Smotrich is playing with Palestinian banking - and endangering banks in Israel

There is one error that repeats in almost every report on the correspondent banking crisis with Palestinian banks, and it turns the story on its head. The error is the assumption that the stalled legislation — intended to allow a government company to clear and transfer payments between Palestinian banks and the Israeli banking system, instead of Bank Hapoalim and Discount Bank — is an economic move that benefits the Palestinian Authority. The opposite is true — the move is entirely security-related and intended to prevent the central strategic threat to Israel: terror financing. This is not an interpretation, but the official position formulated by the Israeli government and security agencies — under Benjamin Netanyahu and the Likud — and it is the reason the Security Cabinet approves the indemnity arrangement again and again, sometimes at a frequency of once every three months.

Logic is simple: a functioning, supervised, and connected-to-Israel Palestinian banking system is a system that can be monitored. When detailing what exactly is about to be harmed, one understands the depth of the story: 100% of the fuel consumed by Palestinians arrives via Israel, 93% of the electricity, and about a third of the water. This clearing mechanism is not a gift to the Palestinian Authority — it is the tool through which Israel controls what enters and what exits. The Paris Protocol, not the Oslo Accords, is what built this structure, and Israel has never expressed interest in reducing it. Giving it up is not pressure on the Authority — it is giving up control. Furthermore, a collapsing system creates a vacuum, and this vacuum is filled with cash, money changers, unregulated trade channels, and crypto. These are exactly the channels through which terror financing moves.

In November 2024, the Security Cabinet, led by Prime Minister Benjamin Netanyahu (and the Finance Minister himself), voted in favor of extending the indemnity for a year. The only minister who opposed it was Itamar Ben Gvir, who consistently argued that the Authority should be collapsed. Bezalel Smotrich sits in the same cabinet. He hears the assessments. He signed them. And at the same time, for four years, he did not promote the legislation that the government he is a member of decided upon.

And here comes the part that should worry not Ramallah, but the deposit holders in Tel Aviv. The reason it was decided from the start to establish a separate body to manage the financial connection with Palestinian banks was not bureaucratic — it was risk management. The American Taylor Force Act, passed in 2017, prohibits American and international financial entities from maintaining contact with banks in the Palestinian Authority, and determines that such contact exposes them to lawsuits for aiding terror. Global rules in the field do not require intent. It is enough that a bank transferred money to an account that turned out in retrospect to belong to a terror operative — even if it thought it was a farmer — for it to find itself excluded from the global banking system. The idea of separating into a dedicated body was intended to isolate this risk. To put it in one defined, governmental box, that if it explodes, it explodes alone.

As long as the legislation does not pass, this risk sits on the two largest banks in the market — Hapoalim and Discount — which together hold most of the deposits and credit in Israel. This is not a theoretical issue. One incident is enough — one transaction that will be linked in retrospect to terror financing, one civil lawsuit that will be accepted in an American court — for a large Israeli bank to struggle to maintain its ties with the American banks through which it transfers and clears payments in dollars. From that moment, the word "risk" changes scale: it no longer concerns a merchant in Ramallah, but the ability of the Israeli economy to clear foreign trade. This is the scenario the government company was intended to prevent, and this is the scenario that not promoting the legislation leaves open. In other words: whoever blocks the legislation is not protecting Israel from risk, but transferring the risk from the state to the private banking system, and in the process increasing it.