FEDERAL RESERVE BANK OF DALLAS12

Although events that lead to currency crises in countries with pegged or fixed ex-change rates are the subject of a large and growing body of literature, how countries get out of these crises has received less attention.1 This article focuses on how Brazil turned around after its 1999 currency crisis. We argue that Brazil’s postdevaluation exchange rate was rapidly sta-bilized and economic recovery began soon after because the banking system had been prepared to withstand not only severe economic shocks but also severe economic policies. Brazil’s commercial banks ’ high capitaliza-tion ratios, shrunken loan portfolios, and ex-panded holdings of government paper allowe