A recovery from one of the most severe recessions in the post-war era is around the corner, Atlanta Federal Reserve Bank President Dennis Lockhart said Thursday. Although he does not expect the recovery to be strong, Lockhart said he expects slow and tentative growth in the third quarter.

My outlook calls for the beginning of a recovery in the second half of 2009, Lockhart said in prepared remarks. I do not expect a strong recovery, but I do expect the economic contraction we're now experiencing to give way to slow and tentative growth as early as the third quarter.

However, Lockhart remains concerned about the commercial real estate sector, including how it could impact the banking system. He reiterated the concerns raised in early March, when he warned that declining commercial real estate markets could put further pressure on already strained financial institutions and markets.

Still, with the cautiously optimistic outlook of a recover around the bend, Lockhart is looking forward. Speaking at the Levy Economics Institute at Bard College Conference on the State of the U.S. and World Economies in New York, Lockhart focused the bulk of his remarks on how the markets should restructure in the wake of the greatest financial crisis since the Great Depression, calling for agile oversight.

The structure of the financial system has undergone a radical change, Lockhart said, although he suggested that most of the changes to the system have already taken place. Rather, more regulation should be expected, with a focus on more international cooperation.

I expect the financial system to continue to involve a mix of capital markets and institutions, but with a wider array of institutions falling under regulatory supervision, the Atlanta Fed President noted.

Looking ahead, I see an ongoing role for securitization and the originate-to-distribute model, he added.

Although securitization markets have shrunk dramatically since the crisis began in August 2007, Lockhart said he expects them to return, albeit in simpler form and with more accountability.

Going forward, markets and investors will show a new awareness of the potential for complexity, opacity, and risk in securitized instruments, Lockhart said. This awareness, in and of itself, has and will continue to provide incentives for the creation of simpler and more transparent securitization structures. For these and other reasons, I expect our securitization system to be reformed but not replaced.

Despite the desire for some to put the crisis in the past and return to simpler times, Lockhart said that it is important to focus on better oversight and a complete regulatory reform.

Coming off the turbulence of 2007 through 2009, I can appreciate the yearning for a simpler era, he concluded. But the future financial architecture and the regulatory approach that lines up with it must be constructed, in my view, to be durable, evolve with inevitable change, and be equal to the reality of the financial sector that will survive this period. I expect the financial system to retain its diverse elements including securitization markets, large globally integrated institutions, and vigorous innovation.

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