Israel acts to ease Palestinian banking crisis it helped create, but is it moving too late?

Smotrich signs waiver allowing transactions with Palestinian banks until end of 2026, though Israeli financial institutions are wary about continuing to provide services crucial to keeping West Bank economy afloat

The Palestine Monetary Authority will be holding a press conference in Ramallah on Thursday titled, “The breaking point: sounding the alarm before collapse.”

Joined by senior officials from the United Nations, the World Bank and the International Monetary Fund, the PMA leadership will warn about a recent decision by two top Israeli financial institutions to cease correspondence with Palestinian banks later this year, in a move that could end the continued import and export of goods to and from the West Bank, a Palestinian official told The Times of Israel.

The decisions by Israeli banks Discount and Hapoalim could collapse the Palestinian economy, though they are motivated by frustration with the Israeli government for putting the financial institutions in this position to begin with.

Discount and Hapoalim have been caught in the middle of Finance Minister Bezalel Smotrich’s efforts to push the Palestinian Authority toward the brink, as he seeks to expand Israel’s control over the West Bank and “encourage the emigration” of the territory’s Palestinians.

One of the many steps Smotrich has taken to weaken the PA has been  to hold off on signing indemnity waivers allowing Israeli banks to handle transactions from Palestinian banks, which are used to tether the West Bank to the global economy.

Since the Oslo Accord peace agreements between Israel and the Palestinians in the 1990s, the Israeli government has tasked Discount and Hapoalim with providing correspondent banking services to Palestinian banks, which do not have access to the Israeli payment system and accordingly cannot clear transactions in shekels — the dominant currency in the West Bank.

The correspondent banking services provided by Discount and Hapoalim have allowed Palestinian banks to process cross-border payments for commercial activity.

But the two Israeli banks have long expressed concern that providing such services could expose them to lawsuits over alleged Palestinian money laundering and terror finance.

To mitigate the risk, the Israeli government for years has been signing indemnity waivers, while also assuring the banks that a new entity would be set up to take over for them in providing correspondent banking services.

That body — the Company for Correspondence Services — was established in 2019 by a previous government led by Prime Minister Benjamin Netanyahu. However, Knesset legislation is needed for it to start operating. While a bill has been crafted, successive governments have dragged their feet in advancing it due to the perception that it would benefit the Palestinians and it became an afterthought amid other domestic debates and regional tensions.

‘Increasing risks’

Since Smotrich’s appointment as finance minister at the end of 2022, the frustration at Discount and Hapoalim has reached new levels, as he gradually shrunk the timeline for each waiver from one-year to just two-week increments, injecting major levels of uncertainty that banks are averse to dealing with.

While US president Joe Biden’s administration engaged more aggressively on the issue, the Trump administration has been slower to criticize Israel over its treatment of the Palestinians.

However, a reformed Palestinian Authority is still a key element of US President Donald Trump’s plan for stabilizing Gaza, and the US has accordingly been quietly warning Israel against the PA’s collapse, an official familiar with the matter told The Times of Israel, adding that the US has recently raised the correspondent banking issue in particular with Jerusalem.

Against that backdrop, an Israeli official confirmed that Smotrich agreed earlier this month to sign a waiver granting indemnity to Israeli banks all the way until the end of 2026 — past the October 27 elections, after which a government slightly more sympathetic to the Palestinians could take charge.

Smotrich has leveraged each waiver to secure major government backing for settlement expansion in the West Bank. The Israeli official tied the latest indemnity waiver to last week’s announcement by Smotrich that the government will allocate NIS 1.3 billion ($431 million) to fund the establishment of 34 new West Bank settlements.

Due to Smotrich’s refusal to sign the waiver extension until this week, Discount and Hapoalim lost their patience and notified their Palestinian counterparts that they would stop providing correspondent banking services on September 1 and October 1, respectively.

Explaining the decision in a statement to The Times of Israel, Discount Bank said it has “complied for years with the requests of the Israeli authorities to continue providing these services on a temporary basis, pending the implementation of a permanent solution by the state, which has not been provided to date.”

“We recognize the importance of economic stability and believe it is essential to put in place a stable and permanent solution. At the same time, in light of the increasing risks associated with providing these services, and given our responsibility to our depositors and shareholders, we brought our concerns to the attention of the relevant authorities. We remain willing to assist with the operational solution, provided that the relevant responsibility and risk are assumed by the State,” Discount Bank added.

Bank Hapoalim declined to comment on the record beyond saying that “the matter is currently under review.”

For its part, the Finance Ministry insisted it wants to maintain ties between Israeli and PA-linked banks, in a statement that appeared uncharacteristically conciliatory.

“The Finance Ministry attaches great importance to the continued existence of correspondent banking relationships between the Israeli banking system and the banks in the Palestinian Authority. The discontinuation of these services could have negative implications for economic stability in the region and could also lead to increased risks of money laundering and terrorist financing due to a shift to unregulated, cash-based alternative financial channels,” the statement said, while recognizing the liability concerns of Discount and Hapoalim.

Indicating that the Israeli banks’ decisions to cease offering correspondent banking services could still be reversed, the Finance Ministry said it is “engaged in direct and intensive discussions with the management of both institutions.

“The purpose of these discussions is to examine additional relevant governmental and regulatory measures that would enable the continuation of correspondent banking activities in a safe and responsible manner, while safeguarding the security and economic interests of the State of Israel,” the Finance Ministry added.

A source familiar with the matter said the Israeli banks were asking for assurances from the government that it will pass legislation allowing the Company for Correspondence Services to begin operating. But given that the Knesset has dissolved ahead of the October elections, it appears unlikely that such a law could be passed in the coming months.

The Finance Ministry statement appeared to be crafted by bureaucrats, even if Smotrich may have needed to approve it.

One of his political aides issued a separate statement with a more accusatory tone toward the PA, alleging it was engaged in money laundering and terror financing.

“The demand that Israel mitigate this risk instead of demanding that the Palestinian Authority cease engaging in terrorism and meet accepted international standards reflects the hypocrisy and racism of low expectations,” the Smotrich aide argued.

The PA has, however, taken steps to address those concerns, and they were hailed by the Biden administration in 2024.

Moreover, the PA’s ability to carry out far-reaching reforms is significantly hampered if it doesn’t have the funds to do so.

For over a year, Smotrich has been withholding the transfer of over $5 billion in clearance revenues, which make up the bulk of the PA’s budget.

Smotrich has taken other steps to severely hobble the Palestinian banking sector, which, as a result, has been unable to make use of billions of additional shekels that are languishing in vaults in the West Bank.

Israel’s revocation of work permits for over 100,000 Palestinians due to security concerns after Hamas’s October 7, 2023, onslaught has led unemployment to skyrocket to 35% in the West Bank.

A Palestinian official acknowledged the PA has long warned about potential collapse, while insisting that the combination of punitive measures taken by Israel has created “unprecedented levels of desperation.”

The official said that the PA is trying to move around money and request emergency assistance from the international community to make it through Israel’s October elections.

“But if there isn’t a new government, I don’t know how we will be able to make it,” the Palestinian official lamented.