Scoop: U.S. fears Israeli finance minister will topple Palestinian banks

• Israel's finance minister Bezalel Smotrich, an ultranationalist anti-Palestinian settler, has taken many steps over the last two years to weaken the Palestinian Authority as part of his ideology of annexing the West Bank.
• In the past, Smotrich described the Palestinian Authority as a threat to Israel and said Hamas was an asset because support for the group split Palestinians' governing power and lowers the chances of a Palestinian state being established.

Catch up quick: Smotrich's positions as finance minister and a minister in the Ministry of Defense in charge of civilian affairs in the West Bank give him significant influence over Israeli government policy toward Palestinians in the occupied territory.

• Smotrich has the power to authorize Israeli banks to conduct financial transactions with Palestinian banks without the risk of being charged with money laundering and funding terrorism. Without that approval, Palestinian banks would be cut off from the Israeli financial system and would collapse.
• In June, Smotrich threatened not to extend the authorization for Israeli banks working with Palestinian banks.
• The threat allowed him to squeeze Israeli Prime Minister Benjamin Netanyahu into approving thousands of new housing units in the Jewish settlements in the occupied West Bank and legalizing five illegal outposts.
• In return, Smotrich extended the bank authorization by four months, instead of one year as his predecessors did.

The latest: U.S. Deputy Secretary of Treasury Wally Adeyemo met in New York on Monday with Israeli central bank chief Amir Yaron and told him the U.S. is concerned about "threats by some within the Israeli government" to cut off Palestinian banks from the Israeli banking system," the Treasury Department said in a statement.

• Adeyemo "insisted" that the correspondence ties between Israeli and Palestinian banks should be extended for at least a year, the statement continued.
• The deputy treasury secretary also "stressed that extending these relations is critical to preventing an economic crisis in the West Bank, and to strengthening Israel's security."

Behind the scenes: The banking correspondence authorization will end on Oct. 31 and the U.S. and many of its allies are concerned Smotrich is not going to extend it, U.S. officials said.

• During a meeting in recent weeks of treasury and finance officials from the governments of the G7 countries, the U.S. raised its concerns about Smotrich and the Palestinian banks, an official from one of the G7 countries said.
• The G7 official said the U.S. warned that if the Palestinian banks are cut off from Israeli banks it could significantly destabilize the West Bank and create a violent escalation that would spill over into Israel.
• The West Bank would turn into a "cash economy" that could benefit terrorist organizations that largely use cash to operate, the G7 official said.

• The official added that if the Palestinian Authority security forces were weakened further, they wouldn't be able to fight terrorism.
• A collapse of the banking system would be devastating to the entire Palestinian society and would decrease the access Palestinian civilians have to food and basic services, the G7 official said.

In the weeks since the meeting, the Biden administration and its G7 allies have been voicing their concerns to the Israeli government and stressing the dangers of such a situation to Israel's security, a U.S. official said.

• The U.S. and other G7 countries are not engaging with Smotrich directly because of his extreme views, the G7 official said. The U.S. has considered sanctioning Smotrich for his destabilizing actions in the West Bank.
• The message was instead conveyed to Israel's foreign minister Israel Katz, minister for strategic affairs Ron Dermer and Netanyahu himself, sources said.

What to watch: Ahead of the October deadline, Smotrich has laid out technical conditions that focus on a third party review of the Palestinian banking system as a condition for extending the authorization for one year, two sources said.

• But the Biden administration and its G7 allies are concerned that when the deadline gets closer and Smotrich's conditions are met, he will come up with "new demands that will have nothing to do with banking and a lot to do with expanding settlements" in the West Bank, the G7 official said.
• "Our goal is to make clear that such behavior doesn't only endanger stability in the West Bank but also Israel's security," the official said.
• Smotrich's office did not respond to a request for comment.

Editor's note: This story was updated with the Treasury Department's statement about the meeting between U.S. Deputy Secretary of Treasury Wally Adeyemo and Israeli central bank chief Amir Yaron.