In light of JPMorgan Chase’s bad derivatives trades, the media’s spotlight has appropriately turned to the pending Volcker Rule. That’s the moniker for the still-under-development regulation that might restrict big banks from pursuing hedging strategies across their entire portfolio, including their own bets. Proponents say banks shouldn’t be able to do this, since banks hold consumer deposits that are effectively guaranteed by taxpayers and since taxpayers could be forced to bail out a foundering bank if it’s deemed too big to fail. On the other hand, the underlying law for the Volcker Rule, the Dodd-Frank financial reform law, specifically exempts or allows hedging related to individual or “aggregated” positions, contracts or other holdings, which may very well have covered JPMorgan’s recent trade.

Inside the beltway, a fresh dispute is now emerging between regulators and policymakers on whether the current draft of the Volcker Rule can even apply to scenarios like JPMorgan’s, given how explicit Dodd-Frank is on this topic. On the one hand, there is the Office of the Comptroller of the Currency, which is starting to argue that these JPMorgan trades would likely have been exempted from the not-yet-final Volcker Rule. But then there are policymakers (namely, Senator Carl Levin) who are trying to make the case that Congress never intended for the law’s language to be interpreted so broadly.

While all the details around JPMorgan’s failed trading strategy emerge, there is an even more interesting backdrop to consider – whether JPMorgan Chase and other banks are still too big to fail. It was only a week ago that the Senate Banking Committee held a hearing where Paul Volcker, Thomas Hoenig and Randall Kroszner testified on “Limiting Federal Support for Financial Institutions.” While they each expressed different viewpoints, it was newly installed FDIC Director Hoenig who made the most news. He used the stage to discuss a paper he wrote in May 2011 on “Restructuring the Banking System to Improve Safety and Soundness.”

In broad strokes, Hoenig doesn’t think that the “too big to fail” (TBTF) problem has been adequately addressed. His conclusion is that the TBTF banks are effectively too big to manage and too complex to understand, and should be made smaller by defining what is and isn’t an “allowable activity.” For Hoenig, “banks should not engage in activities beyond their core services of loans and deposits if those activities disproportionately increase the complexity of banks such that it impedes the ability of the market, bank management, and regulators to assess, monitor, and/or control bank risk taking.”

Hoenig’s plan is bold, to say the least, and even Senator Bob Corker joked at one point that maybe it should be called the Hoenig Rule.