Yellen Warns Israel Against Severing Ties with Palestinian Banks

Treasury Secretary Janet L. Yellen cautioned Israel on Thursday against the potential repercussions of disconnecting Palestinian and Israeli banks, highlighting the detrimental impact such a move could have on the West Bank’s economy amidst already dire economic conditions.

Yellen’s remarks followed Israel’s decision on Wednesday to withhold tax revenue from the Palestinian Authority in response to three European countries unilaterally recognising a Palestinian state. The issue, along with the humanitarian situation in Gaza, is expected to be discussed during the Group of 7 summit in Stresa, Italy.

Expressing her concerns, Yellen emphasised the critical role of banking channels in facilitating transactions that sustain imports worth $8 billion annually, including food, fuel, and electricity from Israel, as well as $2 billion of Palestinian exports.

Amidst global economic crises such as the war in Gaza and Russia’s conflict in Ukraine, policymakers are deliberating over the allocation of over $300 billion in frozen Russian central bank assets to aid Ukraine. Additionally, discussions will revolve around tightening sanctions on Russia and preventing Chinese military support to the country.

Yellen stressed the potential humanitarian crisis that could arise from severing Palestinians from the international financial system, underscoring the interconnectedness of regional economies.

The impending expiration of Israel’s waiver, which protects its banks from legal exposure related to transactions with Palestinians, poses additional challenges. Cutting Palestinian banks off from Israel could isolate them from the global banking system, severely impacting the Palestinian economy.

In response to Israel’s decision to withhold tax revenues from the Palestinian Authority, Yellen criticised the move, stating it threatens economic stability in the West Bank. She emphasised the importance of increasing humanitarian assistance to Palestinians in Gaza and stabilising the West Bank’s economy.

While Yellen refrained from specifying potential repercussions for Israel, she indicated that diplomatic pressure from the United States and other Group of 7 nations would be utilised to address the situation. In February, Yellen urged Israel to enhance commercial engagement with the West Bank, emphasising its significance for the economic welfare of both Israelis and Palestinians.