BANKS AWAIT NOVEMBER 30 CUTOFF OF ISRAELI

C O N F I D E N T I A L JERUSALEM 002210 SIPDIS SIPDIS NEA FOR FRONT OFFICE; NEA/IPA FOR GOLDBERGER/SHAMPAINE/BELGRADE; NSC FOR ABRAMS/WATERS; TREASURY FOR SZUBIN/GRANT/HARRIS/NUGENT/HIRSON E.O. 12958: DECL: 10/25/17 TAGS: ECON EFIN KFTN KWBG IS SUBJECT: BANKS AWAIT NOVEMBER 30 CUTOFF OF ISRAELI CORRESPONDENT BANK SERVICES REF: A. JERUSALEM 2200 ¶B. TEL AVIV 2984 Classified By: Consul General Jake Walles, Reasons 1.4 (b) and (d). ¶1. (SBU) Summary: The Bank of Palestine (BoP) and Arab Bank have been told by their Israeli correspondent banks that they will terminate all correspondent banking services effective November 30. BoP and Arab Bank have no clear indication if the Israeli state-owned Postal Bank is willing to provide correspondent banking services after that. Senior officials from BoP and Arab Bank believe that termination of correspondent services will significantly disrupt their operations and could force their banks to consider transitioning to another currency. End summary. -------------- --- Bank Hapoalim and IDB to Cut Ties by November 30 -------------- --- ¶2. (C) Bank of Palestine (BoP) General Manager Hashim Shawa told Econoff that Bank Hapoalim's board of directors has decided to terminate all banking services to BoP effective November 30. Bank Hapoalim threatened to sever ties with BoP on October 23, but a personal appeal by Shawa resulted in an extension of the termination deadline. In the interim, Bank Hapoalim continues to provide BoP normal correspondent bank services, even facilitating a recent BoP cash shipment into Gaza (reftel),according to Shawa. ¶3. (C) In an October 15 letter to BoP and Arab Bank, Israel Discount Bank (IDB) described a 45-day plan to terminate services to both banks, starting with an immediate halt of cash services to Gaza branches. Shawa and Arab Bank Regional Manager Mazen Abu Hamdan told Econoff separately that IDB planned to cutoff cash services to their West Bank branches by November 15, followed by the termination of all services November 30. Shawa asserted there is enough liquidity in the West Bank for banks to ship cash to their Gaza branches, provided cash shipments are permitted to enter Gaza. The loss of check clearing services, however, will be disastrous for the Palestinian banking sector, according to Shawa, and an alternative currency to the NIS would have to be adopted. (Note: BoP works primarily with Bank Hapoalim. IDB provides almost all of Arab Bank's NIS check clearing needs. End note.) ¶4. (C) Abu Hamdan noted that IDB had first warned Arab Bank of a November 30 termination date in May 2007. Abu Hamdan and Shawa had both been hopeful that procedural changes and safeguards they and other banks had proposed since that time would be sufficient to allow Bank Hapoalim and IDB to maintain their correspondent relationships. Abu Hamdan and Shawa stated separately that their optimism plummeted after the GOI designated Gaza as a "hostile entity" in September, and both Bank Hapoalim and IDB announced their intention to move forward with the termination of services. Abu Hamdan asserted that Arab Bank and First International Bank of Israel had been in serious discussions on establishing ties until the GOI designation, after which talks ground to a halt. -------------- Israeli Postal Bank -------------- ¶5. (C) Abu Hamdan and Shawa said they continue to encourage efforts to have the Israeli state-owned Postal Bank assume responsibility for providing corespondent banking services to the West Bank and Gaza. Palestine Monetary Authority (PMA) Governor Abed and Bank of Israel Fischer met on the margins of the recent World Bank/IMF meetings to discuss the issue, according to Shawa. Abu Hamdan complained that the process has been extremely slow, noting that he provided Postal Bank with a copy of Arab Bank's service agreement with IDB in September, but has heard nothing since. Neither BoP nor Arab Bank has any clear indication if the Postal Bank is willing to step in on November 30. Shawa indicated that BoP has approached CitiBank Group and a number of major European banks in an attempt to secure NIS check clearing services, to no avail. WALLES