The FATF Greylisting Effect On Banking Sector Performance: Evidence From Greylisted Countries 2000-2025

Abstract

This study examines the effect of FATF greylisting on banking sector performance across the full population of greylisted jurisdictions. Using an unbalanced panel of 98 greylisted countries observed annually from 2000 to 2025, it applies the local projections methodology of Jordà (2005) and Jordà & Taylor (2025) to estimate the dynamic response of 14 banking sector and macroeconomic outcome variables to greylisting across a symmetric five-year horizon. Identification relies on within-country variation in listing status, controlled through a two-way fixed effects structure alongside macroeconomic controls and a lagged dependent variable. Four variables exhibit statistically significant responses. Nonperforming loans decline during the listing period, consistent with tighter credit standards under heightened regulatory scrutiny. Net interest margins widen in the first two post-listing years, reflecting the upward repricing of credit as banks absorb higher compliance costs and elevated counterparty risk. Noninterest income contracts significantly, consistent with the disruption of correspondent banking relationships and the cross-border fee revenues they generate. Liquid assets to short-term liabilities rise at listing entry, reflecting precautionary liquidity positioning under designation uncertainty. Capital adequacy, overall profitability, domestic credit supply, fiscal balance, exchange rates, and foreign investment show no statistically significant response. Robustness checks using a greylisting entry shock preserve the direction, magnitude, and significance of all four baseline findings. The results suggest that greylisting imposes real but bounded operational costs on domestic banking systems, concentrated in income structure and liquidity rather than balance sheet resilience, and largely transitory in nature. These findings offer a partial reconciliation of the contested macro-level literature, where greylisting's most consistent consequences operate within the banking sector at a level of disaggregation that aggregate flow analyses do not capture.