Although there is a well-documented positive relationship between credit market depth and economic growth, rapid credit expansion may threaten financial stability due to vulnerabilities in banks’ balance sheets. This paper examines the relationship between the banking sector index (IFNC, from B3) and private credit in Brazil, revisiting Hansen and Sulla (2013) for Latin America. The study contributes by using a sector-specific banking index instead of a general one and by distinguishing between earmarked and non-earmarked credit for households and firms. The empirical analysis isolates the role of credit gaps by controlling for instability transmission through bank assets, liabilities, and economic overheating. Methodologically, it applies a vector error correction model with exogenous variables (VECX) and estimates impulse-response functions following Otero (2020). Using data from March 2011 to October 2025, the results identify when signs of banking instability may arise and which credit types can act as leading indicators.
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