Bank Hapoalim and Bank Discount to sever correspondent banking ties with Palestinian banks by Aug-Sep 2026, risking West Bank financial paralysis

According to recent media reports, the Palestinian economy is facing a systemic shock triggered by the impending severance of correspondent banking relationships between major Israeli financial institutions and Palestinian banks.

Bank Hapoalim and Bank Discount have formally notified their Palestinian counterparts of their intention to halt these vital operational links, with cutoff dates slated for August and September. This decision threatens to paralyze the financial circulatory system of the West Bank, raising alarms among international financial institutions, the Palestinian Monetary Authority (PMA), and regional economists.

The crisis is not merely a byproduct of regional geopolitical friction but a multifaceted collision between international anti-money laundering compliance, private sector risk aversion, and state-level political maneuvering. To understand the magnitude of the looming systemic disruption, one must examine the intricate mechanics of the Palestinian banking sector, its absolute dependency on the Israeli shekel, and the complex matrix of indemnities and regulations that currently tether the two economies together.

The Role of Correspondent Banking

Correspondent banking is the foundational infrastructure of global finance, allowing domestic banks to conduct cross-border transactions, clear foreign currencies, and facilitate international trade. For Palestinian banks, this infrastructure is uniquely constrained by the Paris Economic Protocol.

The Israeli shekel is the dominant currency in the West Bank, utilized for everything from daily retail transactions to public sector payrolls. However, Palestinian banks lack direct access to Israel's central payment systems. Consequently, they rely entirely on Israeli correspondent banks to:

• Process cross-border payments
• Settle accounts for commercial imports
• Transfer the wages of Palestinian laborers
• Repatriate surplus physical currency

In 2025 alone, Israeli correspondent banks processed approximately 51 billion shekels in transactions for the Palestinian financial sector. This singular reliance means that the severance of these ties effectively locks the Palestinian economy out of the global financial system and severs its primary bilateral trade artery.

Macroeconomic Impact

The macroeconomic calculus of this disruption is severe. According to the PMA:

• Ninety percent of Palestinian exports are destined for Israel
• One hundred percent of imports transit through Israeli ports

If correspondent banking channels are severed, the automated clearing of wire transfers will cease, triggering an immediate freeze on the importation of essential commodities, including fuel and medical supplies. Furthermore, the Palestinian Authority (PA) will find its ability to disburse public sector salaries severely compromised.

The liquidity crisis is already acute. An estimated 18 billion shekels, equivalent to nearly six billion US dollars, currently sits idle in Palestinian bank vaults. This physical cash accumulation results from the inability to electronically repatriate surplus banknotes to the Israeli banking system. Without correspondent banking to manage this liquidity, Palestinian banks will be forced to operate in a highly inefficient, cash-heavy environment, drastically increasing operational costs and limiting private sector credit.

Root Causes

The root cause of the current crisis lies at the intersection of regulatory compliance and political strategy. Israeli banks have long expressed concerns regarding...