In retooling the financial markets' regulatory framework, the Obama administration has called for a "systemic risk" regulator who can spot problems and deal with them before they become disasters.

In the recently passed House reform bill, that idea took form as a new Financial Services Oversight Council. It will be made up of the officials who head the major regulatory entities, with the Treasury secretary serving as chair.

The oversight council will have a critical role to play. In the past, no single agency had the job of making assessments about the stability of the entire financial system.

But spotting problems before they become crises will always be an iffy endeavor. Lawmakers also should focus on ensuring that the regulatory system imposes consistent limits on borrowing against financial assets. In other words, tougher standards for bank capital and higher down payments for loans.

Bear Stearns, which collapsed in March 2008, was addicted to debt; its leverage ratio was a staggering 35-to-1. Market participants and borrowers in general shouldn't be allowed to pile up so much debt that they endanger the entire economy.

If home buyers had faced higher down-payment requirements, the housing bubble could not have expanded as it did. Such rules would have curbed demand, slowing the increase in prices.

If AIG had been required to set aside substantial capital against the credit-default swaps it was piling up, it might still have foundered — but the danger it posed to the financial system would have been reduced.

The House reform bill takes steps in this direction by requiring that derivatives trading be subject to capital and margin requirements. But after Wall Street lobbying, lawmakers weakened provisions that would have forced all such trading on public exchanges.

By one estimate, nearly half of derivative transactions could still remain outside public exchanges — unrestrained by the rules such exchanges would impose.

That was a setback, and it wasn't the only one. House members approved provisions that would provide government backing for bank debt — an implicit pledge of future bailouts — if a "liquidity event" threatens to "destabilize the financial system."

This pledge could encourage large institutions to take more risks in the belief their obligations would be backed up by the taxpayer. That's not the direction financial reform should take.

In fact, the bailout mentality that infects Washington seems unabated. As Congress debates financial reform, the rest of the government is taking steps that will substantially increase taxpayer liability.

The Treasury recently eliminated the $400 billion cap on how much tax money could be shoveled into Fannie Mae and Freddie Mac. Meanwhile, the Federal Housing Administration is extending taxpayer guarantees to dubious, low-down-payment loans, increasing the risk that this agency, like Fannie and Freddie, will also be forced to seek a bailout.

Regulatory agencies have a role to play in assessing risk, but tougher borrowing standards should be woven more deeply into the regulatory reform effort. Risk assessment always will be imperfect, but a system with less debt and more capital will be better prepared to weather a crisis.