’ll run into along the way. That big banks needed new rules after 2008 is without question; that they needed so many so fast without a sum-total sense of their impact has long been unclear to me and, now, far more importantly also to the central bank for central bankers. Any effort to ameliorate adverse—indeed, even dangerous—implications will be chastised as “watering down,” and I doubt any of the large central banks will do anything that could expose them to still more opprobrium as “captives.” By virtue of all these rules, banks may well be buffered from the next crisis, but what of the rest of the financial system and, thus, of us?

The BIS report comes from the Committee on the Global Financial System and it follows a path-breaking 2014 report from one of the BIS’s other committees that began the work of figuring out the extent to which new rules would bring with them new risks. The 2014 report posited collateral shortfalls principally due to the liquidity rules, noting that this could lead not only to more “shadow banking” in the repo market, but also to more problems for central-bank transmission of monetary policy. The BIS later suggested that “collateral transformation” would solve for shadow banking—ironically by ensuring that banks waved their hands over high-risk assets to ensure sufficient low-risk collateral. We said at the time that this seemed a solution akin to cutting off one’s head to make the bed fit. Happily, the latest BIS report no longer counts on it.

Instead, it takes a more clear-eyed view of what happens when big banks cut off their heads. That this should matter so much is more than unfortunate, but it’s yet another example of the unintended consequence of poor public policy. A concatenation of circumstances created concentrated banks, but a critical one is the decades-long FRB view that nothing a big bank did should stop it from getting even bigger. Throughout the years after interstate-branching laws were toppled, the Fed constructed tests that found no deal too big and waived any community or compliance concerns that might otherwise have stopped these mergers.

That, though, was then. Now, we have very few banks on whom the bulk of new rules fall with such a heavy hand. The CGFS study rightly looks at the rules policy-makers have determined most critical to a newly-stable financial system: leverage, liquidity, and concentration constraints. What it finds is that, while each rule is largely manageable in its own context, all of them together pose potential—and acute—risk, especially for the orderly conduct of monetary policy as critical challenges confront central banks in the wake of the crisis.

Our report earlier this week described the CGFS report in detail, so I won’t summarize it here. Instead, I’ll cut to the chase: leverage rules make holding the high-quality liquid assets demanded by the liquidity rules harder. As a result, big banks will cut their liquidity as close to the bone as they can. Under ordinary circumstances, banks will extend more unsecured loans because holding quality collateral will expose them to higher leverage capital—in essence, banks will fly with far less of a safety net since regulators won’t know they need one. Under stress, they’ll also have less eligible collateral to post for central-bank liquidity, meaning either that central banks will need to accept lower-quality capital from banks or turn to non-traditional financial institutions.

If these non-banks are under like-kind prudential rules, this won’t work. If they aren’t, then markets will quickly arbitrage the living daylights out of the constraints on the largest banks, accelerating the chances for the next crisis. You choose: either central banks find a way to govern “shadow banks” and come up with yet another way to execute monetary policy in the future, or they settle now for a new class of TBTF financial-services firms. It’s not just a tough choice, but also a very bad one. Better, I think, to decide how best to balance new rules so that banks can remain functional financial intermediaries and central banks can still count on them.