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 should also 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.

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