The Biden administration has expressed serious concerns regarding Israeli Finance Minister Bezalel Smotrich’s reported intention to disconnect Palestinian banks from the Israeli financial system, which could potentially lead to economic collapse in the West Bank. According to reports from Israel’s Walla website, senior U.S. officials fear that such a move could undermine the Palestinian Authority (PA), creating a power vacuum that might destabilize the region and intensify the ongoing conflict.
The U.S. administration warned that the collapse of the Palestinian banking system could severely weaken the PA and lead to widespread chaos in the West Bank. Smotrich, who has been vocal about his stance on diminishing the power of the PA as part of his broader vision of annexing the West Bank, has previously called the PA a threat to Israel. He also sees Hamas as a strategic “asset,” claiming its influence divides Palestinian leadership and reduces the likelihood of a unified Palestinian state.
Smotrich holds a significant role not only as Finance Minister but also within the Defense Ministry, where he oversees civilian affairs in the West Bank. His position grants him substantial control over Israel’s policy toward Palestinians, including the ability to authorize transactions between Israeli and Palestinian banks.
This authorization ensures that Israeli banks, like Bank Hapoalim and Israel Discount Bank, can engage in financial transactions with Palestinian banks without facing charges related to money laundering or financing terrorism.
Smotrich has previously threatened not to renew these banking permits, using the leverage to press Prime Minister Benjamin Netanyahu on expanding settlements in the West Bank and legalizing illegal outposts. While permits were temporarily extended, they are set to expire in October, and Smotrich has demanded a third-party audit of the Palestinian banking system before considering a longer extension.
U.S. officials and G7 allies are concerned that even if Smotrich’s audit conditions are met, he may impose new, unrelated demands focused on settlement expansion. The U.S. has made it clear that such actions threaten not only the stability of the West Bank but also Israel’s security.
During recent G7 finance meetings, the U.S. warned that cutting Palestinian banks off from the Israeli financial system could destabilize the West Bank, potentially leading to a cash-based economy that could be exploited by terrorist groups. This would weaken the PA’s security forces, further exacerbating social and economic instability.
The Biden administration and its G7 allies have communicated their concerns to the Israeli government, emphasizing the broader security risks, but have refrained from engaging directly with Smotrich due to his hardline views.
There are ongoing discussions within the U.S. administration about possibly sanctioning Smotrich for his destabilizing actions in the West Bank, with messages being relayed to Israeli officials, including Foreign Minister Israel Katz, Minister for Strategic Affairs Ron Dermer, and Prime Minister Netanyahu.
