Biden administration fears Smotrich’s plan to push Palestine bank collapse

The administration of US President Joe Biden expressed its deep concern that Israeli Finance Minister Bezalel Smotrich intends to sever the connection between Palestinian banks and the Israeli financial system next month. This could lead to an economic collapse in the West Bank, according to reports by Israel’s Walla website on Tuesday, citing senior US officials.

The US administration fears that: “The crash of the Palestinian banking system could bring down the Palestinian Authority, creating a power vacuum that could throw the West Bank into chaos and exacerbate the conflict in the region.” Meanwhile, Smotrich continues his plan to weaken the Palestinian Authority (PA) as part of his ideology to annex the West Bank.

Smotrich, who also serves as a minister in the Defence Ministry and has been given many civilian powers related to the occupied West Bank, has previously stated that the PA poses a threat to Israel and has said that Hamas is an “asset” because it divides the Palestinian leadership, reducing the chances of establishing a Palestinian state.

As finance minister and the minister in the Defence Ministry responsible for civilian affairs in the West Bank, Smotrich has significant influence over Israeli government policy towards Palestinians. He has the power to authorise Israeli banks to conduct financial transactions with Palestinian banks without the risk of being charged with money laundering and funding terrorism.

Without such approval, Palestinian banks would be cut off from the Israeli financial system and collapse. The approval provides legal and economic protection to Bank Hapoalim and Israel Discount Bank. These two central banks offer banking services to Palestinian banks and prevent them from being accused of “money laundering” and “financing terrorism”.

In June, Smotrich threatened not to renew permits for Israeli banks to do business with Palestinian banks, a threat he used to pressure Prime Minister Benjamin Netanyahu to approve thousands of settlement homes in the West Bank and to legalise five illegal outposts.

Smotrich extended the permits for only four months, compared to previous one-year renewals. As the permits for Israeli banks expire in October, Smotrich demanded a third-party audit of the Palestinian banking system as a condition for extending the permits for a year.

However, according to a senior G7 official, the Biden administration and its G7 allies fear that as the deadline approaches and Smotrich’s conditions are met, he could come up with new demands that have nothing to do with the banking system but much to do with expanding settlements in the West Bank.

“Our goal is to make clear that such behaviour not only threatens stability in the West Bank but also threatens Israel’s security,” the official said.

A few weeks ago, a meeting of finance ministers from the G7 countries was held, during which the US expressed its concerns about Smotrich and the Palestinian banks. A senior official from one of the G7 countries said that the US warned that: “If the Palestinian banks are cut off from Israeli banks, it could significantly destabilise the West Bank and create a violent escalation that would spill over into Israel.”

The US also warned that the West Bank could turn into a “cash economy” and considered that it could benefit terrorist groups that rely heavily on cash. The official added that if the banks collapse, the PA security forces would be weakened further, and they wouldn’t be able to fight terrorism. This would affect the stability of Palestinian society as a whole and decrease the access Palestinian civilians have to food and basic services.

In the weeks following the meeting, the Biden administration and its G7 allies expressed their concerns to the Israeli government, stressing the security risks that the collapse of Palestinian banks could entail, including risks to the security of Israel itself.

The report noted that the US and its allies are not engaging with Smotrich directly because of his extreme views. It added that the US has considered sanctioning Smotrich for his destabilising actions in the West Bank. According to sources, the message was conveyed to Israel’s Foreign Minister Israel Katz, Minister for Strategic Affairs Ron Dermer and Netanyahu himself.

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