Israel Ends Bank Protection for Palestinian Transfers Amid Global Backlash and Domestic Power Struggles

According to Israel’s public broadcaster, this move could severely destabilize financial ties between Israeli and Palestinian banks, especially in the West Bank. The cancellation of the indemnity mechanism is expected to significantly slow financial transfers from the PA, which could deeply impact the Palestinian economy and its institutions.

The indemnification mechanism was initially implemented to protect Israeli banks from legal risks—both domestic and international—linked to accusations of financing hostile entities. Without this legal shield, Israeli banks may reconsider working with Palestinian financial institutions, fearing lawsuits.

A joint statement from the foreign ministers of the sanctioning nations explicitly accused Smotrich and Ben Gvir of fueling violence against Palestinians and reaffirmed their support for a two-state solution. The UK’s Times reported that the sanctions include asset freezes and entry bans.

This financial and political move could ignite a new phase of tension between Israel and the PA, especially given the heavy reliance of the Palestinian economy on Israeli financial channels. Reports citing sources close to Smotrich suggest that further escalations are coming, including halting all clearance revenue transfers—funds that account for nearly 70% of the PA’s income.

Economist Mohammad Abdullah Khabisa explained that the indemnity system was critical to maintaining Israel-PA banking ties. In 2023 alone, it covered transactions worth over 53 billion shekels. He emphasized that without such protection, both Israeli and Palestinian banks could face legal jeopardy—especially from lawsuits filed by dual-national Israeli citizens in U.S. courts.

Two Israeli banks—Discount and Hapoalim—currently manage all official financial channels between Israel and the Palestinian Authority. These include transfers for taxes, electricity, water, and cross-border trade.