West Bank banking ties at risk as Israeli banks signal end to correspondent services
Israeli banks have warned they may sever correspondent services to Palestinian lenders, placing West Bank banking ties and the territory’s trade lifelines under immediate threat.
The Israel Discount Bank has told Palestinian counterparts it intends to end correspondent relationships by September 1, 2026, and Bank Hapoalim has indicated it is considering the same step. Palestinian officials say the move would choke imports of food, fuel and other essentials and could amount to a near-commercial blockade of the West Bank.
Banks announce potential cutoff
The decision by the Israeli banks follows growing concern in Tel Aviv about legal exposure to allegations of money laundering and terrorist financing. Correspondent banking arrangements, in place since the mid-1990s after the Oslo process, allow Palestinian banks to clear payments and import goods through Israeli financial infrastructure.
Israeli financial firms say they need state indemnities that shield them from lawsuits and prosecution, and those guarantees carry expiry dates and have been issued only for short periods. The current uncertainty and repeated short-term extensions have prompted the banks to signal an exit unless a permanent operational solution is put in place.
Palestinian authorities convene crisis talks
The Palestine Monetary Authority has organized a high-level meeting in Ramallah titled “The Breaking Point: Sounding the Alarm Before Collapse,” inviting representatives from the United Nations, the World Bank and the IMF. Palestinian leaders and former regulators have appealed to foreign governments to press Israel to keep financial channels open.
Former Palestine Monetary Authority governor Feras Milhem, who led the regulator from 2021 to 2025, warned that cutting correspondent links could precipitate rapid shortages of staples and critical services. He called the prospect “a huge fear,” while also cautioning that a complete cutoff would represent a deliberate step toward economic collapse.
State indemnities and political leverage
The practical root of the crisis is legal risk. Israeli banks have repeatedly sought letters from the Israeli government indemnifying them against lawsuits related to alleged ties to illicit financing, and those letters have at times been withheld or granted only temporarily.
Finance Minister Bezalel Smotrich has used the indemnities as leverage in internal Israeli politics, at times conditioning extensions on policy concessions related to settlement activity. International pressure, including a public intervention by U.S. Treasury officials in 2024, has previously forced the government to renew protections; yet officials say recent extensions have been shorter and granted at the last minute.
Economic dependencies and supply vulnerabilities
Palestinian trade is heavily dependent on Israel: roughly 55 percent of imports and 85 percent of exports move through Israeli channels, according to data cited by former regulator Milhem. The West Bank receives nearly all its fuel and the large majority of its electricity from Israel, while a significant share of water also crosses the boundary.
Economists warn that, without correspondent banking, shipments would quickly stall because letters of credit and payment clearances would be disrupted. That interruption would affect supermarkets, hospitals and power suppliers and could create cascading shortages within weeks.
Failed contingency plans and legal obstacles
Palestinian officials say they examined alternatives, including currency swaps in dollars or euros, but found these measures would be temporary and would not sustain months-long trade flows. A long-term option — moving away from the Israeli shekel — carries legal and political risks tied to the Oslo Accords, which prohibit Palestinian issuance of a national currency and established the shekel as primary tender.
The Israeli government in 2019 created a company intended to serve as an intermediary between the banking systems, but the entity has not become operational and would require new legislation to function. With the Israeli parliament in recess and national elections looming later this year, officials say enactment of such laws in the near term is unlikely.
Security and humanitarian implications
Analysts say the collapse of formal banking links would be both a humanitarian and security concern. Observers expect a rapid emergence of cash-driven black markets, with high-priced deliveries and informal cross-border trade that could enrich criminal networks and create openings for militant groups.
Palestinian officials point out that the measure would compound punitive steps already taken after the October 2023 Gaza-linked attacks, including withheld tax transfers and cancelled work permits for West Bank labourers. They argue that cutting financial channels risks increasing instability and undermining basic public services.
The Israel Discount Bank has publicly acknowledged the broader economic stakes but emphasized its duty to protect depositors and shareholders from legal exposure, saying it is willing to help operationally only if the state assumes relevant risk. Palestinian leaders say they need a binding, durable mechanism that preserves cross-border banking while meeting international compliance standards, and they are pressing international institutions and foreign governments to intervene to avert what they describe as an impending economic collapse.