Palestinian Authority raises alarm as Israeli banks plan to cut ties

Israeli banks have informed their Palestinian counterparts that they intend to end critical banking services within weeks, Palestinian and Israeli officials said on Thursday, raising fears of an economic crisis in the West Bank.

These banking links are essential for financing imports from Israel to the occupied Palestinian territory, including electricity, water, fuel, and food, as well as for transferring wages earned by Palestinians working in Israel.

"This is not simply a technical banking matter. These channels are a cornerstone of the infrastructure that underpins our trade, our commerce, and the daily life of millions of people," Palestinian Monetary Authority governor Yahya Shunnar told journalists on Thursday.

Five Palestinian banks that rely on Israel's Bank Hapoalim for correspondent banking services will lose access on Oct. 1, Shunnar said.

Those working through Discount Bank face a Sept. 1 cutoff.

Together, the two banks process 51 billion shekels ($ 16.5 billion) in Palestinian transactions annually, including for the 90% of Palestinian exports that go through Israel, Shunnar said.

'It's a cliff'

Should correspondent payments end, Shunnar warned, the entire financial system would come to a halt, dragging with them trade and prices for consumer items.

"This is not a slope, it's a cliff," Shunnar said.

Israel's finance ministry confirmed the two banks had proposed cutting ties with their Palestinian counterparts.

"In light of the overall risk environment and the growing concern over private lawsuits against banking entities, the Israeli banks recently announced their intention to discontinue providing correspondent banking services," the ministry said on Wednesday.

The ministry is in discussions with the banks in a bid to "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", it said.

The two banks currently serve as a bridge between the Palestinian and Israeli financial systems, processing transactions in Israeli shekels -- the currency also used in the Palestinian territories.

To protect Israeli banks from legal liability for transactions processed on behalf of Palestinian banks, the Israeli government renews an indemnity every six months.

An Israeli banking official told AFP that commercial banks no longer want to bear these risks — including possible exposure to money laundering or terrorist financing — arguing that the arrangement was always intended to be temporary.

"Risks have increased with the years and the waiver is not enough. They [the banks) want the state to take the responsibility," the official said.

Chairman of the Association of Banks in Palestine, Maher al-Masri, warned on Thursday that severing these banking ties could force more transactions into cash, increasing the risk of a banking cisis and expanding the informal economy.

"If the banks collapse, the Authority collapses," a Palestinian businessman with close ties to a local bank told AFP, pointing to the PA's status as the largest borrower in the West Bank.

The PA is already under intense financial pressure after Israel suspended the transfer of customs revenues it collects on the Authority's behalf.

Those revenues account for roughly two-thirds of the PA's income.

Central Bank of Jordan governor Adel al-Sharkas, who spoke on Thursday at the briefing with Shunnar, said that his country's banks, which conduct business in the Palestinian territories, were also exposed.

"If this link [between Israeli and Palestinian banks] is stopped ... our banks find themselves holding a large shekel balance that cannot be transferred or sold," he said.