Banks Hapoalim and Discount to Sever Ties with PA: Economic Impact
The expected cessation of bank transfers between Israel and the PA in September-October threatens financial chaos. This move creates risks for trade and security, forcing businesses to shift to cash transactions.
Bank transfers with the Palestinian Authority are expected to cease in September-October, and this scenario is already causing concern. The realization of this move could lead to financial chaos in the territories of the Authority, including a mass shift to the use of cash or foreign currency.
Forecasts paint a particularly complex picture of the "day after." Palestinian workers will not be able to receive their salaries by bank transfer, and trade will face severe difficulties — a critical problem, especially given the fact that almost all of the Authority's foreign trade passes through Israel. Beyond the economic chaos, the sweeping shift to cash poses a security risk, as intelligence authorities will find it harder to track compared to channels subject to oversight.
Bank of Israel previously clarified in a conversation with Globes its opposition to cutting off transfers. "Correspondent relations with the Palestinian Authority are essential in order to maintain trade relations with Israeli merchants," it was stated then. "According to the Bank of Israel's assessment, the cancellation of the letters of indemnity and immunity for Israeli correspondent banks will lead to material damage to trade relations with the Palestinian Authority and, as a result, to significant damage to the Palestinian economy, with all that this implies."
The damage will spill over to Israel
In the absence of a clearing mechanism, payments will be forced to shift, as mentioned, to cash or foreign currency. Trade in foreign currency will require finding an American correspondent bank, but even the small American banks currently operating in the Authority are expected to fear taking the risk.
This damage will not stop in the territories of the Authority, but will also spill over to Israeli businesses — from beef exporters to importers of building materials from the Authority. Beyond that, a sweeping shift to cash creates a trap: the Israeli law for reducing the use of cash prohibits dealers from accepting amounts exceeding 6,000 shekels in business (or 15,000 shekels in a transaction between private individuals). Thus, dealers who try to continue trading will find themselves violating the law, unless the government grants a special permit.
At the same time, difficulties with payments to the Israel Electric Corporation are expected to worsen. Although the company does not express concern, as the Authority's debts are collected through the offsetting of tax funds that Israel collects for them, it is unclear how residents and businesses in the Authority will be able to pay the local distribution companies for the electricity they consume.
Let us recall that the current crisis was ignited following the announcement by Bank Hapoalim and Israel Discount Bank — the banks mediating between Israel and the Authority — of the cessation of activity. Trade with the Palestinian Authority stood at more than 7 billion dollars in 2025, and its continuous infrastructure was managed through them. However, the mechanism currently puts Israeli banks at risk before international laws against terror financing and money laundering prohibitions.
The leading concern stems from the connection with the "Bank of Palestine," the largest bank in the Authority, which is suspected of serving as a conduit for transferring funds to families of terrorists. According to estimates, Israeli banks even recently received intelligence indications of direct involvement of Palestinian banks in terror financing. Although the funds are transferred according to economic criteria and not just according to the period of imprisonment in an Israeli prison, it is still a problematic mechanism. Added to this is the fact that the Palestinian Authority itself does not meet international standards for anti-money laundering.
The banks broke the tools
Since 2018, Israeli banks have been demanding to stop interacting directly with the Authority. As an interim solution, the government issues "letters of indemnity" that guarantee to compensate the banks in case of international lawsuits, alongside protection from criminal consequences from the Attorney General.
However, the letter of indemnity is granted only temporarily. The banks do not see it as an adequate response, especially in the face of a possible refusal by foreign correspondent banks (Citibank and Deutsche Bank), or in the face of a threat of lawsuits against office holders.
Originally, it was planned to establish a government bank for correspondence that would roll the risk to the government. Although such a government company was established in 2022, at the end of the previous government, the current government refused to carry out the move, mainly due to an aversion to taking responsibility for accusations of terror financing directed against Israeli citizens.
These delays, which were led by Finance Minister Bezalel Smotrich, are what pushed Discount to initiate the severing of ties. Now, a proposal to increase the indemnity ceiling ahead of its expiration at the end of the year is on the table, but it is doubtful whether the step will be enough to satisfy the banking system. In the meantime, efforts are being made to convince the banks to wait until the end of the year to examine the steps of the next government.
