Palestinian officials warn of crisis if Israeli banks cut banking links

Israeli banks have told Palestinian counterparts that they plan to end important banking services within weeks, Palestinian and Israeli officials said, raising fears of an economic crisis in the West Bank.

The banking links are used to finance imports from Israel to the occupied Palestinian territory, including electricity, water, fuel and food. They are also used to transfer wages earned by Palestinians working in Israel.

Palestinian Monetary Authority governor Yahya Shunnar said the channels support trade, commerce and daily life for millions of people. He said five Palestinian banks that rely on Israel's Bank Hapoalim for correspondent banking services will lose access on October 1, while those using Discount Bank face a September 1 cutoff.

Shunnar said the two Israeli banks together process 51 billion shekels, or $16.5 billion, in Palestinian transactions each year. He said this includes transactions linked to 90 percent of Palestinian exports that go through Israel. He warned that if correspondent payments end, the financial system could stop functioning, affecting trade and consumer prices.

Israel's finance ministry confirmed that the two banks had proposed ending correspondent banking services. The ministry said the banks cited the overall risk environment and concern about private lawsuits against banking entities. It said it was holding talks with the banks to try to allow correspondent banking to continue in a safe and responsible way while protecting Israeli security and economic interests.

The two banks act as a bridge between the Palestinian and Israeli financial systems and process transactions in Israeli shekels, which are also used in the Palestinian territories. The Israeli government renews an indemnity every six months to protect Israeli banks from legal liability for transactions handled for Palestinian banks.

An Israeli banking official said commercial banks no longer want to carry these risks, including possible exposure to money laundering or terrorist financing. The official said the arrangement had been intended to be temporary and that banks want the state to take responsibility.

Maher al-Masri, chairman of the Association of Banks in Palestine, said cutting the ties could force more transactions into cash, increase the risk of a banking crisis and expand the informal economy. A Palestinian businessman with close ties to a local bank said the Palestinian Authority could be at risk if banks collapse, noting that the Authority is the largest borrower in the West Bank.

The Palestinian Authority is already under financial pressure after Israel suspended customs revenue transfers it collects for the Authority. Those revenues make up about two-thirds of the PA's income.

Central Bank of Jordan governor Adel al-Sharkas said Jordanian banks that operate in the Palestinian territories are also exposed. He said that if the link between Israeli and Palestinian banks is stopped, Jordanian banks could be left holding large shekel balances that cannot be transferred or sold.