Two major Israeli banks have announced plans to sever ties with Palestinian lenders by September and October, threatening to collapse the West Bank economy. Israeli Finance Minister Bezalel Smotrich recently agreed to extend indemnity waivers to end-2026, yet the persistent threat of banking isolation has created a shekel cash surplus.
The Impending Cutoff Dates by Discount and Hapoalim
The financial lifeline tethering the West Bank to the global economy faces an imminent expiration date. Israel Discount Bank will end its association with Palestinian banks on September 1, and Bank Hapoalim will follow on October 1, according to Israeli officials and the head of the Palestinian central bank. Since the Oslo Accord peace agreements in the 1990s, these two financial institutions have been tasked with providing correspondent banking services to clear shekel transactions for Palestinian lenders, who lack direct access to the Israeli payment system.
Without this correspondent framework, cross-border commercial payments for vital imports such as food, fuel, and medicines cannot be processed. Discount, operating as Israel’s fourth-largest bank, stated that it had provided banking services on a temporary basis for years while waiting for a permanent solution which has not been provided to date.
The bank’s leadership emphasized their duty to depositors and shareholders in bringing these mounting financial integrity risks to the attention of authorities.
“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.”
Israel Discount Bank
Indemnity Waivers and Political Leverage
The fragility of the banking corridor stems from a political mechanism requiring the Israeli finance minister to repeatedly sign indemnity waivers. These waivers shield Israeli banks from lawsuits alleging Palestinian money laundering and terror finance. Since taking office at the end of 2022, Israeli Finance Minister Bezalel Smotrich has shortened the waiver renewal timeline from one year down to two-week increments, generating intense uncertainty.
Smotrich has leveraged each waiver renewal to secure broad government support for settlement expansion. In a recent deal tied to an indemnity extension, Smotrich secured an allocation of NIS 1.3 billion ($431 million) to fund the establishment of 34 new West Bank settlements. Although Smotrich ultimately agreed earlier this month to sign a waiver granting indemnity to Israeli banks all the way until the end of 2026, the protracted brinkmanship had already prompted Discount and Hapoalim to issue their cutoff notices.
Drowning in Shekels: The West Bank Cash Surplus Crisis
While the banking cutoff threatens future trade, an immediate crisis is already playing out inside West Bank bank vaults. Palestinian commercial lenders are drowning in physical Israeli shekels that they cannot offload or convert into electronic balances because the Bank of Israel limits physical currency returns from the territory to 18 billion shekels ($5.9 billion) a year. Meanwhile, the local economy accumulates an estimated 30 billion shekels annually, driven by Palestinian laborers paid in cash inside Israel and Israeli citizens purchasing retail goods in the West Bank.
With vault space vanishing, local banks are paying to store and insure idle cash, forcing them to turn away deposits from businesses and households. Mohammad Manasra, the deputy governor of the Palestinian Monetary Authority, described the dynamic bluntly during an interview with the press, stating that What is being practiced in the West Bank is economic warfare.
Divergent Arguments Over Financial Integrity and Regional Stability
The standoff has triggered sharp disagreements between Israeli and Palestinian authorities regarding regulatory compliance and security risks. Yahya Shunnar, governor of the Palestinian Monetary Authority, warned that disrupting these financial arteries would invite profound consequences — not only for Palestinians but for Israelis (and) for regional stability.
Shunnar noted that Discount and Hapoalim process 51 billion shekels ($16.6 billion) a year in transactions for the Palestinian Authority, with 90% of Palestinian trade running through Israel.
Conversely, the Israeli finance ministry argued that the Palestinian Authority’s activities in financing terrorism through various means have created a severe risk environment for maintaining financial interfaces. The ministry warned that cutting off formal channels could increase risks of money laundering by pushing trade toward unregulated, cash-based alternatives. Responding to these allegations, Shunnar maintained that the Palestinian central bank’s counter-terrorism financing framework meets or exceeds international standards, an assessment supported by both the United States and the United Kingdom.
Unresolved Structural Realities and Future Outlook
Even with the newly signed indemnity waiver extending protections through the end of 2026, the underlying structural vulnerability remains unaddressed. A permanent mechanism—such as the Company for Correspondence Services established in 2019 by a previous government led by Prime Minister Benjamin Netanyahu—has languished because successive governments have declined to advance the necessary bills. As international pressure mounts from diplomats seeking to avert a total economic collapse in the West Bank, the question remains whether a permanent institutional framework can be established before the temporary waivers expire.
